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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 July 2, 2011
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. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of August 5, 2011 there were 61,811,862 shares of BlueLinx Holdings Inc. common stock, par value $0.01, outstanding.
 
 

 

 


 

BLUELINX HOLDINGS INC.
Form 10-Q
For the Quarterly Period Ended July 2, 2011
INDEX
         
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 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT

 

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PART I. FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
BLUELINX HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
                 
    Second Quarter  
    Period from     Period from  
    April 3, 2011     April 4, 2010  
    to     to  
    July 2, 2011     July 3, 2010  
Net sales
  $ 500,810     $ 540,781  
Cost of sales
    443,165       476,662  
 
           
Gross profit
    57,645       64,119  
 
           
Operating expenses:
               
Selling, general, and administrative
    56,780       57,089  
Depreciation and amortization
    2,624       3,434  
 
           
Total operating expenses
    59,404       60,523  
 
           
Operating (loss) income
    (1,759 )     3,596  
Non-operating expenses:
               
Interest expense
    7,730       8,205  
Changes associated with the ineffective interest rate swap
          (1,256 )
Other expense, net
    134       18  
 
           
Loss before provision for income taxes
    (9,623 )     (3,371 )
Provision for income taxes
    158       36  
 
           
Net loss
  $ (9,781 )   $ (3,407 )
 
           
Basic and diluted weighted average number of common shares outstanding
    31,063       30,699  
 
           
Basic and diluted net loss per share applicable to common stock
  $ (0.31 )   $ (0.11 )
 
           
See accompanying notes.

 

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BLUELINX HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
                 
    Six Months Ended  
    Period from     Period from  
    January 2, 2011     January 3, 2010  
    to     to  
    July 2, 2011     July 3, 2010  
Net sales
  $ 891,414     $ 971,831  
Cost of sales
    787,500       855,434  
 
           
Gross profit
    103,914       116,397  
 
           
Operating expenses:
               
Selling, general, and administrative
    105,227       113,603  
Depreciation and amortization
    5,561       7,178  
 
           
Total operating expenses
    110,788       120,781  
 
           
Operating loss
    (6,874 )     (4,384 )
Non-operating expenses:
               
Interest expense
    16,791       15,520  
Changes associated with the ineffective interest rate swap
    (1,751 )     (2,061 )
Other expense, net
    149       251  
 
           
Loss before provision for income taxes
    (22,063 )     (18,094 )
Provision for income taxes
    44       52  
 
           
Net loss
  $ (22,107 )   $ (18,146 )
 
           
Basic and diluted weighted average number of common shares outstanding
    30,953       30,643  
 
           
Basic and diluted net loss per share applicable to common stock
  $ (0.71 )   $ (0.59 )
 
           
See accompanying notes.

 

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BLUELINX HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
                 
    July 2, 2011     January 1, 2011  
    (unaudited)        
Assets:
               
Current assets:
               
Cash and cash equivalents
  $ 6,109     $ 14,297  
Receivables, net
    205,735       119,202  
Inventories, net
    212,654       188,250  
Deferred income tax assets, net
    59       143  
Other current assets
    62,902       22,768  
 
           
Total current assets
    487,459       344,660  
 
           
Property, plant, and equipment:
               
Land and land improvements
    51,968       52,540  
Buildings
    97,691       96,720  
Machinery and equipment
    74,495       70,860  
Construction in progress
    1,027       2,028  
 
           
Property, plant, and equipment, at cost
    225,181       222,148  
Accumulated depreciation
    (95,985 )     (92,517 )
 
           
Property, plant, and equipment, net
    129,196       129,631  
Other non-current assets
    18,613       50,728  
 
           
Total assets
  $ 635,268     $ 525,019  
 
           
 
               
Liabilities:
               
Current liabilities:
               
Accounts payable
  $ 95,322     $ 62,827  
Bank overdrafts
    28,798       23,089  
Accrued compensation
    5,402       4,594  
Current maturities of long-term debt
    151,507       1,190  
Other current liabilities
    14,938       16,792  
 
           
Total current liabilities
    295,967       108,492  
 
           
Non-current liabilities:
               
Long-term debt
    323,072       381,679  
Deferred income taxes, net
    107       192  
Other non-current liabilities
    35,514       33,665  
 
           
Total liabilities
    654,660       524,028  
 
           
Stockholders’ (Deficit) Equity:
               
Common Stock, $0.01 par value, 100,000,000 shares authorized; 33,243,238 and 32,667,504 shares issued at July 2, 2011 and January 1, 2011, respectively
    332       327  
Additional paid-in capital
    148,567       147,427  
Accumulated other comprehensive loss
    (6,773 )     (7,358 )
Accumulated deficit
    (161,518 )     (139,405 )
 
           
Total stockholders’ (deficit) equity
    (19,392 )     991  
 
           
Total liabilities and stockholders’ (deficit) equity
  $ 635,268     $ 525,019  
 
           
See accompanying notes.

 

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BLUELINX HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
                 
    Six Months Ended  
    Period     Period from  
    from January 2,     January 3, 2010  
    2011 to     to  
    July 2, 2011     July 3, 2010  
Cash flows from operating activities:
               
Net loss
  $ (22,107 )   $ (18,146 )
Adjustments to reconcile net loss to net cash used in operations:
               
Depreciation and amortization
    5,561       7,178  
Amortization of debt issue costs
    1,094       379  
Payment from terminating the Georgia-Pacific supply agreement
          4,706  
Gain from sale of properties
    (7,222 )      
Changes associated with the ineffective interest rate swap
    (1,751 )     (2,061 )
Deferred income tax benefit
    (214 )     (414 )
Share-based compensation expense
    1,137       1,969  
Decrease in restricted cash related to the ineffective interest rate swap, insurance, and other
    432       5,607  
Changes in assets and liabilities:
               
Receivables
    (86,533 )     (82,222 )
Inventories
    (24,404 )     (52,973 )
Accounts payable
    32,495       38,860  
Changes in other working capital
    (1,338 )     18,538  
Other
    1,804       (2,295 )
 
           
Net cash used in operating activities
    (101,046 )     (80,874 )
 
           
Cash flows from investing activities:
               
Property, plant and equipment investments
    (5,520 )     (1,263 )
Proceeds from disposition of assets
    8,971       656  
 
           
Net cash provided by (used in) investing activities
    3,451       (607 )
 
           
Cash flows from financing activities:
               
Repurchase of common stock
          (583 )
Increase in borrowings from revolving credit facility
    91,710       68,687  
Payment on capital lease obligations
    (197 )     (473 )
Increase in bank overdrafts
    5,709       9,880  
Increase in restricted cash related to the mortgage
    (7,815 )     (6,581 )
Debt financing costs
          (91 )
Other
          6  
 
           
Net cash provided by financing activities
    89,407       70,845  
 
           
Decrease in cash
    (8,188 )     (10,636 )
Balance, beginning of period
    14,297       29,457  
 
           
Balance, end of period
  $ 6,109     $ 18,821  
 
           
 
               
Noncash transactions:
               
Capital leases
  $ 2,544     $  
 
           
See accompanying notes.

 

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BLUELINX HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 2, 2011
1. Basis of Presentation and Background
Basis of Presentation
BlueLinx Holdings Inc. has prepared the accompanying Unaudited 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 United States generally accepted accounting principles (“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, 2011, as filed with the Securities and Exchange Commission (“SEC”). Our fiscal year is a 52- or 53-week period ending on the Saturday closest to the end of the calendar year. Fiscal year 2011 and fiscal year 2010 each contain 52 weeks. BlueLinx Corporation is the wholly-owned operating subsidiary of BlueLinx Holdings Inc. and is referred to herein as the “operating subsidiary” when necessary.
We believe the accompanying Unaudited Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our financial position, results of operations and cash flows for the periods presented. The preparation of the consolidated financial statements in conformity with GAAP requires us 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. We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors, with the second and third quarters typically accounting for the highest sales volumes. These seasonal factors are common in the building products distribution industry.
We are a leading distributor of building products in North America with approximately 2,000 employees. We offer approximately 10,000 products from over 750 suppliers to service more than 11,500 customers nationwide, including dealers, industrial manufacturers, manufactured housing producers and home improvement retailers. We operate our distribution business from sales centers in Atlanta and Denver, and our network of approximately 60 distribution centers.
2. Summary of Significant Accounting Policies
Revenue Recognition
We recognize revenue when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, our price to the buyer is fixed and determinable and collectability 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.
All revenues are recorded at gross. The key indicators used to determine when and how revenue is recorded are as follows:
    We are the primary obligor responsible for fulfillment and all other aspects of the customer relationship.
    Title passes to BlueLinx and we carry all risk of loss related to warehouse and third-party (“reload”) inventory and inventory shipped directly from vendors to our customers.
    We are responsible for all product returns.
    We control the selling price for all channels.
    We select the supplier.
    We bear all credit risk.

 

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In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis. Customer consigned inventory is maintained and stored by certain customers; however, ownership and risk of loss remains with us. When the inventory is sold by the customer, we recognize revenue on a gross basis.
All revenues recognized are net 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.
Cash and Cash Equivalents
Cash and cash equivalents include all highly-liquid investments with maturity dates of less than three months when purchased.
Restricted Cash
We had restricted cash of $50.0 million and $42.2 million at July 2, 2011 and January 1, 2011, respectively. Restricted cash primarily includes amounts held in escrow related to our mortgage and insurance for workers’ compensation, auto liability, and general liability. Restricted cash is included in “Other current assets” and “Other non-current assets” on the accompanying Consolidated Balance Sheets.
The table below provides the balances of each individual component in restricted cash as of July 2, 2011 and January 1, 2011 (in thousands):
                 
    July 2,     January 1,  
    2011     2011  
Cash in escrow:
               
Mortgage*
  $ 38,349     $ 30,616  
Insurance
    8,781       9,430  
Other
    2,422       2,124  
 
           
Total
  $ 49,552     $ 42,170  
 
           
     
*   As a condition of the amendment to the mortgage entered into on July 14, 2011, discussed further in Footnote 13, Subsequent Events, a payment of $38.3 million was made from cash held in escrow to settle the mortgage in July 2011.
Allowance for Doubtful Accounts and Related Reserves
We evaluate the collectability of accounts receivable based on numerous factors, including past transaction history with customers and their creditworthiness. We maintain an allowance for doubtful accounts for each aging category on our aged trial balance, which is aged utilizing contractual terms, based on our historical loss experience. This estimate is periodically adjusted when we become aware of specific customers’ inability to meet their financial obligations (e.g., bankruptcy filing or other evidence of liquidity problems). As we determine that specific balances will ultimately be uncollectible, we remove them from our aged trial balance. Additionally, we maintain reserves for cash discounts that we expect customers to earn as well as expected returns. At July 2, 2011 and January 1, 2011, these reserves totaled $5.4 million and $5.7 million, respectively. Adjustments to earnings resulting from revisions to estimates on discounts and uncollectible accounts have been insignificant.
Inventory Valuation
Inventories are carried at the lower of cost or market. The cost of all inventories is determined by the moving average cost method. We have included all material charges directly or indirectly incurred in bringing inventory to its existing condition and location. We evaluate our 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 July 2, 2011 and January 1, 2011, the market value of our inventory exceeded its cost. Adjustments to earnings resulting from revisions to lower of cost or market estimates have been insignificant.
Additionally, we maintain a reserve for the estimated value impairment associated with damaged, excess and obsolete inventory. The damaged, excess and obsolete reserve generally includes discontinued items or inventory that has turn days in excess of 270 days, excluding new items during their product launch. At July 2, 2011 and January 1, 2011, our damaged, excess and obsolete inventory reserves were $2.0 million and $1.7 million, respectively. Adjustments to earnings resulting from revisions to damaged, excess and obsolete estimates have been insignificant.

