BlueLinx Holdings Inc. — Form 10-Q Summary
Period: Quarter ended September 28, 2013; year-to-date results cover December 30, 2012 through September 28, 2013. The request metadata labels this “2012 Q3,” but the filing is for 2013 Q3. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context and reporting period
BlueLinx distributes building products to more than 11,500 customers through approximately 50 distribution centers. Structural products represented about 43% of Q3 gross sales and specialty products about 57%. The company says the second and third quarters are typically its strongest, with working capital and receivables generally peaking in Q3. Fiscal 2013 contains 53 weeks, versus 52 weeks in fiscal 2012.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Net sales | $558.0 million | $496.8 million | $1,665.7 million | $1,467.5 million |
| Gross profit / margin | $62.5 million / 11.2% | $60.5 million / 12.2% | $174.1 million / 10.5% | $178.0 million / 12.1% |
| Operating income (loss) | $3.1 million | $10.3 million | $(17.6) million | $10.0 million |
| Net income (loss) | $(3.2) million | $3.1 million | $(38.2) million | $(11.7) million |
| Basic and diluted EPS | $(0.04) | $0.04 | $(0.49) | $(0.18) |
| Interest expense | $6.9 million | $7.3 million | $21.0 million | $21.4 million |
Q3 sales rose 12.3%, driven mainly by higher unit volumes. Gross profit dollars increased modestly, but margin fell as structural products made up a larger share of sales, pricing competition remained intense, and the company sold through inventory at closed distribution centers. For the first nine months, sales grew 13.5%, but lower gross margin and higher SG&A pushed operating results into a loss.
Q3 SG&A was $57.3 million, up $9.1 million year over year; the filing cites lower real-estate gains, restructuring costs and higher volume-related costs. Nine-month SG&A rose to $185.2 million from $161.4 million. Nine-month operating results also reflected $11.0 million of restructuring and related charges, lower real-estate gains, and higher variable costs.
Operating cash flow was negative $70.8 million for the first nine months, compared with negative $86.7 million a year earlier. Investing activities provided $4.1 million, and financing activities provided $68.4 million. Cash at quarter-end was $6.9 million. Working capital was $292.8 million, up from $272.4 million at December 29, 2012; the increase included seasonal growth in receivables and inventories.
Total debt reported on the balance sheet was approximately $437.9 million at September 28, 2013, comprising $60.9 million current maturities and $377.0 million long-term debt. This compares with approximately $377.4 million at December 29, 2012. The U.S. revolver had $234.8 million outstanding and $91.3 million excess availability; the Canadian facility had $4.6 million outstanding and $1.2 million availability. The $198.4 million mortgage bears fixed interest at 6.35%; approximately $183.6 million was scheduled to mature in 2016. Stockholders’ deficit was $16.3 million.
Material changes and unusual items
- A fully subscribed rights offering completed March 27, 2013 raised approximately $38.6 million net and issued 22.9 million shares. Prior-period weighted average shares and EPS were retrospectively adjusted for the offering’s bonus element.
- The company closed or ceased operations at five distribution centers and realigned headquarters resources. It recorded nine-month severance charges of $4.7 million, facility lease charges of $1.4 million, other restructuring charges of $2.0 million, and related stock compensation; an additional $1.0 million inventory reserve charge was recorded in cost of sales.
- The Denver sales center was sold in Q3, generating a $3.7 million gain net of broker commissions. The company also reported a $0.2 million gain related to an earlier property sale. Real-estate gains were lower than in the prior-year periods.
- A $3.8 million lower-of-cost-or-market inventory charge recorded in Q2 for lumber, OSB and plywood was reduced to zero by quarter-end as affected inventory sold and prices stabilized.
- During Q2, the company transferred certain properties appraised at approximately $6.8 million to its hourly pension plan and leased them back. It says the transaction was not treated as a contribution for financial-reporting purposes.
- The company recorded a full valuation allowance against deferred tax assets. A $0.6 million uncertain-tax-position liability was reversed in Q3 following expiration of the statute of limitations.
Outlook, risks and contingencies
Management described housing conditions as improving but still below historical levels, and said it expects subdued housing activity to continue weighing on results. It believes the housing recovery is beginning and expects demand to improve over the long term, but provided no quantified earnings or sales guidance. Management stated that available liquidity should fund routine operations and capital requirements for the next 12 months and that it did not expect U.S. revolver availability to fall below the covenant threshold in fiscal 2013.
The U.S. facility requires a 1.1-to-1.0 fixed-charge coverage ratio if excess availability falls below a specified threshold. The company said it would not meet that ratio with current operating results if the test were triggered. Lenders may obtain dominion over bank accounts at a lower availability threshold, although the filing says this would not itself make the debt callable. The company reported compliance with credit-facility covenants as of the filing date. Other stated risks include housing and product-price volatility, customer credit quality, competition, fuel and operating costs, weather, and execution of restructuring and cost-saving initiatives.
Management reported no material changes to previously disclosed legal proceedings and no pending or threatened matter expected, based on its current understanding, to materially adversely affect financial condition, results or cash flows. Environmental matters could affect results in a given quarter, though management did not expect a material adverse long-term effect. The company had requested an IRS waiver for $2.1 million of its 2012 minimum pension contribution and said it believed the waiver would be granted.
Most important facts for investors to verify
- Confirm the period: this filing reports Q3 2013, not Q3 2012.
- Track whether sales-volume growth can translate into recovered gross margins, particularly in structural products.
- Review liquidity and borrowing-base availability against the covenant thresholds, given negative operating cash flow and management’s statement that current results would not satisfy the fixed-charge test if triggered.
- Assess debt maturities and refinancing needs, especially the mortgage amount scheduled for 2016, and the effect of seasonal working-capital requirements.
- Monitor execution costs and benefits from the restructuring, the pension contribution waiver, and the realizability of deferred tax assets subject to a full valuation allowance.