BlueLinx Holdings Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Concerning Forward-Looking Statements This Quarterly Report on Form 10-Q (“Quarterly Report” or “Form 10-Q”) contains forward-looking statements. Forward-looking statements include, without limitation, any statements that predict, forecast, indicate or imply future results, performance, liquidity levels or achievements, and may contain the words “believe,” “anticipate,” “could,” “expect,” “estimate,” “intend,” “may,” “project,” “plan,” “should,” “will,” “will be,” “will likely continue,” “will likely result” “would,” or words or phrases of similar meaning. Forward-looking statements are based on estimates and assumptions made by our management that, although believed by us to be reasonable, are inherently uncertain. Forward-looking statements involve risks and uncertainties that may cause our business, strategy, or actual results to differ materially from the forward-looking statements. The forward-looking statements in this report include statements about anticipated effects of adopting certain accounting standards; estimated future annual amortization expense; potential changes to estimates made in connection with revenue recognition; the expected outcome of legal proceedings; industry conditions; seasonality; liquidity and capital resources; our confidence in the Company’s long-term growth strategy; our ability to capitalize on supplier-led price increases and our value-added services; our areas of focus and management initiatives; the demand outlook for construction materials and expectations regarding new home construction, repair and remodel activity and continued investment in existing and new homes; our positioning for long-term value creation; our efforts and ability to generate profitable growth; our ability to increase net sales in specialty product categories; our ability to generate profits and cash from sales of specialty products; our multi-year capital allocation plans; our ability to manage volatility in wood-based commodities; our improvement in execution and productivity; our efforts and ability to maintain a disciplined capital structure and capital allocation strategy; our ability to maintain a strong balance sheet; our ability to focus on operating improvement initiatives and commercial excellence; and whether or not the Company will continue any share repurchases. These risks and uncertainties also include those discussed under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 30, 2023, those discussed elsewhere in this Form 10-Q, and in future reports that we file with the SEC. We operate in a changing environment in which new risks can emerge from time to time. It is not possible for management to predict all of these risks, nor can it assess the extent to which any factor, or a combination of factors, may cause our business, strategy, or actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information included in this Form 10-Q and in our Annual Report on Form 10-K for fiscal year 2023. In addition to historical information, the following discussion and other parts of this Form 10-Q contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by this forward-looking information due to the factors discussed under Item 1A “Risk Factors” in our Form 10-K for fiscal 2023 and under “Cautionary Statement Concerning Forward-Looking Statements” in Item 2 of this Form 10-Q. Our Culture, Values and Management Focus We remain committed to driving a culture of profitable growth within new and existing product lines and geographies, while positioning the Company for long-term value creation. The following initiatives represent key areas of our management team’s focus: 1. Foster a performance-driven culture committed to profitable growth. This includes enhancing the customer experience; accelerating organic growth within specific product and solutions offerings where the Company is uniquely advantaged; and deploying capital to drive sustained margin expansion, grow cash flow and maintain continued profitable growth. 17 Table of Contents 2. Migrate sales mix toward higher-margin specialty product categories. The Company is pursuing a revenue mix increasingly weighted toward higher-margin, specialty product categories such as engineered wood, siding, moulding and millwork, outdoor living, specialty lumber and panels, and industrial products. Additionally, the Company is expanding its value-added service offerings designed to simplify complex customer sourcing requirements and provide enhanced service capabilities afforded by the Company’s national platform. 