BlueLinx Holdings Inc 10-Q for FY2022 Q2
BlueLinx Holdings Inc. (BXC)
10-Q
2022-08-02
For: 2022-07-02
View Original
Added on
April 09, 2026
About this 10-Q
BlueLinx Holdings Inc filed this 10-Q on August 2, 2022, covering the quarter ended July 2, 2022 (FY2022 Q2).
Headline figures
Quarter ended July 2, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.24B
- down 5.2% from $1.31B a year earlier
- Net income
- $71.27M
- down 37.2% from net income of $113.46M a year earlier
- Diluted EPS
- $7.48
- down 35.6% from $11.61 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended July 2, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission file number: 001-32383
| (Exact name of registrant as specified in its charter) | ||||||||
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(770 ) 953-7000
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically (Section 232.405 of this chapter) every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | ☑ | Non-accelerated Filer | ☐ | Smaller Reporting Company | ||||||||||||||||||
| Emerging Growth Company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of July 29, 2022, there were 9,282,200 shares of BlueLinx Holdings Inc. common stock, par value $0.01, outstanding.
BLUELINX HOLDINGS INC.
Form 10-Q
For the Quarterly Period Ended July 2, 2022
INDEX
| PAGE | |||||
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses (income): | |||||||||||||||||||||||
| Selling, general, and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Amortization of deferred gains on real estate | ( | ( | ( | ( | |||||||||||||||||||
| Gains from sales of property | ( | ( | ( | ||||||||||||||||||||
| Other operating expenses | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Non-operating expenses (income): | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Other expense (income), net | ( | ( | |||||||||||||||||||||
| Income before provision for income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Basic income per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted income per share | $ | $ | $ | $ | |||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Amortization of unrecognized pension gain, net of tax | |||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||
| Total other comprehensive income | |||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See accompanying Notes.
1
BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
| July 2, 2022 | January 1, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, less allowances of $ | |||||||||||
| Inventories, net | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, at cost | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred tax assets | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued compensation | |||||||||||
| Taxes payable | |||||||||||
| Finance lease liabilities - short-term | |||||||||||
| Operating lease liabilities - short-term | |||||||||||
| Real estate deferred gains - short-term | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities: | |||||||||||
Long-term debt, net of debt issuance costs of $ | |||||||||||
| Finance lease liabilities - long-term | |||||||||||
| Operating lease liabilities - long-term | |||||||||||
| Real estate deferred gains - long-term | |||||||||||
| Pension benefit obligation | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies | |||||||||||
| STOCKHOLDERS’ EQUITY: | |||||||||||
Common Stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying Notes.
2
BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
(Unaudited)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Stockholders’ Equity Total | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Impact of pension plan, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Compensation related to share-based grants | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of shares to satisfy employee tax withholdings | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Common stock repurchase and retirement | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, April 2, 2022 | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Impact of pension plan, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | ||||||||||||||||||||||||||||||||
| Compensation related to share-based grants | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of shares to satisfy employee tax withholdings | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Common stock repurchase and retirement | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Forward contract for accelerated share repurchase agreement | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | — | — | ( | — | |||||||||||||||||||||||||||||||
| Balance, July 2, 2022 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings (Accumulated Deficit) | Stockholders’ Equity Total | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, January 2, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Impact of pension plan, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Compensation related to share-based grants | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of shares to satisfy employee tax withholdings | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, April 3, 2021 | ( | ( | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Impact of pension plan, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | ||||||||||||||||||||||||||||||||
| Compensation related to share-based grants | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of shares to satisfy employee tax withholdings | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | — | — | ( | — | |||||||||||||||||||||||||||||||
| Balance, July 3, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
See accompanying Notes.
3
BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six Months Ended | |||||||||||
| July 2, 2022 | July 3, 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to cash provided by operations: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Adjustments to debt issuance costs associated with term loan | |||||||||||
| Gains from sales of property | ( | ( | |||||||||
| Deferred income tax | ( | ( | |||||||||
| Amortization of deferred gains from real estate | ( | ( | |||||||||
| Share-based compensation | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Taxes payable | |||||||||||
| Other current assets | ( | ( | |||||||||
| Other assets and liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sale of assets, net | |||||||||||
| Property and equipment investments | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings on revolving credit facilities | |||||||||||
| Repayments on revolving credit facilities | ( | ||||||||||
| Repayments on term loan | ( | ||||||||||
| Common stock repurchase and retirement | ( | ||||||||||
| Debt financing costs | ( | ||||||||||
| Repurchase of shares to satisfy employee tax withholdings | ( | ( | |||||||||
| Principal payments on finance lease liabilities | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net change in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Interest paid during the period | |||||||||||
| Taxes paid during the period | |||||||||||
| Non-cash transactions: | |||||||||||
| Property and equipment acquired under finance leases | |||||||||||
See accompanying Notes.
4
BLUELINX HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements include the accounts of BlueLinx Holdings Inc. and its wholly owned subsidiaries (the “Company”). We derived the condensed consolidated balance sheet at July 2, 2022 from the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (the “Fiscal 2021 Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”) on February 22, 2022. In the opinion of our management, the condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of our statements of operations and comprehensive income for the three and six months ended July 2, 2022 and July 3, 2021, our balance sheets at July 2, 2022 and January 1, 2022, our statements of stockholders’ equity for the six months ended July 2, 2022 and July 3, 2021, and our statements of cash flows for the six months ended July 2, 2022 and July 3, 2021.
We have condensed or omitted certain notes and other information from the interim condensed consolidated financial statements presented in this report. Therefore, these condensed consolidated interim financial statements should be read in conjunction with the Fiscal 2021 Form 10-K. The results for the three and six months ended July 2, 2022 are not necessarily indicative of results that may be expected for the full year ending December 31, 2022, or any other interim period.
We operate on a 5-4-4 fiscal calendar. Our fiscal year ends on the Saturday closest to December 31 of that fiscal year and may comprise 53 weeks in certain years. Our 2022 fiscal year contains 52 weeks and ends on December 31, 2022. Fiscal 2021 contained 52 weeks and ended on January 1, 2022.
Our financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which requires us to make estimates based on assumptions about current and, for some estimates, future economic and market conditions, which affect reported amounts and related disclosures in our financial statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position.
Reclassification of Prior Period Presentation
For the six months ended July 3, 2021, we have reclassified certain items within the presentation of our statement of cash flows to align with our statement of cash flows presentation for the six months ended July 2, 2022. Our reclassifications are limited to the operating activities section and include presenting only the impact of deferred income taxes, instead of our full provision for income taxes, as a reconciling item for net income to cash provided by operating activities. We have also reclassified certain items previously presented individually, such as pension expense and pension contributions, to be included in the change of other assets and liabilities. In addition, we are presenting the change in taxes payable, previously included in other assets and liabilities, as a distinct line item in our reconciliation of net income to cash provided by operating activities. These reclassifications, we believe, provide an enhanced level of transparency with regards to the presentation of our statement of cash flows.
Recently Adopted Accounting Standards
Credit Impairment Losses. In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This ASU sets forth a current expected credit loss (“CECL”) model which requires the measurement of all expected credit losses for financial instruments or other assets (e.g., trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model, is applicable to the measurement of credit losses on financial assets measured at amortized cost, and applies to some off-balance sheet credit exposures. The standard also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. The Company adopted this
5
standard in the first quarter of 2022 and the implementation did not have a material impact to the Company’s condensed consolidated financial statements.
Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The standard provides temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the discontinuation of the publication of certain tenors of the London Inter-bank Offered Rate (“LIBOR”) on December 31, 2021, with complete elimination of the publication of the LIBOR by June 30, 2023. The amendments in this ASU are elective and apply to all entities that have contracts referencing the LIBOR.
The Company’s revolving credit agreement, as further discussed in Note 6 to these condensed consolidated financial statements, currently references the LIBOR for determining interest payable on current and future borrowings and includes provisions for the use of alternative rates if the LIBOR is unavailable. The guidance in this ASU provides a practical expedient which simplifies accounting analyses under current U.S. GAAP for contract modifications if the change is directly related to a change from the LIBOR to a new interest rate index. The Company adopted this standard prospectively in the first quarter of 2022. The implementation did not have a material impact to the Company’s condensed consolidated financial statements or to any key terms of our revolving credit agreement other than the discontinuation of the LIBOR.
Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740 and also clarifies and amends existing guidance to improve consistent application. The amendments in this standard are effective for interim periods and fiscal years beginning after December 15, 2020. We adopted this standard effective for fiscal year 2021. The adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements.
2. Inventories
3. Goodwill and Other Intangible Assets
In connection with our past merger and acquisition activity, we acquired certain intangible assets. As of July 2, 2022, our intangible assets consist of goodwill and other intangible assets including customer relationships, noncompete agreements, and trade names.
Goodwill
Goodwill is the excess of the cost of an acquired entity over the fair value of tangible and intangible assets (including customer relationships, noncompete agreements, and trade names) acquired, and liabilities assumed, under acquisition accounting for business combinations. As of July 2, 2022, goodwill was $47.8 million.
Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to a reporting unit and to determine if the fair value of the reporting unit’s goodwill is less than its carrying amount. We evaluate goodwill for impairment during the fourth quarter of each fiscal year. In addition, we will evaluate the carrying value for impairment between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Such events and indicators may include, without limitation, significant declines in the industries in which our products are used, significant changes in capital market conditions, and significant changes in our market capitalization. No such indicators were present during the second quarter of fiscal 2022. Our one reporting unit has a fair value that exceeds its carrying value as of July 2, 2022.
