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BXC > SEC Filings for BXC > Form 10-K on 24-Feb-2014All Recent SEC Filings

Show all filings for BLUELINX HOLDINGS INC.

Form 10-K for BLUELINX HOLDINGS INC.


24-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Form 10-K. In addition to historical information, the following discussion and other parts of this Form 10-K contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by this forward-looking information due to the factors discussed under "Risk Factors," "Cautionary Statement Concerning Forward-Looking Statements" and elsewhere in this Form 10-K.

Overview

Company Background

BlueLinx is a leading distributor of building products in North America. As of January 4, 2014, we distributed approximately 10,000 products from over 750 suppliers to service approximately 11,500 customers nationwide, including dealers, industrial manufacturers, manufactured housing producers and home improvement retailers. We operate our distribution business from sales centers in Atlanta and Denver, and our network of approximately 50 distribution centers. We distribute products in two principal categories: structural products and specialty products. Structural products include plywood, OSB, rebar and remesh, lumber and other wood products primarily used for structural support, walls and flooring in construction projects. Structural products represented approximately 44% and 42% of our fiscal 2013 and fiscal 2012 gross sales, respectively. Specialty products include roofing, insulation, moulding, engineered wood, vinyl products (used primarily in siding), outdoor living and metal products (excluding rebar and remesh). Specialty products accounted for approximately 56% and 58% of our fiscal 2013 and fiscal 2012 gross sales, respectively.

Industry Conditions

We operate in a changing environment in which new risks can emerge from time to time. A number of factors cause our results of operations to fluctuate from period to period. Many of these factors are seasonal or cyclical in nature. Conditions in the U.S. housing market, while improving, continue to be at historically low levels. Our operating results have declined during the past several years as they are closely tied to U.S. housing starts. Additionally, over the past several years, the mortgage markets have experienced substantial disruption due to an unprecedented number of defaults. This disruption and the related defaults have increased the inventory of homes for sale in some markets (some markets have sold through excess inventory now) and also have caused lenders to tighten mortgage qualification criteria, which further reduces demand for new homes. While now showing signs of improvement, we expect the lower than historical average level of new housing activity will continue to negatively impact our operating results. However, along with many forecasters, we believe that we are in the beginning of a housing recovery and that U.S. housing demand will continue to improve in the long term based on population demographics and a variety of other factors.

As the housing market and general economic conditions continue to improve, the Company believes that additional capital would allow the Company to participate more fully in these improving conditions, and therefore we will continue to evaluate capital structure opportunities that make sense for the Company . The Company's sales depend heavily on the strength of national and local new residential construction and home improvement and remodeling markets, which are showing signs of improvement. The overall housing market and economy are also improving, which is expected to lead to an increase in residential construction and, to a lesser extent, in home improvement activity. As the Company and its industry continue to recover from the historic housing market downturn, the Company expects its sales to improve and therefore its need for inventory and its accounts receivable to increase. This increased need for working capital is expected to use some of the Company's current excess availability under its revolving credit facilities.

Facility Lease Obligation and Related Restructuring

During the second quarter of fiscal 2013, we announced our 2013 restructuring plan (the "2013 restructuring"), which included the realignment of headquarters resources and the strategic review of our distribution centers. This review resulted in the Company designating five distribution centers to be sold or closed. These distribution centers were closed or ceased operations during the third quarter of fiscal 2013. In addition to the 2013 restructuring, we announced during the second quarter of fiscal 2013 that George R. Judd no longer would serve as President and Chief Executive Officer of the Company (the "change in executive leadership"). In connection with the 2013 restructuring and the change in executive leadership, the Company has recognized severance related charges of $5.6 million, $2.9 million of related share-based compensation charges, a $1.3 million facility lease obligation and $1.4 million of other restructuring related charges in "Selling, general, and administrative" expenses in the Consolidated Statements of Operations and Comprehensive Loss during fiscal 2013. In addition, we recognized a $1.0 million inventory reserve charge recorded in "Cost of sales" in the Consolidated Statements of Operations and Comprehensive Loss. The majority of the remaining payments related to the 2013 restructuring will be made during fiscal 2014 and will be paid from our revolving credit facility. The anticipated impact of the 2013 restructuring is directly related to the elimination of the activity in the five closed distribution centers. This activity includes an anticipated reduction to "Selling, general, and administrative" and "Depreciation" expenses, as well as an increase to Net Income in the Consolidated Statements of Operations and Comprehensive Loss.