 

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Consignment Inventory
We enter into consignment inventory agreements with our vendors. This vendor consignment inventory relationship allows us to obtain and store vendor inventory at our warehouses and reload facilities; however, ownership remains with the vendor and risk of loss generally remains with the vendor. When the inventory is sold, we are required to the pay the vendor and we simultaneously take and transfer ownership from the vendor to the customer.
Consideration Received from Vendors and Paid to Customers
Each year, we enter into agreements with many of our vendors providing for inventory purchase rebates, generally based on achievement of specified volume purchasing levels, price protection and various marketing allowances that are common industry practice. We accrue for the receipt of vendor rebates based on purchases, and also reduce inventory value to reflect the net acquisition cost (purchase price less expected purchase rebates). At July 2, 2011 and January 1, 2011, the vendor rebate receivable totaled $7.0 million and $8.1 million, respectively. Adjustments to earnings resulting from revisions to rebate estimates have been insignificant.
In addition, we enter into agreements with many of our customers to offer customer rebates, generally based on achievement of specified volume sales levels and various marketing allowances that are common industry practice. We accrue for the payment of customer rebates based on sales to the customer, and also reduce sales value to reflect the net sales (sales price less expected customer rebates). At July 2, 2011 and January 1, 2011, the customer rebate payable totaled $8.0 million and $6.4 million, respectively. Adjustments to earnings resulting from revisions to rebate estimates have been insignificant.
Loss per Common Share
We calculate our basic loss per share by dividing net loss by the weighted average number of common shares and participating securities outstanding for the period. Restricted stock granted by us to certain management level employees and directors participate in dividends on the same basis as common shares and are non-forfeitable by the holder. The unvested restricted stock contains non-forfeitable rights to dividends or dividend equivalents. As a result, these share-based awards meet the definition of a participating security and are included in the weighted average number of common shares outstanding, pursuant to the two-class method, for the periods that present net income. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that would otherwise have been available to common stockholders. Given that the restricted stockholders do not have a contractual obligation to participate in the losses and the inclusion of such unvested restricted shares in our basic and dilutive per share calculations would be anti-dilutive, we have not included these amounts in our weighted average number of common shares outstanding for periods in which we report a net loss. Therefore, we have not included 2,163,956 and 2,011,365 of unvested restricted shares that had the right to participate in dividends in our basic and dilutive calculations for the first six months of fiscal 2011 and for the first six months of fiscal 2010, respectively.
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. Our restricted stock units are settled in cash upon vesting and are considered liability awards. Therefore, these restricted stock units are not included in the computation of the basic and diluted earnings per share.
As we experienced losses in all periods, basic and diluted loss per share are computed by dividing net loss by the weighted average number of common shares outstanding for the period. For the second quarter of fiscal 2011 and for the first six months of fiscal 2011, we excluded 3,080,772 unvested share-based awards, respectively, from the diluted earnings per share calculation because they were anti-dilutive. For the second quarter of fiscal 2010 and for the first six months of fiscal 2010, we excluded 3,178,307 unvested share-based awards, respectively, from the diluted earnings per share calculation because they were anti-dilutive.

 

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Stock-Based Compensation
We have two stock-based compensation plans covering officers, directors, certain employees and consultants: the 2004 Equity Incentive Plan (the “2004 Plan”) and the 2006 Long Term Equity Incentive Plan (the “2006 Plan”). The plans are designed to motivate and retain individuals who are responsible for the attainment of our primary long-term performance goals. The plans provide a means whereby our employees and directors develop a sense of proprietorship and personal involvement in our development and financial success and encourage them to devote their best efforts to our business. Although we do not have a formal policy on the matter, we issue new shares of our common stock to participants, upon the exercise of options or vesting of restricted stock, out of the total amount of common shares authorized for issuance under the 2004 Plan and the 2006 Plan. During the first six months of fiscal 2011, the Compensation Committee granted 618,972 restricted shares of our common stock to certain of our officers. Restricted shares of 364,303 vested in the first six months of 2011 due to completion of the vesting term.
We recognize compensation expense equal to the grant-date fair value for all share-based payment awards that are expected to vest. This expense is recorded on a straight-line basis over the requisite service period of the entire award, unless the awards are subject to market or performance conditions, in which case we recognize compensation expense over the requisite service period of each separate vesting tranche to the extent the occurrence of such conditions are probable. All compensation expense related to our share-based payment awards is recorded in “Selling, general and administrative” expense in the Consolidated Statements of Operations. For the second quarter of fiscal 2011 and for the first six months of fiscal 2011, our total stock-based compensation expense was $0.4 million and $1.1 million, respectively. For the second quarter of fiscal 2010 and for the first six months of fiscal 2010, our total stock-based compensation expense was $0.7 million and $1.9 million, respectively. We did not recognize related income tax benefits during these periods.
Income Taxes
Deferred income taxes are provided using the liability method. Accordingly, deferred income taxes are recognized for differences between the income tax and financial reporting bases of our assets and liabilities based on enacted tax laws and tax rates applicable to the periods in which the differences are expected to affect taxable income. We recognize a valuation allowance, when based on the weight of all available evidence, we believe it is more likely than not that some or all of our deferred tax assets will not be realized. In evaluating our ability to recover our deferred income tax assets, we considered available positive and negative evidence, including our past operating results, our ability to carryback losses against prior taxable income, the existence of cumulative losses in the most recent years, our forecast of future taxable income and an excess of appreciated assets over the tax basis of our net assets. In estimating future taxable income, we developed assumptions including the amount of future state and federal pretax operating and non-operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions required significant judgment about the forecasts of future taxable income. We considered all of the available positive and negative evidence during the second quarter of fiscal 2011 and based on the weight of available evidence, we recorded an additional deferred tax asset and valuation allowance of $3.6 million relating to our current period net operating losses, which resulted in a total net deferred tax asset of $54.9 million with a valuation allowance of a corresponding amount as of July 2, 2011.
If the realization of deferred tax assets in the future is considered more likely than not, a reduction to the valuation allowance related to the deferred tax assets would increase net income in the period such determination is made. The amount of the deferred tax asset considered realizable is based on significant estimates, and it is possible that changes in these estimates could materially affect the financial condition and results of operations. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss; changes to the valuation allowance; changes to federal or state tax laws; and as a result of acquisitions.
We generally believe that the positions taken on previously filed tax returns are more likely than not to be sustained by the taxing authorities. We have recorded income tax and related interest liabilities where we believe our position may not be sustained. Such amounts are disclosed in Note 5 in our Annual Report on Form 10-K for the year-ended January 1, 2011. There have been nominal changes to our tax positions during the first six months of fiscal 2011.
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment and intangible assets with definite useful lives, are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.
We consider whether there were indicators of potential impairment on a quarterly basis. Indicators of impairment include current period losses combined with a history of losses, management’s decision to exit a facility, reductions in the fair market value of real properties and changes in other circumstances that indicate the carrying amount of an asset may not be recoverable.

 

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Our evaluation of long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual distribution facility. In the event of indicators of impairment, the assets of the distribution facility are evaluated by comparing the facility’s undiscounted cash flows over the estimated useful life of the asset, which ranges between 5-40 years, to its carrying value. If the carrying value is greater than the undiscounted cash flows, an impairment loss is recognized for the difference between the carrying value of the asset and the estimated fair market value. Impairment losses are recorded as a component of “Selling, general and administrative” expenses in the Consolidated Statements of Operations.
Our estimate of undiscounted cash flows is subject to assumptions that affect estimated operating income at a distribution facility level. These assumptions are related to future sales, margin growth rates, economic conditions, market competition and inflation. In the event that undiscounted cash flows do not exceed the carrying value of a facility, our estimates of fair market value are generally based on market appraisals and our experience with related market transactions. We use a two year average of cash flows based on 2010 EBITDA and 2011 projected EBITDA, which includes a small growth factor assumption, to estimate undiscounted cash flows. These assumptions used to determine impairment are considered to be level 3 measurements in the fair value hierarchy as defined in Note 13 of the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2011.
Our results for the first six months of fiscal 2011 were negatively impacted by severe winter weather and a decrease in housing starts when compared to the first six months of fiscal 2010. The higher number of housing starts in the first six months of 2010 was due in part to the effect of the housing tax credit expiration which expired in April of 2010. The reductions in volume and operating income have not resulted in impairment indictors of a magnitude that would result in reductions to our January 1, 2011 projected undiscounted cash flows, which exceeded our carrying value in all cases during the performance of our January 1, 2011 impairment analysis.
During the first quarter of fiscal 2011 our Newtown, CT facility was damaged due to severe winter weather. As a result of this damage we recognized an impairment of approximately $1.0 million related to the damaged building, a loss related to the insurance deductible of $0.1 million and an insurance recovery of $1.0 million in selling, general and administrative expenses during the first quarter. During the second quarter of fiscal 2011 we recognized approximately $1.9 million of impairment related to damaged inventory and a corresponding insurance recovery of the same amount in selling, general and administrative expenses. The net impact to selling, general and administrative expenses for the six month period ended July 2, 2011 was a loss of $0.1 million, which represents the amount of our insurance deductible. We recorded the recovery of such losses at the time that the minimum expected proceeds under our insurance policy became probable and estimable.
Self-Insurance
It is our policy to self-insure, up to certain limits, traditional risks including workers’ compensation, comprehensive general liability, and auto liability. Our self-insured deductible for each claim involving workers’ compensation, comprehensive general liability (including product liability claims), and auto liability is limited to $0.8 million, $0.8 million, and $2.0 million, respectively. We are also self-insured up to certain limits for certain other insurable risks, primarily physical loss to property ($0.1 million per occurrence) and the majority of our medical benefit plans ($0.3 million per occurrence). Insurance coverage is maintained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. A provision for claims under this self-insured program, based on our estimate of the aggregate liability for claims incurred, is revised and recorded annually. The estimate is derived from both internal and external sources including but not limited to actuarial estimates. The actuarial estimates are subject to uncertainty from various sources, including, among others, changes in claim reporting patterns, claim settlement patterns, judicial decisions, legislation, and economic conditions. Although, we believe that the actuarial estimates are reasonable, significant differences related to the items noted above could materially affect our self-insurance obligations, future expense and cash flow. At July 2, 2011 and January 1, 2011, the self-insurance reserves totaled $8.1 million and $7.6 million, respectively.
3. Restructuring Charges
We account for exit and disposal costs by recognizing a liability for costs associated with an exit or disposal activity at fair value in the period in which it is incurred or when the entity ceases using the right conveyed by a contract (i.e. the right to use a leased property). Our restructuring charges included accruals for estimated losses on facility costs based on our contractual obligations net of estimated sublease income based on current comparable market rates for leases. We reassess this liability periodically based on current market conditions. Revisions to our estimates of this liability could materially impact our operating results and financial position in future periods if anticipated events and key assumptions, such as the timing and amounts of sublease rental income, either do not materialize or change. These costs are included in “Selling, general, and administrative” expenses in the Consolidated Statements of Operations for the first six months of fiscal 2011 and the first six months of fiscal 2010, and “Other current liabilities” and “Other non-current liabilities” on the Consolidated Balance Sheets at July 2, 2011 and January 1, 2011.

 

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We account for severance and outplacement costs by recognizing a liability for employees’ rights to post-employment benefits. These costs are included in “Selling, general, and administrative” expenses in the Consolidated Statements of Operations for the first six months of fiscal 2011 and the first six months of fiscal 2010, and in “Accrued compensation” on the Consolidated Balance Sheets for the periods ended July 2, 2011 and January 1, 2011.
2007 Facility Consolidation and Severance Costs
During fiscal 2007, we announced a plan to adjust our cost structure in order to manage our costs more effectively. The plan included the consolidation of our corporate headquarters and sales center to one building from two buildings and reduction in force initiatives which resulted in charges of $17.1 million during the fourth quarter of fiscal 2007. As of July 2, 2011 and January 1, 2011, there was no remaining accrued severance related to reduction in force initiatives completed in fiscal 2007.
The table below summarizes the balance of accrued facility consolidation reserve and changes in the accrual for the second quarter of fiscal 2011 (in thousands):
         
Balance at April 2, 2011
  $ 9,821  
Payments
    (537 )
Accretion of liability
    132  
 
     
Balance at July 2, 2011
  $ 9,416  
 
     
The table below summarizes the balance of accrued facility consolidation reserve and changes in the accrual for the first six months of fiscal 2011 (in thousands):
         
Balance at January 1, 2011
  $ 10,227  
Payments
    (1,074 )
Accretion of liability
    263  
 
     
Balance at July 2, 2011
  $ 9,416  
 
     
2008 Facility Consolidation and Severance Costs
During fiscal 2008, our board of directors approved a plan to exit our custom milling operations in California primarily due to the impact of unfavorable market conditions on that business. The closure of the custom milling facilities resulted in facility consolidation charges of $2.0 million and severance and outplacement costs of $1.0 million. In addition, we executed other reduction in force initiatives which resulted in $4.2 million of severance. At July 2, 2011 and January 1, 2011, there was no remaining severance reserve.
The table below summarizes the balance of accrued facility consolidation reserve and changes in the accrual for the second quarter of fiscal 2011 (in thousands):
         
Balance at April 2, 2011
  $ 40  
Payments
    (76 )
Sublease income
    46  
 
     
Balance at July 2, 2011
  $ 10  
 
     
The table below summarizes the balance of accrued facility consolidation reserve and changes in the accrual for the first six months of fiscal 2011 (in thousands):
         
Balance at January 1, 2011
  $ 72  
Payments
    (152 )
Sublease income
    90  
 
     
Balance at July 2, 2011
  $ 10  
 
     

 

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2009 Facility Consolidations and Severance Costs
During fiscal 2009, we exited our BlueLinx Hardwoods facility in Austin, Texas to improve overall effectiveness and efficiency by consolidating these operations with our San Antonio and Houston branches. Our exit of the Austin facility resulted in a facility consolidation charge of $0.7 million. In May of 2011, we terminated the lease via a termination payment of $0.4 million. In addition, we recorded severance charges related to reduction in force initiatives of $1.8 million. There were no facility or severance reserves remaining as of July 2, 2011.
The table below summarizes the balances of the accrued facility consolidation and the changes in the accruals for the second quarter of fiscal 2011 (in thousands):
         