6
Definite-Lived Intangible Assets
On July 2, 2022, the gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets were as follows:
| Intangible Asset | Weighted Average Remaining Useful Lives (Years) | Gross Carrying Amounts | Accumulated Amortization(1) | Net Carrying Amounts | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||||||||
| Noncompete agreements | — | ( | ||||||||||||||||||||||||
| Trade names | — | ( | ||||||||||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||||||||
(1) Intangible assets, except customer relationships, are amortized on a straight-line basis. Customer relationships are amortized on a double declining balance method.
Amortization Expense
Amortization expense for our definite-lived intangible assets was $0.6 million and $1.7 million for the three and six month periods ended July 2, 2022, respectively. For the three and six month periods ended July 3, 2021, amortization expense was $1.2 million and $3.1 million, respectively.
Estimated amortization expense for definite-lived intangible assets for the remaining portion of 2022 and the next five fiscal years is as follows:
| Fiscal Year | Estimated Amortization | |||||||
| (In thousands) | ||||||||
| 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
4. Revenue Recognition
We recognize revenue when the following criteria are met: (1) Contract with the customer has been identified; (2) Performance obligations in the contract have been identified; (3) Transaction price has been determined; (4) Transaction price has been allocated to the performance obligations; and (5) When (or as) performance obligations are satisfied.
Contracts with our customers are generally in the form of standard terms and conditions of sale. From time to time, we may enter into specific contracts, which may affect delivery terms. Performance obligations in our contracts generally consist solely of delivery of goods. For all sales channel types, consisting of warehouse, direct, and reload sales, we typically satisfy our performance obligations upon shipment. Our customer payment terms are typical for our industry, and may vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not deemed to be significant by us. For certain sales channels and/or products, our standard terms of payment may be as early as ten days.
In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis. Customer consigned inventory is maintained and stored by certain customers; however, ownership and risk of loss remain with us.
All revenues recognized are net of trade allowances (i.e., rebates), cash discounts, and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical
7
The following table presents our revenues disaggregated by revenue source. Sales and usage-based taxes are excluded from revenues.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| Product type | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Specialty products | $ | $ | $ | $ | |||||||||||||||||||
| Structural products | |||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | |||||||||||||||||||
The following table presents our revenues disaggregated by sales channel. Warehouse sales are delivered from our warehouses. Reload sales are similar to warehouse sales but are shipped from warehouses, most of which are operated by third-parties, where we store owned products to enhance our operating efficiencies. This channel is employed primarily to service strategic customers that would be less economical to service from our warehouses, and to distribute large volumes of imported products from port facilities. Direct sales are shipped from the manufacturer to the customer without our taking physical possession of the inventory and, as a result, typically generate lower margins than our warehouse and reload distribution channels. This distribution channel requires the lowest amount of committed capital and fixed costs. Sales and usage-based taxes are excluded from revenues.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| Sales channel | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Warehouse and reload | $ | $ | $ | $ | |||||||||||||||||||
| Direct | |||||||||||||||||||||||
| Customer discounts and rebates | ( | ( | ( | ( | |||||||||||||||||||
| Total net sales | $ | $ | $ | $ | |||||||||||||||||||
5. Assets Held for Sale
As of July 2, 2022, we had no 2.6 million and was included in other current assets in our condensed consolidated balance sheet. As of January 1, 2022, the book value of total liabilities classified as “held for sale” was $1.9 million and was included in other current liabilities in our condensed consolidated balance sheet.
Assets classified as “held for sale” as of January 1, 2022, consisted of fixed assets, at net book value, and current assets, including raw material and work in process inventory, affiliated with one of our business locations in the Midwest. Liabilities classified as “held for sale” as of January 1, 2022 included current liabilities, such as accounts payable, directly associated with those assets held for sale that will be transferred with the assets held for sale. As of January 1, 2022, we planned to sell these assets and transfer these liabilities within the next 12 months. During the second quarter of 2022, we completed the sale of assets and liabilities previously classified as held for sale.
8
6. Long-Term Debt
As of July 2, 2022 and January 1, 2022, long-term debt consisted of the following:
| July 2, 2022 | January 1, 2022 | ||||||||||
| (In thousands) | |||||||||||
Senior secured notes (1) | $ | $ | |||||||||
Revolving credit facility (2) | |||||||||||
Finance lease obligations (3) | |||||||||||
| Unamortized debt issuance costs | ( | ( | |||||||||
| Unamortized bond discount costs | ( | ( | |||||||||
| Less: current maturities of long-term debt | |||||||||||
| Long-term debt, net of current maturities | $ | $ | |||||||||
(1)As of July 2, 2022 and January 1, 2022, our long-term debt was comprised of $300.0 291.8 million and $291.3 million at July 2, 2022 and January 1, 2022, respectively. This presentation is net of their discount of $3.8 million and $4.0 million and the combined carrying value of our debt issuance costs of $4.5 million and $4.7 million at July 2, 2022 and January 1, 2022, respectively. Our senior secured notes are presented in this table at their face value.
(2) The average effective interest rate was zero percent and 2.5 percent for the quarters ended July 2, 2022 and July 3, 2021, respectively.
(3) Refer to Note 9, Leases, for interest rates associated with finance lease obligations.
Senior Secured Notes
In October 2021, we entered into an indenture (the “Indenture”) with the guarantors party thereto and Truist Bank, as trustee and collateral agent, in connection with a private offering of $300 million of our six percent senior secured notes due 2029 (the “2029 Notes”). The 2029 Notes were issued to investors at 98.625 percent of their principal amount and will mature on November 15, 2029. The majority of net proceeds from the offering of the 2029 Notes were used to repay borrowings under our revolving credit facility, as defined below.
Revolving Credit Facility
In April 2018, we entered into a revolving credit facility with Wells Fargo Bank, National Association, as administrative agent (“the Agent”), and certain other financial institutions party thereto. In August 2021, we entered into a second amendment to our revolving credit facility to, among other things, extend the maturity date of the facility to August 2, 2026, and reduce the interest rate on borrowings under the facility (as amended, the “Revolving Credit Facility”). As amended, the Revolving Credit Facility provides for a senior secured asset-based revolving loan and letter of credit facility of up to $350 million. The Borrowers’ obligations under the Revolving Credit Facility are secured by a security interest in substantially all of our and our subsidiaries’ assets (other than real property), including inventories, accounts receivable, and proceeds from those items.
Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.25 percent to 1.75 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on LIBOR, or (ii) the Agent’s base rate plus a margin ranging from 0.25 percent to 0.75 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate.
Borrowings under the Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the revolving credit agreement). The Borrowers are required to repay revolving loans thereunder to the extent that such revolving loans exceed the Borrowing Base then in effect. The Revolving Credit Facility may be prepaid in whole or in part from time to time without penalty or premium, but including all breakage costs incurred by any lender thereunder.
As of July 2, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $451.4 million under our Revolving Credit Facility. As of January 1, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $431.7 million under our Revolving Credit Facility. Our average effective
9
interest rate under the facility was zero percent and 2.5 percent for the quarters ended July 2, 2022 and July 3, 2021, respectively.
The Revolving Credit Facility contains certain financial and other covenants, and our right to borrow under the Revolving Credit Facility is conditioned upon, among other things, our compliance with these covenants. We were in compliance with all covenants under the Revolving Credit Facility as of July 2, 2022.
Term Loan Facility
On April 2, 2021, we repaid the remaining outstanding principal balance of the term loan facility, and, as a result, as of January 1, 2022 and July 2, 2022, we had zero 5.8 million of debt issuance costs that we were amortizing in connection with our former term loan facility. These costs are included within interest expense, net on the condensed consolidated statements of operations and reported separately as an adjustment to net income in our condensed consolidated statements of cash flows.
As the facility was paid in full as of April 2, 2021, our average effective interest rate under the facility, exclusive of fees and prepayment premiums, was zero percent
Finance Lease Obligations
Our finance lease liabilities consist of leases related to equipment and vehicles, and real estate, with the majority of those finance leases related to real estate. For more information on our finance lease obligations, refer to Note 9, Leases.
7. Net Periodic Pension Benefit
The following table shows the components of our net periodic pension benefit:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| Pension-related items | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
Service cost (1) | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost on projected benefit obligation | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of unrecognized gain | |||||||||||||||||||||||
| Net periodic pension benefit | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
(1) Service cost is not a part of our net periodic pension benefit as our pension plan is frozen for all participants.
The net periodic pension benefit is included in other expense (income), net in our condensed consolidated statement of operations and comprehensive income.
8. Stock Compensation
10
9. Leases
We have operating and finance leases for certain of our distribution facilities, office space, land, mobile fleet, and equipment. Many of our leases are non-cancelable and typically have a defined initial lease term, and some provide options to renew at our election for specified periods of time. The majority of our leases have remaining lease terms of to 15 years, some of which include one or more options to extend the leases for five years . Our leases generally provide for fixed annual rentals. Certain of our leases include provisions for escalating rent based on, among other things, contractually defined increases and/or changes in the Consumer Price Index (“CPI”). The known changes to lease payments are included in the lease liability at lease commencement. Unknown changes related to CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. In addition, a subset of our vehicle lease cost is considered variable. Some of our leases require us to pay taxes, insurance, and maintenance expenses associated with the leased assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We determine if an arrangement is a lease at inception and assess lease classification as either operating or finance at lease inception or modification. Operating lease right-of use (“ROU”) assets and liabilities are presented separately on the condensed consolidated balance sheets. Finance lease ROU assets are included in property and equipment and the finance lease obligations are presented separately in the condensed consolidated balance sheets. When a lease does not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. We have also made the accounting policy election to not separate lease components from non-lease components related to our mobile fleet asset class.
