UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1, 2005
OR
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-32383
BlueLinx Holdings Inc.
(Exact name of registrant as specified in its charter)
| | |
Delaware | | 77-0627356 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
| | |
4300 Wildwood Parkway, Atlanta, Georgia | | 30339 |
(Address of principal executive offices) | | (Zip Code) |
(770) 953-7000
(Registrant’s telephone number, including area code)
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. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of November 4, 2005 there were 30,237,951 shares of BlueLinx Holdings Inc. common stock, par value $0.01, outstanding.
BLUELINX HOLDINGS INC.
Form 10-Q
For the Quarterly Period Ended October 1, 2005
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLUELINX HOLDINGS INC.
(formerly ABP Distribution Holdings Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
| | | | | | | | |
| | Third Quarter | |
| | BlueLinx | | | BlueLinx | |
| | Period from | | | Period from | |
| | July 3, 2005 | | | July 4, 2004 | |
| | to | | | to | |
| | October 1, 2005 | | | October 2, 2004 | |
Net sales | | $ | 1,454,217 | | | $ | 1,509,581 | |
Cost of sales | | | 1,317,180 | | | | 1,367,303 | |
| | | | | | |
Gross profit | | | 137,037 | | | | 142,278 | |
| | | | | | |
Operating expenses: | | | | | | | | |
Selling, general, and administrative | | | 97,926 | | | | 93,363 | |
Depreciation and amortization | | | 4,993 | | | | 3,920 | |
| | | | | | |
Total operating expenses | | | 102,919 | | | | 97,283 | |
| | | | | | |
Operating income | | | 34,118 | | | | 44,995 | |
Non-operating expenses: | | | | | | | | |
Interest expense | | | 11,216 | | | | 10,914 | |
Other expense (income), net | | | (295 | ) | | | 140 | |
| | | | | | |
Income before provision for income taxes | | | 23,197 | | | | 33,941 | |
Provision for income taxes | | | 9,301 | | | | 13,426 | |
| | | | | | |
Net income | | | 13,896 | | | | 20,515 | |
Less: Preferred stock dividends | | | — | | | | 2,487 | |
| | | | | | |
Net income applicable to common shareholders | | $ | 13,896 | | | $ | 18,028 | |
| | | | | | |
Basic weighted average number of common shares outstanding | | | 30,199 | | | | 18,100 | |
| | | | | | |
Basic net income per share applicable to common stock | | $ | 0.46 | | | $ | 1.00 | |
| | | | | | |
Diluted weighted average number of common shares outstanding | | | 30,493 | | | | 19,406 | |
| | | | | | |
Diluted net income per share applicable to common stock | | $ | 0.46 | | | $ | 0.93 | |
| | | | | | |
Dividends declared per share of common stock | | $ | 0.125 | | | | | |
| | | | | | | |
See accompanying notes.
3
BLUELINX HOLDINGS INC.
(formerly ABP Distribution Holdings Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND BUILDING PRODUCTS DISTRIBUTION DIVISION
OF GEORGIA-PACIFIC CORPORATION
STATEMENT OF REVENUE AND DIRECT EXPENSES
(In thousands, except per share data)
| | | | | | | | | | | | | |
| | Nine Months Ended | |
| | BlueLinx | | | BlueLinx | | | | Distribution | |
| | Period from | | | Period from | | | | Division | |
| | January 2, 2005 | | | Inception (March | | | | Period from | |
| | to | | | 8, 2004) to | | | | January 4, | |
| | October 1, 2005 | | | October 2, 2004 | | | | 2004 to May 7, 2004 | |
| | (unaudited) | | | (unaudited) | | | | | | |
Net sales | | $ | 4,292,812 | | | $ | 2,465,193 | | | | $ | 1,885,334 | |
Cost of sales | | | 3,920,766 | | | | 2,233,387 | | | | | 1,658,123 | |
| | | | | | | | | | |
Gross profit | | | 372,046 | | | | 231,806 | | | | | 227,211 | |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Selling, general, and administrative | | | 277,309 | | | | 155,599 | | | | | 139,203 | |
Depreciation and amortization | | | 13,793 | | | | 6,237 | | | | | 6,175 | |
| | | | | | | | | | |
Total operating expenses | | | 291,102 | | | | 161,836 | | | | | 145,378 | |
| | | | | | | | | | |
Operating income | | | 80,944 | | | | 69,970 | | | | | 81,833 | |
Non-operating expenses: | | | | | | | | | | | | | |
Interest expense | | | 31,206 | | | | 17,708 | | | | | — | |
Other expense (income), net | | | 58 | | | | (33 | ) | | | | 614 | |
| | | | | | | | | | |
Income before provision for income taxes | | | 49,680 | | | | 52,295 | | | | | 81,219 | |
Provision for income taxes | | | 19,615 | | | | 20,584 | | | | | 30,782 | |
| | | | | | | | | | |
Net income | | | 30,065 | | | | 31,711 | | | | $ | 50,437 | |
| | | | | | | | | | | | |
Less: Preferred stock dividends | | | — | | | | 3,971 | | | | | | |
| | | | | | | | | | | |
Net income applicable to common shareholders | | $ | 30,065 | | | $ | 27,740 | | | | | | |
| | | | | | | | | | | |
Basic weighted average number of common shares outstanding | | | 30,180 | | | | 18,100 | | | | | | |
| | | | | | | | | | | |
Basic net income per share applicable to common stock | | $ | 1.00 | | | $ | 1.53 | | | | | | |
| | | | | | | | | | | |
Diluted weighted average number of common shares outstanding | | | 30,459 | | | | 19,300 | | | | | | |
| | | | | | | | | | | |
Diluted net income per share applicable to common stock | | $ | 0.99 | | | $ | 1.44 | | | | | | |
| | | | | | | | | | | |
Dividends declared per share of common stock | | $ | 0.375 | | | | | | | | | | |
| | | | | | | | | | | | |
See accompanying notes.
4
BLUELINX HOLDINGS INC.
(formerly ABP Distribution Holdings Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| | | | | | | | |
| | BlueLinx | | | BlueLinx | |
| | October 1, 2005 | | | January 1, 2005 | |
| | (unaudited) | | | | | |
Assets: | | | | | | | | |
Current assets: | | | | | | | | |
Cash | | $ | 28,320 | | | $ | 15,572 | |
Receivables, net | | | 526,466 | | | | 363,688 | |
Inventories, net | | | 418,864 | | | | 500,231 | |
Deferred income taxes | | | 7,259 | | | | 6,122 | |
Other current assets | | | 41,303 | | | | 34,203 | |
| | | | | | |
Total current assets | | | 1,022,212 | | | | 919,816 | |
| | | | | | |
Property, plant, and equipment: | | | | | | | | |
Land and land improvements | | | 56,496 | | | | 55,573 | |
Buildings | | | 93,381 | | | | 93,133 | |
Machinery and equipment | | | 52,408 | | | | 41,063 | |
Construction in progress | | | 1,920 | | | | 5,089 | |
| | | | | | |
Property, plant, and equipment, at cost | | | 204,205 | | | | 194,858 | |
Accumulated depreciation | | | (18,479 | ) | | | (7,880 | ) |
| | | | | | |
Property, plant, and equipment, net | | | 185,726 | | | | 186,978 | |
Other non-current assets | | | 27,382 | | | | 30,268 | |
| | | | | | |
Total assets | | $ | 1,235,320 | | | $ | 1,137,062 | |
| | | | | | |
Liabilities: | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 325,335 | | | $ | 270,271 | |
Bank overdrafts | | | 43,953 | | | | 32,033 | |
Accrued compensation | | | 12,077 | | | | 18,292 | |
Current maturities of long-term debt | | | 63,937 | | | | 94,103 | |
Other current liabilities | | | 14,642 | | | | 13,142 | |
| | | | | | |
Total current liabilities | | | 459,944 | | | | 427,841 | |
| | | | | | |
Non-current liabilities: | | | | | | | | |
Long-term debt | | | 590,000 | | | | 558,000 | |
Deferred income taxes | | | 850 | | | | 740 | |
Other long-term liabilities | | | 13,565 | | | | 8,989 | |
| | | | | | |
Total liabilities | | | 1,064,359 | | | | 995,570 | |
| | | | | | |
Shareholder’s Equity: | | | | | | | | |
Common Stock, $0.01 par value, 100,000,000 shares authorized; 30,225,323 and 29,500,000 shares issued and outstanding at October 1, 2005 and January 1, 2005, respectively | | | 302 | | | | 295 | |
Additional paid-in-capital | | | 131,741 | | | | 121,306 | |
Accumulated other comprehensive income (loss) | | | (508 | ) | | | (789 | ) |
Retained earnings | | | 39,426 | | | | 20,680 | |
| | | | | | |
Total shareholders’ equity | | | 170,961 | | | | 141,492 | |
| | | | | | |
Total liabilities and shareholders’ equity | | $ | 1,235,320 | | | $ | 1,137,062 | |
| | | | | | |
See accompanying notes.
5
BLUELINX HOLDINGS INC.
(formerly ABP Distribution Holdings Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS AND
BUILDING PRODUCTS DISTRIBUTION DIVISION
OF GEORGIA-PACIFIC CORPORATION
STATEMENT OF DIRECT CASH FLOWS
(In thousands)
| | | | | | | | | | | | | |
| | Nine Months Ended | |
| | | | | | | | | | Distribution | |
| | | | | | BlueLinx | | | | Division | |
| | BlueLinx Period | | | Period from | | | | Period from | |
| | from January 2, | | | Inception (March 8, | | | | January 4, | |
| | 2005 to | | | 2004) to | | | | 2004 to | |
| | October 1, 2005 | | | October 2, 2004 | | | | May 7, 2004 | |
| | (unaudited) | | | (unaudited) | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | |
Net income | | $ | 30,065 | | | $ | 31,711 | | | | $ | 50,437 | |
Adjustments to reconcile net income to cash provided by (used in) operations: | | | | | | | | | | | | | |
Depreciation and amortization | | | 13,793 | | | | 6,237 | | | | | 6,175 | |
Amortization of debt issue costs | | | 2,704 | | | | 1,215 | | | | | — | |
Deferred income tax (benefit) provision | | | (1,027 | ) | | | (4,828 | ) | | | | 9,183 | |
Changes in assets and liabilities: | | | | | | | | | | | | | |
Receivables | | | (158,401 | ) | | | 63,782 | | | | | (292,350 | ) |
Inventories | | | 91,976 | | | | (15,556 | ) | | | | (145,689 | ) |
Accounts payable | | | 54,485 | | | | (37,103 | ) | | | | 257,772 | |
Changes in other working capital | | | (11,003 | ) | | | 5,657 | | | | | 2,464 | |
Other | | | 5,695 | | | | 1,528 | | | | | (1,974 | ) |
| | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 28,287 | | | | 52,643 | | | | | (113,982 | ) |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | |
Acquisitions, net of cash acquired | | | (17,021 | ) | | | (776,307 | ) | | | | — | |
Property, plant and equipment investments | | | (10,034 | ) | | | (1,677 | ) | | | | (1,378 | ) |
Proceeds from sale of assets | | | 814 | | | | 25 | | | | | 252 | |
| | | | | | | | | | |
Net cash used in investing activities | | | (26,241 | ) | | | (777,959 | ) | | | | (1,126 | ) |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | |
Net transactions with Georgia-Pacific Corporation | | | — | | | | — | | | | | 88,352 | |
Issuance of preferred stock | | | — | | | | 95,000 | | | | | — | |
Issuance of common stock, net | | | 8,541 | | | | 5,000 | | | | | — | |
Proceeds from stock options exercised | | | 296 | | | | — | | | | | — | |
Net increase in revolving credit facility | | | 1,834 | | | | 473,507 | | | | | — | |
Proceeds from issuance of term loan | | | — | | | | 100,000 | | | | | — | |
Proceeds from issuance of mortgage payable | | | — | | | | 100,000 | | | | | — | |
Debt financing costs | | | (570 | ) | | | (15,338 | ) | | | | — | |
Increase (decrease) in bank overdrafts | | | 11,920 | | | | (9,746 | ) | | | | 26,250 | |
Common dividends paid | | | (11,319 | ) | | | — | | | | | — | |
| | | | | | | | | | |
Net cash provided by financing activities | | | 10,702 | | | | 748,423 | | | | | 114,602 | |
| | | | | | | | | | |
Increase (decrease) in cash | | | 12,748 | | | | 23,107 | | | | | (506 | ) |
Balance, beginning of period | | | 15,572 | | | | — | | | | | 506 | |
| | | | | | | | | | |
Balance, end of period | | $ | 28,320 | | | $ | 23,107 | | | | $ | — | |
| | | | | | | | | | |
See accompanying notes.