Balance at April 2, 2011
  $ 484  
Assumption Changes
    (99 )
Payments
    (385 )
 
     
Balance at July 2, 2011
  $ 0  
 
     
The table below summarizes the balances of the accrued facility consolidation and the changes in the accruals for the first six months of fiscal 2011 (in thousands):
         
Balance at January 1, 2011
  $ 523  
Assumption Changes
    (95 )
Payments
    (428 )
 
     
Balance at July 2, 2011
  $ 0  
 
     
2010 Severance Costs
During fiscal 2010, we had certain reduction in force activities, which resulted in severance charges of $1.1 million.
The table below summarizes the balances of the accrued severance reserves and the changes in the accruals for the second quarter of fiscal 2011 (in thousands):
         
Balance at April 2, 2011
  $ 486  
Assumption Changes
    (191 )
Payments
    (103 )
 
     
Balance at July 2, 2011
  $ 192  
 
     
The table below summarizes the balances of the accrued severance reserves and the changes in the accruals for the first six months of fiscal 2011 (in thousands):
         
Balance at January 1, 2011
  $ 777  
Assumption Changes
    (254 )
Payments
    (331 )
 
     
Balance at July 2, 2011
  $ 192  
 
     
2011 Severance Costs
During fiscal 2011, we had certain reduction in force activities, which resulted in severance charges of $0.5 million.
The table below summarizes the balances of the accrued severance reserves and the changes in the accruals for the second quarter of fiscal 2011 (in thousands):
         
Balance at April 2, 2011
  $ 21  
Charges
    345  
Payments
    (258 )
 
     
Balance at July 2, 2011
  $ 108  
 
     

 

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The table below summarizes the balances of the accrued severance reserves and the changes in the accruals for the first six months of fiscal 2011 (in thousands):
         
Balance at January 1, 2011
  $  
Charges
    461  
Payments
    (353 )
 
     
Balance at July 2, 2011
  $ 108  
 
     
4. Assets Held for Sale and Net Gain on Disposition
As part of our restructuring efforts to improve our cost structure and cash flow, we closed certain facilities and designated them as assets held for sale. At the time of designation, we ceased recognizing depreciation expense on these assets. As of July 2, 2011 and January 1, 2011, total assets held for sale were $2.2 million and $1.6 million respectively, and were included in “Other current assets” in our Consolidated Balance Sheets. During the first six months of fiscal 2011, we sold certain real properties held for sale that resulted in a $7.2 million gain recorded in “Selling, general, and administrative” expenses in the Consolidated Statements of Operations. All of this activity occurred during the first quarter of 2011. We continue to actively market the remaining properties that are held for sale. Due to the fact that, as of July 2, 2011 the remaining properties are all primarily land, depreciation expense is not materially impacted.
5. Comprehensive Loss
The calculation of comprehensive loss is as follows (in thousands):
                 
    Second Quarter  
    Period from     Period from  
    April 3, 2011     April 4, 2010  
    to     to  
    July 2, 2011     July 3, 2010  
Net loss
  $ (9,781 )   $ (3,407 )
Other comprehensive (loss) income:
               
Foreign currency translation
    54       (742 )
*Unrealized gain from cash flow hedge, net of taxes
          324  
 
           
Comprehensive loss
  $ (9,727 )   $ (3,825 )
 
           
                 
    Six Months Ended  
    Period from     Period from  
    January 2, 2011     January 3, 2010  
    to     to  
    July 2, 2011     July 3, 2010  
Net loss
  $ (22,107 )   $ (18,146 )
Other comprehensive income:
               
Foreign currency translation
    351       345  
*Unrealized gain from cash flow hedge, net of taxes
    234       649  
 
           
Comprehensive loss
  $ (21,522 )   $ (17,152 )
 
           
     
*   For the second quarter of fiscal 2011 and for the first six months of fiscal 2011, the income tax expense related to our interest rate swap was $0.0 million and $0.2 million, respectively. For the second quarter of fiscal 2010 and the first six months of fiscal 2010, the income tax expense related to our interest rate swap was $0.2 million and $0.4 million, respectively.

 

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6. 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. We are required to make a $3.3 million contribution to the hourly pension plan in fiscal 2011, all of which will be funded through a pre-funded balance. 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 (in thousands):
                 
    Second Quarter  
    Period from April 3,     Period from April 4,  
    2011 to July 2, 2011     2010 to July 3, 2010  
 
               
Service cost
  $ 523     $ 498  
Interest cost on projected benefit obligation
    1,152       1,186  
Expected return on plan assets
    (1,376 )     (1,232 )
Amortization of unrecognized loss
    145       123  
 
           
Net periodic pension cost
  $ 444     $ 575  
 
           
                 
    Six Months Ended  
    Period from January 2,     Period from January 3,  
    2011 to July 2, 2011     2010 to July 3, 2010  
 
               
Service cost
  $ 1,046     $ 996  
Interest cost on projected benefit obligation
    2,304       2,372  
Expected return on plan assets
    (2,753 )     (2,464 )
Amortization of unrecognized loss
    290       246  
 
           
Net periodic pension cost
  $ 887     $ 1,150  
 
           
7. Revolving Credit Facility
As of July 2, 2011, we had outstanding borrowings of $188.9 million and excess availability of $94.0 million under the terms of our revolving credit facility. The interest rate on the revolving credit facility was 4.3% at July 2, 2011. As of July 2, 2011 and January 1, 2011, we had outstanding letters of credit totaling $2.5 million and $5.9 million, respectively, primarily for the purposes of securing collateral requirements under the interest rate swap (which was terminated in March of 2011), casualty insurance programs and for guaranteeing lease and certain other obligations.
On July 7, 2010, we reached an agreement with Wells Fargo Bank, National Association, successor by merger to Wachovia Bank, National Association, and the other signatories to our existing revolving credit facility, dated August 4, 2006, as amended, to amend the terms thereof. This amendment extends the date of final maturity of the facility to January 7, 2014 and decreases the maximum availability under the agreement from $500 million to $400 million. This decrease does not impact our current available borrowing capacity under the amended revolving credit facility since the borrowing base, which is based on eligible accounts receivable and inventory, currently permits less than $400 million in revolving credit facility borrowings. This amendment also includes an additional $100 million uncommitted accordion credit facility, which will permit us to increase the maximum borrowing capacity up to $500 million. As a result of reducing our maximum borrowing capacity from $500 million to $400 million, we recorded expense of $0.2 million in fiscal 2010 for the write-off of the old debt issuance costs associated with the reduction in borrowing capacity. We also incurred $6.5 million in new debt issuance costs, which we capitalized and will continue to amortize to interest expense over the renewed debt term.

 

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As of July 2, 2011, under the amended agreement, our revolving credit facility contains customary negative covenants and restrictions for asset based loans. Our most significant covenant is a requirement that we maintain a fixed charge ratio of 1.1 to 1.0 in the event our excess availability falls below the greater of $40.0 million or the amount equal to 15% of the lesser of the borrowing base or $60.0 million (subject to increase to $75.0 million if we exercise the uncommitted accordion credit facility in full) (the “Excess Availability Threshold”). The fixed charge ratio is calculated as EBITDA divided by the sum of cash payments for income taxes, interest expense, cash dividends, principal payments on debt, and capital expenditures. EBITDA is defined as BlueLinx Corporation’s net income before interest and tax expense, depreciation and amortization expense, and other non-cash charges. The fixed charge ratio requirement only applies to us when excess availability under our amended revolving credit facility is less than the Excess Availability Threshold for three consecutive business days. As of July 2, 2011 and through the time of the filing of this Form 10-Q, we were in compliance with all covenants. We had $94.0 and $103.4 million of availability as of July 2, 2011 and January 1, 2011, respectively. Our lowest level of fiscal month end availability in the last three years was $94.0 million as of July 2, 2011. We do not anticipate our excess availability in fiscal 2011 will drop below the Excess Availability Threshold. Should our excess availability fall below the Excess Availability Threshold for more than three consecutive business days, however, we would not meet the required fixed charge ratio with our current operating results. In addition, we must maintain a springing lock-box arrangement where customer remittances go directly to a lock-box maintained by our lenders and then are forwarded to our general bank accounts. Our outstanding borrowings are not reduced by these payments unless our excess availability is less than the Excess Availability Threshold, excluding unrestricted cash, for three consecutive business days or in the event of default. Our amended revolving credit facility does not contain a subjective acceleration clause which would allow our lenders to accelerate the scheduled maturities of our debt or to cancel our agreement. On May 11, 2011, we entered into an amendment to our revolving credit facility that revises certain of the covenants described in this paragraph, which amendment became effective subsequent to the fiscal quarter ended July 2, 2011. Refer to Footnote 13, Subsequent Events for additional discussion of this amendment.
On June 24, 2011, we commenced a rights offering of our common stock to our stockholders, pursuant to which we distributed to our common stockholders transferable rights to subscribe for and purchase up to $60 million of our common stock. In conjunction with the rights offering, we entered into an investment agreement with Cerberus ABP Investor LLC, which beneficially owns approximately 55% of our common stock before giving effect to the rights offering, to backstop the rights offering, subject to certain conditions, by purchasing shares of common stock that related to any rights that remained unexercised at the expiration of the rights offering. The rights offering, which expired on July 22, 2011, was fully subscribed and resulted in gross proceeds of approximately $60 million. The majority of the gross proceeds from the rights offering of approximately $56 million were used to pay down the revolving credit facility. We accounted for the rights issued as a component of additional paid in capital as they were indexed to the Company’s equity and there were no net cash settlement provisions.
As of July 2, 2011, our current maturities of long-term debt related to the revolving credit facility totaled $110.6 million and $78.3 million, respectively. As indicated above, the majority of the proceeds from the rights offering were used to pay down a large portion of the revolving credit facility balance classified as current, subsequent to the fiscal quarter ended July 2, 2011. A payment on the revolving credit facility of $50.0 million was made on July 29, 2011 and an additional payment of $6.0 million was made on August 1, 2011. The remaining current maturities of long-term debt related to the revolving credit facility will be funded through seasonal working capital reductions.
We believe that amounts available from our revolving credit facility and other sources are sufficient to fund our routine operations and capital requirements for the next twelve months. If economic conditions, especially those related to the housing market, do not improve, we may need to seek additional sources of capital to support our operations.
8. Mortgage
On June 9, 2006, certain special purpose entities that are wholly-owned subsidiaries of ours entered into a $295 million mortgage loan with the German American Capital Corporation. The mortgage has a term of ten years and is secured by 55 distribution facilities and 1 office building owned by the special purpose entities. The stated interest rate on the mortgage is fixed at 6.35%. German American Capital Corporation assigned half of its interest in the mortgage loan to Wachovia Bank, National Association and both lenders securitized their Notes in separate commercial mortgage backed securities pools in 2006. Subsequent to the quarter ended July 2, 2011, an amendment to the above agreement was executed. Refer to Footnote 13 Subsequent Events for additional discussion of this amendment.
The mortgage loan requires interest-only payments through June 2011. The balance of the loan outstanding at the end of ten years will then become due and payable. The principal will be paid in the following increments (in thousands):
         
2011
  $ 39,572 *
2012
    2,658  
2013
    2,881  
2014
    3,072  
2015
    3,018  
Thereafter
    234,211  
     
*   Payment of $38.3 million was made subsequent to the fiscal quarter ended July 2, 2011, utilizing cash held in escrow.
Subsequent to the fiscal quarter ended July 2, 2011, we entered into an amendment to the mortgage as described below in Footnote 13 Subsequent Events.

