BlueLinx Holdings Inc. — Form 10-K Summary
Period clarification: The supplied filing covers the 52-week fiscal year ended December 29, 2018, with comparison to the 52-week year ended December 30, 2017. It is not a 2017 Q4 filing.
Business context and reporting period
BlueLinx distributes structural and specialty building and industrial products across the United States. Specialty products represented approximately 55% of fiscal 2018 sales and structural products approximately 45%. On April 13, 2018, the company acquired Cedar Creek for a preliminary purchase price of approximately $361.8 million, expanding its distribution network and product and geographic reach. Cedar Creek’s results are included from the acquisition date.
Financial results and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Net sales | $2,862.9 million | $1,815.5 million |
| Gross profit / margin | $331.9 million / 11.6% | $231.0 million / 12.7% |
| Operating income (loss) | $(13.3) million | $30.0 million |
| Net income (loss) | $(48.1) million | $63.0 million |
| Basic and diluted EPS | $(5.21) | $6.96 basic; $6.81 diluted |
| Cash from (used in) operations | $41.6 million | $(2.5) million |
Fiscal 2018 sales rose 57.7%, primarily because of Cedar Creek. Gross margin fell 1.1 percentage points; management cited an $11.8 million acquisition-related inventory step-up charge and falling commodity prices in the second half. SG&A was $319.3 million, including $25.4 million of Cedar Creek legal, professional and integration costs and $15.3 million of share-based compensation expenses. Interest expense increased to $47.3 million from $21.2 million, reflecting higher average debt and rates, transaction costs, and increased capital-lease interest.
Operating cash flow was supported by working-capital movements, including $60.0 million from accounts receivable and $25.0 million from accounts payable. Investing cash use was $242.7 million, largely reflecting $348.1 million paid for Cedar Creek, partly offset by $108.1 million of property-sale proceeds. Financing cash provided was $205.4 million. Year-end cash was $8.9 million, versus $4.7 million a year earlier.
At December 29, 2018, current assets were $599.9 million and current liabilities $196.8 million; management-defined operating working capital was $404.8 million, up from $225.8 million, mainly due to the acquisition. Reported debt was $499.7 million net of discounts and issuance costs (approximately $512 million principal outstanding): $333.3 million under the revolver and $179.1 million under the term loan. Revolver excess availability was $91.7 million. The revolver’s weighted-average rate was 4.6%; the term loan rate was 9.3%. Capital-lease liabilities totaled approximately $151.0 million. Stockholders’ equity was a deficit of $14.7 million.
Material changes versus the prior year
- Cedar Creek contributed approximately $1.0 billion in sales and a $2.5 million net loss for the period included in BlueLinx’s results. The acquisition materially increased sales, assets, operating costs and borrowing.
- The company replaced its $97.8 million CMBS mortgage in January 2018 using net proceeds from sale-leaseback transactions on four distribution centers, which generated $110.0 million gross proceeds. The transactions created $95.1 million of capital-lease assets and obligations and an $83.9 million deferred gain.
- Fiscal 2018 net loss contrasts with fiscal 2017 net income, which included a $53.4 million income-tax benefit, primarily from releasing a substantial valuation allowance.
- Structural-product margin declined to 7.5% from 9.2%; specialty-product margin was 15.5% versus 15.3%.
Outlook, risks and unusual items
Management said near-term housing indicators suggested potential challenges but expected the housing-market improvement trend to continue over the long term. It identified sharp declines in panel and framing-lumber prices in the third and fourth quarters as a drag on results, particularly margins, and said it was monitoring prices, inventory and costs. No quantified earnings or revenue guidance is provided. Management stated that operating cash flows and available revolver capacity were expected to fund routine operations and working capital for at least the next 12 months.
Key risks include housing and construction cyclicality, commodity-price and inventory volatility, competitive and customer pricing pressure, supplier and tariff disruptions, and the ability to integrate Cedar Creek and realize expected benefits. Debt is substantial and floating-rate; facilities impose restrictive covenants and liquidity tests. The company was in compliance with debt covenants at year-end. A February 2019 term-loan amendment permitted up to $50 million of additional sale-leasebacks, with specified proceeds directed to debt repayment, and modified leverage covenant terms.
Other items to monitor include the Central States multiemployer pension plan, which is in critical and declining status: a complete withdrawal in fiscal 2019 was estimated to trigger a $52.5 million liability, although annual payments were expected to remain below $1.0 million and a complete-withdrawal payment period is limited to 20 years. Seven labor agreements covering approximately 130 employees were due for renewal in fiscal 2019 or were under negotiation. The company reported routine legal and environmental matters and said established reserves were adequate; it did not expect a material adverse effect on long-term financial condition, results or cash flows.
The acquisition-related integration of Cedar Creek’s financial controls was ongoing. Management and the auditor concluded BlueLinx’s internal controls were effective, but Cedar Creek’s controls were excluded from the assessment; Cedar Creek represented 49.8% of year-end assets and 35.7% of fiscal 2018 revenue. The financial-statement audit received an unqualified opinion. BlueLinx does not expect to pay dividends in the foreseeable future.
Most important facts for investors to verify
- Whether commodity-price declines and inventory management continue to pressure gross margins and cash generation.
- Whether Cedar Creek integration costs subside and expected operating benefits materialize; compare reported results with the filing’s unaudited pro forma figures.
- Debt principal, interest expense, revolver availability and covenant headroom, including the effects of the February 2019 amendment and planned sale-leasebacks.
- Actual cash conversion and working-capital requirements, given year-end cash of $8.9 million and materially higher working capital.
- Developments in the Central States pension plan, labor negotiations, Cedar Creek control integration and the company’s stated tax-asset recoverability assumptions.