6
BLUELINX HOLDINGS INC.
(Formerly ABP Distribution Holdings Inc.) AND
BUILDING PRODUCTS DISTRIBUTION DIVISION OF
GEORGIA-PACIFIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Background
Basis of Presentation
BlueLinx Holdings Inc. (“BlueLinx” or the “Company”) has prepared the accompanying Unaudited Condensed Consolidated Financial Statements, including its accounts and the accounts of its wholly-owned subsidiaries, in accordance with the instructions to Form 10-Q and therefore they do not include all of the information and notes required by accounting principles generally accepted in the United States (“GAAP”). These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended January 1, 2005, as filed with the Securities and Exchange Commission (“SEC”). The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to the end of the calendar year. Fiscal year 2004 contained 52 weeks. Certain 2004 amounts have been reclassified to conform with 2005 presentation.
The Company believes the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of its financial position, results of operations and cash flows for the periods presented. The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material. In addition, the operating results for interim periods may not be indicative of the results of operations for a full year. The Company is exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors. These seasonal factors are common in the building products distribution industry.
The Company was created on March 8, 2004 as a Georgia corporation named ABP Distribution Holdings Inc. On May 7, 2004, the Company and its operating subsidiary, BlueLinx Corporation, acquired the assets of the Building Products Distribution Division (the “Distribution Division”) of Georgia-Pacific Corporation (“Georgia-Pacific”), pursuant to an asset purchase agreement (the “Asset Purchase Agreement”). On August 30, 2004, ABP Distribution Holdings Inc. merged into BlueLinx Holdings Inc., a Delaware corporation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The financial statements of BlueLinx for the period from inception (March 8, 2004) to October 2, 2004 include the Company’s financial results during the period of time from March 8, 2004 until the purchase of the assets of the Distribution Division on May 7, 2004. The financial statements of the Distribution Division reflect the accounts and results of certain operations of the business conducted by the Distribution Division. The accompanying combined financial statements of the Distribution Division have been prepared from Georgia-Pacific’s historical accounting records and are presented on a carve-out basis reflecting these certain assets, liabilities, and operations. The Distribution Division was an unincorporated business of Georgia-Pacific and, accordingly, Georgia-Pacific’s net investment in these operations (parent’s net investment) was used in lieu of shareholder’s equity. All significant intradivision transactions have been eliminated. The financial statements are not necessarily indicative of the financial position, results of operations and cash flows that might have occurred had the Distribution Division been an independent entity not integrated into Georgia-Pacific’s other operations. Also, they may not be indicative of the actual financial position that might have otherwise resulted, or of future results of operations or financial position of the Distribution Division. The Company operates as one reportable segment.
7
2. Summary of Significant Accounting Policies
Earnings per Common Share
Basic and diluted earnings per share are computed by dividing net income less dividend requirements on the series A preferred stock, if applicable, by the weighted average number of common shares outstanding for the period. The Company redeemed all of its outstanding series A preferred stock during fiscal 2004.
Except when the effect would be anti-dilutive, the diluted earnings per share calculation includes the dilutive effect of the assumed exercise of stock options using the treasury stock method.
Inventory Valuation
Inventories are valued at the lower of moving average cost or market. Prior to May 7, 2004, during the pre-acquisition period, the last-in, first-out (LIFO) method was used to determine the cost of those inventories purchased from Georgia-Pacific. The impact of the change in the LIFO reserve on cost of sales for the first nine months of fiscal 2004 was $3.3 million of expense. Inventories consist primarily of finished goods.
Common Stock Dividends
On March 10, 2005, the Company’s Board of Directors declared a quarterly dividend of $0.125 per share on the Company’s common stock. The dividend was paid on March 31, 2005 to shareholders of record as of March 20, 2005. The Company’s controlling shareholder, Cerberus ABP Investor LLC (“Cerberus”), received a dividend of approximately $2.3 million as a result of its ownership of 18,100,000 shares of the Company’s common stock as of the record date.
On May 8, 2005, the Company’s Board of Directors declared a quarterly dividend of $0.125 per share on the Company’s common stock. The dividend was paid on June 30, 2005 to shareholders of record as of June 15, 2005. Cerberus received a dividend of approximately $2.3 million as a result of its ownership of 18,100,000 shares of the Company’s common stock as of the record date.
On July 21, 2005, the Company’s Board of Directors declared a quarterly dividend of $0.125 per share on the Company’s common stock. The dividend was paid on September 30, 2005 to shareholders of record as of September 15, 2005. Cerberus received a dividend of approximately $2.3 million as a result of its ownership of 18,100,000 shares of the Company’s common stock as of the record date.
8
3. Comprehensive Income
The calculation of comprehensive income is as follows (in thousands):
| | | | | | | | |
| | Third Quarter | |
| | BlueLinx | | | BlueLinx | |
| | Period from | | | Period from | |
| | July 3, 2005 | | | July 4, 2004 | |
| | to | | | to | |
| | October 1, 2005 | | | October 2, 2004 | |
Net income | | $ | 13,896 | | | $ | 20,515 | |
Other comprehensive income: | | | | | | | | |
Foreign currency translation, net of taxes | | | 473 | | | | 160 | |
| | | | | | |
Comprehensive income | | $ | 14,369 | | | $ | 20,675 | |
| | | | | | |
| | | | | | | | | | | | |
| | Nine Months Ended | |
| | | | | | | | | | Distribution | |
| | BlueLinx | | | BlueLinx | | | Division | |
| | Period from | | | Period from | | | Period from | |
| | January 2, 2005 | | | Inception (March | | | January 4, | |
| | to | | | 8, 2004) to | | | 2004 to | |
| | October 1, 2005 | | | October 2, 2004 | | | May 7, 2004 | |
Net income | | $ | 30,065 | | | $ | 31,711 | | | $ | 50,437 | |
Other comprehensive income: | | | | | | | | | | | | |
Foreign currency translation, net of taxes | | | 281 | | | | 555 | | | | (612 | ) |
| | | | | | | | | |
Comprehensive income | | $ | 30,346 | | | $ | 32,266 | | | $ | 49,825 | |
| | | | | | | | | |
4. Employee Benefits
Defined Benefit Pension Plans
Most of our hourly employees participate in noncontributory defined benefit pension plans. These include a plan that is administered solely by us (the “hourly pension plan”) and union-administered multiemployer plans. Our funding policy for the hourly pension plan is based on actuarial calculations and the applicable requirements of federal law. The Company does not expect to make any contributions to the hourly pension plan in fiscal 2005. Benefits under the majority of plans for hourly employees (including multiemployer plans) are primarily related to years of service.
Net periodic pension cost for our pension plans included the following:
| | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | Nine Month | | | Period from | |
| | Three Month | | | Period from January | | | Inception (March 8, | |
| | Period from July 3, | | | 2,2005 to October 1, | | | 2004) to January 1, | |
| | 2005 to October 1, 2005 | | | 2005 | | | 2005 | |
Service cost | | $ | 650 | | | $ | 1,950 | | | $ | 1,511 | |
Interest cost on projected benefit obligation | | | 970 | | | | 2,910 | | | | 2,591 | |
Expected return on plan assets | | | (1,208 | ) | | | (3,624 | ) | | | (3,168 | ) |
| | | | | | | | | |
Net periodic pension cost | | $ | 412 | | | $ | 1,236 | | | $ | 934 | |
| | | | | | | | | |
9
5. Revolving Credit Facility
As of October 1, 2005, the Company had outstanding borrowings of $489 million and availability of $171 million under the terms of its revolving credit facility. Based on borrowing base limitations, the Company classifies the lowest projected balance of the credit facility over the next twelve months of $425 million as long-term debt. The revolving credit facility was amended on July 14, 2005 to among other things, increase the revolving loan limit to $800 million from $700 million and expand certain criteria for the Company’s borrowing base in order to increase the Company’s liquidity.
As of October 1, 2005 the Company had outstanding letters of credit totaling $7.5 million, primarily for the purposes of securing collateral requirements under the casualty insurance programs for the Company and for guaranteeing payment of international purchases based on the fulfillment of certain conditions.
6. Related Party Transactions
Temporary Staffing Provider
The Company uses Tandem Staffing Solutions (“Tandem”), an affiliate of Cerberus, as the temporary staffing company for its office located in Atlanta, Georgia. The Company incurred total expenses of $468,005 and $1.4 million for the third quarter of fiscal 2005 and for the first nine months of fiscal 2005, respectively. As of October 1, 2005 and January 1, 2005, the Company had accounts payable in the amount of $74,876 and $136,000 to Tandem, respectively.
For the third quarter of fiscal 2004 and the period from inception (March 8, 2004) to October 2, 2004, the Company incurred total expenses of $796,840 and $1.1 million, respectively, related to Tandem.
Consulting
For the third quarter of fiscal 2005 and for the first nine months of fiscal 2005, the Company incurred expenses in the amount of $173,000 and $273,600, respectively, for consulting services provided to the Company by consultants on retainer to Cerberus. As of October 1, 2005, the Company had accounts payable in the amount of $231,000 for these services.
Overhead Expense Reimbursement
For the third quarter of fiscal 2005 and for the first nine months of fiscal 2005, the Company incurred expenses in the amount of $16,626 and $60,301, respectively, related to reimbursements to Cerberus for various overhead expenses directly related to the Company’s business.
For the third quarter of fiscal 2004 and the period from inception (March 8, 2004) to October 2, 2004, the Company incurred total expenses of $122,258 and $258,000, respectively, related to reimbursements to Cerberus.
Other Selling, General and Administrative
The Company uses ATC Associates, Inc. (ATC) and SBI Group (SBI), Cerberus affiliates, for real estate surveys and information technology consulting. These expenses totaled $18,000 and $90,076 for the third quarter of fiscal 2005 and for the first nine months of fiscal 2005, respectively.
For the period from inception (March 8, 2004) to October 2, 2004, the Company incurred total expenses of $307,729 and $32,851 related to ATC and SBI, respectively.
10
Information Systems
The Company purchased software licenses and a three year maintenance agreement from SSA Global Technologies, Inc., a Cerberus affiliate. These payments were directly related to the transfer of the Company’s existing financial reporting software from Georgia-Pacific. These payments totaled $242,611 for the first nine months of fiscal 2005.
Rental Car
For the third quarter of fiscal 2005 and for the first nine months of fiscal 2005, the Company incurred expenses for car rentals in the amount of $129,774 and $306,643, respectively. These services were provided by Vanguard Car Rental USA Inc., an affiliate of Cerberus.
7. Commitments and Contingencies
The Company is involved in various proceedings incidental to its businesses and is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates. 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. Management further believes that the ultimate outcome of these matters could be material to operating results in any given quarter but will not have a materially adverse effect on the long-term financial condition or results of operations of the Company.
Collective Bargaining Agreements
Approximately 33% of the Company’s total work force is covered by collective bargaining agreements. Collective bargaining agreements representing approximately 3.4% of the Company’s work force will expire within one year.
Preference Claim
On October 14, 2005, Wickes Inc. filed a lawsuit in the United States Bankruptcy Court for the Northern District of Illinois titled “Wickes Inc. v. Georgia Pacific Distribution Division (Blue Linx),” (Bankruptcy Adversary Proceeding No. 05-2322), asserting that approximately $16 million in payments received by the Distribution Division during the 90-day period prior to Wickes’ January 20, 2004 Chapter 11 filing were preferential payments under section 547 of the United States Bankruptcy Code. The deadline for the Company to respond to the complaint commencing the lawsuit is November 14, 2005. Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes Wickes’ assertion to be without merit and, in any event, subject to one or more complete defenses, including, but not limited to, that the payments were made and received in the ordinary course of business and were a substantially contemporaneous exchange for new value given to Wickes. Accordingly, the Company has no plans to establish a reserve with respect to the asserted claim.