 

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9. Derivatives
We are exposed to risks such as changes in interest rates, commodity prices and foreign currency exchange rates. We employ a variety of practices to manage these risks, including operating and financing activities and, where deemed appropriate, the use of derivative instruments. Derivative instruments are used only for risk management purposes and not for speculation or trading, and are not used to address risks related to foreign currency rates. We record derivative instruments as assets or liabilities on the balance sheet at fair value.
On June 12, 2006, we entered into an interest rate swap agreement with Goldman Sachs Capital Markets, to hedge against interest rate risks related to our variable rate revolving credit facility. The interest rate swap was terminated in March of 2011. The interest rate swap had a notional amount of $150.0 million and the terms called for us to receive interest monthly at a variable rate equal to the 30-day LIBOR and to pay interest monthly at a fixed rate of 5.4%. This interest rate swap was designated as a cash flow hedge.
During fiscal 2009, we reduced our borrowings under the revolving credit facility by $100.0 million, which reduced outstanding debt below the interest rate swap’s notional amount of $150.0 million, at which point the hedge became ineffective in offsetting future changes in expected cash flows during the remaining term of the interest rate swap. As a result, changes in the fair value of the instrument were recorded through earnings from the point in time that the revolving credit facility balance was reduced below the interest rate swap’s notional amount of $150.0 million, which was during the first quarter of fiscal 2009. The remaining accumulated other comprehensive income was amortized over the life of the interest rate swap to interest expense.
Changes associated with the ineffective interest rate swap recognized in the Consolidated Statements of Operations for the period from January 1, 2011 to July 2, 2011 was approximately $1.8 million of income and are comprised of amortization of the remaining accumulated other comprehensive loss of the ineffective swap of $0.4 million offset by income of $2.2 million related to reducing the fair value of the ineffective interest rate swap liability to zero. Due to the termination of the swap in the first quarter of 2011, there was no such activity for the quarter ended July 2, 2011. Changes associated with the ineffective interest rate swap recognized in the Consolidated Statements of Operations for the period from January 3, 2010 to July 3, 2010 were approximately $2.1 million of income and are comprised of amortization of the remaining accumulated other comprehensive loss over the life of the ineffective swap of $1.1 million offset by income of $3.1 million related to current year changes in the fair value of the ineffective interest rate swap liability. Changes associated with the ineffective interest rate swap recognized in the Consolidated Statements of Operations for the period April 4, 2010 to July 3, 2010 were approximately $1.3 million of income and are comprised of amortization of the remaining accumulated other comprehensive loss over the life of the ineffective swap of $0.5 million offset by income of $1.8 million related to current year changes in the fair value of the ineffective interest rate swap liability.
The following table presents a reconciliation of the unrealized losses related to our interest rate swap measured at fair value in accumulated other comprehensive loss as of July 2, 2011 (in thousands):
         
Balance at January 1, 2011
  $ 444  
Amortization of accumulated other comprehensive loss recorded to interest expense
    (444 )
 
     
Balance at July 2, 2011
  $  
 
     
The fair value of our swap liability at January 1, 2011 was $2.2 million.
10. Fair Value Measurements
We determine a fair value measurement based on the assumptions a market participant would use in pricing an asset or liability. The fair value measurement guidance established a three level hierarchy making a distinction between market participant assumptions based on (i) unadjusted quoted prices for identical assets or liabilities in an active market (Level 1), (ii) quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability (Level 2), and (iii) prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (Level 3).

 

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We are exposed to market risks from changes in interest rates, which may affect our operating results and financial position. When deemed appropriate, we minimize our risks from interest rate fluctuations through the use of an interest rate swap. This derivative financial instrument is used to manage risk and is not used for trading or speculative purposes. The swap is valued using a valuation model that has inputs other than quoted market prices that are both observable and unobservable. The interest rate swap was terminated in March of fiscal 2011.
The following table presents a reconciliation of the level 3 interest rate swap liability measured at fair value on a recurring basis as of July 2, 2011 (in thousands):
         
Fair value at January 1, 2011
  $ (2,195 )
Realized gains included in earnings, net
    2,195  
 
     
Fair value at July 2, 2011
  $  
 
     
The $2.2 million realized gain is included in “Changes associated with ineffective interest rate swap” in the Consolidated Statements of Operations for the six month period ended July 2, 2011.
Carrying amounts for our financial instruments are not significantly different from their fair value, with the exception of our mortgage. To determine the fair value of our mortgage, we used a discounted cash flow model. Assumptions critical to our fair value in the period were present value factors used in determining fair value and an interest rate. At July 2, 2011, the carrying value and fair value of our mortgage was $285.7 million and $276.7 million, respectively.
11. Related Party Transactions
Cerberus Capital Management, L.P., our equity sponsor, retains consultants that specialize in operations management and support and who provide Cerberus with consulting advice concerning portfolio companies in which funds and accounts managed by Cerberus or its affiliates have invested. From time to time, Cerberus makes the services of these consultants available to Cerberus portfolio companies. We believe that the terms of these consulting arrangements are favorable to us, or, alternatively, are materially consistent with those terms that would have been obtained by us in an arrangement with an unaffiliated third party. We have normal service, purchase and sales arrangements with other entities that are owned or controlled by Cerberus. We believe that these transactions are at arms’ length terms and are not material to our results of operations or financial position.
On April 26, 2011, we entered into an investment agreement with Cerberus ABP Investor LLC (“Cerberus”) in connection with our rights offering, which expired on July 22, 2011. Pursuant to the investment agreement, Cerberus agreed to purchase from us, unsubscribed shares of our common stock, after the other stockholders had exercised their basic subscription rights and over-subscription privileges in connection with the rights offering, such that gross proceeds of the rights offering would be no less than $60.0 million. The price per share paid by Cerberus for such common stock under the investment agreement was equal to the subscription price paid in the rights offering by all stockholders. As a result of the rights offering, Cerberus purchased only its pro rata share of the common stock issued in the rights offering.
12. Commitments and Contingencies
Legal Proceedings
During the first six months of fiscal 2011, there were no material changes to our previously disclosed legal proceedings. Additionally, we are, and from time to time may be, a party to routine legal proceedings incidental to the operation of our business. The outcome of any pending or threatened proceedings is not expected to have a material adverse effect on our financial condition, operating results or cash flows, based on our current understanding of the relevant facts. Legal expenses incurred related to these contingencies are generally expensed as incurred.

 

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Environmental and Legal Matters
From time to time, we are involved in various proceedings incidental to our businesses and we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Although the ultimate outcome of these proceedings cannot be determined with certainty, based on presently available information management believes that adequate reserves have been established for probable losses with respect thereto. 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 our long-term financial condition, our results of operations, or our cash flows.
Collective Bargaining Agreements
As of July 2, 2011, approximately 30% of our total work force is covered by collective bargaining agreements. Collective bargaining agreements representing approximately 8% of our work force have expired or will expire within one year.
13. Subsequent Events
On May 10, 2011, we entered into an amendment to our revolving credit facility, which became effective on July 29, 2011, following the successful completion of the rights offering (see Footnote 7 Revolving Credit Facility for more information regarding the rights offering). The amendment to the revolving credit facility (i) reduced the excess liquidity we are required to maintain under the revolving credit facility to the greater of $35 million or the amount equal to 15% of the lesser of our borrowing base or $400 million, (ii) increased the amount of our accounts receivable included in the calculation of the borrowing base to 87.5%, (iii) increased the applicable percentage of the liquidation value of our inventory included in the calculation of the borrowing base to 90% for the periods January to March 2012 and January to March 2013, subject to specified EBITDA targets, (iv) included in the calculation of our excess liquidity certain cash on the balance sheet and subject to a deposit account control agreement, and (v) decreased the amount of excess liquidity we are required to maintain in order to avoid being required to meet certain financial ratios and triggering additional limits on capital expenditures under the revolving credit facility to the greater of $30 million or the amount equal to 15% of the lesser of our borrowing base or $400 million.
On July 14, 2011, we entered into an amendment to the mortgage which (i) eliminated the requirement to obtain lender approval for any transfer of equity interests that would reduce Cerberus ABP Investor LLC’s ownership in the Company and certain of our subsidiaries, directly or indirectly, to less than 51%, (ii) provided for the immediate prepayment of $38.3 million of the indebtedness under the mortgage without incurring a prepayment premium from funds currently held as collateral under the mortgage and, if certain conditions are met, will allow for an additional prepayment on or after July 30, 2014 from funds held as collateral without incurrence of a prepayment premium, (iii) allow us, at the lenders’ reasonable discretion, to use a portion of the cash held as collateral under the mortgage for specified alterations, repairs, replacements and other improvements to the mortgaged properties, and (iv) in the event certain financial conditions are met and the Company extends the Amended and Restated Master Lease by and among certain of our subsidiaries with respect to properties covered by the mortgage for an additional five years, we may request the lenders to disburse to the Company a portion of the cash held as collateral under the mortgage.
On July 22, 2011, the unexercised rights issued in connection with our rights offering, commenced on June 24, 2011, expired. As of that date, the rights offering was fully subscribed and, as a result, the backstop provisions with Cerberus, described in Footnote 7, were not utilized. We received cash proceeds of approximately $60 million, and issued 28.6 million shares of common stock on July 28, 2011. We used approximately $56 million of the gross proceeds from the rights offering to repay outstanding amounts under the revolving credit facility.
We are not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Consolidated Financial Statements.
14. Unaudited Supplemental Consolidating Financial Statements
The condensed consolidating financial information as of July 2, 2011 and January 1, 2011 and for the second quarters and first half of fiscal 2011 and fiscal 2010 is provided due to restrictions in our revolving credit facility that limit distributions by BlueLinx Corporation, our operating company and our wholly-owned subsidiary, to us, which, in turn, may limit our ability to pay dividends to holders of our common stock (see our Annual Report on Form 10-K for the year ended January 1, 2011, for a more detailed discussion of these restrictions and the terms of the facility). Also included in the supplemental condensed consolidated financial statements are sixty-two single member limited liability companies, which are wholly owned by us (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 us or BlueLinx Corporation.

 

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The consolidating statement of operations for BlueLinx Holdings Inc. for the period from April 3, 2011 to July 2, 2011 follows (in thousands):
                                         
            BlueLinx                    
    BlueLinx     Corporation                    
    Holdings     and     LLC              
    Inc.     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales
  $     $ 500,810     $ 7,429     $ (7,429 )   $ 500,810  
Cost of sales
          443,165                   443,165  
 
                             
Gross profit
          57,645       7,429       (7,429 )     57,645  
 
                             
Operating expenses:
                                       
Selling, general and administrative
    1,387       62,822             (7,429 )     56,780  
Depreciation and amortization
          1,663       961             2,624  
 
                             
Total operating expenses
    1,387       64,485       961       (7,429 )     59,404  
 
                             
Operating (loss) income
    (1,387 )     (6,840 )     6,468             (1,759 )
Non-operating expenses:
                                       
Interest expense
          2,980       4,750             7,730  
Changes associated with ineffective interest rate swap
                             
Other (income) expense, net
          133       1             134  
 
                             
(Loss) income before (benefit from) provision for income taxes
    (1,387 )     (9,953 )     1,717             (9,623 )
(Benefit from) provision for income taxes
    706       122       (670 )           158  
Equity in loss of subsidiaries
    (7,688 )                 7,688        
 
                             
Net (loss) income
  $ (9,781 )   $ (10,075 )   $ 2,387     $ 7,688     $ (9,781 )
 
                             
The consolidating statement of operations for BlueLinx Holdings Inc. for the period from April 4, 2010 to July 3, 2010 follows (in thousands):
                                         
            BlueLinx                    
    BlueLinx     Corporation                    
    Holdings     and     LLC              
    Inc.     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales
  $     $ 540,781     $ 7,456     $ (7,456 )   $ 540,781  
Cost of sales
          476,662                   476,662  
 
                             
Gross profit
          64,119       7,456       (7,456 )     64,119  
 
                             
Operating expenses:
                                       
Selling, general and administrative
    1,561       62,939       45       (7,456 )     57,089  
Depreciation and amortization
          2,473       961             3,434  
 
                             
Total operating expenses
    1,561       65,412       1,006       (7,456 )     60,523  
 
                             
Operating (loss) income
    (1,561 )     (1,293 )     6,450             3,596  
Non-operating expenses:
                                       
Interest expense
          3,447       4,758             8,205  
Changes associated with ineffective interest rate swap
          (1,256 )                 (1,256 )
Other (income) expense, net
          (48 )     66             18  
 
                             
(Loss) income before (benefit from) provision for income taxes
    (1,561 )     (3,436 )     1,626             (3,371 )
(Benefit from) provision for income taxes
    (630 )     32       634             36  
Equity in loss of subsidiaries
    (2,476 )                 2,476        
 
                             
Net (loss) income
  $ (3,407 )   $ (3,468 )   $ 992     $ 2,476     $ (3,407 )
 
                             

 

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The consolidating statement of operations for BlueLinx Holdings Inc. for the period from January 2, 2011 to July 2, 2011 follows (in thousands):
                                         
            BlueLinx                    
    BlueLinx     Corporation                    
    Holdings     and     LLC              
    Inc.     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales
  $     $ 891,414     $ 14,857     $ (14,857 )   $ 891,414  
Cost of sales
          787,500                   787,500  
 
                             
Gross profit
          103,914       14,857       (14,857 )     103,914  
 
                             
Operating expenses:
                                       
Selling, general and administrative
    3,005       124,301       (7,222 )     (14,857 )     105,227  
Depreciation and amortization
          3,647       1,914             5,561  
 
                             
Total operating expenses
    3,005       127,948       (5,308 )     (14,857 )     110,788  
 
                             
Operating (loss) income
    (3,005 )     (24,034 )     20,165             (6,874 )
Non-operating expenses:
                                       
Interest expense
          7,292       9,499             16,791  
Changes associated with the ineffective interest rate swap
          (1,751 )                 (1,751 )
Other expense, net
          155       (6 )           149  
 
                             
(Loss) income before (benefit from) provision for income taxes
    (3,005 )     (29,730 )     10,672             (22,063 )
(Benefit from) provision for income taxes
    (3,481 )     (637     4,162             44  
Equity in loss of subsidiaries
    (22,583 )                 22,583        
 
                             
Net (loss) income
  $ (22,107 )   $ (29,093 )   $ 6,510     $ 22,583     $ (22,107 )
 