During the first quarter of fiscal 2013, we completed the transition of our Fremont, California operation to our new facility in Stockton, California. We incurred approximately $0.8 million of transition costs related to this move which are recorded in "Selling, general, and administrative" expenses in the Consolidated Statements of Operations and Comprehensive Loss in the first nine months of fiscal 2013.

During the third quarter of fiscal 2011, we entered into an amendment to our corporate headquarters lease in Atlanta, Georgia related to the unoccupied 4100 building. This amendment released us from our obligations with respect to this unoccupied space as of January 31, 2012, in exchange for a $5.0 million space remittance fee, which was paid in the first quarter of 2012. We also paid $0.9 million in the third quarter of fiscal 2012 and paid an additional $0.3 million in the first quarter of fiscal 2014 related to contractually obligated tenant improvement reimbursement expense. The provisions relating to the occupied 4300 building remain unchanged. Under the existing provisions, the current term of the lease ends on January 31, 2019. The amendment resulted in a reduction of our restructuring reserve of approximately $2.0 million, with the credit recorded in "Selling, general, and administrative" expenses in the Consolidated Statements of Operations and Comprehensive Loss during fiscal 2011.

Stock Rights Offerings

On March 27, 2013, we concluded the 2013 Rights Offering. The 2013 Rights Offering was fully subscribed and resulted in net proceeds of approximately $38.6 million. Remaining expenses to be paid related to the 2013 Rights Offering as of January 4, 2014 totaled $0.1 million. We issued 22.9 million shares of stock to our stockholders in conjunction with the 2013 Rights Offering.

On July 22, 2011, we concluded a rights offering of our common stock to our stockholders (the "2011 Rights Offering"). The 2011 Rights Offering was fully subscribed and resulted in net proceeds of approximately $58.0 million. We issued 28.6 million shares of stock to our stockholders in conjunction with the 2011 Rights Offering.

Private Label Products

In February of 2012, we launched our own privately branded engineered product line for all geographic markets other than New England. In addition, on February 13, 2012, we entered into a distribution agreement with Weyerhaeuser Company for the sale of certain engineered wood products in the New England region. We have subsequently increased the number of private label products that we offer to customers and currently offer several products under our private labels.

Selected Factors that Affect our Operating Results

Our operating results are affected by housing starts, mobile home production, industrial production, repair and remodeling spending and non-residential construction. We believe a substantial percentage of our sales are directly related to new home construction.

Our operating results also are impacted by changes in product prices. Structural products prices can vary significantly based on short-term and long-term changes in supply and demand. The prices of specialty products also can vary from time to time, although they generally are less variable than structural products.

The following table sets forth changes in net sales by product category, sales variances due to changes in unit volume and dollar and percentage changes in unit volume and price, in each case for fiscal 2013, fiscal 2012 and fiscal 2011:

                       Sales Revenue Variances by Product

                           Fiscal 2013       Fiscal 2012       Fiscal 2011
                                        (Dollars in millions)
Sales by Category
Structural Products       $         968     $         806     $         705
Specialty Products                1,200             1,114             1,068
Other(1)                            (16 )             (12 )             (18 )
Total Sales               $       2,152     $       1,908     $       1,755
Sales Variances
Unit Volume $ Change      $         161     $          42     $         (52 )
Price/Other(1)                       83               111                 3
Total $ Change            $         244     $         153     $         (49 )
Unit Volume % Change                8.4 %             2.3 %            (2.8 )%
Price/Other(1) % Change             4.4 %             6.4 %             0.1 %
Total % Change                     12.8 %             8.7 %            (2.7 )%



(1) "Other" includes unallocated allowances and discounts.