Hurricane Katrina
Hurricane Katrina caused significant damage at the Company’s distribution center in New Orleans, Louisiana. The facility ceased operations prior to the arrival of the storm on August 29, 2005 and has not reopened. There was approximately $2.4 million in inventory located at the facility that has been declared a total loss by the Company’s insurer. Damage to the building and furniture, fixtures and equipment is still being assessed. The cost to the Company related to the damage is $250,000 which is the amount of its insurance deductible.
8. Subsequent Events
On October 20, 2005, the Company announced that Charles H. McElrea was retiring from his position as chief executive officer. Simultaneously, the Company announced that it entered into an employment agreement effective October 20, 2005 with Stephen E. Macadam to replace Mr. McElrea as chief executive officer. In connection with Mr. McElrea’s retirement, the Company and Mr. McElrea entered into a retirement and consulting
11
agreement pursuant to which the Company agreed to pay Mr. McElrea a consulting fee of $58,890 per month, payable in 24 monthly installments. The first such installment shall be due and payable on the date that is 6 months after his retirement date. The retirement and consulting agreement also contains confidentiality provisions, as well as a covenant not to compete during the term of the agreement. Mr. McElrea will continue to serve as a member of the Company’s Board. The Company anticipates it will record the entire consulting fee expense under Mr. McElrea’s agreement of approximately $1.4 million in the fourth quarter of fiscal 2005.
In connection with his employment agreement, Mr. Macadam was granted an option to purchase 750,000 shares of the Company’s common stock at an exercise price of $13.50 per share. The options vest in five equal annual installments beginning on October 20, 2006. The employment agreement expires on December 31, 2008, except that it will be renewed automatically for an additional one-year period unless thirty days prior written notice is given by either party in advance of such one-year period. Mr. Macadam received a $600,000 signing bonus from the Company and his annual base salary shall be paid at the rate of $700,000 for 2005 and 2006, $750,000 for 2007 and $800,000 for 2008. Mr. Macadam also resigned from his position as a member of the Company’s audit committee and the chair of the compensation committee. Mark Suwyn, a member of the Company’s Board and the compensation committee since May 2005, was appointed to replace Mr. Macadam as chairman of the compensation committee and Alan Schumacher, a member of the Company’s Board since May 2004, was also appointed as a member of the compensation committee. The audit committee will operate with its two remaining members until a third independent member is appointed to assume Mr. Macadam’s position on the audit committee.
On November 7, 2005, the Company’s Board declared a quarterly dividend of $0.125 per share on the Company’s common stock. The dividend is payable as of December 30, 2005 to stockholders of record as of December 15, 2005.
9. Unaudited Supplemental Condensed Consolidating/Combined Financial Statements
The condensed consolidating financial information as of October 1, 2005 and January 1, 2005 and for the periods from July 3, 2005 to October 1, 2005, July 4, 2004 to October 2, 2004, January 2, 2005 to October 1, 2005, and inception (March 8, 2004) to October 2, 2004 is provided due to restrictions in the Company’s revolving credit facility that limit distributions by BlueLinx Corporation, a wholly-owned subsidiary of the Company, to the Company, which, in turn, may limit the Company’s ability to pay dividends to holders of its common stock (see the Company’s Annual Report on Form 10-K for the year ended January 1, 2005,for a more detailed discussion of these restrictions and the terms of the facility). Also included in the supplemental condensed consolidated/combining financial statements are sixty-one single member limited liability companies, which are wholly owned by the Company (the “LLC subsidiaries”). The LLC subsidiaries own certain warehouse properties that are occupied by BlueLinx Corporation, each under the terms of a master lease agreement. The warehouse properties collateralize a mortgage loan and are not available to satisfy the debts and other obligations of either the Company or BlueLinx Corporation. The supplemental condensed combining financial statements for the period from January 4, 2004 to May 7, 2004 also present the financial position, results of operations and cash flows for the pre-acquisition period as if the current structure of the Company had been outstanding for the period presented.
12
The condensed consolidating statement of operations for BlueLinx Holdings Inc. for the period from July 3, 2005 to October 1, 2005 follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | BlueLinx | | | | | | | | | | | | | |
| | Holdings | | | BlueLinx | | | LLC | | | | | | | |
| | Inc. | | | Corporation | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Net sales | | $ | — | | | $ | 1,454,217 | | | $ | 4,900 | | | $ | (4,900 | ) | | $ | 1,454,217 | |
Cost of sales | | | — | | | | 1,317,180 | | | | — | | | | — | | | | 1,317,180 | |
| | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 137,037 | | | | 4,900 | | | | (4,900 | ) | | | 137,037 | |
| | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 416 | | | | 102,307 | | | | 103 | | | | (4,900 | ) | | | 97,926 | |
Depreciation and amortization | | | — | | | | 3,918 | | | | 1,075 | | | | — | | | | 4,993 | |
| | | | | | | | | | | | | | | |
Total operating expenses | | | 416 | | | | 106,225 | | | | 1,178 | | | | (4,900 | ) | | | 102,919 | |
| | | | | | | | | | | | | | | |
Operating income (loss) | | | (416 | ) | | | 30,812 | | | | 3,722 | | | | — | | | | 34,118 | |
Non-operating expenses: | | | | | | | | | | | | | | | | | | | | |
|
Interest expense | | | — | | | | 8,557 | | | | 2,659 | | | | — | | | | 11,216 | |
Other income, net | | | — | | | | (185 | ) | | | (110 | ) | | | — | | | | (295 | ) |
| | | | | | | | | | | | | | | |
Income before (benefit) provision for income taxes | | | (416 | ) | | | 22,440 | | | | 1,173 | | | | — | | | | 23,197 | |
Provision (benefit) for income taxes | | | (163 | ) | | | 9,005 | | | | 459 | | | | — | | | | 9,301 | |
Equity in income (loss) of subsidiaries | | | 14,149 | | | | — | | | | — | | | | (14,149 | ) | | | — | |
| | | | | | | | | | | | | | | |
Net income (loss) | | $ | 13,896 | | | $ | 13,435 | | | $ | 714 | | | $ | (14,149 | ) | | $ | 13,896 | |
| | | | | | | | | | | | | | | |
The condensed combining statement of operations for BlueLinx Holdings Inc. for the period from July 4, 2004 to October 2, 2004 follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | BlueLinx | | | | | | | | | | | | | |
| | Holdings | | | BlueLinx | | | LLC | | | | | | | |
| | Inc. | | | Corporation | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Net sales | | $ | — | | | $ | 1,509,581 | | | $ | 3,750 | | | $ | (3,750 | ) | | $ | 1,509,581 | |
Cost of sales | | | — | | | | 1,367,303 | | | | — | | | | — | | | | 1,367,303 | |
| | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 142,278 | | | | 3,750 | | | | (3,750 | ) | | | 142,278 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 76 | | | | 97,013 | | | | 24 | | | | (3,750 | ) | | | 93,363 | |
Depreciation and amortization | | | — | | | | 2,830 | | | | 1,090 | | | | — | | | | 3,920 | |
| | | | | | | | | | | | | | | |
Total operating expenses | | | 76 | | | | 99,843 | | | | 1,114 | | | | (3,750 | ) | | | 97,283 | |
| | | | | | | | | | | | | | | |
Operating income (loss) | | | (76 | ) | | | 42,435 | | | | 2,636 | | | | — | | | | 44,995 | |
Non-operating expenses: | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | — | | | | 8,385 | | | | 2,529 | | | | — | | | | 10,914 | |
Other expense, net | | | — | | | | 140 | | | | — | | | | — | | | | 140 | |
| | | | | | | | | | | | | | | |
Income before provision (benefit) for income taxes | | | (76 | ) | | | 33,910 | | | | 107 | | | | — | | | | 33,941 | |
Provision (benefit) for income taxes | | | (30 | ) | | | 13,415 | | | | 41 | | | | — | | | | 13,426 | |
Equity in income (loss) of subsidiaries | | | 20,561 | | | | — | | | | — | | | | (20,561 | ) | | | — | |
| | | | | | | | | | | | | | | |
Net income (loss) | | | 20,515 | | | $ | 20,495 | | | $ | 66 | | | $ | (20,561 | ) | | | 20,515 | |
| | | | | | | | | | | | | | | | | |
Less: Preferred stock dividends | | | 2,487 | | | | | | | | | | | | | | | | 2,487 | |
| | | | | | | | | | | | | | | | | | |
Net income attributable to common shareholders | | $ | 18,028 | | | | | | | | | | | | | | | $ | 18,028 | |
| | | | | | | | | | | | | | | | | | |
13
The condensed consolidating statement of operations for BlueLinx Holdings Inc. for the period from January 2, 2005 to October 1, 2005 follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | BlueLinx | | | | | | | | | | | | | |
| | Holdings | | | BlueLinx | | | LLC | | | | | | | |
| | Inc. | | | Corporation | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Net sales | | $ | — | | | $ | 4,292,812 | | | $ | 14,700 | | | $ | (14,700 | ) | | $ | 4,292,812 | |
Cost of sales | | | — | | | | 3,920,766 | | | | — | | | | — | | | | 3,920,766 | |
| | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 372,046 | | | | 14,700 | | | | (14,700 | ) | | | 372,046 | |
| | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 1,299 | | | | 290,400 | | | | 310 | | | | (14,700 | ) | | | 277,309 | |
Depreciation and amortization | | | — | | | | 10,567 | | | | 3,226 | | | | — | | | | 13,793 | |
| | | | | | | | | | | | | | | |
Total operating expenses | | | 1,299 | | | | 300,967 | | | | 3,536 | | | | (14,700 | ) | | | 291,102 | |
| | | | | | | | | | | | | | | |
Operating income (loss) | | | (1,299 | ) | | | 71,079 | | | | 11,164 | | | | — | | | | 80,944 | |
Non-operating expenses: | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | — | | | | 23,511 | | | | 7,695 | | | | — | | | | 31,206 | |
Other expense (income), net | | | — | | | | 168 | | | | (110 | ) | | | — | | | | 58 | |
| | | | | | | | | | | | | | | |
Income before provision (benefit) for income taxes | | | (1,299 | ) | | | 47,400 | | | | 3,579 | | | | — | | | | 49,680 | |
Provision (benefit) for income taxes | | | (507 | ) | | | 18,725 | | | | 1,397 | | | | — | | | | 19,615 | |
Equity in income (loss) of subsidiaries | | | 30,857 | | | | — | | | | — | | | | (30,857 | ) | | | — | |
| | | | | | | | | | | | | | | |
Net income (loss) | | $ | 30,065 | | | $ | 28,675 | | | $ | 2,182 | | | $ | (30,857 | ) | | $ | 30,065 | |
| | | | | | | | | | | | | | | |
The condensed combining statement of operations for BlueLinx Holdings Inc. for the period from inception (March 8, 2004) to October 2, 2004 follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | BlueLinx | | | | | | | | | | | | | |
| | Holdings | | | BlueLinx | | | LLC | | | | | | | |
| | Inc. | | | Corporation | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Net sales | | $ | — | | | $ | 2,465,193 | | | $ | 6,058 | | | $ | (6,058 | ) | | $ | 2,465,193 | |
Cost of sales | | | — | | | | 2,233,387 | | | | — | | | | — | | | | 2,233,387 | |
| | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 231,806 | | | | 6,058 | | | | (6,058 | ) | | | 231,806 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 231 | | | | 161,386 | | | | 40 | | | | (6,058 | ) | | | 155,599 | |
Depreciation and amortization | | | — | | | | 4,506 | | | | 1,731 | | | | — | | | | 6,237 | |
| | | | | | | | | | | | | | | |