                             
The consolidating statement of operations for BlueLinx Holdings Inc. for the period from January 3, 2010 to July 3, 2010 follows (in thousands):
                                         
            BlueLinx                    
    BlueLinx     Corporation                    
    Holdings     and     LLC              
    Inc.     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales
  $     $ 971,831     $ 14,912     $ (14,912 )   $ 971,831  
Cost of sales
          855,434                   855,434  
 
                             
Gross profit
          116,397       14,912       (14,912 )     116,397  
 
                             
Operating expenses:
                                       
Selling, general and administrative
    3,456       124,969       90       (14,912 )     113,603  
Depreciation and amortization
          5,257       1,921             7,178  
 
                             
Total operating expenses
    3,456       130,226       2,011       (14,912 )     120,781  
 
                             
Operating (loss) income
    (3,456 )     (13,829 )     12,901             (4,384 )
Non-operating expenses:
                                       
Interest expense
          6,013       9,507             15,520  
Changes associated with the ineffective interest rate swap
          (2,061 )                 (2,061 )
Other expense, net
          214       37             251  
 
                             
(Loss) income before (benefit from) provision for income taxes
    (3,456 )     (17,995 )     3,357             (18,094 )
(Benefit from) provision for income taxes
    (1,318 )     61       1,309             52  
Equity in loss of subsidiaries
    (16,008 )                 16,008        
 
                             
Net (loss) income
  $ (18,146 )   $ (18,056 )   $ 2,048     $ 16,008     $ (18,146 )
 
                             

 

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The consolidating balance sheet for BlueLinx Holdings Inc. as of July 2, 2011 follows (in thousands):
                                         
            BlueLinx                    
    BlueLinx     Corporation     LLC              
    Holdings Inc.     and Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Assets:
                                       
Current assets:
                                       
Cash
  $ 90     $ 6,019     $     $     $ 6,109  
Receivables
          205,735                   205,735  
Inventories
          212,654                   212,654  
Deferred income tax assets
          59                   59  
Other current assets
    1,955       20,306       40,641             62,902  
 
                                       
Intercompany receivable
    59,169       10,287       2,637       (72,093 )      
 
                             
 
                                       
Total current assets
    61,214       455,060       43,278       (72,093 )     487,459  
 
                             
Property and equipment:
                                       
Land and land improvements
          3,021       48,947             51,968  
Buildings
          9,737       87,954             97,691  
Machinery and equipment
          74,495                   74,495  
Construction in progress
          1,027                   1,027  
 
                             
Property and equipment, at cost
          88,280       136,901             225,181  
Accumulated depreciation
          (68,271 )     (27,714 )           (95,985 )
 
                             
Property and equipment, net
          20,009       109,187             129,196  
Investment in subsidiaries
    (67,763 )                 67,763        
Non-current deferred income tax assets
                             
 
                                       
Other non-current assets
          18,472       141             18,613  
 
                             
 
                                       
Total assets
  $ (6,549 )   $ 493,541     $ 152,606     $ (4,330 )   $ 635,268  
 
                             
Liabilities:
                                       
Current liabilities:
                                       
Accounts payable
  $ 203     $ 95,119     $     $       95,322  
Bank overdrafts
          28,798                   28,798  
Accrued compensation
    20       5,382                   5,402  
 
                                       
Current maturities of long-term debt
          110,584       40,923             151,507  
Other current liabilities
    811       12,883       1,244             14,938  
Intercompany payable
    11,807       60,286           (72,093 )      
 
                             
Total current liabilities
    12,841       313,052       42,167       (72,093 )     295,967  
 
                             
 
                                       
Non-current liabilities:
                                       
Long-term debt
          78,326       244,746             323,072  
Non-current deferred income tax liabilities
          107                   107  
Other non-current liabilities
    3       35,511                   35,514  
 
                             
Total liabilities
    12,844       426,996       286,913       (72,093 )     654,661  
 
                             
Stockholders’ (Deficit) Equity/Parent’s Investment
    (19,393 )     66,545       (134,307 )     67,763       (19,392 )
 
                             
Total liabilities and equity
  $ (6,549 )   $ 493,541     $ 152,606     $ (4,330 )   $ 635,268  
 
                             

 

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The consolidating balance sheet for BlueLinx Holdings Inc. as of January 1, 2011 follows (in thousands):
                                         
            BlueLinx                    
    BlueLinx     Corporation     LLC              
    Holdings Inc.     and Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Assets:
                                       
Current assets:
                                       
Cash
  $ 384     $ 13,913     $     $     $ 14,297  
Receivables
          119,202                   119,202  
Inventories
          188,250                   188,250  
Deferred income tax assets, current
          143                   143  
Other current assets
    669       20,500       1,599             22,768  
Intercompany receivable
    57,208       8,759             (65,967 )      
 
                             
Total current assets
    58,261       350,767       1,599       (65,967 )     344,660  
 
                             
Property and equipment:
                                       
Land and land improvements
          3,027       49,513             52,540  
Buildings
          8,069       88,651             96,720  
Machinery and equipment
          70,860                   70,860  
Construction in progress
          2,028                   2,028  
 
                             
Property and equipment, at cost
          83,984       138,164             222,148  
 
                                       
Accumulated depreciation
          (65,564 )     (26,953 )           (92,517 )
 
                             
Property and equipment, net
          18,420       111,211             129,631  
Investment in subsidiaries
    (47,943 )                 47,943        
Other non-current assets
          19,602       31,126             50,728  
 
                             
Total assets
  $ 10,318     $ 388,789     $ 143,936     $ (18,024 )   $ 525,019  
 
                             
Liabilities:
                                       
Current liabilities:
                                       
Accounts payable
  $ 59     $ 62,768     $     $       62,827  
Bank overdrafts
          23,089                   23,089  
Accrued compensation
          4,594                   4,594  
 
                                       
Current maturities of long-term debt
                1,190             1,190  
 
                                       
Other current liabilities
          15,065       483       1,244       16,792  
Intercompany payable
    9,264       57,947             (67,211 )      
 
                             
 
                                       
Total current liabilities
    9,323       163,463       1,673       (65,967 )     108,492  
 
                             
 
                                       
Non-current liabilities:
                                       
Long-term debt
          97,200       284,479             381,679  
Non-current deferred income tax liabilities
          192                   192  
Other non-current liabilities
    4       33,661                   33,665  
 
                             
Total liabilities
    9,327       294,516       286,152       (65,967 )     524,028  
 
                             
Stockholders’ Equity (Deficit)/Parent’s Investment
    991       94,273       (142,216 )     47,943       991  
 
                             
 
                                       
Total liabilities and equity
  $ 10,318     $ 388,789     $ 143,936     $ (18,024 )   $ 525,019  
 
                             

 

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The consolidating statement of cash flows for BlueLinx Holdings Inc. for the period from January 2, 2011 to July 2, 2011 follows (in thousands):
                                         
            BlueLinx                    
    BlueLinx     Corporation                    
    Holdings     and     LLC              
    Inc.     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Cash flows from operating activities:
                                       
Net (loss) income
  $ (22,107 )   $ (29,093 )   $ 6,510     $ 22,583     $ (22,107 )
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
                                       
Depreciation and amortization
          3,647       1,914             5,561  
Amortization of debt issuance costs
          1,094                   1,094  
Gain from the sale of properties
                (7,222 )           (7,222 )
Changes associated with the ineffective interest rate swap
          (1,751 )                 (1,751 )
Deferred income tax benefit
          (214 )                 (214 )
Share-based compensation expense
          1,137                   1,137  
Decrease (increase) in restricted cash
          432                   432  
Equity in earnings of subsidiaries
    22,583                   (22,583 )      
Changes in assets and liabilities:
                                       
Receivables
          (86,533 )                 (86,533 )
Inventories
          (24,404 )                 (24,404 )
Accounts payable
    123       32,352       20             32,495  
Changes in other working capital
    (452 )     566       (208 )     (1,244 )     (1,338 )
Intercompany receivable
    (1,961 )     (1,528 )     (1,519 )     5,008        
Intercompany payable
    2,543       2,339       (1,118 )     (3,764 )      
Other
    17       (458 )     2,245             1,804  
 
                             
Net cash provided by (used in) operating activities
    746       (102,414 )     622             (101,046 )
 
                             
Cash flows from investing activities:
                                       
Investment in subsidiaries
    (1,040 )           1,040              
Property, plant and equipment investments
          (2,702 )     (2,818 )           (5,520 )
Proceeds from disposition of assets
                  8,971             8,971  
 
                             
Net cash (used in) provided by investing activities
    (1,040 )     (2,702 )     7,193             3,451  
 
                             
Cash flows from financing activities:
                                       
Net transactions with Parent
                             
Repurchase of common stock
                               
Increase in revolving credit facility
          91,710                   91,710  
Payments on capital lease obligations
          (197 )                 (197 )
Increase in bank overdrafts
          5,709                   5,709  
Increase in restricted cash related to the mortgage
                (7,815 )           (7,815 )
Intercompany receivable
                             
Intercompany payable
                             
Other
                                 
 
                             
Net cash provided by (used in) financing activities
          97,222       (7,815 )           89,407  
 
                             
Decrease in cash
    (294 )     (7,894 )                 (8,188 )
Balance, beginning of period
    384       13,913                   14,297  
 
                             
Balance, end of period
  $ 90     $ 6,019     $     $     $ 6,109  
 
                             
Noncash transactions
                                       
Capital leases
  $     $ 2,544     $     $     $ 2,544  
 
                             

 

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The consolidating statement of cash flows for BlueLinx Holdings Inc. for the period from January 3, 2010 to July 3, 2010 follows (in thousands):
                                         
            BlueLinx                    
    BlueLinx     Corporation                    
    Holdings     and     LLC              
    Inc.     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Cash flows from operating activities:
                                       
Net (loss) income
  $ (18,146 )   $ (18,056 )   $ 2,048     $ 16,008     $ (18,146 )
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
                                       
Depreciation and amortization
          5,254       1,924             7,178  
Amortization of debt issuance costs
          43       336             379  
Payments from terminating the Georgia-Pacific supply agreement
          4,706                   4,706  
Changes associated with the ineffective interest rate swap
          (2,061 )                 (2,061 )
Deferred income tax benefit
          (414 )                 (414 )
Share-based compensation expense
    910       1,059                   1,969  
Decrease in restricted cash related to the ineffective interest rate swap, insurance, and other
          5,607                   5,607  
Equity in earnings of subsidiaries
    16,008                   (16,008 )      
Changes in assets and liabilities:
                                       
Receivables
          (82,222 )                 (82,222 )
Inventories
          (52,973 )                 (52,973 )
Accounts payable
    4       38,856                   38,860  
Changes in other working capital
    246       19,503       (1,211 )           18,538  
Intercompany receivable
    10,376       (471 )           (9,905 )      
Intercompany payable
    (1,937 )     (9,433 )     1,465       9,905        
Other
    (14 )     (2,253 )     (28 )           (2,295 )
 
                             
Net cash provided by (used in) operating activities
    7,447       (92,855 )     4,534             (80,874 )
 
                             
Cash flows from investing activities:
                                       
Investment in subsidiaries
    (2,123 )                 2,123        
Property, plant and equipment investments
          (1,263 )                 (1,263 )
Proceeds from disposition of assets
          656                   656  
 
                             
Net cash (used in) provided by investing activities
    (2,123 )     (607 )           2,123       (607 )
 
                             
Cash flows from financing activities:
                                       
Net transactions with Parent
                2,123       (2,123 )      
Repurchase of common stock
    (583 )                       (583 )
Increase in revolving credit facility
          68,687                   68,687  
Payments on capital lease obligations
          (473 )                 (473 )
Increase in bank overdrafts
          9,880                   9,880  
Increase in restricted cash related to the mortgage
                (6,581 )           (6,581 )
Debt financing costs
          (43 )     (48 )           (91 )
Intercompany receivable
    (4,716 )                 4,716        
Intercompany payable
          4,716             (4,716 )      
Other
    6                         6  
 
                             
Net cash (used in) provided by financing activities
    (5,293 )     82,767       (4,506 )     (2,123 )     70,845  
 
                             
Increase (decrease) in cash
    31       (10,695 )     28             (10,636 )
Balance, beginning of period
    32       29,129       296             29,457  
 
                             
Balance, end of period
  $ 63     $ 18,434     $ 324     $     $ 18,821  
 
                             

 

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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 consolidated 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, 2011 as filed with the U.S. Securities and Exchange Commission (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 “Risk Factors” in our Annual Report on Form 10-K for the year ended January 1, 2011 as filed with the SEC 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, especially as a result of conditions in the residential housing market;
    inventory levels of new and existing homes for sale;
    general economic and business conditions in the United States;
    the financial condition and credit worthiness of our customers;
    the activities of competitors;
    changes in significant operating expenses;
    fuel costs;
    risk of losses associated with accidents;
    exposure to product liability claims;
    changes in the availability of capital and interest rates;
    immigration patterns and job and household formation;
    our ability to identify acquisition opportunities and effectively and cost-efficiently integrate acquisitions;
    adverse weather patterns or conditions;
    acts of war or terrorist activities;
    variations in the performance of the financial markets, including the credit markets;
    the other factors described herein under and in our Annual Report on Form 10-K for the year ended January 1, 2011 as filed with the SEC.

