BlueLinx Holdings Inc. — Form 10-Q Summary
Reporting-period note: The request identifies 2017 Q2, but this filing is for the quarter and six months ended June 30, 2018; comparative periods ended July 1, 2017. Fiscal 2018 results include Cedar Creek only from its April 13, 2018 acquisition date, so year-over-year comparisons are not like-for-like.
Business context and reporting period
BlueLinx distributes structural and specialty building products to wholesale and retail customers across the United States. Structural products were approximately 47% and specialty products approximately 53% of year-to-date 2018 sales. The Cedar Creek acquisition expanded the company to approximately 70 distribution facilities and more than 2,500 employees.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $893.0 million | $474.0 million | $1,330.4 million | $902.6 million |
| Gross profit | $103.7 million | $60.5 million | $159.0 million | $115.0 million |
| Gross margin | 11.6% | 12.8% | 11.9% | 12.7% |
| Operating income (loss) | $4.5 million | $9.1 million | $(2.1) million | $14.9 million |
| Interest expense | $12.2 million | $5.4 million | $20.7 million | $10.6 million |
| Net income (loss) | $(8.6) million | $3.2 million | $(22.0) million | $3.8 million |
| Diluted earnings (loss) per share | $(0.93) | $0.35 | $(2.40) | $0.42 |
Q2 sales increased 88.4%; six-month sales rose 47.4%. Management attributed growth principally to Cedar Creek and higher commodity prices. Gross margin declined in both comparisons; the company reported a $10.9 million acquisition-related inventory step-up charge. Q2 SG&A included $11.6 million of Cedar Creek legal, professional, and integration costs; six-month acquisition-related costs were $15.2 million. Cash-settled stock appreciation rights and other share-based compensation expense totaled $13.0 million for the six months.
Operating cash flow was $(98.5) million for the six months, versus $(53.9) million a year earlier. Investing cash flow was $(245.7) million, including $353.1 million net cash paid for Cedar Creek, partly offset by asset-sale proceeds. Financing cash flow was $344.7 million. Cash at June 30 was $5.2 million.
At June 30, total assets were $1.145 billion, current assets $788.6 million, current liabilities $237.3 million, and stockholders’ equity $12.4 million. Balance-sheet long-term debt, net of discounts and current portion, was $615.1 million; total debt carrying value including the current portion was $616.8 million. Revolver borrowings were $449.6 million, with $133.6 million excess availability and a 4.1% weighted average rate. Term-loan borrowings were $179.6 million at a stated 9.09% rate. Capital-lease principal commitments were $155.3 million.
Material changes, outlook, and risks
- On April 13, 2018, BlueLinx acquired Cedar Creek for a preliminary purchase price of approximately $361.8 million. Cedar Creek contributed $358.1 million in sales and $1.2 million in net income from acquisition through quarter-end; reported earnings included integration costs and the effect of selling inventory marked up to fair value. Purchase accounting remained preliminary.
- The company increased its asset-based revolving facility to $600 million, with an uncommitted accordion of up to $150 million, and added a $180 million secured term loan. Both facilities are secured by substantially all company assets. BlueLinx reported compliance with debt covenants at quarter-end.
- Management said available liquidity and operating sales should fund routine operations and working-capital needs for at least the next 12 months. No specific revenue or earnings guidance was provided. Management viewed housing-market improvement as a long-term trend but noted that housing starts and permits indicated potential near-term challenges.
- Results are seasonal: the first and fourth fiscal quarters are typically weakest, while the second and third are typically strongest. Risks cited include housing and economic conditions, product prices and supply, tariffs and trade policy, customer and supplier concentration, interest rates and capital availability, and Cedar Creek integration, synergies, indebtedness, and possible loss of customers or suppliers.
- Other notable items: four distribution-center sale-leasebacks generated $110.0 million gross proceeds; the mortgage was repaid, while $95.1 million of capital-lease assets and obligations and an $83.9 million deferred gain were recorded. SAR liability rose to $13.3 million at June 30. Cedar Creek’s internal controls were excluded from management’s control assessment for this quarter and are expected to remain excluded through fiscal 2018 while integration proceeds.
- Management stated that environmental and legal matters were adequately reserved and were not expected to materially adversely affect long-term financial condition, results, or cash flows, while acknowledging outcomes could affect a given quarter. Approximately 6% of employees were covered by collective bargaining agreements up for renewal in fiscal 2018 or expired and under negotiation.
Important facts for investors to verify
- How much of reported sales growth and future profitability reflects Cedar Creek, commodity-price changes, and sustainable organic demand.
- Final Cedar Creek purchase-price allocation, integration costs, inventory step-up effects, and realization of anticipated synergies.
- Debt-service capacity, borrowing-base availability, covenant headroom, and exposure to the term loan’s 9.09% stated rate and other interest-rate changes.
- Working-capital conversion and liquidity, given operating cash outflow and substantial receivables and inventory balances.
- Potential cash payments related to the SAR liability, capital leases, and other commitments, as well as the outcome of pending legal, environmental, and labor matters.