The following table sets forth changes in gross margin dollars and percentages by product category, and percentage changes in unit volume growth by product, in each case for fiscal 2013, fiscal 2012 and fiscal 2011:

                                   Fiscal 2013       Fiscal 2012       Fiscal 2011
                                                (Dollars in millions)
Gross Margin $ by Category
 Structural Products              $          67     $          77     $          65
 Specialty Products                         155               146               137
 Other(1)                                     6                 7                 8
Total Gross Margin                $         228     $         230     $         210
Gross Margin % by Category
 Structural Products                        6.9 %             9.6 %             9.2 %
 Specialty Products                        12.9 %            13.1 %            12.8 %
Total Gross Margin %                       10.6 %            12.1 %            12.0 %
Unit Volume % Change by Product
 Structural Products                       10.0 %             1.4 %           (15.1 )%
 Specialty Products                         7.1 %             2.9 %             7.4 %
Total Unit Volume % Change                  8.4 %             2.3 %            (2.8 )%



(1) "Other" includes unallocated allowances and discounts.

The following table sets forth changes in net sales and gross margin by channel and percentage changes in gross margin by channel, in each case for fiscal 2013, fiscal 2012 and fiscal 2011:

                                                                               Fiscal 2013       Fiscal 2012       Fiscal 2011
                                                                                            (Dollars in millions)
Sales by Channel
 Warehouse/Reload                                                             $       1,755     $       1,534     $       1,397
 Direct                                                                                 413               386               376
 Other(1)                                                                               (16 )             (12 )             (18 )
Total                                                                         $       2,152     $       1,908     $       1,755
Gross Margin by Channel
 Warehouse/Reload                                                             $         198     $         199     $         179
 Direct                                                                                  24                24                23
 Other(1)                                                                                 6                 7                 8
Total                                                                         $         228     $         230     $         210
Gross Margin % by Channel
 Warehouse/Reload                                                                      11.3 %            13.0 %            12.8 %
 Direct                                                                                 5.8 %             6.2 %             6.1 %
Total                                                                                  10.6 %            12.1 %            12.0 %



(1) "Other" includes unallocated allowances and discounts.

Fiscal Year

Fiscal 2013 contained 53 weeks. Fiscal 2012 and fiscal 2011 each contained 52 weeks. Our fiscal quarters are based on a 5-4-4 week period, with the exception of the fourth fiscal quarter of fiscal years containing 53 weeks, which are based on a 5-4-5 week period.

Results of Operations

Fiscal 2013 Compared to Fiscal 2012

The following table sets forth our results of operations for fiscal 2013 and
fiscal 2012.

                                                                                  % of                             % of
                                                                                  Net                              Net
                                                              Fiscal 2013        Sales         Fiscal 2012        Sales
                                                                                 (Dollars in thousands)
Net sales                                                     $  2,151,972          100.0 %    $  1,907,842          100.0 %
Gross profit                                                       228,483           10.6 %         230,070           12.1 %
Selling, general and administrative                                240,667           11.2 %         215,996           11.3 %
Depreciation and amortization                                        9,117            0.4 %           8,565            0.4 %
Operating (loss) income                                            (21,301 )         (1.0 )%          5,509            0.3 %
Interest expense, net                                               28,024            1.3 %          28,157            1.5 %
Other expense (income), net                                            306            0.0 %              (7 )          0.0 %
Loss before (benefit from) provision for income taxes              (49,631 )         (2.3 )%        (22,641 )         (1.2 )%
(Benefit from) provision for income taxes                           (9,013 )         (0.4 )%            386            0.0 %
Net loss                                                      $    (40,618 )         (1.9 )%   $    (23,027 )         (1.2 )%

Net sales. For the fiscal year ended January 4, 2014, net sales increased by 12.8%, or $244.1 million, to $2.2 billion. Sales during the fiscal year were positively impacted by a 15.5% increase in single family housing starts. Single family home construction has a significant impact on our sales. Structural sales increased by $162.2 million, or 20.1% from a year ago, as a result of a 10.1% increase in structural product prices and a 10.0% increase in unit volume. In addition, specialty sales increased $86.0 million, or 7.7% from a year ago, as a result of a 7.1% increase in unit volume and a 0.6% increase in specialty product prices.

Gross profit. Gross profit for fiscal 2013 was $228.5 million, or 10.6% of sales, compared to $230.1 million and 12.1% a year ago . Declines in gross margin were driven by volatility in wood-based structural product pricing, primarily during the second quarter of fiscal 2013. The declines in gross margin were further impacted by a greater percentage of our sales being comprised of lower gross margin structural products. In addition, we experienced lower margin sales as we sold through inventory at the five distribution centers we closed during the third quarter of fiscal 2013.