3. Maintain a disciplined capital structure and pursue high-return investments that increase the value of the Company. The Company is maintaining a disciplined capital structure while at the same time investing in its business to modernize its distribution facilities, as well as its tractor and trailer fleet, and to improve operational performance. The Company also continues to evaluate potential acquisition targets that complement its existing capabilities, grow its specialty products business, increase customer exposure, expand its geographic reach through potential greenfield expansions in new markets, or a combination thereof. We invested $5.4 million cash in our business and entered into $8.2 million of finance leases during the first quarter of fiscal 2024 to improve operational performance and productivity. Our culture is guided by an unwavering commitment to apply our values to every decision we make and every action we take: • Customer Centric - We put our customers first, so we are customer centric in all that we do. • Integrity - We act with integrity, because doing the right thing is critical to our success. • Respect - We treat everyone with dignity and respect. • Grit - We show grit in the face of changing landscapes. • Collaboration - We collaborate with each other and our customers to build great teams and construct innovative solutions. Looking ahead, we plan to continue pursuing a three-pronged growth strategy focusing on specialty products sales growth, opportunistic mergers and acquisitions (“M&A”), and potential greenfield expansion in new geographic markets. Within specialty products, we will continue our focus on the five key areas of engineered wood, siding, moulding and millwork, outdoor living, and industrial products, which we believe are all favorable for two-step distributors and have attractive long-term prospects. Factors That Affect Our Operating Results and Trends Our results of operations and financial performance are influenced by a variety of factors, including the following: housing market conditions; pricing and product cost variability; volumes of product sold; competition; the cyclical nature of the industry in which we operate; consolidation among competitors, suppliers, and customers; disintermediation risk; loss of products or key suppliers and manufacturers; our dependence on international suppliers and manufacturers for certain products; effective inventory management relative to our sales volume or the prices of the products we produce; business disruptions; potential acquisitions and the integration and completion of such acquisitions; information technology security risks and business interruption risks; the ability to attract, train, and retain highly qualified associates and other key personnel while controlling related labor costs; exposure to product liability and other claims and legal proceedings related to our business and the products we distribute; natural disasters, catastrophes, fire, wars or other unexpected events; the impacts of climate change; successful implementation of our strategy; wage increases or work stoppages by our union employees; costs imposed by federal, state, local, and other regulations; compliance costs associated with federal, state, and local environmental protection laws; the effects of epidemics, global pandemics or other widespread public health crises and governmental rules and regulations; fluctuations in our operating results; our level of indebtedness and our ability to incur additional debt to fund future needs; the covenants of the instruments governing our indebtedness limiting the discretion of our management in operating the business; the potential to incur more debt; the fact that we have consummated certain sale leaseback transactions with resulting long-term non-cancelable leases, many of which are or will be finance leases; the fact that we lease many of our distribution centers, and we would still be obligated under these leases even if we close a leased distribution center; inability to raise funds necessary to finance a required repurchase of our senior secured notes; a lowering or withdrawal of debt ratings; changes in our product mix; increases in fuel and other energy prices or availability of third-part freight providers; changes in insurance-related deductible/retention reserves based on actual loss development experience; the possibility that the value of our deferred tax assets could become impaired; changes in our expected annual effective tax rate could be volatile; the costs and liabilities related to our participation in multi-employer pension plans could increase; the risk that our cash flows and capital resources may be insufficient to service our existing or future indebtedness; interest rate risk, which could cause our debt service obligations to increase; and changes in, or 18 Table of Contents interpretation of, accounting principles. These factors, and the related trends and uncertainties, have historically produced cyclicality in our results of operations, and we expect this cyclicality to continue in future periods. For more information on the risk factors impacting our business, refer to Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year 2023. 