 

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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.
Overview
Background
We are a leading distributor of building products in the United States. We distribute approximately 10,000 products to more than 11,500 customers through our network of approximately 60 distribution centers which serve all major metropolitan markets in the United States. We distribute products in two principal categories: structural products and specialty products. Structural products include plywood, oriented strand board (“OSB”), rebar and remesh, lumber and other wood products primarily used for structural support, walls and flooring in construction projects. Structural products represented approximately 38% of our second quarter of fiscal 2011 gross sales. Specialty products include roofing, insulation, moulding, engineered wood, vinyl products (used primarily in siding), outdoor living, and metal products (excluding rebar and remesh). Specialty products accounted for approximately 62% of our second quarter of fiscal 2011 gross sales.
Industry Conditions
As noted above, we operate in a changing environment in which new risks can emerge from time to time. A number of factors cause our results of operations to fluctuate from period to period. Many of these factors are seasonal or cyclical in nature. Conditions in the United States housing market are at historically low levels. Our operating results have declined during the past several years as they are closely tied to U.S. housing starts. Additionally, the mortgage markets have experienced substantial disruption due to the number of defaults in the market. This disruption and the related defaults have increased the inventory of homes for sale and also have caused lenders to tighten mortgage qualification criteria which further reduces demand for new homes. We expect the downturn in new housing activity will continue to negatively impact our operating results for the foreseeable future. We continue to prudently manage our inventories, receivables and spending in this environment. However, along with many forecasters, we believe U.S. housing demand will improve in the long term based on population demographics and a variety of other factors.
Selected Factors Affecting Our Operating Results
Our operating results are affected by housing starts, mobile home production, industrial production, repair and remodeling spending and non-residential construction. Our operating results are also impacted by changes in product prices. Structural product prices can vary significantly based on short-term and long-term changes in supply and demand. The prices of specialty products can also vary from time to time, although they are generally significantly less variable than structural products.
The following table sets forth changes in net sales by product category, sales variances due to changes in unit volume and dollar and percentage changes in unit volume and price versus comparable prior periods, in each case for the second quarter of fiscal 2011, the second quarter of fiscal 2010, the first six months of fiscal 2011, the first six months of fiscal 2010, fiscal 2010 and fiscal 2009.
                                                 
    Fiscal     Fiscal     Fiscal     Fiscal     Fiscal     Fiscal  
    Q2 2011     Q2 2010     2011 YTD     2010 YTD     2010     2009  
    (Dollars in millions)  
    (Unaudited)  
Sales by Category
                                               
Structural Products
  $ 194     $ 265     $ 355     $ 469     $ 838     $ 738  
Specialty Products
    317       286       552       519       1,005       948  
Other(1)
    (10 )     (10 )     (16 )     (16 )     (39 )     (40 )
 
                                   
Total Sales
  $ 501     $ 541     $ 891     $ 972     $ 1,804     $ 1,646  
 
                                   
Sales Variances
                                               
Unit Volume $ Change
  $ (3 )   $ 51     $ (23 )   $ 57     $ 36     $ (1,036 )
Price/Other(1)
    (37 )     66       (58 )     84       122       (98 )
 
                                   
Total $ Change
  $ (40 )   $ 117     $ (81 )   $ 141     $ 158     $ (1,134 )
 
                                   
Unit Volume % Change
    (0.5 )%     11.9 %     (2.4 )%     6.7 %     2.2 %     (36.6 )%
Price/Other(1)
    (6.7 )%     15.8 %     (5.8 )%     10.3 %     7.4 %     (4.2 )%
 
                                   
Total % Change
    (7.2 )%     27.7 %     (8.2 )%     17.0 %     9.6 %     (40.8 )%
 
                                   
 
     
(1)   “Other” includes unallocated allowances and discounts.

 

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The following table sets forth changes in gross margin dollars and percentage changes by product category, and percentage changes in unit volume growth by product, in each case for the second quarter of fiscal 2011, the second quarter of fiscal 2010, the first six months of fiscal 2011, the first six months of fiscal 2010, fiscal 2010 and fiscal 2009.
                                                 
    Fiscal     Fiscal     Fiscal     Fiscal     Fiscal     Fiscal  
    Q2 2011     Q2 2010     2011 YTD     2010 YTD     2010     2009  
    (Dollars in millions)  
    (Unaudited)  
Gross Margin $’s by Category
                                               
Structural Products
  $ 17     $ 24     $ 34     $ 46     $ 77     $ 73  
Specialty Products
    46       44       79       77       148       132  
Other (1)
    (5 )     (4 )     (9 )     (7 )     (14 )     (12 )
 
                                   
Total Gross Margin $’s
  $ 58     $ 64     $ 104     $ 116     $ 211     $ 193  
 
                                   
Gross Margin %’s by Category
                                               
Structural Products
    8.8 %     9.1 %     9.6 %     9.8 %     9.1 %     9.9 %
Specialty Products
    14.5 %     15.4 %     14.3 %     14.8 %     14.7 %     13.9 %
Total Gross Margin %’s
    11.5 %     11.9 %     11.7 %     12.0 %     11.7 %     11.7 %
Unit Volume Change by Product
                                               
Structural Products
    (18.9 )%     9.7 %     (21.6 )%     5.0 %     (2.5 )%     (40.3 )%
Specialty Products
    16.5 %     13.5 %     15.0 %     8.0 %     5.7 %     (32.8 )%
Total Change in Unit Volume %’s
    (0.5 )%     11.9 %     (2.4 )%     6.7 %     2.2 %     (36.6 )%
 
     
(1)   “Other” includes unallocated allowances and discounts.
The following table sets forth changes in net sales and gross margin by channel and percentage changes in gross margin by channel, in each case for the second quarter of fiscal 2011, the second quarter of fiscal 2010, the first six months of fiscal 2011, the first six months of fiscal 2010, fiscal 2010 and fiscal 2009.
                                                 
    Fiscal     Fiscal     Fiscal     Fiscal     Fiscal     Fiscal  
    Q2 2011     Q2 2010     2011 YTD     2010 YTD     2010     2009  
    (Dollars in millions)  
    (Unaudited)  
Sales by Channel
                                               
Warehouse/Reload
  $ 400     $ 423     $ 708     $ 758     $ 1,429     $ 1,251  
Direct
    111       128       199       230       414       435  
Other(1)
    (10 )     (10 )     (16 )     (16 )     (39 )     (40 )
 
                                   
Total
  $ 501     $ 541     $ 891     $ 972     $ 1,804     $ 1,646  
 
                                   
Gross Margin by Channel
                                               
Warehouse/Reload
  $ 55     $ 60     $ 100     $ 111     $ 201     $ 177  
Direct
    8       8       13       12       24       28  
Other(1)
    (5 )     (4 )     (9 )     (7 )     (14 )     (12 )
 
                                   
Total
  $ 58     $ 64     $ 104     $ 116     $ 211     $ 193  
 
                                   
                                                 
    Fiscal     Fiscal     Fiscal     Fiscal     Fiscal     Fiscal  
    Q2 2011     Q2 2010     2011 YTD     2010 YTD     2010     2009  
    (Dollars in millions)  
    (Unaudited)  
Gross Margin % by Channel
                                               
Warehouse/Reload
    13.8 %     14.2 %     14.1 %     14.6 %     14.1 %     14.1 %
Direct
    7.2 %     6.3 %     6.5 %     5.2 %     5.8 %     6.4 %
Total
    11.5 %     11.9 %     11.7 %     12.0 %     11.7 %     11.7 %
 
     
(1)   “Other” includes unallocated allowances and adjustments.

 

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Fiscal Year
Our fiscal year is a 52- or 53-week period ending on the Saturday closest to the end of the calendar year. Fiscal year 2011 and fiscal year 2010 each contain 52 weeks.
Results of Operations
Second Quarter of Fiscal 2011 Compared to Second Quarter of Fiscal 2010
The following table sets forth our results of operations for the second quarter of fiscal 2011 and second quarter of fiscal 2010.
                                 
            % of             % of  
    Second Quarter of     Net     Second Quarter of     Net  
    Fiscal 2011     Sales     Fiscal 2010     Sales  
    (Unaudited)           (Unaudited)        
    (Dollars in thousands)  
Net sales
  $ 500,810       100.0 %   $ 540,781       100.0 %
Gross profit
    57,645       11.5 %     64,119       11.9 %
Selling, general and administrative
    56,780       11.3 %     57,089       10.6 %
Depreciation and amortization
    2,624       0.5 %     3,434       0.6 %
 
                           
Operating (loss) income
    (1,759 )     (0.4 %)     3,596       0.7 %
Interest expense
    7,730       1.5 %     8,205       1.5 %
Changes associated with the ineffective interest rate swap
          0.0 %     (1,256 )     (0.2 )%
Other expense, net
    134       0.0 %     18       0.0 %
 
                           
Loss before provision for income taxes
    (9,623 )     (1.9 )%     (3,371 )     (0.6 )%
Provision for income taxes
    158       0.0 %     36       0.0 %
 
                           
Net loss
  $ (9,781 )     (2.0 )%   $ (3,407 )     (0.6 )%
 
                           
Net sales. For the second quarter of fiscal 2011, net sales decreased by 7.4%, or $40.0 million, to $500.8 million. Sales during the quarter were negatively impacted by a decrease in housing starts and a reduction in sales volume. New home construction has a significant impact on our sales. Specialty sales, primarily consisting of roofing, specialty panels, insulation, moulding, engineered wood products, vinyl siding, composite decking and metal products (excluding rebar and remesh) increased by $30.6 million, or 10.7%, compared to the second quarter of fiscal 2010, primarily due to an increase in specialty unit volume of 16.5%, partially offset by a decrease in specialty products prices of 5.9%. Structural sales, including plywood, OSB, lumber and metal rebar, decreased by $71.8 million, or 27.0% from a year ago, primarily as a result of a decrease in unit volume of 18.9% and a decrease in structural product prices of 8.2%.
Gross profit. Gross profit for the second quarter of fiscal 2011 was $57.6 million, or 11.5% of sales, compared to $64.1 million, or 11.9% of sales, in the prior year period. The decrease in gross profit dollars compared to the second quarter of fiscal 2010 was driven primarily by a decrease in structural product volumes of 18.9%, due to the Company’s efforts to manage gross margin under commodity pricing pressure coupled with the expiration of the housing credit in April 2010. The decrease in structural volumes was offset by an increase in specialty product volumes of 16.5%. The gross margin percentage decreased by 40 basis points to 11.5% primarily due to a shift from the warehouse channel to the reload channel and lower prices, which were temporarily inflated in the year-ago period due to the Chilean earthquake.
Selling , general, and administrative expenses. Selling, general and administrative expenses were $56.8 million, or 11.3% of net sales, for the second quarter of fiscal 2011, compared to $57.1 million, or 10.6% of net sales, a $0.3 million decrease compared to the second quarter of fiscal 2010. This decrease is primarily due to the reduction in variable compensation of $0.9 million and a gain on sales of assets of $0.5 million, partially offset by a $1.1 million increase in fuel expense.
Depreciation and amortization. Depreciation and amortization expense totaled $2.6 million for the second quarter of fiscal 2011, compared to $3.4 million for the second quarter of fiscal 2010. The $0.8 million decrease in depreciation and amortization is primarily related to a portion of our property and equipment becoming fully depreciated during fiscal 2011 coupled with capital expenditures not keeping pace with our historical purchase levels of property and equipment and sales of certain depreciable assets during the current period.
Operating (loss) income. Operating loss for the second quarter of fiscal 2011 was $(1.8) million, or (0.4)% of sales, compared to operating income of $3.6 million, or 0.7% of sales, in the second quarter of fiscal 2010, reflecting a decrease in gross profit dollars of $6.5 million, as a result of factors described above. This decrease is partially offset by a decrease in selling, general, and administrative expenses and depreciation of $0.3 million and $0.8 million, respectively.

