BlueLinx Holdings Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2014, ended July 5, 2014; filed August 7, 2014. The filing is unaudited. Fiscal 2014 has 52 weeks; comparative periods are the corresponding periods of fiscal 2013.
Business context and performance
BlueLinx distributes building products across North America, serving about 11,500 customers through 49 distribution centers. Its products span structural materials and specialty products. Results are seasonal and depend substantially on housing construction, remodeling, product prices, and customer demand.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $531.5 million | $604.6 million | $975.4 million | $1,107.7 million |
| Gross profit | $62.0 million | $55.2 million | $114.7 million | $111.6 million |
| Gross margin | 11.7% | 9.1% | 11.8% | 10.1% |
| Operating income (loss) | $9.7 million | $(15.6) million | $8.1 million | $(20.7) million |
| Net income (loss) | $3.2 million | $(22.3) million | $(5.4) million | $(35.0) million |
| Net income (loss) per share | $0.04 | $(0.27) | $(0.06) | $(0.46) |
Material changes and management commentary
- Q2 sales declined 12.1% year over year; six-month sales declined 11.9%. The company attributed much of the reduction to five distribution centers closed in 2013, with unusually cold first-quarter weather also weighing on year-to-date sales. Q2 unit volume fell 5.7%, while price and other factors reduced sales by 6.4%.
- Despite lower sales, gross profit increased and margin improved. Management cited a greater mix of higher-margin specialty products, improved structural margins, and prior-year inventory charges. Q2 2013 included $3.8 million of lower-of-cost-or-market charges and $1.0 million of restructuring-related inventory charges.
- SG&A decreased $18.6 million in Q2 and $26.0 million year to date, reflecting lower variable costs and payroll, reduced headcount, and a $5.1 million gain on the Portland facility sale. Leadership-change severance costs were $2.8 million in both Q2 and the first six months. Year-to-date gross profit also benefited from a $1.4 million recovery of countervailing and antidumping duties.
- Management described U.S. housing activity as below historical levels but said it and other forecasters expected a continuing long-term housing recovery. It expects improved construction and remodeling activity to support sales, but growth would require more inventory and receivables and could consume revolving-credit availability.
Cash flow, liquidity, and debt
- Cash was $7.7 million at July 5, 2014, versus $5.0 million at January 4, 2014. Working capital was $286.5 million, down from $294.9 million.
- Six-month operating cash use was $68.3 million, improving from $133.7 million a year earlier. Receivables and inventory absorbed $55.2 million and $44.1 million, respectively; higher accounts payable provided $39.6 million. Investing activities provided $6.0 million, primarily from asset-sale proceeds, while financing activities provided $65.0 million.
- Balance-sheet debt totaled approximately $461.9 million, including current maturities, versus approximately $396.4 million at year-end. U.S. revolver borrowings were $280.9 million, with $80.7 million excess availability; Canadian revolver borrowings were $3.8 million, with $1.3 million availability. The U.S. revolver rate was 3.8% and the Canadian rate 4.0%.
- The mortgage had a $178.7 million principal balance, a fixed 6.35% rate, and a July 2016 maturity; approximately $175.0 million of principal was scheduled for 2016. The company used $6.9 million of Portland sale proceeds to repay mortgage principal.
- The company reported compliance with credit-facility covenants. It said it did not expect U.S. revolver availability to fall below the threshold that activates a 1.1:1 fixed-charge coverage test, but stated that current operating results would not meet that test if triggered. Management believed available funding and other sources would cover routine operations and capital requirements for at least 12 months; it said additional capital could strengthen liquidity and support participation in a housing recovery.
Risks, contingencies, and unusual items
- Key sensitivities include housing and remodeling demand, structural-product prices and supply, customer creditworthiness, vendor continuity, competition, fuel and operating costs, interest rates, and weather. The company also cautioned that increased sales could require working capital and reduce credit availability.
- A full valuation allowance was recorded against deferred tax assets; the filing reports a $90.4 million net deferred tax asset with a corresponding valuation allowance at July 5, 2014. Tax benefits therefore may not translate into recognized earnings.
- The company reported no material change in previously disclosed legal proceedings and said routine pending or threatened proceedings were not expected to have a material adverse effect based on currently known facts. Environmental matters could affect results in an individual quarter. About 34% of employees were union-represented; six collective bargaining agreements were due for renewal in fiscal 2014.
- Leadership changes included the departure of the CFO and other executives and a director’s decision not to stand for reelection. Certain restricted and performance shares vested in connection with the changes.
- No material change in risk factors was reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether sales, volume, and margins recover, particularly in structural products, and how much future results depend on specialty-product mix.
- How working-capital needs affect revolver usage and covenant headroom; confirm availability against the applicable thresholds and the potential consequences if breached.
- The company’s ability to address the large 2016 mortgage maturity and its overall debt burden, including the rise in current maturities.
- Whether operating improvement is sustainable apart from the $5.1 million property-sale gain and other unusual or prior-period comparison effects.
- Future realizability of deferred tax assets, pension funding requirements, and developments in environmental, legal, and labor matters.