Total operating expenses | | | 231 | | | | 165,892 | | | | 1,771 | | | | (6,058 | ) | | | 161,836 | |
| | | | | | | | | | | | | | | |
Operating income (loss) | | | (231 | ) | | | 65,914 | | | | 4,287 | | | | — | | | | 69,970 | |
Other expenses (income): | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | — | | | | 13,563 | | | | 4,145 | | | | — | | | | 17,708 | |
Other expense (income), net | | | — | | | | (33 | ) | | | — | | | | — | | | | (33 | ) |
| | | | | | | | | | | | | | | |
Income before provision (benefit) for income taxes | | | (231 | ) | | | 52,384 | | | | 142 | | | | — | | | | 52,295 | |
Provision (benefit) for income taxes | | | (90 | ) | | | 20,619 | | | | 55 | | | | — | | | | 20,584 | |
Equity in income (loss) of subsidiaries | | | 31,852 | | | | — | | | | — | | | | (31,852 | ) | | | — | |
| | | | | | | | | | | | | | | |
Net income (loss) | | | 31,711 | | | $ | 31,765 | | | $ | 87 | | | $ | (31,852 | ) | | | 31,711 | |
| | | | | | | | | | | | | | | | | |
Less: Preferred stock dividends | | | 3,971 | | | | | | | | | | | | | | | | 3,971 | |
| | | | | | | | | | | | | | | | | | |
Net income attributable to common shareholders | | $ | 27,740 | | | | | | | | | | | | | | | $ | 27,740 | |
| | | | | | | | | | | | | | | | | | |
14
The pre-acquisition condensed combining statement of operations of the Distribution Division for the period from January 4, 2004 to May 7, 2004 follows (in thousands):
| | | | | | | | | | | | |
| | Distribution | | | | | | | |
| | Division | | | | | | | |
| | Excluding | | | | | | | |
| | Warehouse | | | Warehouse | | | | |
| | Properties | | | Properties | | | Combined | |
Net sales | | $ | 1,885,334 | | | $ | — | | | $ | 1,885,334 | |
Cost of sales | | | 1,658,123 | | | | — | | | | 1,658,123 | |
| | | | | | | | | |
Gross profit | | | 227,211 | | | | — | | | | 227,211 | |
Operating expenses: | | | | | | | | | | | | |
Selling, general and administrative | | | 139,203 | | | | — | | | | 139,203 | |
Depreciation and amortization | | | 3,786 | | | | 2,389 | | | | 6,175 | |
| | | | | | | | | |
Total operating expenses | | | 142,989 | | | | 2,389 | | | | 145,378 | |
| | | | | | | | | |
Operating income (loss) | | | 84,222 | | | | (2,389 | ) | | | 81,833 | |
Non-operating expenses: | | | | | | | | | | | | |
Interest expense | | | — | | | | — | | | | — | |
Other expense, net | | | 614 | | | | — | | | | 614 | |
| | | | | | | | | |
Income before provision (benefit) for income taxes | | | 83,608 | | | | (2,389 | ) | | | 81,219 | |
Provision (benefit) for income taxes | | | 31,687 | | | | (905 | ) | | | 30,782 | |
Equity in income (loss) of subsidiaries | | | — | | | | — | | | | — | |
| | | | | | | | | |
Net income (loss) | | $ | 51,921 | | | $ | (1,484 | ) | | $ | 50,437 | |
| | | | | | | | | |
15
The condensed consolidating balance sheet for BlueLinx Holdings Inc. as of October 1, 2005 follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | BlueLinx | | | | | | | | | | | | | |
| | Holdings | | | BlueLinx | | | LLC | | | | | | | |
| | Inc. | | | Corporation | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash | | $ | — | | | $ | 28,320 | | | $ | — | | | $ | — | | | $ | 28,320 | |
Receivables | | | — | | | | 526,466 | | | | — | | | | — | | | | 526,466 | |
Inventories | | | — | | | | 418,864 | | | | — | | | | — | | | | 418,864 | |
Deferred income taxes | | | — | | | | 7,259 | | | | — | | | | — | | | | 7,259 | |
Other current assets | | | 268 | | | | 41,035 | | | | — | | | | — | | | | 41,303 | |
Intercompany receivable | | | 507 | | | | — | | | | 598 | | | | (1,105 | ) | | | — | |
| | | | | | | | | | | | | | | |
Total current assets | | | 775 | | | | 1,021,944 | | | | 598 | | | | (1,105 | ) | | | 1,022,212 | |
| | | | | | | | | | | | | | | |
Property, plant and equipment: | | | | | | | | | | | | | | | | | | | | |
Land and land improvements | | | — | | | | 2,335 | | | | 54,161 | | | | — | | | | 56,496 | |
Buildings | | | — | | | | 4,034 | | | | 89,347 | | | | — | | | | 93,381 | |
Machinery and equipment | | | — | | | | 52,408 | | | | — | | | | — | | | | 52,408 | |
Construction in progress | | | — | | | | 1,920 | | | | — | | | | — | | | | 1,920 | |
| | | | | | | | | | | | | | | |
Property, plant and equipment, at cost | | | — | | | | 60,697 | | | | 143,508 | | | | — | | | | 204,205 | |
Accumulated depreciation | | | — | | | | (12,539 | ) | | | (5,940 | ) | | | — | | | | (18,479 | ) |
| | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | — | | | | 48,158 | | | | 137,568 | | | | — | | | | 185,726 | |
Investment in subsidiaries | | | 170,186 | | | | — | | | | — | | | | (170,186 | ) | | | — | |
Deferred income taxes | | | — | | | | 2,611 | | | | — | | | | (2,611 | ) | | | — | |
Other non-current assets | | | — | | | | 23,077 | | | | 4,305 | | | | — | | | | 27,382 | |
| | | | | | | | | | | | | | | |
Total assets | | $ | 170,961 | | | $ | 1,095,790 | | | $ | 142,471 | | | $ | (173,902 | ) | | $ | 1,235,320 | |
| | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Current liabilities : | | | | | | | | | | | | | | | | | | | | |
Accounts payable | | $ | — | | | $ | 325,335 | | | $ | — | | | $ | — | | | $ | 325,335 | |
Bank overdrafts | | | — | | | | 43,953 | | | | — | | | | — | | | | 43,953 | |
Accrued compensation | | | — | | | | 12,077 | | | | — | | | | — | | | | 12,077 | |
Current maturities of long-term debt | | | — | | | | 63,937 | | | | — | | | | — | | | | 63,937 | |
Other current liabilities | | | — | | | | 11,926 | | | | 2,716 | | | | — | | | | 14,642 | |
Intercompany payable | | | — | | | | 598 | | | | 507 | | | | (1,105 | ) | | | — | |
| | | | | | | | | | | | | | | |
Total current liabilities | | | — | | | | 457,826 | | | | 3,223 | | | | (1,105 | ) | | | 459,944 | |
| | | | | | | | | | | | | | | |
Non-current liabilities: | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | — | | | | 425,000 | | | | 165,000 | | | | — | | | | 590,000 | |
Deferred income taxes | | | — | | | | — | | | | 3,461 | | | | (2,611 | ) | | | 850 | |
Other long-term liabilities | | | — | | | | 12,740 | | | | 825 | | | | — | | | | 13,565 | |
| | | | | | | | | | | | | | | |
Total liabilities | | | — | | | | 895,566 | | | | 172,509 | | | | (3,716 | ) | | | 1,064,359 | |
| | | | | | | | | | | | | | | |
Shareholders’ Equity/Parent’s Investment | | | 170,961 | | | | 200,224 | | | | (30,038 | ) | | | (170,186 | ) | | | 170,961 | |
| | | | | | | | | | | | | | | |
Total liabilities and equity | | $ | 170,961 | | | $ | 1,095,790 | | | $ | 142,471 | | | $ | (173,902 | ) | | $ | 1,235,320 | |
| | | | | | | | | | | | | | | |
16
The condensed consolidating balance sheet for BlueLinx Holdings Inc. as of January 1, 2005 follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | BlueLinx | | | | | | | | | | | | | |
| | Holdings | | | BlueLinx | | | LLC | | | | | | | |
| | Inc. | | | Corporation | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash | | $ | 3 | | | $ | 15,569 | | | $ | — | | | $ | — | | | $ | 15,572 | |
Receivables, net | | | — | | | | 363,688 | | | | — | | | | — | | | | 363,688 | |
Inventories, net | | | — | | | | 500,231 | | | | — | | | | — | | | | 500,231 | |
Deferred income tax assets | | | — | | | | 6,122 | | | | — | | | | — | | | | 6,122 | |
Other current assets | | | 1,258 | | | | 32,945 | | | | — | | | | — | | | | 34,203 | |
Intercompany receivable | | | 167 | | | | 4,012 | | | | 2,251 | | | | (6,430 | ) | | | — | |
| | | | | | | | | | | | | | | |
Total current assets | | | 1,428 | | | | 922,567 | | | | 2,251 | | | | (6,430 | ) | | | 919,816 | |
| | | | | | | | | | | | | | | |
Property, plant and equipment: | | | | | | | | | | | | | | | | | | | | |
Land and land improvements | | | — | | | | 1,412 | | | | 54,161 | | | | — | | | | 55,573 | |
Buildings | | | — | | | | 3,091 | | | | 90,042 | | | | — | | | | 93,133 | |
Machinery and equipment | | | — | | | | 41,063 | | | | — | | �� | | — | | | | 41,063 | |
Construction in progress | | | — | | | | 5,089 | | | | — | | | | — | | | | 5,089 | |
| | | | | | | | | | | | | | | |
Property, plant and equipment, at cost | | | — | | | | 50,655 | | | | 144,203 | | | | — | | | | 194,858 | |
Accumulated depreciation | | | — | | | | (5,068 | ) | | | (2,812 | ) | | | — | | | | (7,880 | ) |
| | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | — | | | | 45,587 | | | | 141,391 | | | | — | | | | 186,978 | |
Investment in subsidiaries | | | 145,146 | | | | — | | | | — | | | | (145,146 | ) | | | — | |
Deferred income taxes | | | — | | | | 3,456 | | | | — | | | | (3,456 | ) | | | — | |
Other non-current assets | | | — | | | | 25,715 | | | | 4,553 | | | | — | | | | 30,268 | |
| | | | | | | | | | | | | | | |
Total assets | | $ | 146,574 | | | $ | 997,325 | | | $ | 148,195 | | | $ | (155,032 | ) | | $ | 1,137,062 | |
| | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 1,070 | | | $ | 269,201 | | | $ | — | | | $ | — | | | $ | 270,271 | |
Bank overdrafts | | | — | | | | 32,033 | | | | — | | | | — | | | | 32,033 | |
Accrued compensation | | | — | | | | 18,292 | | | | — | | | | — | | | | 18,292 | |
Current maturities of long-term debt | | | — | | | | 94,103 | | | | — | | | | — | | | | 94,103 | |
Other current liabilities | | | — | | | | 11,897 | | | | 1,245 | | | | — | | | | 13,142 | |
Intercompany payable | | | 4,012 | | | | 2,251 | | | | 167 | | | | (6,430 | ) | | | — | |
| | | | | | | | | | | | | | | |
Total current liabilities | | | 5,082 | | | | 427,777 | | | | 1,412 | | | | (6,430 | ) | | | 427,841 | |
| | | | | | | | | | | | | | | |
Non-current liabilities: | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | — | | | | 393,000 | | | | 165,000 | | | | — | | | | 558,000 | |
Deferred income taxes | | | — | | | | — | | | | 4,196 | | | | (3,456 | ) | | | 740 | |
Other long-term liabilities | | | — | | | | 8,989 | | | | — | | | | — | | | | 8,989 | |
| | | | | | | | | | | | | | | |
Total liabilities | | | 5,082 | | | | 829,766 | | | | 170,608 | | | | (9,886 | ) | | | 995,570 | |
| | | | | | | | | | | | | | | |
Shareholders’ Equity/Parent’s Investment | | | 141,492 | | | | 167,559 | | | | (22,413 | ) | | | (145,146 | ) | | | 141,492 | |
| | | | | | | | | | | | | | | |
Total liabilities and equity | | $ | 146,574 | | | $ | 997,325 | | | $ | 148,195 | | | $ | (155,032 | ) | | $ | 1,137,062 | |
| | | | | | | | | | | | | | | |
17
The condensed consolidating statement of cash flows for BlueLinx Holdings Inc. for the period from January 2, 2005 to October 1, 2005 follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | BlueLinx | | | | | | | | | | | | | |
| | Holdings | | | BlueLinx | | | LLC | | | | | | | |
| | Inc. | | | Corporation | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 30,065 | | | $ | 28,675 | | | $ | 2,182 | | | $ | (30,857 | ) | | $ | 30,065 | |
Adjustments to reconcile net income (loss) to cash provided by (used in) operations: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | — | | | | 10,567 | | | | 3,226 | | | | — | | | | 13,793 | |
Amortization of debt issue costs | | | — | | | | 2,021 | | | | 683 | | | | — | | | | 2,704 | |
Deferred income tax provision (benefit) | | | — | | | | (292 | ) | | | (735 | ) | | | — | | | | (1,027 | ) |
Equity in earnings of subsidiaries | | | (30,857 | ) | | | — | | | | — | | | | 30,857 | | | | — | |
Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
Receivables | | | — | | | | (158,401 | ) | | | — | | | | — | | | | (158,401 | ) |
Inventories | | | — | | | | 91,976 | | | | — | | | | — | | | | 91,976 | |
Accounts payable | | | (1,070 | ) | | | 55,555 | | | | — | | | | — | | | | 54,585 | |
Changes in other working capital | | | 990 | | | | (13,464 | ) | | | 1,471 | | | | — | | | | (11,003 | ) |
Intercompany receivable | | | (340 | ) | | | 4,012 | | | | 1,653 | | | | (5,325 | ) | | | — | |