 

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Interest expense. Interest expense totaled $7.7 million for the second quarter of fiscal 2011 compared to $8.2 million for the second quarter of fiscal 2010. The $0.5 million decline is largely due to the termination of the ineffective interest rate swap in March of fiscal 2011, which eliminated related fees classified as interest expense of $1.9 million. This decrease was partially offset by a $0.2 million increase in amortization of debt issuance costs and a $1.2 million increase in interest expense incurred on the revolving credit facility. Interest expense included $0.7 million and $0.5 million of debt issue cost amortization for the second quarter of fiscal 2011 and the second quarter of fiscal 2010, respectively. During the second quarter of fiscal 2011, interest expense related to our revolving credit facility and mortgage was $2.4 million and $4.6 million, respectively. During the second quarter of fiscal 2010, interest expense related to our revolving credit facility and mortgage was $1.2 million and $4.6 million, respectively. See “Liquidity and Capital Resources” below for a description of amendments to both the revolving credit facility and the mortgage.
Changes associated with ineffective interest rate swap. The $1.3 million of income for the second quarter of fiscal 2010 is related to the ineffective interest rate swap which was terminated in March of fiscal 2011.
Provision for income taxes. The effective tax rate was (1.6)% and (1.1)% for the second quarter of fiscal 2011 and the second quarter of fiscal 2010, respectively. The unusual effective tax rate in both periods is driven by a full valuation allowance recorded against our second quarter federal and state benefit and tax expense related to gross receipts, Canadian and certain state taxes.
Net loss. Net loss for the second quarter of fiscal 2011 was $(9.8) million compared to a net loss of $(3.4) million for the second quarter of fiscal 2010 as a result of the above factors.
On a per-share basis, basic and diluted loss applicable to common stockholders for the second quarter of fiscal 2011 and for the second quarter of fiscal 2010 were each $(0.31) and $(0.11), respectively.
First Six Months of Fiscal 2011 Compared to First Six Months of Fiscal 2010
The following table sets forth our results of operations for the first six months of fiscal 2011 and the first six months of fiscal 2010.
                                 
            % of             % of  
    First Six Months of     Net     First Six Months of     Net  
    Fiscal 2011     Sales     Fiscal 2010     Sales  
    (Unaudited)           (Unaudited)        
    (Dollars in thousands)  
Net sales
  $ 891,414       100.0 %   $ 971,831       100.0 %
Gross profit
    103,914       11.7 %     116,397       12.0 %
Selling, general and administrative
    105,227       11.8 %     113,603       11.7 %
Depreciation and amortization
    5,561       0.6 %     7,178       0.7 %
 
                           
Operating loss
    (6,874 )     (0.8 )%     (4,384 )     (0.5 )%
Interest expense
    16,791       1.9 %     15,520       1.6 %
Changes associated with the ineffective interest rate swap
    (1,751 )     (0.2 )%     (2,061 )     (0.2 )%
Other expense, net
    149       0.0 %     251       0.0 %
 
                           
Loss before provision for income taxes
    (22,063 )     (2.5 )%     (18,094 )     (1.9 )%
Provision for income taxes
    44       0.0 %     52       0.0 %
 
                           
Net loss
  $ (22,107 )     (2.5 )%   $ (18,146 )     (1.9 )%
 
                           
Net sales. For the first six months of fiscal 2011, net sales decreased by 8.2%, or $80.4 million, to $891.4 million. Sales during the first six months were negatively impacted by a decrease in housing starts and a decrease of 21.6% in structural product volumes. New home construction has a significant impact on our sales. Specialty sales, primarily consisting of roofing, specialty panels, insulation, moulding, engineered wood products, vinyl siding, composite decking and metal products (excluding rebar and remesh) increased by $32.5 million or 6.3% compared to the first six months of fiscal 2010, reflecting a 15.0% increase in unit volume and a 8.8% decrease in prices. Structural sales, including plywood, OSB, lumber and metal rebar, decreased by $114.2 million, or 24.3% from a year ago, primarily due to a 21.6% decrease in unit volume and a 2.7% decrease in product prices.

 

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Gross profit. Gross profit for the first six months of fiscal 2011 was $103.9 million, or 11.7% of sales, compared to $116.4 million, or 12.0% of sales, in the prior year period. The decrease in gross profit dollars compared to the first six months of fiscal 2010 was driven primarily by a decrease in structural unit volumes of 21.6%, due to the Company’s efforts to manage gross margin under commodity pricing pressure coupled with the expiration of the housing credit in April 2010. The gross margin percentage decreased by 30 basis points to 11.7% primarily due to a shift from the warehouse channel to the reload channel and lower prices, which were temporarily inflated in the year-ago period due to the Chilean earthquake.
Selling, general, and administrative. Selling, general and administrative expenses for the first six months of fiscal 2011 were $105.2 million, or 11.8% of net sales, compared to $113.6 million, or 11.7% of net sales, during the first six months of fiscal 2010. The decrease in selling, general, and administrative expenses was primarily due to inclusion of a $7.2 million gain on sale of real estate in the first six months of 2011.
Depreciation and amortization. Depreciation and amortization expense totaled $5.6 million for the first six months of fiscal 2011, compared with $7.2 million for the first six months of fiscal 2010. The $1.6 million decrease in depreciation and amortization is primarily related to a portion of our property and equipment becoming fully depreciated during fiscal 2011 coupled with capital expenditures not keeping pace with our historical purchase levels of property and equipment. In addition, certain depreciating assets were sold during the current period.
Operating loss. Operating loss for the first six months of fiscal 2011 was $(6.9) million, or (0.8)% of sales, compared to $(4.4) million, or (0.5)% of sales, in the prior year period. The change in operating loss reflects a $12.5 million decrease in gross profit as a result of the above factors. This decrease is partially offset by a decrease in selling, general, and administrative expenses, resulting primarily from the sale of real estate, and depreciation of $8.4 million and $1.6 million, respectively.
Interest expense. Interest expense totaled $16.8 million for the first six months of fiscal 2011 compared to $15.5 million for the first six months of fiscal 2010. The $1.3 million increase is largely due to a $2.3 million increase in interest expense from our revolving credit facility related to a higher average debt balance and a $0.7 million increase in amortization of debt issuance costs related to the additional costs capitalized for the amendment of the revolving credit facility in 2010. This increase was offset by a decrease of $1.7 million in swap and other fixed charges due to the conclusion of the interest rate swap. Interest expense included $1.1 million and $0.4 million of debt issue cost amortization for the first six months of fiscal 2011 and for the first six months of fiscal 2010, respectively. During the first six months of fiscal 2011, interest expense related to our revolving credit facility and mortgage was $4.3 million and $9.2 million, respectively. During the first six months of fiscal 2010, interest expense related to our revolving credit facility and mortgage was $2.1 million and $9.2 million, respectively. See “Liquidity and Capital Resources” below for a description of amendments to both the revolving credit facility and the mortgage.
Changes associated with ineffective interest rate swap. Changes associated with the ineffective interest rate swap totaled $1.8 million of income for the first six months of fiscal 2011 compared to $2.1 million of income for the first six months of fiscal 2010. The decrease is primarily related to the change in the swap’s fair value and a decrease in amortization expense due to the termination of the swap in March 2011.
Provision for income taxes. The effective tax rate was (0.2)% and (0.3)% for the first six months of fiscal 2011 and the first six months of fiscal 2010, respectively. The unusual effective tax rate in both periods is driven by a full valuation allowance recorded against our year to date federal and state benefit and tax expense related to gross receipts, Canadian and certain state taxes.
Net loss. Net loss for the first six months of fiscal 2011 was $(22.1) million compared to a net loss of $(18.1) million for the first six months of fiscal 2010 as a result of the above factors.
On a per-share basis, basic and diluted loss per share applicable to common stockholders for the first six months of fiscal 2011 and for the first six months of fiscal 2010 were $(0.71) and $(0.59), respectively.
Seasonality
We are 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 and fourth quarters are typically our slowest quarters due to the impact of poor weather on the construction market. Our second and third quarters are typically our strongest quarters, reflecting a substantial increase in construction due to more favorable weather conditions. Our 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 summer building season.

 

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Liquidity and Capital Resources
We depend on cash flow from operations and funds available under our revolving credit facility to finance working capital needs and capital expenditures. We had approximately $94.0 million of excess availability under our amended revolving credit facility as of July 2, 2011. As of the period ended July 2, 2011, under our amended revolving credit facility, we were required to maintain our excess availability above the greater of $40.0 million or the amount equal to 15% of the lesser of the borrowing base, as defined therein, or $60.0 million (subject to increase to $75.0 million if we exercise the uncommitted accordion provision in the amended revolving credit facility in full). If we fail to maintain this minimum excess availability, the amended revolving credit facility requires us to (i) maintain certain financial ratios, which we would not meet with current operating results, and (ii) limit our capital expenditures, which would have a negative impact on our ability to finance working capital needs and capital expenditures. As described under the Debt and Credit Sources section below, subsequent to the fiscal quarter end, an amendment to the revolving credit facility became effective that impacts the covenants described above.
On July 24, 2011, we commenced a rights offering of our common stock to our stockholders, pursuant to which we distributed to our common stockholders transferable rights to subscribe for and purchase up to $60 million of our common stock. In conjunction with the rights offering, we entered into an investment agreement with Cerberus ABP Investor LLC, which beneficially owns approximately 55% of our common stock before giving effect to the rights offering, to backstop the rights offering, subject to certain conditions, by purchasing shares of common stock that related to any rights that remained unexercised at the expiration of the rights offering. The rights offering, which expired on July 22, 2011, was fully subscribed and resulted in gross proceeds of approximately $60 million. The majority of the gross proceeds from the rights offering of approximately $56 million were used to pay down the revolving credit facility. We accounted for the rights issued as a component of additional paid in capital as they were indexed to the Company’s equity and there were no net cash settlement provisions. The rights offering was contingent on entry by us into amendments to both our revolving credit facility and our mortgage. Both amendments are described in Footnote 13 Subsequent Events. We believe that the amounts available from our revolving credit facility and other sources are sufficient to fund our routine operations and capital requirements for the next twelve months. If economic conditions, especially those related to the housing market, do not improve, we may need to seek additional sources of capital to support our operations.
We may elect to selectively pursue acquisitions. Accordingly, depending on the nature of the acquisition or currency, we may use cash or stock, or a combination of both, as acquisition currency. Our 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 any acquisitions. To the extent that significant amounts of cash are expended in connection with acquisitions, our liquidity position may be adversely impacted. In addition, there can be no assurance that we will be successful in completing acquisitions in the future. For a discussion of the risks associated with acquisitions, see the risk factor “Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows” set forth under Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the year ended January 1, 2011, as filed with the SEC.
The following tables indicate our working capital and cash flows for the periods indicated.
                 
    July 2, 2011     January 1, 2011  
    (Dollars in thousands)  
    (Unaudited)  
Working capital
  $ 191,492     $ 236,168  
                 
    First Six Months of     First Six Months of  
    Fiscal 2011     Fiscal 2010  
    (Dollars in thousands)  
    (Unaudited)  
Cash flows used in operating activities
  $ (101,046 )   $ (80,874 )
Cash flows provided by (used in) investing activities
    3,451       (607 )
Cash flows provided by financing activities
    89,407       70,845  
Working Capital
Working capital decreased by $44.7 million to $191.5 million at July 2, 2011 from $236.2 million at January 1, 2011. The decrease in working capital was primarily attributable to increases in our current maturities of long term debt related to the amendments to the revolving credit facility and mortgage. As part of the amendments to our revolving credit facility and the mortgage, we used the majority of the net proceeds obtained from the stock rights offering, subsequent to the quarter end, to repay outstanding amounts under the revolving credit facility and used cash held in escrow to pay down the mortgage in July 2011. Our accounts payable and overdrafts also increased as we purchased more products to meeting existing demand. These changes are partially offset by increases in receivables and inventory. We increased inventory levels to meet existing demand, and the increase in accounts receivable is due to increased sales volume due to seasonality.