Finance Lease Liabilities
Our finance lease liabilities consist of leases related to equipment and vehicles, and real estate. As noted in the table below, a majority of our finance leases, formally known as capital leases, relate to real estate.
The following table presents our assets and liabilities related to our leases as of July 2, 2022 and January 1, 2022:
| Lease assets and liabilities | July 2, 2022 | January 1, 2022 | ||||||||||||
| (In thousands) | ||||||||||||||
| Assets | Classification | |||||||||||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | $ | $ | |||||||||||
Finance lease right-of-use assets (1) | Property and equipment, net | |||||||||||||
| Total lease right-of-use assets | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||
| Current portion | ||||||||||||||
| Operating lease liabilities | Operating lease liabilities - short term | $ | $ | |||||||||||
| Finance lease liabilities | Finance lease liabilities - short term | |||||||||||||
| Non-current portion | ||||||||||||||
| Operating lease liabilities | Operating lease liabilities - long term | |||||||||||||
| Finance lease liabilities | Finance lease liabilities - long term | |||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||
(1) Finance lease right-of-use assets are presented net of accumulated amortization of $82.3 million and $73.7 million as of July 2, 2022 and January 1, 2022, respectively.
11
The components of lease expense were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| Components of lease expense | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Operating lease cost: | $ | $ | $ | $ | |||||||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | $ | |||||||||||||||||||
| Interest on lease liabilities | |||||||||||||||||||||||
| Total finance lease costs | $ | $ | $ | $ | |||||||||||||||||||
Cash flow information related to leases was as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| Cash flow information | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | |||||||||||||||||||
| Operating cash flows from finance leases | |||||||||||||||||||||||
| Financing cash flows from finance leases | $ | $ | $ | $ | |||||||||||||||||||
Non-cash supplemental cash flow information related to leases was as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| Non-cash information | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations | |||||||||||||||||||||||
| Operating leases | $ | $ | $ | $ | |||||||||||||||||||
| Finance leases | $ | $ | $ | $ | |||||||||||||||||||
Supplemental balance sheet information related to leases was as follows:
| Balance sheet information | July 2, 2022 | January 1, 2022 | |||||||||
| (In thousands) | |||||||||||
| Finance leases | |||||||||||
| Property and equipment | $ | $ | |||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
| Weighted Average Remaining Lease Term (in years) | |||||||||||
| Operating leases | |||||||||||
| Finance leases | |||||||||||
| Weighted Average Discount Rate | |||||||||||
| Operating leases | % | % | |||||||||
| Finance leases | % | % | |||||||||
12
The major categories of our finance lease liabilities as of July 2, 2022 and January 1, 2022 are as follows:
| Category | July 2, 2022 | January 1, 2022 | |||||||||
| (In thousands) | |||||||||||
| Equipment and vehicles | $ | $ | |||||||||
| Real estate | |||||||||||
| Total finance leases | $ | $ | |||||||||
As of July 2, 2022, maturities of lease liabilities were as follows:
| Fiscal year | Operating leases | Finance leases | |||||||||
| (In thousands) | |||||||||||
| 2022 | $ | $ | |||||||||
| 2023 | |||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| Thereafter | |||||||||||
| Total lease payments | $ | $ | |||||||||
| Less: imputed interest | ( | ( | |||||||||
| Total | $ | $ | |||||||||
On January 1, 2022, maturities of lease liabilities were as follows:
| Fiscal year | Operating leases | Finance leases | |||||||||
| (In thousands) | |||||||||||
| 2022 | $ | $ | |||||||||
| 2023 | |||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| Thereafter | |||||||||||
| Total lease payments | $ | $ | |||||||||
| Less: imputed interest | ( | ( | |||||||||
| Total | $ | $ | |||||||||
10. Commitments and Contingencies
Environmental and Legal Matters
From time to time, we are involved in various proceedings incidental to our businesses, and we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Although the ultimate outcome of these proceedings cannot be determined with certainty, based on presently available information management believes that adequate reserves have been established for probable losses with respect thereto and receivables have been recorded for expected receipts from settlements. Management further believes that, while the ultimate outcome of one or more of these matters could be material to our operating results in any given quarter, it will not have a materially adverse effect on our consolidated financial condition, results of operations, or cash flows.
Collective Bargaining Agreements
As of July 2, 2022, we employed approximately 2,053 associates and less than one percent of our associates are employed on a part-time basis. Approximately 19 percent of our associates are represented by various local labor unions with terms and
13
11. Accumulated Other Comprehensive Loss
Comprehensive income includes both net income and other comprehensive income. Other comprehensive income results from items deferred from recognition into our condensed consolidated statements of operations and comprehensive income. Accumulated other comprehensive loss is separately presented on our condensed consolidated balance sheets as part of stockholders’ equity.
The changes in balances for each component of accumulated other comprehensive loss for the six months ended July 2, 2022 were as follows:
| Defined benefit pension plan, net of tax | Other, net of tax | Total Accumulated Other Comprehensive Loss | |||||||||||||||
| January 1, 2022, beginning balance, net of tax | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive income, net of tax | |||||||||||||||||
| July 2, 2022, ending balance, net of tax | $ | ( | $ | $ | ( | ||||||||||||
12. Income Taxes
Effective Tax Rate
Our effective tax rate for the three months ended July 2, 2022 and July 3, 2021 was 23.1 percent and 23.5 percent, respectively. Our effective tax rate for the six months ended July 2, 2022 and July 3, 2021 was 25.1 percent and 24.4 percent, respectively.
Our effective tax rate for the three and six months ended July 2, 2022 and July 3, 2021 were impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation. Each period also includes a benefit from the vesting of restricted stock units, which had a greater impact on the three months ended July 2, 2022 and July 3, 2021 due to the timing of the vesting of our restricted stock awards. Our effective tax rate for the three and six months ended July 3, 2021 also benefited from the partial release of our valuation allowance for state net operating loss carryforwards we anticipated being able to utilize based on our taxable income through the end of the first and second quarters of fiscal 2021.
Deferred Tax Assets
Quarterly, we assess the carrying value of our deferred tax assets for impairment by evaluating the weight of available evidence at the end of each fiscal quarter. In our evaluation of the weight of available evidence at the end of the current quarter, we considered the recent reported income in the current quarter, as well as the reported income for 2021 and 2020 and the reported losses for 2019, which resulted in a three-year cumulative income situation as positive evidence which carried substantial weight. While this was substantial, it was not the only evidence we evaluated. We also considered evidence related to the four sources of taxable income to determine whether such positive evidence outweighed the negative evidence. The evidence considered included:
•future reversals of existing taxable temporary differences;
•future taxable income exclusive of reversing temporary differences and carryforwards;
•taxable income in prior carryback years, if carryback is permitted under the tax law; and
•tax planning strategies.
In addition to the positive evidence discussed above, we considered as positive evidence forecasted taxable income, the detail scheduling of timing of the reversal of our deferred tax assets and liabilities, and the evidence from business and tax planning strategies. As of July 2, 2022, in our evaluation of the weight of available evidence, we concluded that our net deferred tax assets were not impaired.
14
13. Income per Share
On May 3, 2022, we announced that our Board of Directors increased our share repurchase authorization to $100.0 million, up $75.0 million from the previous program, and that we entered into an Accelerated Share Repurchase Agreement (“ASR Agreement”) with Jefferies LLC (“Jefferies”) to repurchase $60.0 million of our common stock. Under the ASR Agreement, we received initial delivery of 553,584 shares of common stock on May 3, 2022 (the “Transaction Date”) representing approximately 65 percent of the total number of shares of common stock initially underlying the ASR Agreement based on our closing stock price of $70.45 on May 2, 2022. The initial delivery of 553,584 shares reduced the number of common shares outstanding on the Transaction Date and, as a result, reduced the weighted average number of common shares outstanding used to calculate basic income per share and diluted income per share for the three and six month periods ended July 2, 2022.
The total number of shares repurchased under the ASR Agreement is based on the average of the daily volume-weighted average price of our common stock during the repurchase period under the ASR Agreement, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR Agreement. At settlement, under certain circumstances, Jefferies may be required to deliver additional shares of common stock to us, or, under certain circumstances, we may be required to make a cash payment or to deliver shares of our common stock to Jefferies. Final settlement of the shares of common stock repurchased under the ASR Agreement could occur as early as the third quarter of 2022.
Management has performed an analysis of the average of the daily volume-weighted average price of our common stock since the Transaction Date and has determined, as of July 2, 2022, that the final settlement of shares of common stock under the ASR Agreement is not anticipated to have a dilutive impact upon final settlement.
The reconciliation of basic net income and diluted net income per common share for the three and six month periods ended July 2, 2022 and July 3, 2021 were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | ||||||||||||||||||||
| (In thousands, except per share data) | (In thousands, except per share data) | ||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average shares outstanding - basic | |||||||||||||||||||||||
| Dilutive effect of share-based awards | |||||||||||||||||||||||
| Weighted-average shares outstanding - diluted | |||||||||||||||||||||||
| Basic income per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted income per share | $ | $ | $ | $ | |||||||||||||||||||
Approximately 21,000 and 55,000 weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the three months ended July 2, 2022 and July 3, 2021, respectively, as the awards would have been anti-dilutive for the periods presented.
