Business context and reporting period
BlueLinx distributes structural and specialty building products through approximately 55 distribution centers. The filing covers the quarter ended September 29, 2012, and the nine months from January 1 to September 29, 2012. The request metadata says “2011 Q3,” but the filing itself is for fiscal 2012 Q3.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $496.8 million | $472.9 million | $1,467.5 million | $1,364.3 million |
| Gross profit / margin | $60.5 million / 12.2% | $58.3 million / 12.3% | $178.0 million / 12.1% | $162.2 million / 11.9% |
| Operating income (loss) | $10.3 million | $1.2 million | $10.0 million | $(5.7) million |
| Net income (loss) | $3.1 million | $(6.2) million | $(11.7) million | $(28.3) million |
| Basic and diluted EPS | $0.05 | $(0.12) | $(0.19) | $(0.75) |
- Q3 sales rose 5.1%; management attributed the increase mainly to stronger housing starts and higher structural product prices. Q3 unit volume declined 1.9%. Nine-month sales increased 7.6%, with unit volume up 2.2% and price/other up 5.4%.
- Q3 operating income improved substantially, but included a $9.2 million real-estate sale gain in SG&A. Nine-month results included $9.7 million of real-estate gains and a $0.5 million insurance recovery gain. These items are important when assessing recurring profitability.
- Interest expense was $7.3 million in Q3 and $21.4 million for the nine months. Nine-month net loss improved year over year, but the company remained loss-making year to date.
- Nine-month operating cash flow was negative $86.7 million, versus negative $83.8 million in the comparable period. Receivables and inventory increases used $52.9 million and $34.7 million, respectively. Investing activities provided $16.1 million, principally from asset-sale proceeds; financing activities provided $73.6 million.
- At September 29, cash was $7.9 million; working capital was $264.0 million. Current assets were $465.0 million and current liabilities $201.0 million. Restricted cash totaled $36.2 million and is not freely available for general use.
- Balance-sheet debt was approximately $420.1 million, including $69.5 million current maturities and $350.6 million long-term debt. Stockholders’ equity was a deficit of $1.6 million, compared with positive equity of $8.4 million at year-end 2011.
Material changes, outlook, risks and unusual items
- U.S. revolving-credit borrowings rose to $181.3 million from $93.4 million at December 31, 2011; excess availability was $110.3 million. The Canadian facility had $3.9 million borrowed and $1.8 million available. Both facilities were reported covenant-compliant. The U.S. facility matures January 7, 2014.
- The $295 million mortgage carries a stated fixed rate of 6.35%. A September 2012 amendment provides for mortgage prepayments from collateral cash and subsequent limited releases for operating expenses. Management expected $12.8 million of Newark sale proceeds and $11.8 million of collateral cash to reduce mortgage debt in Q4 2012.
- Management described housing activity as recovering, but still below historical levels, and said it expected housing-market weakness to continue to weigh on results. It believed available revolver capacity and other sources would cover routine operations and capital needs for 12 months; if economic conditions, particularly housing, did not improve, additional capital might be needed.
- Management said excess availability could decline during the recovery and warned that if it fell below the facility threshold, the company would not meet the required fixed-charge coverage ratio on current results. This could give lenders control over bank accounts, require debt reclassification as current, and restrict capital expenditures. Management did not anticipate falling below the threshold in fiscal 2012.
- The company maintained a full valuation allowance against its $71.2 million net deferred tax asset. It requested an IRS waiver of its 2012 minimum pension contribution; approval was uncertain and could increase future required contributions.
- Seasonality is significant: the second and third quarters are typically strongest, while the first and fourth are slowest. The filing also cites housing demand, product prices, customer creditworthiness, fuel costs, interest rates, competition, weather and access to capital as risks.
- On October 30, 2012, a director resigned, leaving the Audit Committee with two independent members and the company temporarily noncompliant with NYSE listing requirements. The company committed to appoint a replacement by its 2013 annual meeting, expected in May and no later than June 1, 2013.
Most important facts for investors to verify
- Whether operating performance remains positive excluding property-sale and insurance gains, and whether sales and margins persist as product prices and housing activity change.
- How seasonal working-capital needs affect cash generation, revolver borrowings and availability heading into the fourth quarter.
- Execution and timing of the planned mortgage prepayments, collateral releases and the approaching January 2014 revolver maturity.
- Whether liquidity remains above the covenant threshold, especially given management’s statement that current results would not satisfy the fixed-charge coverage test if triggered.
- The outcome of the pension contribution waiver request and the plan to restore NYSE Audit Committee compliance.