Intercompany payable | | | (4,012 | ) | | | (1,653 | ) | | | 340 | | | | 5,325 | | | | — | |
Other | | | — | | | | 4,708 | | | | 987 | | | | — | | | | 5,695 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (5,224 | ) | | | 23,704 | | | | 9,807 | | | | — | | | | 28,287 | |
| | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Investment in subsidiaries | | | 7,795 | | | | — | | | | — | | | | (7,795 | ) | | | — | |
Acquisitions, net of cash acquired | | | — | | | | (17,021 | ) | | | — | | | | — | | | | (17,021 | ) |
Property, plant and equipment investments | | | — | | | | (10,034 | ) | | | — | | | | — | | | | (10,034 | ) |
Proceeds from sale of assets | | | — | | | | 814 | | | | — | | | | — | | | | 814 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 7,795 | | | | (26,241 | ) | | | — | | | | (7,795 | ) | | | (26,241 | ) |
| | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Net transactions with Parent | | | — | | | | 2,012 | | | | (9,807 | ) | | | 7,795 | | | | — | |
Issuance of common stock, net | | | 8,541 | | | | — | | | | — | | | | — | | | | 8,541 | |
Proceeds from stock options exercised | | | 204 | | | | 92 | | | | — | | | | — | | | | 296 | |
Net increase in revolving credit facility | | | — | | | | 1,834 | | | | — | | | | — | | | | 1,834 | |
Debt financing costs | | | — | | | | (570 | ) | | | — | | | | — | | | | (570 | ) |
Increase (decrease) in bank overdrafts | | | — | | | | 11,920 | | | | — | | | | — | | | | 11,920 | |
Common dividends paid | | | (11,319 | ) | | | — | | | | — | | | | — | | | | (11,319 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (2,574 | ) | | | 15,288 | | | | (9,807 | ) | | | 7,795 | | | | 10,702 | |
| | | | | | | | | | | | | | | |
Increase (decrease) in cash | | | (3 | ) | | | 12,751 | | | | — | | | | — | | | | 12,748 | |
Balance, beginning of period | | | 3 | | | | 15,569 | | | | — | | | | — | | | | 15,572 | |
| | | | | | | | | | | | | | | |
Balance, end of period | | $ | — | | | $ | 28,320 | | | $ | — | | | $ | — | | | $ | 28,320 | |
| | | | | | | | | | | | | | | |
18
The condensed combining statement of cash flows for BlueLinx Holdings Inc. for the period from inception (March 8, 2004) to October 2, 2004 follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | BlueLinx | | | | | | | | | | | | | |
| | Holdings | | | BlueLinx | | | | | | | | | | |
| | Inc. | | | Corporation | | | LLCs | | | Elimination | | | Consolidated | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 31,711 | | | $ | 31,765 | | | $ | 87 | | | $ | (31,852 | ) | | $ | 31,711 | |
Adjustments to reconcile net income (loss) to cash provided by operations: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | — | | | | 4,506 | | | | 1,731 | | | | — | | | | 6,237 | |
Amortization of debt issue costs | | | — | | | | 1,215 | | | | — | | | | — | | | | 1,215 | |
Deferred income tax provision (benefit) | | | — | | | | (8,987 | ) | | | 4,159 | | | | — | | | | (4,828 | ) |
Equity in earnings of subsidiaries | | | (31,852 | ) | | | — | | | | — | | | | 31,852 | | | | — | |
Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
Receivables | | | — | | | | 63,782 | | | | — | | | | — | | | | 63,782 | |
Inventories | | | — | | | | (15,556 | ) | | | — | | | | — | | | | (15,556 | ) |
Accounts payable | | | — | | | | (37,103 | ) | | | — | | | | — | | | | (37,103 | ) |
Changes in other working capital | | | (455 | ) | | | 3,930 | | | | 909 | | | | 1,273 | | | | 5,657 | |
Intercompany receivable | | | (90 | ) | | | — | | | | — | | | | 90 | | | | — | |
Intercompany payable | | | 768 | | | | — | | | | 595 | | | | (1,363 | ) | | | — | |
Other | | | — | | | | 1,156 | | | | 372 | | | | — | | | | 1,528 | |
| | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 82 | | | | 44,708 | | | | 7,853 | | | | — | | | | 52,643 | |
| | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Contributed capital to subsidiaries | | | (100,802 | ) | | | — | | | | — | | | | 100,802 | | | | — | |
Acquisition of operating assets of division | | | — | | | | (632,104 | ) | | | (144,203 | ) | | | — | | | | (776,307 | ) |
Property, plant and equipment investments | | | — | | | | (1,677 | ) | | | — | | | | — | | | | (1,677 | ) |
Proceeds from sale of assets | | | — | | | | 25 | | | | — | | | | — | | | | 25 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | (100,802 | ) | | | (633,756 | ) | | | (144,203 | ) | | | 100,802 | | | | (777,959 | ) |
| | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Net transactions with Georgia-Pacific | | | — | | | | 63,732 | | | | 36,350 | | | | (100,802 | ) | | | — | |
Issuance of preferred stock | | | 95,000 | | | | — | | | | — | | | | — | | | | 95,000 | |
Issuance of common stock, net | | | 5,000 | | | | — | | | | — | | | | — | | | | 5,000 | |
Net increase in revolving credit facility | | | — | | | | 473,507 | | | | — | | | | — | | | | 473,507 | |
Proceeds from term loan | | | — | | | | 100,000 | | | | — | | | | — | | | | 100,000 | |
Proceeds from mortgage payable | | | — | | | | — | | | | 100,000 | | | | — | | | | 100,000 | |
Debt financing costs | | | — | | | | (15,338 | ) | | | — | | | | — | | | | (15,338 | ) |
Decrease in bank overdrafts | | | — | | | | (9,746 | ) | | | — | | | | — | | | | (9,746 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 100,000 | | | | 612,155 | | | | 136,350 | | | | (100,802 | ) | | | 748,423 | |
| | | | | | | | | | | | | | | |
Increase in cash | | | — | | | | 23,107 | | | | — | | | | — | | | | 23,107 | |
Balance, beginning of period | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
Balance, end of period | | $ | — | | | $ | 23,107 | | | $ | — | | | $ | — | | | $ | 23,107 | |
| | | | | | | | | | | | | | | |
19
The pre-acquisition condensed combining statement of cash flows for the Distribution Division for the period from January 4, 2004 to May 7, 2004 follows (in thousands):
| | | | | | | | | | | | |
| | Distribution | | | | | | | |
| | Division | | | | | | | |
| | Excluding | | | | | | | |
| | Warehouse | | | Warehouse | | | | |
| | Properties | | | Properties | | | Combined | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 51,921 | | | $ | (1,484 | ) | | $ | 50,437 | |
Adjustments to reconcile net income (loss) to cash provided by (used in) operations: | | | | | | | | | | | | |
Depreciation and amortization | | | 3,786 | | | | 2,389 | | | | 6,175 | |
Amortization of debt issue costs | | | — | | | | — | | | | — | |
Deferred income tax provision | | | 9,183 | | | | — | | | | 9,183 | |
Equity in earnings of subsidiaries | | | — | | | | — | | | | — | |
Changes in assets and liabilities: | | | | | | | | | | | | |
Receivables | | | (292,350 | ) | | | — | | | | (292,350 | ) |
Inventories | | | (145,689 | ) | | | — | | | | (145,689 | ) |
Accounts payable | | | 257,772 | | | | — | | | | 257,772 | |
Changes in other working capital | | | 2,464 | | | | — | | | | 2,464 | |
Other | | | (1,974 | ) | | | — | | | | (1,974 | ) |
| | | | | | | | | |
Net cash provided by (used in) operating activities | | | (114,887 | ) | | | 905 | | | | (113,982 | ) |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Contributed capital to subsidiaries | | | — | | | | — | | | | — | |
Acquisition of operating assets of division | | | — | | | | — | | | | — | |
Property, plant and equipment investments | | | (1,378 | ) | | | — | | | | (1,378 | ) |
Proceeds from sale of assets | | | 252 | | | | — | | | | 252 | |
| | | | | | | | | |
Net cash used in investing activities | | | (1,126 | ) | | | — | | | | (1,126 | ) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Net transactions with Georgia-Pacific | | | 89,257 | | | | (905 | ) | | | 88,352 | |
Issuance of preferred stock | | | — | | | | — | | | | — | |
Issuance of common stock, net | | | — | | | | — | | | | — | |
Net increase in revolving credit facility | | | — | | | | — | | | | — | |
Proceeds from term loan | | | — | | | | — | | | | — | |
Proceeds from mortgage payable | | | — | | | | — | | | | — | |
Fees paid to issue debt | | | — | | | | — | | | | — | |
Increase in bank overdrafts | | | 26,250 | | | | — | | | | 26,250 | |
| | | | | | | | | |
Net cash provided by (used in) financing activities | | | 115,507 | | | | (905 | ) | | | 114,602 | |
| | | | | | | | | |
Decrease in cash | | | (506 | ) | | | — | | | | (506 | ) |
Balance, beginning of period | | | 506 | | | | — | | | | 506 | |
| | | | | | | | | |
Balance, end of period | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | |
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) has been derived from our historical financial statements and is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We recommend that you read this MD&A section in conjunction with our condensed financial statements and notes to those statements included in Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended January 1, 2005 as filed with the SEC. This MD&A section is not a comprehensive discussion and analysis of our financial condition and results of operations, but rather updates disclosures made in the aforementioned filing. The discussion below contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance 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. All of these 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, including, but not limited to, economic, competitive, governmental and technological factors outside of our control, that may cause our business, strategy or actual results to differ materially from the forward-looking statements. These risks and uncertainties may include those discussed under the heading “Factors Affecting Future Results” in our Annual Report on Form 10-K for the year ended January 1, 2005 as filed with the U.S. Securities and Exchange Commission and other factors, some of which may not be known to us. 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 you should consider that could cause these differences include, among other things:
| • | | changes in the prices, supply and/or demand for products which we distribute; |
|
| • | | the activities of competitors; |
|
| • | | changes in significant operating expenses; |
|
| • | | changes in the availability of capital; |
|
| • | | our ability to identify acquisition opportunities and effectively and cost-efficiently integrate acquisitions; |
|
| • | | general economic and business conditions in the United States; |
|
| • | | adverse weather patterns or conditions; |
|
| • | | acts of war or terrorist activities; |
|
| • | | variations in the performance of the financial markets; and |
|
| • | | the other factors described herein under “Factors Affecting Future Results” in our Annual Report on Form 10-K for the year ended January 1, 2005 as filed with the U.S. Securities and Exchange Commission. |
Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.
21
Overview
Company Background
The Company is a leading distributor of building products in the United States. The Company distributes over 10,000 products to more than 11,700 customers through its network of more than 65 warehouses and third-party operated warehouses which serve all major metropolitan markets in the United States. The Company distributes products in two principal categories: structural products and specialty products. Structural products include plywood, oriented strand board (OSB), lumber and other wood products primarily used for structural support, walls and flooring in construction projects. Structural products represented approximately 55% of the Company’s third quarter of fiscal 2005 gross sales. Specialty products include roofing, insulation, moulding, engineered wood, vinyl products (used primarily in siding) and metal products. Specialty products accounted for approximately 45% of the Company’s third quarter of fiscal 2005 gross sales.