Selling, general and administrative. Selling, general and administrative expenses for fiscal 2013 were $240.7 million, or 11.2% of net sales, compared to $216.0 million, or 11.3% of net sales, during fiscal 2012. The increase in selling, general, and administrative expenses primarily was due to $11.2 million of restructuring and other charges associated with the fiscal 2013 restructuring and the change in executive leadership. In addition, during fiscal 2013 the Company recognized $5.2 million of other gains in selling, general and administrative expenses compared to $10.4 million of other gains recognized in selling, general and administrative expenses in fiscal 2012, resulting in an increase in total selling, general, and administrative expenses of $5.2 million. During fiscal 2013 there were also increases in third party freight, professional fees, and general maintenance and supplies of $2.3 million, $1.9 million and $1.3 million, respectively. These changes were partially offset by a decrease in payroll of $1.2 million related to a reduced headcount from the 2013 restructuring and change in executive leadership.

The other gains recorded in selling, general and administrative expenses during fiscal 2013 were comprised of $5.2 million of gains on sales of property. In comparison, during fiscal 2012, other gains recorded in selling, general and administrative expenses were comprised of $9.9 million of gains on sales of property and a $0.5 million gain related to the insurance settlement on the Newtown, Connecticut facility. The increases to third party freight and general maintenance and supplies are largely due to the increase in revenue during fiscal 2013. The increase in professional fees relates to certain non-recurring activities requiring the services of various professionals. These activities included the 2013 Rights Offering, the freeze of the non-union participants in the hourly pension plan, the contribution of certain real properties to the hourly pension plan and the waiver process for the 2012 minimum required contribution of the hourly pension plan.

Depreciation and amortization. Depreciation and amortization expense was $9.1 million for fiscal 2013, compared to $8.6 million for fiscal 2012. The $0.5 million increase in depreciation and amortization is primarily due to an increase in capital expenditures for mobile equipment consisting of trucks, trailers, forklifts and automobiles.

Operating (loss) income. Operating loss for fiscal 2013 was $21.3 million compared to operating income of $5.5 million for fiscal 2012. The change in operating (loss) income reflects a $1.6 million decrease in gross profit as a result of the above factors, and an increase in depreciation of $0.5 million and an increase in selling, general, and administrative expenses of $24.7 million. Interest expense, net. Interest expense for fiscal 2013 was $28.0 million compared to $28.2 million for fiscal 2012. The $0.2 million decrease is due to a decrease in interest expense related to our mortgage of $1.7 million due to a decrease in principal and a decrease in amortization of debt issuance costs of $0.6 million. These changes were partially offset by an increase in interest related to our revolving credit facilities of $1.8 million, an increase in interest related to our capital lease obligations of $0.3 million, and expense of $0.1 million for the write-off of deferred financing costs that had been capitalized in fiscal 2013 with no similar activity during fiscal 2012. Interest expense included $3.2 million and $3.7 million of debt issue cost amortization for fiscal 2013 and fiscal 2012, respectively. In fiscal 2013, interest expense related to our revolving credit facilities and mortgage was $11.4 million and $13.0 million, respectively. In fiscal 2012, interest expense related to our revolving credit facilities and mortgage was $9.6 million and $14.7 million, respectively. See "Liquidity and Capital Resources" below for a description of agreements for the revolving credit facilities and the mortgage.

(Benefit from) provision for income taxes. Our effective tax rate was 18.2% and
(1.7)% for fiscal 2013 and fiscal 2012, respectively. The effective tax rate for fiscal 2013 is largely due to a full valuation allowance recorded against our tax benefit and an allocation of income tax expense to other comprehensive income (loss) for an actuarial gain associated with our hourly pension plan resulting in a benefit to continuing operations. The main driver of the actuarial pension gain is an increase in the market value of the underlying assets and a decrease in the pension liability resulting largely from the change in the underlying discount rate assumption, which increased from 4.24% in fiscal 2012 to 5.00% in fiscal 2013. The effective tax rate for fiscal 2012 is largely due to a full valuation allowance recorded against our tax benefit related to our fiscal 2012 loss. The effect of the valuation allowance was offset by state income taxes, gross receipts taxes, and foreign income taxes recorded on a separate company basis partially offset by various refundable tax credits.