19 Table of Contents Results of Operations Three Months Ended March 30, 2024 % of Net Sales Three Months Ended April 1, 2023 % of Net Sales ($ amounts in thousands) Net sales $ 726,244 $ 797,904 Gross profit 127,681 17.6% 133,539 16.7% Selling, general, and administrative 91,250 12.6% 91,174 11.4% Depreciation and amortization 9,433 1.3% 7,718 1.0% Amortization of deferred gains on real estate (984) (0.1)% (984) (0.1)% Other operating expenses 314 0.0% 3,116 0.4% Operating income 27,668 3.8% 32,515 4.1% Interest expense, net 4,624 0.6% 7,687 1.0% Other expense, net — —% 594 0.1% Income before provision for income taxes 23,044 3.2% 24,234 3.0% Provision for income taxes 5,552 0.8% 6,422 0.8% Net income $ 17,492 2.4% $ 17,812 2.2% The following table sets forth net sales by product category: Three Months Ended March 30, 2024 April 1, 2023 ($ amounts in thousands) Specialty products $ 503,834 69 % $ 567,838 71 % Structural products 222,410 31 % 230,066 29 % Total net sales $ 726,244 100 % $ 797,904 100 % The following table sets forth gross profit and gross margin percentages by product category: Three Months Ended March 30, 2024 April 1, 2023 Gross profit by product category: ($ amounts in thousands) Specialty products $ 104,049 $ 106,627 Structural products 23,632 26,912 Total gross profit $ 127,681 $ 133,539 Gross margin % by product category: Specialty products 20.7 % 18.8 % Structural products 10.6 % 11.7 % Consolidated gross margin % 17.6 % 16.7 % First Quarter of Fiscal 2024 Compared to First Quarter of Fiscal 2023 For the first quarter of fiscal 2024, we generated consolidated net sales of $726.2 million, a decrease of $71.7 million when compared to the first quarter of fiscal 2023 and the consolidated gross margin percentage increased from 16.7 percent to 17.6 percent year over year. The decrease in consolidated net sales in the current period was due to 11.3 percent and 3.3 percent declines in specialty products and structural products net sales, respectively. For both product categories, volumes were adversely impacted by winter weather in January 2024 in several parts of the U.S., which resulted in the closure of about half of our branch locations for one to five days. Volumes improved in February and March 2024. Compared to first quarter 2023, industry-wide commodity pricing for framing lumber decreased 2.4% and increased 23.2% for structural panels. 20 Table of Contents The increase in consolidated gross margin percentage in the current period was due to a net benefit of $6.5 million for import duty items in the current period for our specialty products. The import duty items were related to changes in retroactive rates for anti-dumping duties resulting in a credit to Cost of products sold of $16.9 million, partially offset by classification adjustments for certain goods imported by the Company that resulted in an increase in Cost of products sold of $10.4 million. The net benefit from import duties added 0.9% to the consolidated gross margin percentage for the current period. Net sales of specialty products, which includes products such as engineered wood, siding, millwork and moulding, outdoor living, specialty lumber and panels, and industrial products, decreased $64.0 million, or 11.3 percent, to $503.8 million in the first quarter of fiscal 2024. This decline in net sales for specialty products was due to deflationary impacts across several specialty categories. Specialty products gross profit decreased $2.6 million, or 2.4 percent, to $104.0 million, with a year-over-year increase in gross margin percentage to 20.7 percent for the first quarter of fiscal 2024 from 18.8 percent in the first quarter of fiscal 2023. The net benefit for import duty items of $6.5 million described above added 1.3% to the specialty products gross margin for the current quarter. Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $7.7 million, or 3.3 percent, to $222.4 million in the first quarter of fiscal 2024. Structural products gross margin percentage for the first quarter of fiscal 2024 was 10.6 percent, down from 11.7 percent in the prior-year period. The decreases in structural products net sales and gross profit percentage were due primarily to lower framing lumber volumes when compared to the elevated levels in the prior year period. Our selling, general, and administrative expenses (“SG&A”) were $91.3 million in the first quarter of 2024, comparable with the $91.2 million for the prior year period. Depreciation and amortization expense increased 22.2 percent, compared to the first quarter of fiscal 2023. The increase in depreciation and amortization is due to a higher base of amortizable and depreciable assets in the first quarter of fiscal 2024 when compared the prior-year period, resulting from our continued focus on capital investment. Other operating expenses decreased $2.8 million compared to the first quarter of fiscal 2023; the prior year period included $3.7 million for restructuring costs related to our leadership transition and costs related to settlement of our legacy defined benefit pension plan. Interest expense, net, decreased by 39.8 percent, or $3.1 million, compared to the first quarter of fiscal 2023. The decrease was primarily due to the generation of higher interest income on our cash and cash equivalents due to higher balances and interest