Recent Developments
On October 20, 2005, the Company announced that Charles H. McElrea was retiring from his position as chief executive officer. Simultaneously, the Company announced that it entered into an employment agreement effective October 20, 2005 with Stephen E. Macadam to replace Mr. McElrea as chief executive officer. In connection with Mr. McElrea’s retirement, the Company and Mr. McElrea entered into a retirement and consulting agreement pursuant to which the Company agreed to pay Mr. McElrea a consulting fee of $58,890 per month, payable in 24 monthly installments. The first such installment shall be due and payable on the date that is 6 months after his retirement date. The retirement and consulting agreement also contains confidentiality provisions, as well as a covenant not to compete during the term of the agreement. Mr. McElrea will continue to serve as a member of the Company’s Board. The Company anticipates it will record the entire consulting fee expense under Mr. McElrea’s agreement of approximately $1.4 million in the fourth quarter of fiscal 2005.
In connection with his employment agreement, Mr. Macadam was granted an option to purchase 750,000 shares of the Company’s common stock at an exercise price of $13.50 per share. The options vest in five equal annual installments beginning on October 20, 2006. The employment agreement expires on December 31, 2008, except that it will be renewed automatically for an additional one-year period unless thirty days prior written notice is given by either party in advance of such one-year period. Mr. Macadam received a $600,000 signing bonus from the Company and his annual base salary shall be paid at the rate of $700,000 for 2005 and 2006, $750,000 for 2007 and $800,000 for 2008. Mr. Macadam also resigned from his position as a member of the Company’s audit committee and the chair of the compensation committee. Mark Suwyn, a member of the Company’s Board and the compensation committee since May 2005, was appointed to replace Mr. Macadam as chairman of the compensation committee and Alan Schumacher, a member of the Company’s Board since May 2004, was also appointed as a member of the compensation committee. The audit committee will operate with its two remaining members until a third independent member is appointed to assume Mr. Macadam’s position on the audit committee.
On November 7, 2005, the Company’s Board declared a quarterly dividend of $0.125 per share on the Company’s common stock. The dividend is payable on December 30, 2005 to stockholders of record as of December 15, 2005.
Acquisition of Building Products Distribution Division’s Assets from Georgia-Pacific
On March 12, 2004, the Company and its operating company, BlueLinx Corporation, entered into two separate definitive agreements to acquire the real estate and operating assets, respectively, of the distribution division of Georgia-Pacific Corporation. The transactions were consummated on May 7, 2004. The Company refers to the period on or prior to May 7, 2004 as the “pre-acquisition period.” The Distribution Division’s financial data for the pre-acquisition period generally will not be comparable to the Company’s financial data for the period after the acquisition. The principal factors affecting comparability are incremental costs that the Company will incur as a separate company, discussed in greater detail below; interest costs attributable to debt the Company incurred in connection with the acquisition transactions and mortgage refinancing transactions; and the effects of the purchase method of accounting applied to the acquisition transactions. The acquisition of the assets of the Distribution Division was accounted for using the purchase method of accounting, and the assets acquired and liabilities assumed were accounted for at their fair market values at the date of consummation.
22
Agreements with Georgia-Pacific
Supply Agreement.On May 7, 2004, the Company entered into a multi-year supply agreement with Georgia-Pacific. Under the agreement, the Company has exclusive distribution rights on certain products and certain customer segments. Georgia-Pacific is the Company’s largest vendor, with Georgia-Pacific products representing approximately 27% of purchases during fiscal 2004.
Transition Agreements.During the pre-acquisition period, Georgia-Pacific charged the Distribution Division for the estimated cost of certain functions that were managed by Georgia-Pacific and could reasonably be directly attributed to the operations of the Distribution Division. These costs included dedicated human resources, legal, accounting and information systems support. The charges to the Distribution Division were based on Georgia-Pacific management’s estimate of the services specifically used by the Distribution Division. Where determinations based on specific usage alone were impracticable, other methods and criteria were used that management believes are equitable and provide a reasonable estimate of the cost attributable to the Distribution Division. The total of the allocations was $5.8 million for the period from January 4, 2004 to May 7, 2004. Certain general corporate expenses were not allocated to the Distribution Division. These expenses included portions of property and casualty insurance premiums, health and welfare administration costs, human resources administration costs, finance administration costs and legal costs. The Company estimates that these incremental costs would have been approximately $4.7 million for the period from January 4, 2004 to May 7, 2004.
The Company believes the assumptions underlying the Distribution Division’s financial statements are reasonable. However, the Distribution Division’s financial statements do not necessarily reflect what the Company’s future results of operations, financial position and cash flows will be, nor do they reflect what the Company’s results of operations, financial position and cash flows would have been had the Company been a separate, independent company during the periods presented.
Sales Revenue Variances
The following table sets forth changes in net sales by product category, sales variances due to changes in unit volume and dollar and percentage changes in unit volume and price versus comparable prior periods, in each case for the third quarter of fiscal 2005, the third quarter of fiscal 2004, the first nine months of fiscal 2005, the first nine months of fiscal 2004, fiscal 2004 and fiscal 2003 (the 2004 financial results reflect the combined results of BlueLinx and the Distribution Division for the applicable period).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal | | | Fiscal | | | Fiscal | | | Fiscal | | | Fiscal | | | Fiscal | |
| | Q3 2005 | | | Q3 2004 | | | 2005 YTD | | | 2004 YTD | | | 2004 | | | 2003 | |
| | (Dollars in millions) | |
| | (Unaudited) | |
Sales by Category | | | | | | | | | | | | | | | | | | | | | | | | |
Structural Products | | $ | 809 | | | $ | 895 | | | $ | 2,426 | | | $ | 2,563 | | | $ | 3,225 | | | $ | 2,401 | |
Specialty Products | | | 648 | | | | 643 | | | | 1,897 | | | | 1,825 | | | | 2,391 | | | | 1,924 | |
Other* | | | (3 | ) | | | (28 | ) | | | (30 | ) | | | (37 | ) | | | (58 | ) | | | (53 | ) |
| | | | | | | | | | | | | | | | | | |
Total Sales | | $ | 1,454 | | | $ | 1,510 | | | $ | 4,293 | | | $ | 4,351 | | | $ | 5,558 | | | $ | 4,272 | |
| | | | | | | | | | | | | | | | | | |
Sales Variances | | | | | | | | | | | | | | | | | | | | | | | | |
Unit Volume $ Change | | $ | 24 | | | $ | 71 | | | $ | 137 | | | $ | 240 | | | $ | 351 | | | $ | 94 | |
Price/Other* | | | (80 | ) | | | 246 | | | | (195 | ) | | | 1,007 | | | | 935 | | | | 444 | |
| | | | | | | | | | | | | | | | | | |
Total $ Change | | $ | (56 | ) | | $ | 317 | | | $ | (58 | ) | | $ | 1,247 | | | $ | 1,286 | | | $ | 538 | |
| | | | | | | | | | | | | | | | | | |
Unit Volume % Change | | | 1.6 | % | | | 5.9 | % | | | 3.1 | % | | | 7.7 | % | | | 8.2 | % | | | 2.5 | % |
Price/Other* | | | (5.3 | )% | | | 20.7 | % | | | (4.4 | )% | | | 32.5 | % | | | 21.9 | % | | | 11.9 | % |
| | | | | | | | | | | | | | | | | | |
Total % Change | | | (3.7 | )% | | | 26.6 | % | | | (1.3 | )% | | | 40.2 | % | | | 30.1 | % | | | 14.4 | % |
| | | | | | | | | | | | | | | | | | |
| | |
* | | Other includes unallocated allowances and discounts, acquisitions and the impact of the 53rd week in fiscal 2003. |
The following table sets forth changes in net sales and gross margin by channel and percentage changes in gross margin by channel, in each case for the third quarter of fiscal 2005, the third quarter of fiscal 2004, the first nine
23
months of fiscal 2005, the first nine months of fiscal 2004, fiscal 2004 and fiscal 2003 (the 2004 financial results reflect the combined results of BlueLinx and the Distribution Division for the applicable period).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal | | | Fiscal | | | Fiscal | | | Fiscal | | | Fiscal | | | Fiscal | |
| | Q3 2005 | | | Q3 2004 | | | 2005 YTD | | | 2004 YTD | | | 2004 | | | 2003 | |
| | (Dollars in millions) | |
| | (Unaudited) | |
Sales by Channel | | | | | | | | | | | | | | | | | | | | | | | | |
Warehouse/Reload | | $ | 969 | | | $ | 1,069 | | | $ | 2,826 | | | $ | 2,972 | | | $ | 3,819 | | | $ | 2,935 | |
Direct | | | 488 | | | | 469 | | | | 1,497 | | | | 1,416 | | | | 1,797 | | | | 1,390 | |
Other* | | | (3 | ) | | | (28 | ) | | | (30 | ) | | | (37 | ) | | | (58 | ) | | | (53 | ) |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 1,454 | | | $ | 1,510 | | | $ | 4,293 | | | $ | 4,351 | | | $ | 5,558 | | | $ | 4,272 | |
| | | | | | | | | | | | | | | | | | |
Gross Margin by Channel | | | | | | | | | | | | | | | | | | | | | | | | |
Warehouse/Reload | | $ | 107 | | | $ | 122 | | | $ | 296 | | | $ | 387 | | | $ | 459 | | | $ | 380 | |
Direct | | | 22 | | | | 21 | | | | 61 | | | | 65 | | | | 84 | | | | 74 | |
Other* | | | 8 | | | | (1 | ) | | | 15 | | | | 7 | | | | 18 | | | | 3 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 137 | | | $ | 142 | | | $ | 372 | | | $ | 459 | | | $ | 561 | | | $ | 457 | |
| | | | | | | | | | | | | | | | | | |
Gross Margin % by Channel | | | | | | | | | | | | | | | | | | | | | | | | |
Warehouse/Reload | | | 11.0 | % | | | 11.4 | % | | | 10.5 | % | | | 13.0 | % | | | 12.0 | % | | | 12.9 | % |
Direct | | | 4.5 | % | | | 4.5 | % | | | 4.1 | % | | | 4.6 | % | | | 4.7 | % | | | 5.3 | % |
Other* | | | 0.6 | % | | | (0.1 | )% | | | 0.3 | % | | | 0.2 | % | | | 0.3 | % | | | 0.1 | % |
| | | | | | | | | | | | | | | | | | |
Total | | | 9.4 | % | | | 9.4 | % | | | 8.7 | % | | | 10.5 | % | | | 10.1 | % | | | 10.7 | % |
| | | | | | | | | | | | | | | | | | |
| | |
* | | Other includes unallocated allowances and discounts, acquisitions and the impact of the 53rd week in fiscal 2003. |
Fiscal Year
The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to the end of the calendar year. Fiscal year 2004 contained 52 weeks and fiscal year 2003 contained 53 weeks. The additional week in fiscal year 2003 was included in the fourth quarter of that year.
24
Results of Operations
Third Quarter of Fiscal 2005 Compared to Third Quarter of Fiscal 2004
The following table sets forth the Company’s results of operations for the third quarter of fiscal 2005 and third quarter of fiscal 2004.
| | | | | | | | | | | | | | | | |
| | BlueLinx | | | | | | | | | | | |
| | Period | | | | | | | BlueLinx | | | | |
| | from | | | | | | | Period from | | | | |
| | July 3, 2005 | | | % of | | | July 4, | | | % of | |
| | to | | | Net | | | 2004 to | | | Net | |
| | October 1, 2005 | | | Sales | | | October 2, 2004 | | | Sales | |
| | (Unaudited) | | | | | | | (Unaudited) | | | | | |
| | (Dollars in thousands) | |
Net sales | | $ | 1,454,217 | | | | 100.0 | % | | $ | 1,509,581 | | | | 100.0 | % |
Gross profit | | | 137,037 | | | | 9.4 | % | | | 142,278 | | | | 9.4 | % |
Selling, general & administrative | | | 97,926 | | | | 6.7 | % | | | 93,363 | | | | 6.2 | % |
Depreciation and amortization | | | 4,993 | | | | 0.3 | % | | | 3,920 | | | | 0.3 | % |
| | | | | | | | | | | | | | |
Operating income | | | 34,118 | | | | 2.3 | % | | | 44,995 | | | | 3.0 | % |
Interest expense | | | 11,216 | | | | 0.8 | % | | | 10,914 | | | | 0.7 | % |
Other expense (income), net | | | (295 | ) | | | 0.0 | % | | | 140 | | | | 0.0 | % |
| | | | | | | | | | | | | | |
Income before provision for income taxes | | | 23,197 | | | | 1.6 | % | | | 33,941 | | | | 2.2 | % |
Income tax provision (benefit) | | | 9,301 | | | | 0.6 | % | | | 13,426 | | | | 0.9 | % |
| | | | | | | | | | | | | | |
Net income | | $ | 13,896 | | | | 1.0 | % | | $ | 20,515 | | | | 1.4 | % |
| | | | | | | | | | | | | | |
Net Sales.For the third quarter of fiscal 2005, net sales decreased by 3.7%, or $55.4 million, to $1.5 billion. The decrease was primarily due to price decreases of $80 million. This decrease was partially offset by unit volume increases of $24 million. Structural product sales fell 9.6% during the quarter to $809 million, while sales for specialty products increased 1.0%, to nearly $648 million.