Net loss. Net loss for fiscal 2013 was $40.6 million, compared to $23.0 million for fiscal 2012 as a result of the factors discussed above.

On a per-share basis, basic and diluted loss applicable to common stockholders for fiscal 2013 each was $0.51. For fiscal 2012, basic and diluted loss per share each was $0.35.

Fiscal 2012 Compared to Fiscal 2011

The following table sets forth our results of operations for fiscal 2012 and
fiscal 2011.

                                                                                  % of                             % of
                                                                                  Net                              Net
                                                              Fiscal 2012        Sales         Fiscal 2011        Sales
                                                                                 (Dollars in thousands)
Net sales                                                     $  1,907,842          100.0 %    $  1,755,431          100.0 %
Gross profit                                                       230,070           12.1 %         210,149           12.0 %
Selling, general and administrative                                215,996           11.3 %         207,857           11.8 %
Depreciation and amortization                                        8,565            0.4 %          10,562            0.6 %
Operating income (loss)                                              5,509            0.3 %          (8,270 )         (0.5 )%
Interest expense, net                                               28,157            1.5 %          30,510            1.7 %
Changes associated with the ineffective interest rate swap               -            0.0 %          (1,676 )         (0.1 )%
Other (income) expense, net                                             (7 )          0.0 %             501            0.0 %
Loss before provision for income taxes                             (22,641 )         (1.2 )%        (37,605 )         (2.1 )%
Provision for income taxes                                             386            0.0 %             962            0.1 %
Net loss                                                      $    (23,027 )         (1.2 )%   $    (38,567 )         (2.2 )%

Net sales. For the fiscal year ended December 29, 2012, net sales increased by 8.7%, or $152.4 million, to $1.9 billion. Sales during the fiscal year were positively impacted by a 28% increase in single family housing starts. Single family home construction has a significant impact on our sales. Structural sales increased by $101.2 million, or 14.3% from a year ago, as a result of a 12.9% increase in structural product prices and a 1.4% increase in unit volume. In addition, specialty sales increased $45.8 million, or 4.3% from a year ago, as a result of a 1.4% increase in specialty product prices and a 2.9% increase in unit volume.

Gross profit. Gross profit for fiscal 2012 was $230.1 million, or 12.1% of sales, compared to $210.1 million, or 12.0% of sales, in fiscal 2011. The increase in gross profit dollars compared to fiscal 2011 was driven primarily by the factors noted above, coupled with an improvement in gross margin percentage due to the Company's efforts to improve gross margin.

Selling, general and administrative. Selling, general and administrative expenses for fiscal 2012 were $216.0 million, or 11.3% of net sales, compared to $207.9 million, or 11.8% of net sales, during fiscal 2011. The increase in selling, general, and administrative expenses is primarily due to a reduction in other gains recorded in selling, general and administrative expenses in 2012 when compared to 2011 coupled with increases in certain variable costs and pension expense. During 2012 the Company recognized $10.4 million of other gains in selling, general and administrative expenses compared to $14.0 million of other gains recognized in selling, general and administrative expenses in fiscal 2011, both of which were recorded in selling, general and administrative expenses, resulting in an increase in total selling, general, and administrative expenses of $3.6 million. In addition, during fiscal 2012 there were increases in pension expense, commissions, stock compensation and other salary based incentives of $2.1 million, $0.7 million, $0.8 million and $1.7 million, respectively. These increases were partially offset by a decrease in payroll of $2.8 million.

The other gains recorded in selling, general and administrative expenses during fiscal 2012 were comprised of $9.9 million of gains on property sales and a $0.5 million gain related to the insurance settlement on the Newtown, Connecticut facility. In comparison, during fiscal 2011, other gains recorded in selling, general and administrative expenses were comprised of $10.6 million of gains on property sales, a $2.0 million gain related to the modification of the lease agreement for our headquarters in Atlanta, Georgia and a $1.4 million gain related to the insurance settlement on the Newtown, Connecticut facility. The increase in pension expense was due to changes in the underlying pension valuation assumptions. The increases in incentives and commissions were largely attributable to higher sales activity in fiscal 2012. The $2.8 million decrease in payroll was due to reduction in force activities occurring in fiscal 2011, which resulted in $1.4 million in severance charges in fiscal 2011. We did not materially increase headcount during fiscal 2012 or perform any material restructuring.

. . .

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