rates in the current quarter. Included in interest income for the three months ended March 30, 2024 is $2.0 million received for antidumping import duty refunds. Interest expense, net for the three months ended March 30, 2024 also includes $1.6 million of estimated accrued interest expense related to estimated import duties owed by the Company (see Note 9, Commitments and Contingencies) . Our effective tax rates were 24.1 percent and 26.5 percent for the first quarter of fiscal 2024 and 2023, respectively. Our effective tax rate for both periods was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, slightly offset by a benefit from the vesting of restricted stock units, which occurred during each period. For the current quarter, the partial release of a valuation allowance for deferred income taxes lowered our effective income tax rate by 1.4 percent. We anticipate that our annual effective income tax rate for fiscal 2024 will be approximately 26 percent. Our net income for the first quarter of fiscal 2024 was $17.5 million, or $2.00 per diluted share, versus $17.8 million, or $1.94 per diluted share, in the prior-year period. The change in net income was due to the matters previously discussed. Despite lower net income in the current quarter, basic and diluted earnings per share were higher than the prior year period due to a lower average number of common shares outstanding during the current quarter; this resulted from share repurchases that occurred in fiscal 2023 after the first quarter. 21 Table of Contents Liquidity and Capital Resources We expect our primary sources of liquidity to be cash flows from sales and operating activities in the normal course of our operations, cash and cash equivalents on hand, and availability from our revolving credit facility, as needed. We expect that these sources will be sufficient to fund our ongoing cash requirements for at least the next 12 months and into the foreseeable future. As of March 30, 2024, we had $481.3 million of cash and cash equivalents plus $346.5 million of availability on our revolving credit facility. Senior Secured Notes In October 2021, we completed a private offering of $300 million of our six percent senior secured notes due 2029 (the “2029 Notes”). Interest is payable semi-annually. Our 2029 Notes are scheduled to mature on November 15, 2029, and no principal is due until that time as long as we remain in compliance with the related covenants. As of March 30, 2024, we were in compliance with these covenants. Revolving Credit Facility Our amended revolving credit facility matures on August 2, 2026, provided we remain in compliance with the related covenants. As of March 30, 2024, we were in compliance with these covenants. Any outstanding borrowings under the revolving credit facility bear interest at a rate per annum equal to (i) Adjusted Term Secured Overnight Financing Rate (“SOFR”) (calculated as SOFR plus 0.1%) plus a margin ranging from 1.25 percent to 1.75 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on SOFR, or (ii) the agent’s base rate (as that term is defined in the revolving credit agreement) plus a margin ranging from 0.25 percent to 0.75 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate. Borrowings under the Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the revolving credit agreement). The Company is required to repay revolving loans thereunder to the extent that such revolving loans exceed the Borrowing Base then in effect. The Revolving Credit Facility may be prepaid in whole or in part from time to time without penalty or premium but including all breakage costs incurred by any lender thereunder. Available borrowing capacity under our Revolving Credit Facility was $346.5 million as of March 30, 2024. The available borrowing capacity reflects undrawn letters of credit. Finance Lease Commitments Our finance lease liabilities consist of leases related to equipment and vehicles, and to real estate, with the majority of those finance lease commitments relating to the real estate financing transactions that we completed in recent years. Our total finance lease commitments totaled $292.1 million and $285.4 million as of March 30, 2024 and December 30, 2023, respectively. Of the $292.1 million of finance lease commitments as of March 30, 2024, $243.6 million related to real estate and $48.4 million related to equipment. Of the $285.4 million of finance lease commitments as of December 30, 2023, $243.2 million related to real estate and $42.3 million related to equipment. Sources and Uses of Cash Operating Activities Net cash used in operating activities for the first three months of fiscal 2024 was $31.1 million, compared to net cash provided by operating activities of $89.0 million in the first three months of fiscal 2023. This decrease of $120.1 million in cash generated from operating activities in the current year period compared to the prior year period was primarily a result of seasonal inventory purchases in the current year period. The net source of cash generated in the prior year