BlueLinx Holdings Inc. — Q3 2011 Form 10-Q
Reporting period: Third quarter ended October 1, 2011; year-to-date figures cover the nine months beginning January 2, 2011. Financial amounts below are in millions unless otherwise stated. BlueLinx distributes building products through more than 55 distribution centers; specialty products represented about 61% of Q3 gross sales.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $472.9 | $464.7 | $1,364.3 | $1,436.5 |
| Gross profit | $58.3 | $49.9 | $162.2 | $166.3 |
| Gross margin | 12.3% | 10.7% | 11.9% | 11.6% |
| Operating income (loss) | $1.2 | $(7.3) | $(5.7) | $(11.7) |
| Net loss | $(6.2) | $(14.9) | $(28.3) | $(33.0) |
| Loss per share | $(0.12) | $(0.48) | $(0.75) | $(1.08) |
Q3 sales increased 1.8%, while nine-month sales declined 5.0%. Q3 gross profit rose by $8.3 million; year-to-date gross profit fell by $4.1 million. Interest expense was $7.0 million in Q3 and $23.8 million year to date.
- Cash flow: Nine-month operating cash use was $83.5 million, versus $47.9 million in the prior-year period. Investing activities provided $3.0 million; financing activities provided $72.2 million. Cash declined to $5.9 million from $14.3 million at January 1.
- Working capital: $237.9 million at October 1, compared with $236.2 million at year-end. Receivables were $184.7 million and inventory was $203.8 million.
- Debt and liquidity: Balance-sheet current and long-term debt totaled $365.4 million. U.S. revolver borrowings were $115.6 million, with $148.9 million available; the Canadian facility had $2.8 million drawn and $1.8 million available. Reported cash was $5.9 million. The mortgage balance was $235.3 million.
- Equity: Stockholders’ equity was $32.8 million, versus $1.0 million at January 1. Common shares issued increased from 32.7 million to 61.8 million during the period.
Material changes and notable items
- Q3 specialty sales rose 12.4%, including 11.4% unit-volume growth; structural sales fell 12.4%, with unit volume down 14.0%. Year to date, specialty sales increased 8.4%, while structural sales decreased 20.7%.
- Management attributed the year-to-date demand decline partly to severe winter weather and the end of the housing tax credit in April 2010. It attributed stronger Q3 results partly to a moderate increase in housing starts and a shift toward higher-margin specialty products.
- Q3 SG&A included a $2.0 million credit from amending the Atlanta headquarters lease and a $1.2 million insurance-related gain on the Newtown, Connecticut facility. Year-to-date SG&A also included a $6.9 million gain on real estate sales. These items affected comparability; the prior-year periods included tender-offer costs and a gain from an OSB class-action settlement.
- The company completed a fully subscribed $60 million rights offering; approximately $56 million was used to repay the U.S. revolver. It also prepaid $38.3 million of mortgage principal from restricted collateral cash. The offering increased the share count.
- Cash use from operations was driven chiefly by a $65.5 million increase in receivables and a $15.5 million increase in inventory, partly offset by a $26.6 million increase in accounts payable.
Outlook, risks and contingencies
- Management said available revolving-credit capacity and other sources should fund routine operations and capital requirements for the next 12 months. It cautioned that continued weak economic conditions, particularly in housing, could require additional capital. Management expected the housing downturn to continue to pressure results for the foreseeable future, while expressing a long-term expectation for housing demand to improve.
- The U.S. revolver requires a 1.1-to-1.0 fixed-charge coverage ratio if availability falls below the defined threshold: the greater of $30 million or 15% of the lesser of the borrowing base or $400 million. The company reported covenant compliance and said it did not expect availability to fall below the threshold in fiscal 2011, but stated it would not meet the required ratio at current operating results if triggered.
- The company reported a full valuation allowance against deferred tax assets; the net deferred tax asset and corresponding valuation allowance were each $57.4 million. Tax-asset realization depends on estimates of future taxable income.
- After quarter-end, BlueLinx decided to consolidate its Seattle facility into Portland and Sacramento into Fremont, while continuing to serve those markets. It was marketing the affected properties.
- Four collective bargaining agreements covering about 40 employees were due for renewal in 2011; negotiations were ongoing for an agreement that had expired in March 2010. Management said routine legal matters were not expected to have a material adverse effect. Environmental outcomes could affect a given quarter, though management did not expect a material long-term adverse effect.
- Other disclosed risks include housing-market conditions, product prices and demand, customer creditworthiness, fuel costs, adverse weather, interest rates and access to capital. The planned privately branded engineered-lumber line was expected to launch February 13, 2012, after the Georgia-Pacific supply agreement expired.
Important facts for investors to verify
- Whether operating cash outflows and seasonal working-capital needs remain manageable as housing demand and customer collections evolve.
- U.S. revolver availability relative to the springing covenant threshold, and the company’s ability to meet the fixed-charge coverage requirement if triggered.
- The effect of the rights offering and resulting share-count increase on per-share results and ownership.
- How much reported operating improvement reflects sustainable product mix and margin performance versus real-estate, insurance and lease-related gains.
- Progress and costs associated with the facility consolidations and the planned engineered-lumber launch; the filing provides no quantified earnings guidance.