Approximately 13,000 and 27,000 weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the six months ended July 2, 2022 and July 3, 2021, respectively, as the awards would have been anti-dilutive for the periods presented.
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
About Our Business
BlueLinx is a leading wholesale distributor of residential and commercial building products in the United States. We are a “two-step” distributor. Two-step distributors purchase products from manufacturers and distribute those products to dealers and other suppliers in local markets, who then sell those products to end users. We carry a broad portfolio of both branded and private-label stock keeping units (“SKUs”) across two principal product categories: specialty products and structural products. Specialty products include items such as engineered wood, siding, millwork, outdoor living, specialty lumber and industrial products. Structural products include items such as lumber, plywood, oriented strand board, rebar, and remesh. We also provide a wide range of value-added services and solutions aimed at relieving distribution and logistics challenges for our customers and suppliers, while enhancing their marketing and inventory management capabilities.
We sell products through three main distribution channels, consisting of warehouse sales, reload sales, and direct sales. Warehouse sales, which generate the majority of our sales, are delivered from our warehouses to our customers. Reload sales are similar to warehouse sales but are shipped from warehouses, most of which are operated by third-parties, where we store owned products to enhance operating efficiencies. This channel is employed primarily to service strategic customers that would be less economical to service from our warehouses, and to distribute large volumes of imported products from port facilities. Direct sales are shipped from the manufacturer to the customer without our taking physical possession of the inventory and, as a result, typically generate lower margins than our warehouse and reload distribution channels. This distribution channel, however, requires the lowest amount of committed capital and fixed costs.
With a strong market position, a broad geographic coverage footprint servicing over 45 states, where our locations are in approximately 75 percent of the highest growth metropolitan statistical areas, combined with the strength of a locally focused sales force, we distribute a comprehensive range of products from over 750 suppliers. Our suppliers include some of the leading manufacturers in the industry, such as Allura, Arauco, Fiberon, Georgia-Pacific, Huber Engineered Woods, James Hardie, Louisiana-Pacific, Oldcastle APG, Ply Gem, Roseburg, Royal and Weyerhaeuser. We supply products to a broad base of over 15,000 total customers including national home centers, pro dealers, cooperatives, specialty distributors, regional and local dealers and industrial manufacturers. Many of our customers serve residential and commercial builders, contractors and remodelers in their respective geographic areas and local markets.
As a value-added partner in a complex and demanding building products supply chain, we play a critical role in enabling our customers to offer a broad range of products and brands, as most of our customers do not have the capability to purchase and warehouse products directly from manufacturers for such a large set of SKUs. The depth of our geographic footprint supports meaningful customer proximity across all the markets in which we operate, enabling faster and more efficient service. Similarly, we provide value to our supplier partners by enabling access to the large and fragmented network of lumber yards and dealers that those suppliers could not adequately serve directly. Our position in this distribution model for building products provides easy access to the marketplace for our suppliers and a value proposition of rapid delivery on an as-needed basis to our customers from our network of warehouse facilities.
Industry Overview
Our products are available across large and attractive end markets, including residential repair and remodel and residential new construction, which together account for approximately 85 percent of the end market mix for our addressable building material market served via two-step distribution based on our estimates. We estimate the remaining approximately 15 percent of end market mix is accounted for by commercial construction.
Certain recent changes in macro-economic factors, such as escalating home prices, may put pressure on the overall housing market, including the residential repair and remodel and residential new construction end markets. Given these developments, we anticipate a slowdown of the housing industry over the coming quarters. However, we believe that several factors, including the current high levels of home equity, recent work from home trends, the undersupply of housing in the United States, and the strength of housing starts compared to pre-COVID levels, among others, will continue to support demand for our products and drive long-term growth across the end markets in which we operate.
Residential Repair and Remodel
We estimate that residential repair and remodel spending accounts for approximately 45 percent of the end market mix for our addressable building material market served via two-step distribution. Repair and remodel sales tend to be less cyclical than
16
new construction, particularly for exterior products that are exposed to the elements and where maintenance is less likely to be deferred for long periods of time. We expect that current factors including the total installed base of U.S. homes, overall age of the U.S. housing stock, rising home prices supporting increased underlying home equity and availability of consumer capital will drive continued growth in repair and remodel spending.
According to the U.S. Census Bureau and Department of Housing and Urban Development, the median home age in the U.S. increased from 23 years in 1985 to 39 years in 2019 and approximately 80 percent of the current housing stock was built prior to 1999. We believe the increasing average age of the nation’s 142 million existing homes will continue to drive demand for repair and remodel projects. The annual U.S. homes installed base is projected to continue to increase through 2025, which is positive for both residential repair and remodel spending, as well as for residential construction.
Increased home improvement spending has also benefited from the COVID-19 pandemic, as homeowners are spending more time at home and are investing more in their homes as a result. Outdoor and exterior projects make heavy use of outdoor living products like composite decking and fencing, and other aesthetically focused exterior products like siding and trim, which are key and growing product categories for us.
Residential New Construction
We estimate that residential new home construction (including single-family and multi-family homes) accounts for approximately 40 percent of the end market mix for our addressable building material market served via two-step distribution. The pace of housing starts, with which a portion of our business is correlated, is driven by demographic and population shifts, mortgage interest rates (which are low compared to the 40-year average), the ability of builders to obtain skilled labor, and builders’ economic outlook. U.S. single family housing starts peaked in 2005, before experiencing a downturn through 2011. Since 2011, we have experienced the continuing recovery of residential new construction, which has translated into increased demand for the products we sell. We believe our large footprint, strong customer relationships, and comprehensive offering of leading products and brands position us to capitalize on continued growth in the new housing market.
According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, June 2022 single family housing starts in the United States were approximately two percent lower compared to that of May 2022, but approximately 28 percent higher than that of February 2020, prior to the COVID-19 pandemic. The monthly single family residential home supply is in line with the 25-year average and significantly below the peak levels observed in 2008 and 2009. For most of the last decade, housing production has lagged population growth and household formation and Freddie Mac estimates that the housing supply at the end of 2020 was 3.8 million units short of the level needed to match long-term demand. Harvard University’s Joint Center for Housing Studies estimates total annual housing construction through 2028 should be on the order of 1.5 million units, or about 120,000 higher than in 2020. Based on these data points, we believe there are fundamental factors driving opportunity in the residential new home construction end-market for building products of which we are well positioned to serve.
Seasonality
We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors common in the building products distribution industry, such as weather conditions and other seasonal factors. As a result, our quarterly sales volumes may trend higher in quarters when weather conditions and other seasonal factors are more favorable, reflecting an increase in activity in the residential repair and remodel and residential new home construction markets. Conversely, when weather conditions and other seasonal factors are less favorable, we may experience declines in sales volumes.
Commodity Markets
Our operating results are sensitive to fluctuations in commodity markets, specifically commodity markets for wood-based commodities that we classify as structural products. When prices fluctuate in the commodity markets which impact us, we may immediately adjust the end price of our products to compensate for the changes in market prices, which is common for businesses with inventories impacted by commodity price fluctuations. When we change our prices in response to market fluctuations, we will often see immediate impacts in our operating results. When market prices increase, this impact can be beneficial. Conversely, when market prices decrease, the impact can be negative because we are adjusting the selling prices for inventory often purchased at higher market prices. Fluctuations in the commodity markets during the last two years have had a significant impact on our operating results for the periods presented in this quarterly report, of which we discuss in more detail elsewhere in this report.
17
Supply Constraints
Our operating results are impacted by the availability of the products we sell in the markets in which we do business. When our inventory supply is constrained, our operating results may be impacted by lower sales volumes. While supply constraints may negatively impact our sales volumes, they may also have a positive impact on our net sales and overall profitability. This is because supply constraints can cause prices to increase. Under these circumstances, we may sell less product by volume, but at a higher price which could have a positive impact on our levels of sales and profitability. Conversely, rapid changes in supply levels, such as the sudden increase in availability of a product where the supply was previously constrained, may have a negative impact on our operating results especially in situations where the demand does not also increase proportionally with supply increases.
Our Culture and Management Focus
We remain committed to driving a culture of profitable growth within new and existing product lines and geographies, while positioning the Company for long-term value creation. The following initiatives represent key areas of our management team’s focus:
1.Foster a performance-driven culture committed to profitable growth. This includes enhancing the customer experience; accelerating organic growth within specific product and solutions offerings where the Company is uniquely advantaged; and deploying capital to drive sustained margin expansion, grow cash flow and maintain continued profitable growth.
2.Migrate sales mix toward higher-margin specialty product categories. The Company intends to pursue a revenue mix increasingly weighted toward higher-margin, specialty product categories such as engineered wood, siding, millwork, outdoor living, specialty lumber and industrial products. Additionally, the Company intends to expand its value-added service offerings designed to simplify complex customer sourcing requirements, together with marketing, inventory and pricing services afforded by the Company’s national platform.
3.Maintain a disciplined capital structure and pursue high-return investments that increase the value of the Company. The Company intends to maintain a disciplined capital structure while at the same time investing in its business to modernize its tractor fleet and distribution facilities and to improve operational performance. The Company also continues to evaluate potential acquisition targets that complement its existing capabilities, grow its specialty products business, increase customer exposure, expand its geographic reach, or a combination thereof. We invested $4.4 million and $6.9 million in capital for our business during the three and six month periods ending July 2, 2022, respectively, to improve operational performance and productivity.