period was driven by significant inventory reduction efforts. Investing Activities Net cash used in investing activities for the first quarter of fiscal 2024 was $5.3 million compared to net cash used in investing activities of $9.0 million in the first quarter of fiscal 2023. The decrease in net cash used in investing activities was primarily due to lower purchases of property and equipment in the current year-period compared to the prior-year period. However, during the 22 Table of Contents first quarter of fiscal 2024, we also invested in additional fleet upgrades by entering into $8.2 million of finance leases, which are non-cash activities at lease inception. Financing Activities Net cash used in financing activities totaled $4.0 million for the first three months of fiscal 2024, compared to net cash used in financing activities of $2.7 million for the first three months of fiscal 2023. This change was due to higher payments on finance lease obligations in the current period. Other than to satisfy payroll and withholding taxes for vesting grants of restricted stock units, we did not repurchase any shares of our common stock during either the first quarter of 2024 or the first quarter of 2023. Share Repurchase Program As of March 30, 2024, we have a remaining authorization amount of $91.4 million under our $100 million share repurchase program that was previously disclosed and authorized by our Board of Directors on October 31, 2023. Under this share repurchase program, the Company may repurchase its common stock from time to time, without prior notice, subject to prevailing market conditions and other considerations. Repurchases may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, accelerated share repurchase programs, tender offers or pursuant to a trading plan that may be adopted in accordance with the Securities and Exchange Commission Rule 10b5-1. Net Working Capital Net working capital is an important measurement we use to determine the efficiencies of our operations and our ability to readily convert assets into cash. Net working capital is defined as the sum of accounts receivables and inventory, less accounts payable, each determined in accordance with GAAP and included in our consolidated balance sheets. This metric differs from traditional working capital in that it excludes certain current assets and current liabilities that are reported in our consolidated balance sheets. Management of net working capital helps us monitor our progress in meeting our goals to enhance working capital assets. March 30, 2024 December 30, 2023 April 1, 2023 (In thousands) Current assets: Accounts receivables, less allowance for doubtful accounts $ 288,244 $ 228,410 $ 298,888 Inventories, net 370,942 343,638 409,324 $ 659,186 $ 572,048 $ 708,212 Current liabilities: Accounts payable $ 171,715 $ 157,931 $ 177,046 $ 171,715 $ 157,931 $ 177,046 Net working capital $ 487,471 $ 414,117 $ 531,166 Net working capital of $487.5 million as of March 30, 2024, compared to $414.1 million as of December 30, 2023, increased on a net basis by approximately $73.4 million. The increase in net working capital was primarily driven by the increases in accounts receivable and inventory due to higher sales and seasonality. This overall increase was partially offset by the increase in accounts payable due to seasonal inventory procurement activity. Net working capital of $487.5 million as of March 30, 2024, compared to $531.2 million as of April 1, 2023, decreased on a net basis by approximately $43.8 million. The decrease in net working capital was primarily driven by the decrease in inventory, which reflected our strategic inventory management efforts and a deflationary pricing environment. Investments in Property and Equipment Our investments in capital assets consist of cash paid for owned assets and the inception of financing lease arrangements for long-lived assets to support our distribution infrastructure. The gross values of these assets are included in property and 23 Table of Contents equipment, at cost on our condensed consolidated balance sheet. For the first quarter of 2024, we invested $5.4 million in property and equipment, including $3.9 million for our distribution facilities and $1.5 million in fleet upgrades. Additionally, during the first quarter of 2024, we entered into finance leases of $8.2 million for fleet upgrades. For the first quarter of 2023, we invested $9.0 million cash in long-lived assets primarily for our distribution facilities and to a lesser extent, upgrading our fleet. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements and related disclosures in conformity with GAAP requires our management to make judgments and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 30, 2023. 24 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks as part of our on-going business operations. Our exposure includes commodity price risk and interest rate risk. There have been no material changes to our exposure to market risks from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2023.