 

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Operating Activities
During the first six months of fiscal 2011, cash flows used in operating activities totaled $101.0 million. The primary drivers of cash flow used in operations were increases in accounts receivable of $86.5 million due to an increase in sales volume coupled with seasonal payment patterns and an increase in inventories of $24.4 million due to an increase in purchases to meet current demand. These cash outflows were offset by an increase in accounts payable of $32.5 million due the seasonality of our business and the related purchasing patterns.
During the first six months of fiscal 2010, cash flows used in operating activities totaled $80.9 million. The primary drivers of cash flow used in operations were increases in accounts receivable of $82.2 million due to an increase in sales volume coupled with seasonal payment patterns and an increase in inventories of $53.0 million due to an increase in prices for certain structural products and an increase in purchases to meet current demand. These cash outflows were offset by an increase in accounts payable of $38.9 million due the seasonality of our business. In addition, changes in other working capital increased by $18.5 million largely due to a federal tax refund of $20.0 million received in fiscal 2010.
Investing Activities
During the first six months of fiscal 2011 and fiscal 2010, cash flows provided by (used in) investing activities totaled $3.5 million and $(0.6) million, respectively.
During the first six months of fiscal 2011 and fiscal 2010, our expenditures for property and equipment were $5.5 million and $1.3 million, respectively. These expenditures were used primarily to purchase a replacement property for a facility sold during the first quarter of 2011, computer equipment and leasehold improvements. Our capital expenditures for fiscal 2011 are anticipated to be paid from our revolving credit facility.
Proceeds from the disposition of property totaled $9.0 million and $0.7 million for the first six months of fiscal 2011 and fiscal 2010, respectively. The proceeds from disposition of assets in the first six months of fiscal 2011 were primarily related to the sale of our Nashville facility for $6.9 million.
Financing Activities
Net cash provided by financing activities was $89.4 million and $70.8 million during the first six months of fiscal 2011 and the first six months of fiscal 2010, respectively. The net cash provided by financing activities primarily reflected an increase in the balance of our revolving credit facility of $91.7 million and an increase in bank overdrafts of $5.7 million partially offset by an increase in restricted cash related to our mortgage of $7.8 million. The net cash provided by financing activities in the first six months of fiscal 2010 primarily reflected an increase in the balance of our revolving credit facility of $68.7 million and an increase in bank overdrafts of $9.9 million partially offset by an increase in restricted cash related to our mortgage of $6.6 million.
Debt and Credit Sources
As of July 2, 2011, we had outstanding borrowings of $188.9 million and excess availability of $94.0 million under the terms of our revolving credit facility. The interest rate on the revolving credit facility was 4.3% at July 2, 2011. As of July 2, 2011 and January 1, 2011, we had outstanding letters of credit totaling $2.5 million and $5.9 million, respectively, primarily for the purposes of securing collateral requirements under the interest rate swap (which was terminated in March of 2011), casualty insurance programs and for guaranteeing lease and certain other obligations.
On July 7, 2010, we reached an agreement with Wells Fargo Bank, National Association, successor by merger to Wachovia Bank, National Association, and the other signatories to our existing revolving credit facility, dated August 4, 2006, as amended, to amend the terms thereof. This amendment extends the date of final maturity of the facility to January 7, 2014 and decreases the maximum availability under the agreement from $500 million to $400 million. This decrease does not impact our current available borrowing capacity under the amended revolving credit facility since the borrowing base, which is based on eligible accounts receivable and inventory, currently permits less than $400 million in revolving credit facility borrowings. This amendment also includes an additional $100 million uncommitted accordion credit facility, which will permit us to increase the maximum borrowing capacity up to $500 million. As a result of reducing our maximum borrowing capacity from $500 million to $400 million, we recorded expense of $0.2 million in fiscal 2010 for the write-off of the old debt issuance costs associated with the reduction in borrowing capacity. We also incurred $6.5 million in new debt issuance costs, which we capitalized and will continue to amortize to interest expense over the renewed debt term.

 

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As of July 2, 2011, under the amended agreement, our revolving credit facility contains customary negative covenants and restrictions for asset based loans. Our most significant covenant is a requirement that we maintain a fixed charge ratio of 1.1 to 1.0 in the event our excess availability falls below the greater of $40.0 million or the amount equal to 15% of the lesser of the borrowing base or $60.0 million (subject to increase to $75.0 million if we exercise the uncommitted accordion credit facility in full) (the “Excess Availability Threshold”). The fixed charge ratio is calculated as EBITDA divided by the sum of cash payments for income taxes, interest expense, cash dividends, principal payments on debt, and capital expenditures. EBITDA is defined as BlueLinx Corporation’s net income before interest and tax expense, depreciation and amortization expense, and other non-cash charges. The fixed charge ratio requirement only applies to us when excess availability under our amended revolving credit facility is less than the Excess Availability Threshold for three consecutive business days. As of July 2, 2011 and through the time of the filing of this Form 10-Q, we were in compliance with all covenants. We had $94.0 and $103.4 million of availability as of July 2, 2011 and January 1, 2011, respectively. Our lowest level of fiscal month end availability in the last three years was $94.0 million as of July 2, 2011. We do not anticipate our excess availability in fiscal 2011 will drop below the Excess Availability Threshold. Should our excess availability fall below the Excess Availability Threshold for more than three consecutive business days, however, we would not meet the required fixed charge ratio with our current operating results. In addition, we must maintain a springing lock-box arrangement where customer remittances go directly to a lock-box maintained by our lenders and then are forwarded to our general bank accounts. Our outstanding borrowings are not reduced by these payments unless our excess availability is less than the Excess Availability Threshold, excluding unrestricted cash, for three consecutive business days or in the event of default. Our amended revolving credit facility does not contain a subjective acceleration clause which would allow our lenders to accelerate the scheduled maturities of our debt or to cancel our agreement. As described below, subsequent to the fiscal quarter ended July 2, 2011, an amendment to our revolving credit facility became effective that revises certain of the covenants described in this paragraph.
On May 10, 2011, we entered into an amendment to our revolving credit facility, which became effective on July 29, 2011. The amendment to the revolving credit facility (i) reduced the excess liquidity we are required to maintain under the revolving credit facility to the greater of $35 million or the amount equal to 15% of the lesser of our borrowing base or $400 million, (ii) increased the amount of our accounts receivable included in the calculation of the borrowing base to 87.5%, (iii) increased the applicable percentage of the liquidation value of our inventory included in the calculation of the borrowing base to 90% for the periods January to March 2012 and January to March 2013, subject to specified EBITDA targets, (iv) included in the calculation of our excess liquidity certain cash on the balance sheet and subject to a deposit account control agreement, and (v) decreased the amount of excess liquidity we are required to maintain in order to avoid being required to meet certain financial ratios and triggering additional limits on capital expenditures under the revolving credit facility to the greater of $30 million or the amount equal to 15% of the lesser of our borrowing base or $400 million.
On July 14, 2011, we entered into an amendment to the mortgage, which (i) eliminated the requirement to obtain lender approval for any transfer of equity interests that would reduce Cerberus ABP Investor LLC’s ownership in the Company and certain of our subsidiaries, directly or indirectly, to less than 51%, (ii) provided for the immediate prepayment of $38.3 million of the indebtedness under the mortgage without incurring a prepayment premium from funds currently held as collateral under the mortgage and, if certain conditions are met, will allow for an additional prepayment on or after July 30, 2014 from funds held as collateral without incurrence of a prepayment premium, (iii) allow us, at the lenders’ reasonable discretion, to use a portion of the cash held as collateral under the mortgage for specified alterations, repairs, replacements and other improvements to the mortgaged properties, and (iv) in the event certain financial conditions are met and the Company extends the Amended and Restated Master Lease by and among certain of our subsidiaries with respect to properties covered by the mortgage for an additional five years, we may request the lenders to disburse to the Company a portion of the cash held as collateral under the mortgage.
Effectiveness of the amendment to the revolving credit facility was contingent on the successful completion of the rights offering. In addition, consummation of the rights offering was contingent on entry by us into both the amendment to the revolving credit facility and the mortgage. We believe that the amounts available from our revolving credit facility and other sources are sufficient to fund our routine operations and capital requirements for the next 12 months. Payments of $38.3 million and approximately $56 million were made on the mortgage and the revolving credit facility, respectively, subsequent to the fiscal quarter ended July 2, 2011. If economic conditions, especially those related to the housing market, do not improve, we may need to seek additional sources of capital to support our operations.

 

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On June 12, 2006, we entered into an interest rate swap agreement with Goldman Sachs Capital Markets, to hedge against interest rate risks related to our variable rate revolving credit facility. The interest rate swap was terminated in March of 2011. The interest rate swap had a notional amount of $150 million and the terms called for us to receive interest monthly at a variable rate equal to 30-day LIBOR and to pay interest monthly at a fixed rate of 5.4%. This interest rate swap was designated as a cash flow hedge.
During fiscal 2009, we reduced our borrowings under the revolving credit facility by $100.0 million, which reduced outstanding debt below the interest rate swap’s notional amount of $150.0 million, at which point the hedge became ineffective in offsetting future changes in expected cash flows during the remaining term of the interest rate swap. We used cash on hand to pay down this portion of our revolving credit debt during the first, second, and third quarters of fiscal 2009. As a result, changes in the fair value of the instrument were recorded through earnings from the point in time that the revolving credit facility balance was reduced below the interest rate swap’s notional amount of $150.0 million, which was during the first quarter of fiscal 2009. The reduction in debt below the interest rate swap notional amount resulted in a pro rata reduction to accumulated other comprehensive income with an offsetting charge to interest expense. The remaining accumulated other comprehensive income was amortized over the life of the interest rate swap to interest expense.
Changes associated with the ineffective interest rate swap recognized in the Consolidated Statement of Operations for the quarter ended July 2, 2011 and for the period from January 1, 2011 to July 2, 2011 were approximately $1.8 million of income and are comprised of amortization of the remaining accumulated other comprehensive loss of the ineffective swap of $0.4 million offset by income of $2.2 million related to reducing the fair value of the ineffective interest rate swap liability to zero. Changes associated with the ineffective interest rate swap recognized in the Consolidated Statement of Operations for the period from April 4, 2010 to July 3, 2010 were approximately $1.3 million of income and are comprised of amortization of the remaining accumulated other comprehensive loss over the life of the ineffective swap of $0.5 million offset by income of $1.8 million related to current year changes in the fair value of the ineffective interest rate swap liability. Changes associated with the ineffective interest rate swap recognized in the Consolidated Statement of Operations for the period from January 3, 2010 to July 3, 2010 were approximately $2.1 million of income and are comprised of amortization of the remaining accumulated other comprehensive loss over the life of the ineffective swap of $1.0 million offset by income of $3.1 million related to current year changes in the fair value of the ineffective interest rate swap liability.
The following table presents a reconciliation of the unrealized losses related to our interest rate swap measured at fair value in accumulated other comprehensive loss as of July 2, 2011 (in thousands):
         
Balance at January 1, 2011
  $ 444  
Amortization of accumulated other comprehensive loss recorded to interest expense
    (444 )
 
     
Balance at July 2, 2011
  $  
 
     
The fair value of our swap liability at January 1, 2011 was $2.2 million.
Contractual Obligations
As part of the amendment to our mortgage and revolving credit facility, described above, payments of $38.3 million and approximately $56 million, respectively, were made in July 2011. There have been no other 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, 2011.
Critical Accounting Policies
Stock Based Compensation
During the first six months of fiscal 2011, the Compensation Committee granted 618,972 restricted shares of our common stock to certain of our officers. Restricted shares of 364,303 vested in the first six months of 2011 due to completion of the vesting term. For the second quarter of fiscal 2011 and for the first six months of fiscal 2011, our total stock-based compensation expense was $0.4 million and $1.1 million, respectively. For the second quarter of fiscal 2010 and for the first six months of fiscal 2010, our total stock-based compensation expense was $0.7 million and $1.9 million, respectively. We did not recognize related income tax benefits during these periods.
The preparation of our consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires our management to make judgments and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. There have been no material changes to our accounting policies from the information provided in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 1, 2011.

 

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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, 2011.
ITEM 4.   CONTROLS AND PROCEDURES
Our management performed an evaluation, as of the end of the period covered by this report on Form 10-Q, under the supervision of our chief executive officer and chief financial officer of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in rule 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS
During the first six months of fiscal 2011, there were no material changes to our previously disclosed legal proceedings. Additionally, we are, and from time to time may be, a party to routine legal proceedings incidental to the operation of our business. The outcome of any pending or threatened proceedings is not expected to have a material adverse effect on our financial condition, operating results or cash flows, based on our current understanding of the relevant facts. Legal expenses incurred related to these contingencies are generally expensed as incurred.
ITEM 1A.   RISK FACTORS
There has been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended January 1, 2011 as filed with the SEC.
ITEM 5.   OTHER EVENTS
At the 2011 Annual Meeting, stockholders approved an amendment to our 2006 Long-Term Equity Incentive Plan to increase the number of shares available for grant thereunder from 3,200,000 shares to 5,200,000 and to permit the grant of awards exempt from the deduction limit of Section 162(m) of the Internal Revenue Code. In addition, the stockholders also approved an amendment to our Short-Term Incentive Plan (the “STIP”) to give us the ability to structure incentive compensation under the STIP to avoid having the $1 million deduction limit of Section 162(m) of the Internal Revenue Code applied to certain parts of awards to be granted under the STIP. In approving the amendment, the stockholders also approved a complete restatement of the STIP Other than described above, no other material changes were made to either the 2006 Long-Term Equity Incentive Plan or the STIP.

 

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ITEM 6.   EXHIBITS
         
Exhibit    
Number   Description
       
 
  10.1    
Amended and Restated BlueLinx Holdings, Inc. 2006 Long-Term Equity Incentive Plan (as amended through May 19, 2011 and restated solely for purposes of filing pursuant to Item 601 of Regulation S-K) (Incorporated by reference to Appendix A to the proxy statement for the 2011 Annual Meeting of Stockholders filed on Schedule 14A with the Securities and Exchange Commission on April 18, 2011.)
       
 
  10.2    
BlueLinx Holdings, Inc. Short-Term Incentive Plan (as amended and restated effective January 1, 2011) (Incorporated by reference to Attachment B to the proxy statement for the 2011 Annual Meeting of Stockholders filed on Schedule 14A with the Securities and Exchange Commission on April 18, 2011.)
       
 
  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.
       
 
  101    
The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 2, 2011, formatted in Extensible Business Reporting Language (“XBRL”):
       
(i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.*
 
     
*   Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 

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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: August 5, 2011
  /s/ H. Douglas Goforth
 
H. Douglas Goforth
   
 
  Chief Financial Officer and Treasurer    

 

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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.

 

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