Factors That Affect Operating Results
Our results of operations and financial performance are influenced by a variety of factors, including the following: pricing and product cost variability; volumes of product sold; competition; changes in the supply and/or demand for products that we distribute; the cyclical nature of the industry in which we operate; housing market conditions; consolidation among competitors, suppliers, and customers; disintermediation risk; loss of products or key suppliers and manufacturers; our dependence on international suppliers and manufacturers for certain products; potential acquisitions and the integration and completion of such acquisitions; business disruptions; effective inventory management relative to our sales volume or the prices of the products we produce; information technology security risks and business interruption risks; the ability to attract, train, and retain highly qualified associates and other key personnel while controlling related labor costs; exposure to product liability and other claims and legal proceedings related to our business and the products we distribute; natural disasters, catastrophes, fire, wars or other unexpected events; successful implementation of our strategy; wage increases or work stoppages by our union employees; costs imposed by federal, state, local, and other regulations; compliance costs associated with federal, state, and local environmental protection laws; the COVID-19 pandemic and other contagious illness outbreaks and their potential effects on our industry; regulations concerning mandatory COVID-19 vaccines; fluctuations in our operating results; our level of indebtedness and our ability to incur additional debt to fund future needs; the covenants of the instruments governing our indebtedness limiting the discretion of our management in operating the business; variable interest rate risk under certain indebtedness; the fact that we have consummated certain sale leaseback transactions with resulting long-term non-cancelable leases, many of which are or will be finance leases; the fact that we lease many of our distribution centers, and we would still be obligated under these leases even if we close a leased distribution center; inability to raise funds necessary to finance a required repurchase of our senior secured notes; inability to successfully execute the ASR; a lowering or withdrawal of debt ratings; changes in our product mix; increases in petroleum prices; shareholder activism; changes in insurance-related deductible/retention reserves based on actual loss experience; the possibility that the value of our deferred tax assets could become impaired; changes in our expected annual effective tax rate could be volatile; changes in actuarial assumptions for our pension plan; the costs and liabilities related to our
18
participation in multi-employer pension plans could increase; the risk that our cash flows and capital resources may be insufficient to service our existing or future indebtedness; the possibility that we could be the subject of securities class action litigation due to stock price volatility; activities of activist shareholders; indebtedness terms that limit our ability to pay dividends on common stock; and changes in, or interpretation of, accounting principles.
19
Results of Operations
The following table sets forth our results of operations for the second quarter of fiscal 2022 and fiscal 2021:
| Second Quarter of Fiscal 2022 | % of Net Sales | Second Quarter of Fiscal 2021 | % of Net Sales | ||||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Net sales | $ | 1,239,379 | 100.0% | $ | 1,307,913 | 100.0% | |||||||||||||||||
| Gross profit | 201,408 | 16.3% | 251,172 | 19.2% | |||||||||||||||||||
| Selling, general, and administrative | 91,338 | 7.4% | 87,010 | 6.7% | |||||||||||||||||||
| Depreciation and amortization | 6,518 | 0.5% | 7,080 | 0.5% | |||||||||||||||||||
| Amortization of deferred gains on real estate | (984) | (0.1)% | (984) | (0.1)% | |||||||||||||||||||
| Gains from sales of property | (144) | 0.0% | — | 0.0% | |||||||||||||||||||
| Other operating expenses | 626 | 0.1% | 871 | 0.1% | |||||||||||||||||||
| Operating income | 104,054 | 8.4% | 157,195 | 12.0% | |||||||||||||||||||
| Interest expense, net | 11,255 | 0.9% | 9,143 | 0.7% | |||||||||||||||||||
| Other expense (income), net | 139 | 0.0% | (314) | (0.0)% | |||||||||||||||||||
| Income before provision for income taxes | 92,660 | 7.5% | 148,366 | 11.3% | |||||||||||||||||||
| Provision for income taxes | 21,388 | 1.7% | 34,908 | 2.7% | |||||||||||||||||||
| Net income | $ | 71,272 | 5.8% | $ | 113,458 | 8.7% | |||||||||||||||||
The following table sets forth our results of operations for the first six month periods of fiscal 2022 and fiscal 2021:
| First Six Months of Fiscal 2022 | % of Net Sales | First Six Months of Fiscal 2021 | % of Net Sales | ||||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Net sales | $ | 2,541,684 | 100.0% | $ | 2,333,382 | 100.0% | |||||||||||||||||
| Gross profit | 492,459 | 19.4% | 431,564 | 18.5% | |||||||||||||||||||
| Selling, general, and administrative | 182,627 | 7.2% | 162,569 | 7.0% | |||||||||||||||||||
| Depreciation and amortization | 13,264 | 0.5% | 14,545 | 0.6% | |||||||||||||||||||
| Amortization of deferred gains on real estate | (1,968) | (0.1)% | (1,967) | (0.1)% | |||||||||||||||||||
| Gains from sales of property | (144) | 0.0% | (1,287) | (0.1)% | |||||||||||||||||||
| Other operating expenses | 1,464 | 0.1% | 983 | 0.0% | |||||||||||||||||||
| Operating income | 297,216 | 11.7% | 256,721 | 11.0% | |||||||||||||||||||
| Interest expense, net | 22,548 | 0.9% | 25,377 | 1.1% | |||||||||||||||||||
| Other expense (income), net | 1,277 | 0.1% | (628) | (0.0)% | |||||||||||||||||||
| Income before provision for income taxes | 273,391 | 10.8% | 231,972 | 9.9% | |||||||||||||||||||
| Provision for income taxes | 68,710 | 2.7% | 56,654 | 2.4% | |||||||||||||||||||
| Net income | $ | 204,681 | 8.1% | $ | 175,318 | 7.5% | |||||||||||||||||
20
The following table sets forth net sales by product category for the three and six month periods ending July 2, 2022 and July 3, 2021:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | ||||||||||||||||||||
| Net sales by product category | (In thousands) | (In thousands) | |||||||||||||||||||||
| Specialty products | $ | 787,860 | $ | 675,189 | $ | 1,555,767 | $ | 1,237,811 | |||||||||||||||
| Structural products | 451,519 | 632,724 | 985,917 | 1,095,571 | |||||||||||||||||||
| Total net sales | $ | 1,239,379 | $ | 1,307,913 | $ | 2,541,684 | $ | 2,333,382 | |||||||||||||||
| Percentage of total net sales by product category | |||||||||||||||||||||||
| Specialty products | 63.6 | % | 51.6 | % | 61.2 | % | 53.0 | % | |||||||||||||||
| Structural products | 36.4 | % | 48.4 | % | 38.8 | % | 47.0 | % | |||||||||||||||
| Total net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
The following table sets forth gross profit and gross margin percentages by product category for the three and six month periods ending July 2, 2022 and July 3, 2021:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | ||||||||||||||||||||
| Gross profit by product category | (In thousands) | (In thousands) | |||||||||||||||||||||
| Specialty products | $ | 180,254 | $ | 164,995 | $ | 364,353 | $ | 273,530 | |||||||||||||||
| Structural products | 21,154 | 86,177 | 128,106 | 158,034 | |||||||||||||||||||
| Total gross profit | $ | 201,408 | $ | 251,172 | $ | 492,459 | $ | 431,564 | |||||||||||||||
| Gross margin % by product category | |||||||||||||||||||||||
| Specialty products | 22.9 | % | 24.4 | % | 23.4 | % | 22.1 | % | |||||||||||||||
| Structural products | 4.7 | % | 13.6 | % | 13.0 | % | 14.4 | % | |||||||||||||||
| Total gross margin % | 16.3 | % | 19.2 | % | 19.4 | % | 18.5 | % | |||||||||||||||
The following table sets forth our structural product gross profit and gross margin percentage, excluding the impact of our lower of cost or net realizable value reserve, for the three and six month periods ending July 2, 2022 and July 3, 2021:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| Structural products | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Net sales | $ | 451,519 | $ | 632,724 | $ | 985,917 | $ | 1,095,571 | |||||||||||||||
| Gross profit, as reported | 21,154 | 86,177 | 128,106 | 158,034 | |||||||||||||||||||
| Add: lower of cost or net realizable value reserve | 9,776 | 16,693 | 9,776 | 16,693 | |||||||||||||||||||
| Gross profit, excluding reserve | $ | 30,930 | $ | 102,870 | $ | 137,882 | $ | 174,727 | |||||||||||||||
| Gross margin %, excluding reserve | 6.9 | % | 16.3 | % | 14.0 | % | 15.9 | % | |||||||||||||||
21
Second Quarter of Fiscal 2022 Compared to Second Quarter of Fiscal 2021
For the second quarter of fiscal 2022, we generated net sales of $1.2 billion, a decrease of $68.5 million when compared to the second quarter of fiscal 2021 and overall gross margin percentage decreased from 19.2 percent to 16.3 percent year over year. Our second quarter net income was $71.3 million, or $7.48 per diluted share, versus $113.5 million, or $11.61 per diluted share, in the prior-year period. The significant decrease in wood-based commodity prices is the primary contributor to the decline in our overall sales and profitability year over year, partially offset by improvements in pricing of our specialty products.
Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and industrial products, increased $112.7 million to $787.9 million in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021. Strategic pricing of our specialty products throughout the second quarter of fiscal 2022 resulted in improved revenue and gross profit growth, partially offset by slightly lower volume when compared to the prior-year period, where we saw historically strong demand. Specialty products gross profit increased $15.3 million to $180.3 million, with a year-over-year decline of 150 basis points in specialty gross margin to 22.9 percent for the second quarter of fiscal 2022 compared to 24.4 percent in the second quarter of fiscal 2021. The decrease in specialty gross margin percentage over the prior-year period is primarily attributable to some price volatility during the second quarter of fiscal 2022 related to certain of our specialty products, such as treated lumber and panels.
Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $181.2 million to $451.5 million in the second quarter of fiscal 2022. The significant decrease in wood-based commodity prices of our structural products resulted in the decrease of revenue and gross profit for the second quarter of fiscal 2022. Our structural gross margin percentage for the second quarter of fiscal 2022 was 4.7 percent, down from 13.6 percent in the prior-year period, also primarily attributable to the significant decrease in wood-based commodity prices. Our structural gross margin percentage includes a lower of cost or net realizable value reserve of $9.8 million recorded as of the end of the second quarter of fiscal 2022 compared to $16.7 million recorded as of the end of the second quarter of fiscal 2021, both of which were recorded in response to the decline in wood-based commodity prices as of the end of each fiscal quarter. Excluding the impact of the lower of cost or net realizable value reserve, our structural gross margin percentage for the second quarter of fiscal 2022 and 2021 would have been 6.9 percent and 16.3 percent, respectively.
Our selling, general, and administrative expenses increased 5.0 percent, or $4.3 million, compared to the second quarter of fiscal 2021. The increase in selling, general, and administrative expenses is due primarily to increases in logistical expenses of $5.3 million related to inflation in our delivery costs, including third-party delivery services and fuel costs, along with net increases of $3.2 million related to higher payroll costs and other strategic investments in our workforce and business. These net increases were partially offset by reduced variable incentive compensation, which includes sales commissions and stock compensation, of $4.2 million. Depreciation and amortization expense decreased 7.9 percent, compared to the second quarter of fiscal 2021. The decrease in depreciation and amortization is due to a lower base of amortizable and depreciable assets throughout the second quarter of fiscal 2022 when compared to the prior-year period. The increase in gains from sales of property in the amount of $0.1 million is due to the sale of assets previously classified as held for sale during the second quarter of fiscal 2022 compared to no sale of property during the second quarter of fiscal 2021. Other operating expenses decreased $0.2 million compared to the second quarter of fiscal 2021 primarily due to lower other operating expenses incurred in the second quarter of fiscal 2022.
Interest expense, net, increased by 23.1 percent, or $2.1 million, compared to the second quarter of fiscal 2021. The increase is primarily due to capital structure mix changes, as our senior secured notes carry a higher interest rate than our former revolving credit facility.
Our effective tax rate was 23.1 percent and 23.5 percent for the second quarter of fiscal 2022 and 2021, respectively. Our effective tax rate for both periods was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation. Each period also includes a benefit from the vesting of restricted stock units, which had a greater impact on the three months ended July 2, 2022 and July 3, 2021 due to the timing of the vesting of our restricted stock awards. Our effective tax rate for the three months ended July 3, 2021 also benefited from the partial release of our valuation allowance for state net operating loss carryforwards we anticipated being able to utilize based on our taxable income through the end of the second quarter of fiscal 2021.
For the second quarter of fiscal 2022, our net income decreased by $42.2 million from the prior-year period due primarily to a decrease in gross profit driven by a significant decrease in wood-based commodity prices, in conjunction with some increases in our operating expenses along with higher interest expense. This was partially offset by a decrease in our income tax expense.
22
First Six Months of Fiscal 2022 Compared to First Six Months of Fiscal 2021
For the first six months of fiscal 2022, we generated net sales of $2.5 billion, an increase of $208.3 million when compared to the first six months of fiscal 2021, and overall gross margin percentage increased from 18.5 percent to 19.4 percent year over year. Our net income for the first six months of fiscal 2022 was $204.7 million, or $21.07 per diluted share, versus $175.3 million, or $18.15 per diluted share, in the prior-year period. Strategic pricing of our specialty products is the primary contributor to the increase in our overall sales and profitability year over year, partially offset by a decline in wood-based commodity prices impacting our structural products.
Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and industrial products, increased $318.0 million to $1.6 billion in the first six months of fiscal 2022. Strategic pricing of our specialty products during the first six months of fiscal 2022 resulted in improved revenue and gross profit growth compared to the prior-year period. Specialty products gross profit increased $90.8 million to $364.4 million, with a year-over-year improvement of 130 basis points in specialty gross margin to 23.4 percent for the first six months of fiscal 2022 compared to 22.1 percent in the first six months of fiscal 2021. The increase in specialty gross margin percentage over the prior-year period is primarily attributable to benefits from strategic pricing for our specialty products.
Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $109.7 million to $985.9 million in the first six months of fiscal 2022. The decrease in wood-based commodity prices of our structural products is the primary contributor to the decrease of revenue and gross profit for the first six months of fiscal 2022. Our structural gross margin percentage for the first six months of fiscal 2022 was 13.0 percent, down from 14.4 percent in the prior-year period, also primarily attributable to the decrease in wood-based commodity prices impacting our structural products. Our structural gross margin percentage for the first six months of fiscal 2022 and the first six months of fiscal 2021 was also impacted by a lower of cost or net realizable value reserve of $9.8 million and $16.7 million, respectively, recorded as of the end of the second quarter of both comparable periods in response to the decline in wood-based commodity prices. Excluding the impact of the lower of cost or net realizable value reserve, our structural gross margin percentage for the first six months of fiscal 2022 and 2021 would have been 14.0 percent and 15.9 percent, respectively.
Our selling, general, and administrative expenses increased 12.3 percent, or $20.1 million, compared to the first six months of fiscal 2021. The increase in sales, general, and administrative expenses is due primarily to increases in logistical expenses of $10.6 million related to inflation in our delivery costs, including third-party delivery services and fuel costs, along with net increases of $5.7 million related to higher payroll costs and other strategic investments in our workforce and business, combined with increases in variable incentive compensation, which includes sales commissions and stock compensation, of $3.8 million. Depreciation and amortization expense decreased 8.8 percent, compared to the first six months of fiscal 2021. The decrease in depreciation and amortization is due to a lower base of amortizable and depreciable assets throughout the first six months of fiscal 2022 when compared to the prior-year period. The decrease in gains from sales of property in the amount of $1.1 million is due to the sale of our Birmingham property during the first six months of fiscal 2021, which resulted in a larger gain as compared to the sale of assets previously held for sale during the same period in 2022. Other operating expenses increased $0.5 million compared to the first six months of fiscal 2021 primarily due to restructuring related costs, including severance, incurred in the first six months of fiscal 2022.
Interest expense, net, decreased by 11.1 percent, or $2.8 million, compared to the first six months of fiscal 2021. The decrease is primarily due to $5.8 million in debt issuance costs expensed in the first six months of fiscal 2021 related to the extinguishment of our former term loan facility, partially offset by an increase due to capital structure mix changes, as our senior secured notes carry a higher interest rate than our former revolving credit facility. Other expense (income), net, increased $1.9 million compared to the first six months of fiscal 2021 primarily due to an increase in other non-operating expenses.
Our effective tax rate was 25.1 percent and 24.4 percent for the first six months of fiscal 2022 and 2021, respectively. Our effective tax rate for both periods was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation. Each period also includes a benefit from the vesting of restricted stock units, which had a greater impact on the three months ended July 2, 2022 and July 3, 2021 due to the timing of the vesting of our restricted stock awards. Our effective tax rate for the six months ended July 3, 2021 also benefited from the partial release of our valuation allowance for state net operating loss carryforwards we anticipated being able to utilize based on our taxable income through the end of the first six months of fiscal 2021.
For the first six months of fiscal 2022, our net income increased by $29.4 million from the prior-year period due primarily to an increase in gross profit driven by strategic pricing of our specialty products, in conjunction with lower interest expense. This was partially offset by increases in our operating expenses and income tax expense.
23
Liquidity and Capital Resources
We expect our primary sources of liquidity to be cash flows from sales and operating activities in the normal course of our operations and availability of our revolving credit facility, as needed. We expect that these sources will be sufficient to fund our ongoing cash requirements for the foreseeable future.
Senior Secured Notes
In October 2021, we entered into an indenture (the “Indenture”) with the guarantors party thereto and Truist Bank, as trustee and collateral agent, in connection with a private offering of $300 million of our six percent senior secured notes due 2029 (the “2029 Notes”). The 2029 Notes were issued to investors at 98.625 percent of their principal amount and will mature on November 15, 2029. The majority of net proceeds from the offering of the 2029 Notes were used to repay borrowings under our revolving credit facility, as defined below.
Revolving Credit Facility
In April 2018, we entered into a revolving credit facility with Wells Fargo Bank, National Association, as administrative agent (“the Agent”), and certain other financial institutions party thereto. In August 2021, we entered into a second amendment to our revolving credit facility to, among other things, extend the maturity date of the facility to August 2, 2026, and reduce the interest rate on borrowings under the facility (as amended, the “Revolving Credit Facility”). As amended, the Revolving Credit Facility provides for a senior secured asset-based revolving loan and letter of credit facility of up to $350 million. The Borrowers’ obligations under the Revolving Credit Facility are secured by a security interest in substantially all of our and our subsidiaries’ assets (other than real property), including inventories, accounts receivable, and proceeds from those items.
Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to (i) London Inter-bank Offered Rate (“LIBOR”) plus a margin ranging from 1.25 percent to 1.75 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on LIBOR, or (ii) the Agent’s base rate plus a margin ranging from 0.25 percent to 0.75 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate.
Borrowings under the Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the revolving credit agreement). The Borrowers are required to repay revolving loans thereunder to the extent that such revolving loans exceed the Borrowing Base then in effect. The Revolving Credit Facility may be prepaid in whole or in part from time to time without penalty or premium, but including all breakage costs incurred by any lender thereunder.
As of July 2, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $451.4 million under our Revolving Credit Facility. As of January 1, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $431.7 million under our Revolving Credit Facility. Our average effective interest rate under the facility was zero percent and 2.5 percent for the quarters ended July 2, 2022 and July 3, 2021, respectively.
The Revolving Credit Facility contains certain financial and other covenants, and our right to borrow under the Revolving Credit Facility is conditioned upon, among other things, our compliance with these covenants. We were in compliance with all covenants under the Revolving Credit Facility as of July 2, 2022.
Term Loan Facility
On April 2, 2021, we repaid the remaining outstanding principal balance of the term loan facility, and, as a result, as of January 1, 2022 and July 2, 2022, we had zero outstanding borrowings under the term loan facility, which has been extinguished. In connection with our repayment of the outstanding principal balance in full on April 2, 2021, we expensed $5.8 million of debt issuance costs that we were amortizing in connection with our former term loan facility. These costs are included within interest expense, net on the condensed consolidated statements of operations and reported separately as an adjustment to net income in our condensed consolidated statements of cash flows.
There were no prepayment premiums associated with the repayment of indebtedness for the three and six month period ended July 2, 2022. There were no prepayment premiums associated with the repayment of indebtedness for the three month period ended July 3, 2021. Prepayment premiums were $0.9 million for the six month period ended July 3, 2021.
24
Finance Lease Commitments
Our finance lease liabilities consist of leases related to equipment and vehicles, and to real estate, with the majority of those finance lease commitments relating to the real estate financing transactions that we have completed in recent years. During fiscal 2017 and 2018, we completed real estate financing transactions on six warehouse facilities; during fiscal 2019, we completed real estate financing transactions on two warehouse facilities; and, during fiscal 2020, we completed real estate financing transactions on fourteen warehouse facilities. We recognized finance lease assets and obligations as a result of each of these transactions. Our total finance lease commitments totaled $271.4 million as of July 2, 2022. Of the $271.4 million of finance lease commitments as of July 2, 2022, $243.8 million related to real estate and $27.6 million related to equipment. For the three and six months ended July 2, 2022, we recognized $2.3 million in new finance leases for tractors acquired as a component of our fleet investment plan. For the three and six months ended July 3, 2021, we recognized $0.3 million and $10.5 million, respectively, in new finance leases for tractors acquired to support our fleet investment plan in fiscal 2021.
Interest Rates
Our Revolving Credit Facility includes available interest rate options based on LIBOR. Certain LIBOR rates were discontinued after 2021, while other rates will be discontinued in 2023. The U.S. and other countries are currently working to replace LIBOR with alternative reference rates. The consequences of these developments with respect to LIBOR cannot be entirely predicted; however, we do not believe that the discontinuation of LIBOR as a reference rate in our loan agreement will have a material adverse effect on our financial position or materially affect our interest expense.
Sources and Uses of Cash
Operating Activities
Net cash provided by operating activities for the first six months of fiscal 2022 was $103.4 million, compared to net cash provided by operating activities of $22.6 million in the first six months of fiscal 2021. The increase in cash provided by operating activities during the first six months of fiscal 2022 was primarily a result of working capital changes, including the reduction of accounts receivable, which resulted in $60.6 million more cash provided by operating activities in the current-year period compared to the prior-year period, and the $29.4 million increase in net income for the current-year period compared to the prior-year period.
Investing Activities
Net cash used in investing activities for the first six months of fiscal 2022 was $6.4 million, compared to net cash used in investing activities of $0.8 million in the first six months of fiscal 2021. The increase in net cash used in investing activities was primarily due to higher capital investments during the first six months of fiscal 2022.
Financing Activities
Net cash used in financing activities totaled $77.3 million for the first six months of fiscal 2022, compared to net cash used in financing activities of $21.7 million for the first six months of fiscal 2021. The increase in net cash used in financing activities is primarily due to the $66.4 million spent repurchasing our common stock under our announced repurchase program, including the ASR Agreement, as defined below, during the first six months of fiscal 2022, with no such transactions completed in the first six months of fiscal 2021. Additionally, we made $649.2 million in repayments on our revolving credit facility and term loan facility, including the repayment of the remaining outstanding balance on our term loan facility, partially offset by borrowings of $638.2 million from our revolving credit facility, in the first six months of fiscal 2021, with no such transactions completed in the first six months of fiscal 2022.
Stock Repurchase Program
On August 23, 2021, we announced that our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $25.0 million of our common stock. On May 3, 2022, we announced that our Board of Directors increased our share repurchase authorization to $100.0 million, up $75.0 million from the previous program, and that we entered into an Accelerated Share Repurchase Agreement (“ASR Agreement”) with Jefferies LLC (“Jefferies”) to repurchase $60.0 million of our common stock.
25
Under the ASR Agreement, we received initial delivery of 553,584 shares of common stock on May 3, 2022 representing approximately 65 percent of the total number of shares of common stock initially underlying the ASR Agreement, based on our closing stock price of $70.45 on May 2, 2022. The total number of shares repurchased under the ASR Agreement is based on the average of the daily volume-weighted average price of our common stock during the repurchase period under the ASR Agreement, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR Agreement. At settlement, under certain circumstances, Jefferies may be required to deliver additional shares of common stock to us, or, under certain circumstances, we may be required to make a cash payment or to deliver shares of our common stock to Jefferies. Final settlement of the shares of common stock repurchased under the ASR Agreement could occur as early as the third quarter of fiscal 2022.
With the remaining availability under the stock repurchase program, we may repurchase our common stock at any time or from time to time, without prior notice, subject to prevailing market conditions and other considerations. Our repurchases may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, accelerated share repurchase programs, tender offers or pursuant to a trading plan that may be adopted in accordance with the Securities and Exchange Commission Rule 10b5-1.
As of July 2, 2022, we have repurchased 634,915 shares for $66.4 million under this program, including shares purchased through the ASR Agreement, and we have a remaining authorization amount of $33.6 million.
Operating Working Capital
Operating working capital is an important measurement we use to determine the efficiencies of our operations and our ability to readily convert assets into cash. Operating working capital is defined as the sum of cash, receivables, and inventory, less accounts payable. Management of working capital helps us monitor our progress in meeting our goals to enhance working capital assets.
| Selected financial information | |||||||||||||||||
| July 2, 2022 | January 1, 2022 | July 3, 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 104,952 | $ | 85,203 | $ | 179 | |||||||||||
| Receivables, less allowance for doubtful accounts | 422,659 | 339,637 | 437,217 | ||||||||||||||
| Inventories, net | 577,648 | 488,458 | 425,714 | ||||||||||||||
| $ | 1,105,259 | $ | 913,298 | $ | 863,110 | ||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 239,515 | $ | 180,000 | $ | 227,100 | |||||||||||
| $ | 239,515 | $ | 180,000 | $ | 227,100 | ||||||||||||
| Operating working capital | $ | 865,744 | $ | 733,298 | $ | 636,010 | |||||||||||
Operating working capital of $865.7 million as of July 2, 2022, compared to $733.3 million as of January 1, 2022, increased on a net basis by approximately $132.4 million. The increase in operating working capital is primarily driven by an increase in inventory, which continues to be affected by the inflationary environment for building materials, along with an increase in accounts receivable from our continued increase in net sales. The net increase in current assets was offset by an increase in accounts payable, also affected by the inflationary environment for building products.
Operating working capital of $865.7 million as of July 2, 2022, compared to $636.0 million as of July 3, 2021, increased on a net basis by $229.7 million. The increase in operating working capital is primarily driven by an increase in inventory, which continues to be affected by the inflationary environment for building products, along with an increase in cash due to our improved operating performance, including increased net income, as well as a decrease in accounts receivable from our improved collection efforts. The net increase in current assets was offset by an increase in accounts payable, also affected by the inflationary environment for building products.
26
Investments in Property and Equipment
Our investments in capital assets consist of cash paid for owned assets and the inception of financing lease arrangements for long-lived assets to support our distribution infrastructure. The gross value of these assets are included in property and equipment, at cost on our condensed consolidated balance sheet. For the first six months of fiscal 2022, we invested $9.2 million in long-lived assets primarily related to investments in our distribution branches and to a lesser extent, upgrading our fleet, which includes $6.9 million in cash investments and $2.3 million in new finance leases recognized for tractors acquired as a component of our fleet investment plan.
Critical Accounting Policies
The preparation of our consolidated financial statements and related disclosures in conformity with GAAP requires our management to make judgments and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. There have been no material changes to our critical accounting policies from the information provided in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.
Forward-Looking Statements
This report contains forward-looking statements. Forward-looking statements include, without limitation, any statement that predicts, forecasts, indicates or implies future results, performance, liquidity levels or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will be,” “will likely continue,” “will likely result” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties that may cause our business, strategy, or actual results to differ materially from the forward-looking statements. The forward-looking statements in this report include statements about the COVID-19 pandemic, its duration and effects, and its potential effects on our business and results of operations; anticipated effects of adopting certain accounting standards; estimated future annual amortization expense; potential changes to estimates made in connection with revenue recognition; the expected outcome of legal proceedings; industry conditions; seasonality; and liquidity and capital resources.
Forward-looking statements are based on estimates and assumptions made by our management that, although believed by us to be reasonable, are inherently uncertain. Forward-looking statements involve risks and uncertainties that may cause our business, strategy, or actual results to differ materially from the forward-looking statements. These risks and uncertainties include those discussed under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended January 1, 2022, and those discussed elsewhere in this report (including Item 1A of Part II of this report) and in future reports that we file with the SEC. We operate in a changing environment in which new risks can emerge from time to time. It is not possible for management to predict all of these risks, nor can it assess the extent to which any factor, or a combination of factors, may cause our business, strategy, or actual results to differ materially from those contained in forward-looking statements. Factors that may cause these differences include, among other things:
•we may experience pricing and product cost variability;
•our earnings are highly dependent on volumes;
•our industry is highly fragmented and competitive and if we are unable to compete effectively, our net sales and operating results may be reduced;
•our industry is highly cyclical, and prolonged periods of weak demand or excess supply may reduce our net sales and/or margins, which may cause us to incur losses or reduce our net income;
•adverse housing market conditions may negatively impact our business, liquidity, and results of operations, and increase the credit risk from our customers;
•consolidation among competitors, suppliers, and customers could negatively impact our business;
•we are subject to disintermediation risk;
•loss of key products or key suppliers and manufacturers could affect our financial health;
•our dependence on international suppliers and manufacturers for certain products exposes us to risks that could affect our financial condition;
•our strategy includes pursuing acquisitions, and we may be unsuccessful in making and integrating mergers, acquisitions and investments, and completing divestitures;
•we may incur business disruptions resulting from a variety of possible causes;
•we may be unable to effectively manage our inventory relative to our sales volume or as the prices of the products we distribute fluctuate, which could affect our business, financial condition, and operating results;
•we are subject to information technology security risks and business interruption risks and may incur increasing costs in an effort to minimize and/or respond to those risks;
27
•our success depends on our ability to attract, train, and retain highly qualified associates and other key personnel while controlling related labor costs;
•we are exposed to product liability and other claims and legal proceedings related to our business and the products we distribute, which may exceed the coverage of our insurance;
•our business operations could suffer significant losses from climate changes, natural disasters, catastrophes, fire, or other unexpected events;
•our operating results depend on the successful implementation of our strategy and we may not be able to implement our strategic initiatives successfully, on a timely basis, or at all;
•a significant percentage of our employees are unionized, and wage increases or work stoppages by our unionized employees may reduce our results of operations;
•federal, state, local, and other regulations could impose substantial costs and restrictions on our operations that would reduce our net income;
•we are subject to federal, state, and local environmental protection laws and may have to incur significant costs to comply with these laws and regulations in the future;
•the ongoing effect of the COVID-19 pandemic and other widespread public health crises may adversely affect our business and results from operations;
•our vaccination policies and governmental regulations concerning mandatory COVID-19 vaccination of employees could have a material adverse impact on our business and results of operations;
•our future operating results may fluctuate significantly, and our current operating results may not be a good indication of our future performance;
•fluctuations in our quarterly financial results could affect our stock price in the future;
•our level of indebtedness could limit our financial and operating activities and adversely affect our ability to incur additional debt to fund future needs;
•the instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business, including requiring us to maintain a minimum level of excess liquidity;
•borrowings under our revolving credit facility bear interest at a variable rate, which subjects us to interest rate risk, which could cause our debt service obligations to increase significantly;
•despite our current levels of debt, we may still incur more debt, which would increase the risks described in these risk factors relating to indebtedness;
•we have sold and leased back certain of our distribution centers under long-term non-cancelable leases, and we may enter into similar transactions in the future. All of these leases are (or will be) finance leases, and our debt and interest expense may increase as a result;
•many of our distribution centers are leased, and if we close a leased distribution center before expiration of the lease, we will still be obligated under the applicable lease, and we may be unable to renew the leases at the end of their terms;
•we may not have or be able to raise the funds necessary to finance a required repurchase of our senior secured notes;
•constraints, volatility or disruptions in the capital markets or other factors affecting the amount and timing of share repurchases;
•our ability to successfully execute the ASR;
•the number of shares that will be delivered to the Company under the ASR;
•whether or not the Company will continue, and the timing of, any open market repurchases;
•a lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital;
•a change in our product mix could adversely affect our results of operations;
•if petroleum or energy prices increase, our results of operations could be adversely affected;
•we establish insurance-related deductible/retention reserves based on historical loss development factors, which could lead to adjustments in the future based on actual development experience;
•the value of our deferred tax assets could become impaired, which could materially and adversely affect our operating results;
•our expected annual effective tax rate could be volatile and materially change as a result of changes in mix of earnings and other factors;
•changes in actuarial assumptions for our pension plan could impact our financial results, and funding requirements are mandated by the Federal government;
•costs and liabilities related to our participation in multi-employer pension plans could increase;
•our cash flows and capital resources may be insufficient to make required payments on our indebtedness or future indebtedness;
•we could be the subject of securities class action litigation due to stock price volatility, which could divert management’s attention and adversely affect our results of operations;
•the activities of activist stockholders could have a negative impact on our business and results of operations;
28
•the terms of our revolving credit facility and senior secured notes place restrictions on our ability to pay dividends on our common stock, so any returns to stockholders may be limited to the value of their stock;
•changes in, or interpretation of, accounting principles could result in unfavorable accounting changes.
Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Our management performed an evaluation, as of the end of the period covered by this report on Form 10-Q, under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
During the period covered by this report, other than described below, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the second quarter of fiscal 2022, there were no material changes to our legal proceedings as disclosed in our Annual Report on Form 10-K for the year ended January 1, 2022. Additionally, we are, and from time to time may be, a party to routine legal proceedings incidental to the operation of our business. The outcome of any pending or threatened proceedings is not expected to have a material adverse effect on our financial condition, operating results, or cash flows, based on our current understanding of the relevant facts. Legal expenses incurred related to these contingencies are generally expensed as incurred.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Part I, "Item 1A.Risk Factors" in the Company’s Annual Report on Form 10-K for the year ended January 1, 2022.
31
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents our share repurchase activity for each month of the quarter ended July 2, 2022:
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||||||||
| April 3 - May 7 | 556,791 | 70.44 | 553,584 | 33,572,690 | |||||||||||||||||||
| May 8 - June 4 | 201 | 89.16 | — | 33,572,690 | |||||||||||||||||||
| June 5 - July 2 | 63,173 | 87.71 | — | 33,572,690 | |||||||||||||||||||
| Total | 620,165 | 553,584 | |||||||||||||||||||||
(1) Includes shares withheld by us in connection with tax withholding obligations of our employees upon vesting of such employees’ restricted stock unit awards.
(2) On August 23, 2021, we announced that our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $25.0 million of our common stock. On May 3, 2022, we announced that our Board of Directors increased our share repurchase authorization to $100.0 million, up $75.0 million from the previous program, and that we entered into an Accelerated Share Repurchase Agreement (“ASR Agreement”) with Jefferies LLC (“Jefferies”) to repurchase $60.0 million of our common stock. Under the ASR Agreement, we received initial delivery of 553,584 shares of common stock on May 3, 2022 representing approximately 65 percent of the total number of shares of common stock initially underlying the ASR Agreement, based on our closing stock price of $70.45 on May 2, 2022. The total number of shares repurchased under the ASR Agreement is based on the average of the daily volume-weighted average price of our common stock during the repurchase period under the ASR Agreement, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR Agreement. At settlement, under certain circumstances, Jefferies may be required to deliver additional shares of common stock to us, or, under certain circumstances, we may be required to make a cash payment or to deliver shares of our common stock to Jefferies. Final settlement of the shares of common stock repurchased under the ASR Agreement could occur as early as the third quarter of fiscal 2022. With the remaining availability under the stock repurchase program, we may repurchase our common stock at any time or from time to time, without prior notice, subject to prevailing market conditions and other considerations. Our repurchases may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, accelerated share repurchase programs, tender offers or pursuant to a trading plan that may be adopted in accordance with the Securities and Exchange Commission Rule 10b5-1.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
32
ITEM 6. EXHIBITS
| Exhibit Number | Description | |||||||
| * | ||||||||
| * | ||||||||
| * | ||||||||
| * | ||||||||
| ** | ||||||||
| ** | ||||||||
| 101.Def | Definition Linkbase Document. | |||||||
| 101.Pre | Presentation Linkbase Document. | |||||||
| 101.Lab | Labels Linkbase Document. | |||||||
| 101.Cal | Calculation Linkbase Document. | |||||||
| 101.Sch | Schema Document. | |||||||
| 101.Ins | Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 104 | The cover page from this Quarterly Report on Form 10-Q for the quarter ended July 2, 2022, formatted in Inline XBRL. | |||||||
| * | Filed herewith. | |||||||
| ** | Exhibit is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended. | |||||||
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| BlueLinx Holdings Inc. | ||||||||
| (Registrant) | ||||||||
| Date: August 2, 2022 | By: | /s/ Kelly C. Janzen | ||||||
| Kelly C. Janzen | ||||||||
| Senior Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Date: August 2, 2022 | By: | /s/ Adam K. Bowen | ||||||
| Adam K. Bowen | ||||||||
| Vice President and Chief Accounting Officer | ||||||||
| (Principal Accounting Officer) | ||||||||
34