Gross Profit.Gross profit for the third quarter of fiscal 2005 was $137 million, or 9.4% of sales, compared to $142 million, or 9.4% of sales, in the prior year period. The decline in gross profit is primarily due to the decrease in structural product margins for the quarter. The overall decline in structural product prices for the third quarter of fiscal 2005 was somewhat offset during the last month of the quarter as structural product prices rose sharply following Hurricane Katrina.
Selling, General and Administrative Expenses.Selling, general and administrative expenses for the third quarter of fiscal 2005 were $97.9 million, or 6.7% of net sales, compared to $93.4 million, or 6.2% of net sales, during the third quarter of fiscal 2004. Excluding acquisitions, selling, general and administrative expenses for the third quarter of fiscal 2005 were $94.6 million as higher costs for transportation, payroll related, and travel expenses were somewhat offset by decreases in sales promotions, bad debt and professional fees.
Depreciation and Amortization.Depreciation and amortization expense totaled $5.0 million for the third quarter of fiscal 2005, while depreciation and amortization expense totaled $3.9 million for third quarter fiscal 2004. The increase in depreciation and amortization is primarily due to capital expenditures for mobile equipment.
Operating Income.Operating income for the third quarter of fiscal 2005 was $34.1 million, or 2.3% of sales, versus $45.0 million, or 3.0% of sales, in the third quarter of fiscal 2004, reflecting the decline in gross profit, partially offset by lower variable operating expenses.
25
Interest Expense.Interest expense totaled $11.2 million for the third quarter of fiscal 2005, which includes $0.8 million of debt issue cost amortization. Interest expense related to the Company’s revolving credit facility and mortgage was $8.0 million and $2.4 million, respectively, during this period. Interest expense totaled $10.9 million for the third quarter of fiscal 2004, which includes $0.8 million of debt issue cost amortization. Interest expense related to the Company’s term loan, revolving credit facility and mortgage was $2.6 million, $4.7 million and $2.5 million, respectively, for this period. Additionally, for the third quarter of fiscal 2004, interest on the final working capital settlement with Georgia-Pacific was $0.3 million. Lower borrowing rates associated with the new mortgage and the reduction in interest expense resulting from the repayment of the term loan in 2004 were offset by increases in borrowings under the revolving credit facility and an increase in the effective interest rate for the credit facility.
Provision for Income Taxes.The effective tax rate was 40.1% and 39.6% for the third quarter of fiscal 2005 and the third quarter of fiscal 2004, respectively.
Net Income.Net income for the third quarter of fiscal 2005 was $13.9 million compared to net income of $20.5 million for the third quarter of fiscal 2004.
On a per-share basis, basic and diluted income applicable to common stockholders for the third quarter of fiscal 2005 were each $0.46. Basic and diluted earnings per share for the period from July 4, 2004 to October 2, 2004 were $1.00 and $0.93, respectively.
Year to Date Fiscal 2005 Compared to Year to Date Fiscal 2004
The following table sets forth the Company’s and the Distribution Division’s results of operations for the first nine months of fiscal 2005 and the first nine months of fiscal 2004. The results of operations for the first nine months of fiscal 2004 combine the pre-acquisition period from January 4, 2004 to May 7, 2004 of the Distribution Division and the period from inception (March 8, 2004) to October 2, 2004 of the Company.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | BlueLinx | | | | | | | BlueLinx | | | | | | | Pre-Acquisition | | | | | | | | | | | |
| | Period | | | | | | | Period from | | | | | | | Period | | | | | | | Combined | | | | |
| | from | | | | | | | Inception | | | | | | | from | | | | | | | Period from | | | | |
| | January 2, 2005 | | | % of | | | (March 8, | | | % of | | | January 4, 2004 | | | % of | | | January 4, 2004 | | | % of | |
| | to | | | Net | | | 2004) to | | | Net | | | to | | | Net | | | to | | | Net | |
| | October 1, 2005 | | | Sales | | | October 2, 2004 | | | Sales | | | May 7, 2004 | | | Sales | | | October 2, 2004 | | | Sales | |
| | (Unaudited) | | | | | | | (Unaudited) | | | | | | | (Unaudited) | | | | | | | (Unaudited) | | | | | |
| | (Dollars in thousands) | |
Net sales | | $ | 4,292,812 | | | | 100.0 | % | | $ | 2,465,193 | | | | 100.0 | % | | $ | 1,885,334 | | | | 100.0 | % | | $ | 4,350,527 | | | | 100.0 | % |
Gross profit | | | 372,046 | | | | 8.7 | % | | | 231,806 | | | | 9.4 | % | | | 227,211 | | | | 12.1 | % | | | 459,017 | | | | 10.6 | % |
Selling, general & administrative | | | 277,309 | | | | 6.5 | % | | | 155,599 | | | | 6.3 | % | | | 139,203 | | | | 7.4 | % | | | 294,802 | | | | 6.8 | % |
Depreciation and amortization | | | 13,793 | | | | 0.3 | % | | | 6,237 | | | | 0.3 | % | | | 6,175 | | | | 0.3 | % | | | 12,412 | | | | 0.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 80,944 | | | | 1.9 | % | | | 69,970 | | | | 2.8 | % | | | 81,833 | | | | 4.3 | % | | | 151,803 | | | | 3.5 | % |
Interest expense | | | 31,206 | | | | 0.7 | % | | | 17,708 | | | | 0.7 | % | | | — | | | | 0.0 | % | | | 17,708 | | | | 0.4 | % |
Other expense (income), net | | | 58 | | | | 0.0 | % | | | (33 | ) | | | 0.0 | % | | | 614 | | | | 0.0 | % | | | 581 | | | | 0.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before provision for income taxes | | | 49,680 | | | | 1.2 | % | | | 52,295 | | | | 2.1 | % | | | 81,219 | | | | 4.3 | % | | | 133,514 | | | | 3.1 | % |
Income tax provision (benefit) | | | 19,615 | | | | 0.5 | % | | | 20,584 | | | | 0.8 | % | | | 30,782 | | | | 1.6 | % | | | 51,366 | | | | 1.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 30,065 | | | | 0.7 | % | | $ | 31,711 | | | | 1.3 | % | | $ | 50,437 | | | | 2.7 | % | | $ | 82,148 | | | | 1.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Sales.For the first nine months of fiscal 2005, net sales decreased by 1.3%, or $57.7 million, to $4.3 billion. The decrease was primarily due to price decreases amounting to $195 million, offset by unit volume increases of $137 million. Structural product sales fell 5.3% during the nine months, to $2.4 billion, while sales for specialty products increased 3.9%, to $1.9 billion.
26
Gross Profit.Gross profit for the first nine months of fiscal 2005 was $372 million compared to $459 million in the prior year period. The decline in gross profit is primarily due to the decrease in structural product margins.
Selling, General and Administrative Expenses.Selling, general and administrative expenses for first nine months of fiscal 2005 were $277 million, or 6.5% of net sales, compared to $295 million, or 6.8% of net sales, during the first nine months of fiscal 2004. Excluding acquisitions, selling, general and administrative expenses for the first nine months of 2005 were $274 million. The decrease in selling, general and administrative expenses were caused by decreases in incentive compensation, sales commissions and sales promotions.
Depreciation and Amortization.Depreciation and amortization expense totaled $13.8 million for the first nine months of fiscal 2005, while depreciation and amortization expense totaled $12.4 million for first nine months of fiscal 2004. The increase in depreciation and amortization is primarily due to capital expenditures for mobile equipment.
Operating Income.Operating income for the first nine months of fiscal 2005 was $80.9 million, or 1.9% of sales, versus $152 million, or 3.5% of sales, in the first nine months of fiscal 2004, reflecting the decline in gross profit, partially offset by lower variable operating expenses.
Interest Expense.Interest expense totaled $31.2 million for the first nine months of fiscal 2005, which includes $2.8 million of debt issue cost amortization. Interest expense related to the Company’s revolving credit facility and mortgage was $21.8 million and $6.6 million, respectively. Interest expense totaled $17.7 million for the first nine months of fiscal 2004, which includes $1.2 million of debt issue cost amortization. Interest expense related to the Company’s term loan, revolving credit facility, and mortgage was $4.1 million, $7.5 million and $4.1 million, respectively. Additionally, for the first nine months of fiscal 2004, interest on final working capital settlement with Georgia-Pacific was $0.7 million. The Company did not incur interest expense prior to the May 7, 2004 acquisition.
Provision for Income Taxes.The effective tax rate was 39.5% and 38.5% for the first nine months of fiscal 2005 and the first nine months of fiscal 2004, respectively. During the second quarter of fiscal 2005, the State of Georgia approved BlueLinx for a tax credit of $515,000 related to the 2004 tax year. Without this credit, the effective tax rate would have been 40.5%. This higher effective tax rate that the Company would normally be subjected to is principally due to the fact that BlueLinx is a stand-alone company. As part of Georgia-Pacific, the Distribution Division was combined with the other divisions of Georgia-Pacific for state tax purposes. As a stand-alone company, we are projecting a state tax rate approximately 2% higher than Georgia-Pacific’s carve-out rate. The other differences resulted from higher non-deductible expenses and deemed repatriation of Canadian earnings.
Net Income.Net income for the first nine months of fiscal 2005 was $30.1 million compared to net income of $82.1 million for the first nine months of fiscal 2004. The Company’s net income for the period from January 4, 2004 to May 7, 2004 was achieved as a division of Georgia-Pacific and did not include interest expense and certain corporate overhead expenses that are included in the results for the same period in fiscal 2005.
On a per-share basis, basic and diluted income applicable to common stockholders for the first nine months of fiscal 2005 were $1.00 and $0.99, respectively. Basic and diluted earnings per share for the period from inception (March 8, 2004) to October 2, 2004 were $1.53 and $1.44, respectively. For the period prior to May 7, 2004, there were no earnings per share as a result of the business operating for much of that period as a division of Georgia-Pacific.
Seasonality
The Company is exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors. These seasonal factors are common in the building products distribution industry. The first quarter is historically the Company’s slowest quarter due to the impact of poor weather on the construction market. The Company’s second quarter typically improves from its first quarter as the weather begins to improve and held-over construction demand from the winter season is released. The Company’s third quarter is typically its strongest quarter, reflecting a substantial increase in construction due to more favorable weather conditions. The Company’s working capital and accounts receivable and payable generally peak in the third quarter, while inventory generally peaks in the second quarter in anticipation of the third quarter season. The fourth quarter is typically the Company’s second slowest
27
quarter due to the decline in construction with the onset of the winter season. The Company expects these trends to continue for the foreseeable future.
Liquidity and Capital Resources
The Company intends to fund future capital needs through its operating cash flows and its revolving credit facility. The Company believes that the amounts available from this and other sources will be sufficient to fund operations and capital requirements for the foreseeable future.
The Company’s capital expenditures for the first nine months of fiscal 2005 were approximately $10.0 million, and were incurred primarily in connection with transportation equipment consisting of trucks, trailers, forklifts and automobiles. The Company’s capital expenditures were paid for from cash on hand, cash flows provided by operating activities or borrowings under its revolving credit facility. The Company estimates that capital expenditures, excluding any capital expenditures related to acquisitions, for the remainder of fiscal 2005 will be approximately $2.3 million, primarily for transportation equipment. The Company’s 2005 capital expenditures are anticipated to be paid from its current cash, cash provided from operating activities or borrowings under its revolving credit facility. Part of the Company’s growth strategy is to selectively pursue acquisitions. The Company may use cash or stock, or a combination of both, as acquisition currency. The Company’s cash requirements may significantly increase and incremental cash expenditures will be required in connection with the integration of the acquired company’s business and to pay fees and expenses in connection with acquisitions. To the extent that significant amounts of cash are expended in connection with acquisitions, the Company’s liquidity position may be adversely impacted. In addition, there can be no assurance that the Company will be successful in implementing its acquisition strategy. For a discussion of the risks associated with the Company’s acquisition strategy, see risk factor on integrating acquisitions in the Company’s Annual Report on Form 10-K.
The following tables indicate the Company’s working capital and cash flows for the periods indicated.
| | | | | | | | |
| | BlueLinx at | | | BlueLinx at | |
| | October 1, | | | January 1, | |
| | 2005 | | | 2005 | |
| | (Dollars in thousands) | |
| | (Unaudited) | | | | | |
Working capital | | $ | 562,268 | | | $ | 491,975 | |
| | | | | | | | | | | | | | | | |
| | BlueLinx | | | BlueLinx | | | Distribution | | | | |
| | Period from | | | Period from | | | Division | | | | |
| | January 2, | | | Inception (March 8, | | | Period from | | | | |
| | 2005 to | | | 2004) to | | | January 4, 2004 | | | Combined | |
| | October 1, | | | October 2, | | | to | | | Nine Months Ended | |
| | 2005 | | | 2004 | | | May 7, 2004 | | | October 2, 2004 | |
| | (Dollars in thousands) | |
| | (Unaudited) | |
Cash flows provided by (used for) operating activities | | $ | 28,287 | | | $ | 52,643 | | | $ | (113,982 | ) | | $ | (61,339 | ) |
Cash flows used for investing activities | | | (26,241 | ) | | | (777,959 | ) | | | (1,126 | ) | | | (779,085 | ) |
Cash flows provided by financing activities | | $ | 10,702 | | | $ | 748,423 | | | $ | 114,602 | | | $ | 863,025 | |
Working Capital
Working capital increased by $70.3 million to $562 million at October 1, 2005, from $492 million at January 2, 2005. The increase was primarily driven by a seasonal increase in accounts receivable in the amount of $158 million, partially offset by a corresponding increase in accounts payable of $54.5 million and a decline in inventories of $92.0 million. Additionally, cash increased from $15.6 million on January 2, 2005 to $28.3 million at October 1,
28
2005. The $28.3 million of cash on the Company’s balance sheet at October 1, 2005 primarily reflects customer remittances received in the Company’s lock boxes on Friday and Saturday that are not available until Monday, which is part of the next fiscal period.
Operating Activities
During the first nine months of fiscal 2005 and fiscal 2004, cash flows provided by (used in) operating activities totaled $28.3 million and $(61.3) million, respectively. The increase of $89.6 million in cash flows provided by operating activities was primarily the result of a lower use of cash related to working capital of $22.9 million for the first nine months of fiscal 2005 compared to $161 million for the first nine months of fiscal 2004. Partially offsetting this decreased use of cash related to working capital was a $52.1 million decline in earnings. The change in working capital for the first nine months of fiscal 2004 included an increase of $99 million in payables to Georgia-Pacific as these amounts were previously classified as parent’s investment at January 3, 2004.
Investing Activities
During the first nine months of fiscal 2005 and fiscal 2004, cash flows used in investing activities totaled $26.2 million and $779 million, respectively.
On May 7, 2004, we and our operating company acquired the real estate and operating assets of the Distribution Division, respectively. On that date, we paid purchase consideration of approximately $776 million to Georgia-Pacific.
On July 22, 2005, the Company completed the acquisition of California-based hardwood lumber company Lane Stanton Vance (LSV), formerly a unit of privately-held Hampton Distribution Companies.
During the first nine months of fiscal 2005 and fiscal 2004, the Company’s expenditures for property and equipment were $10.0 million and $3.1 million, respectively. These expenditures were primarily for transportation equipment consisting of trucks, trailers, forklifts and sales force automobiles.
Proceeds from the sale of property and equipment totaled $0.8 million and $0.3 million during the first nine months of fiscal 2005 and fiscal 2004, respectively.
Financing Activities
Net cash provided by financing activities was $10.7 million during the first nine months of fiscal 2005 compared to $863 million during the first nine months of fiscal 2004. The difference in cash provided by financing activities during the first nine months of 2004 primarily resulted from net proceeds from the Company’s (i) revolving credit facility of $474 million, (ii) former term loan of $100 million, (iii) old mortgage payable to ABPMC LLC, an affiliate of Cerberus, of $100 million, (iv) issuance of preferred stock in the amount of $95 million and (v) issuance of common stock in the amount of $5 million, all of which relate to our acquisition of the assets of the Distribution Division. Fees paid to issue the revolving credit facility and former term loan totaled $15.3 million.
The Company paid dividends to its common stockholders in the aggregate amount of $11.3 million in the first nine months of fiscal 2005.
During the pre-acquisition period, the Distribution Division was financed by Georgia-Pacific and through the use of bank overdrafts.
Debt and Credit Sources
On May 7, 2004, the Company’s operating company entered into a revolving credit facility. As of October 1, 2005, advances outstanding under the revolving credit facility were approximately $489 million. Borrowing availability was approximately $171 million and outstanding letters of credit on this facility were approximately $7.5 million. As of October 1, 2005, the interest rate on outstanding balances under the revolving credit facility was 6.23%. For the third quarter and first nine months of fiscal 2005, interest expense related to the revolving credit
29
facility was $8.0 million and $21.8 million, respectively. The revolving credit facility was amended on July 14, 2005 to among other things, increase the revolving loan limit to $800 million from $700 million and expand certain criteria for the Company’s borrowing base in order to increase the Company’s liquidity.
On October 27, 2004, the existing mortgage was refinanced by a new mortgage loan in the amount of $165 million, which was provided by Column Financial, Inc., a wholly-owned subsidiary of Credit Suisse First Boston LLC. The interest rate on the new mortgage loan is equal to LIBOR (subject to a 2% floor and a 6% cap), plus a 2.25% spread. On October 1, 2005, the interest rate was 6.02%. For the third quarter and first nine months of fiscal 2005, interest expense related to the mortgage was $2.4 million and $6.6 million, respectively.
Contractual Obligations
There have been no material changes to our contractual obligations from those disclosed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 1, 2005.
Critical Accounting Policies
The Company’s significant accounting policies are more fully described in the notes to the consolidated financial statements. Certain of the Company’s accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. As with all judgments, they are subject to an inherent degree of uncertainty. These judgments are based on the Company’s historical experience, current economic trends in the industry, information provided by customers, vendors and other outside sources and management’s estimates, as appropriate.
The following are accounting policies that management believes are important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgment.
Revenue Recognition
The Company recognizes revenue when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the Company’s price to the buyer is fixed and determinable, and collectibility is reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership. The timing of revenue recognition is largely dependent on shipping terms. Revenue is recorded at the time of shipment for terms designated as FOB (free on board) shipping point. For sales transactions designated FOB destination, revenue is recorded when the product is delivered to the customer’s delivery site. Discounts and allowances are comprised of trade allowances, 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 experience. Adjustments to earnings resulting from revisions to estimates on discounts and returns have been insignificant for each of the reported periods.
Allowance for Doubtful Accounts and Related Reserves
The Company evaluates the collectibility of accounts receivable based on numerous factors, including past transaction history with customers and their creditworthiness. The Company maintains an allowance for doubtful accounts for each aging category on the Company’s aged trial balance based on the Company’s historical loss experience. This estimate is periodically adjusted when the Company becomes aware of specific customers’ inability to meet their financial obligations (e.g., bankruptcy filing or other evidence of liquidity problems). As the Company determines that specific balances will be ultimately uncollectible, the Company removes them from its aged trial balance. Additionally, the Company maintains reserves for cash discounts that it expects customers to earn as well as expected returns. Adjustments to earnings resulting from revisions to estimates on discounts and uncollectible accounts have been insignificant for each of the reported periods. At October 1, 2005 and January 1, 2005 these allowances totaled $12.6 million and $13.4 million, respectively.
30
Inventories
Inventories are carried at the lower of cost or market. The cost of substantially all inventories is determined by the moving average cost method. The Company evaluates its inventory value at the end of each quarter to ensure that first quality, actively moving inventory, when viewed by category, is carried at the lower of cost or market. At January 1, 2005, the lower of cost or market reserve totaled $1 million. The market value of the Company’s inventory exceeded its cost at October 1, 2005.
Additionally, the Company maintains a reserve for the estimated value of impairment associated with damaged and inactive inventory. The inactive reserve includes inventory that has had no sales in the past twelve months or has turn days in excess of 360 days. At October 1, 2005 and January 1, 2005, the Company’s damaged and inactive inventory reserves totaled $3.3 million and $3.0 million, respectively.
Consideration Received from Vendors
At the beginning of each calendar year, the Company enters into agreements with many of its vendors providing for purchase rebates, generally based on achievement of specified volume purchasing levels and various marketing allowances that are common industry practice. The Company accrues for the receipt of vendor rebates based on purchases, and also reduces inventory value to reflect the net acquisition cost (purchase price less expected purchase rebates). Adjustments to earnings resulting from revisions to rebate estimates have been insignificant for each of the reported periods.
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment, are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. The Company uses internal cash flow estimates, quoted market prices when available and independent appraisals as appropriate to determine fair value. The Company derives the required cash flow estimates from its historical experience and its internal business plans and applies an appropriate discount rate. If these projected cash flows are less than the carrying amount, an impairment loss is recognized based on the fair value of the asset less any costs of disposition. The Company’s judgment regarding the existence of impairment indicators is based on market and operational performance. There have been no adjustments to earnings resulting from the impairment of long-lived assets.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004),Share-Based Payment(“SFAS No. 123R”) which is a revision of SFAS No. 123. SFAS No. 123R supersedes APB No. 25 and amends SFAS No. 95,Statement of Cash Flows.Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure will no longer be an alternative. SFAS No. 123R is effective for fiscal year 2006.
SFAS No. 123R permits public companies to adopt its requirements using one of two methods:
1. A “modified prospective method” in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date.
2. A “modified retrospective method” which includes the requirements of the modified prospective method described above, but also permits entities to restate the amounts previously recognized under SFAS No. 123 for
31
purposes of pro forma disclosures either for (a) all prior periods presented or (b) prior interim periods in the year of adoption.
The Company plans to adopt SFAS No. 123R using the modified prospective method. The Company does not expect the adoption of SFAS No. 123R to have a material impact on its results of operations.
In November 2004, the FASB issued SFAS No. 151,Inventory Costs — an Amendment of ARB No. 43, Chapter 4(“SFAS No. 151”), which is the result of the FASB’s efforts to converge U.S. accounting standards for inventory with International Accounting Standards. SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs, and wasted material to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact of SFAS No. 151 on its results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2005, other than those discussed below.
The Company’s revolving credit facility accrues interest based on a floating benchmark rate (the prime rate or LIBOR rate), plus an applicable margin. A change in interest rates under the revolving credit facility could have an impact on results of operations. A change of 100 basis points in the market rate of interest would impact interest expense by approximately $4.9 million on an annual basis based on borrowings outstanding at October 1, 2005.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed, as of the end of the period covered by this report on Form 10-Q, under the supervision of the Chief Executive Officer and the Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to rules 13a-14 and 15d-14 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.
There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended October 1, 2005, there were no material changes to the Company’s previously disclosed legal proceedings. Additionally, the Company is, and from time to time may be, a party to routine legal proceedings incidental to the operation of its business. The outcome of any pending or threatened proceedings is not expected to have a material adverse effect on the financial condition, operating results or cash flows of the Company, based on its current understanding of the relevant facts. Legal expenses incurred related to these contingencies are generally expensed as incurred.
32
ITEM 6. EXHIBITS
Exhibits:
| | |
Exhibit | | |
Number | | Description |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned hereunto duly authorized.
| | | | |
| | | | BlueLinx Holdings Inc. |
| | | | |
| | | | (Registrant) |
| | Date: November 8, 2005 | | /s/ David J. Morris |
| | | | |
| | | | David J. Morris |
| | | | Chief Financial Officer and Treasurer |
| | | | (Principal Accounting and Financial Officer) |
34
EXHIBIT INDEX
| | |
Exhibit | | |
Number | | Description |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |