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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 27, 2020
 OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-32383
bl2a35.jpg
BlueLinx Holdings Inc.
 
 
(Exact name of registrant as specified in its charter)
 
 
Delaware
77-0627356
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
 
1950 Spectrum Circle, Suite 300

Marietta
GA
30067
(Address of principal executive offices)
(Zip Code)
 
(770) 953-7000
(Registrant’s telephone number, including area code)
 Not applicable
(Former name or former address, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
BXC
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No  
Indicate by check mark whether the registrant has submitted electronically (Section 232.405 of this chapter) every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer 
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
                                                                                             
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
As of July 31, 2020, there were 9,461,412 shares of BlueLinx Holdings Inc. common stock, par value $0.01, outstanding.





BLUELINX HOLDINGS INC.
Form 10-Q
For the Quarterly Period Ended June 27, 2020
 
INDEX
 
PAGE 
 
 
 
 
 
 


i



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
Net sales
$
698,776

 
$
706,448

 
$
1,360,846

 
$
1,345,149

Cost of sales
597,956

 
612,281

 
1,166,817

 
1,164,937

Gross profit
100,820

 
94,167

 
194,029

 
180,212

Operating expenses:
 
 
 

 
 

 
 

Selling, general, and administrative
69,710

 
70,150

 
143,314

 
139,235

Depreciation and amortization
7,063

 
7,503

 
14,698

 
14,831

Gains from sales of property

 
(9,760
)
 
(525
)
 
(9,760
)
Other operating expenses
1,962

 
3,951

 
6,127

 
9,276

Total operating expenses
78,735

 
71,844

 
163,614

 
153,582

Operating income
22,085

 
22,323

 
30,415

 
26,630

Non-operating expenses (income):
 

 
 

 
 

 
 

Interest expense, net
11,535

 
13,717

 
25,915

 
27,118

Other (income) expense, net
417

 
(45
)
 
180

 
105

Income (loss) before provision for (benefit from) income taxes
10,133

 
8,651

 
4,320

 
(593
)
Provision for (benefit from) income taxes
3,438

 
2,350

 
(1,588
)
 
(175
)
Net income (loss)
$
6,695

 
$
6,301

 
$
5,908

 
$
(418
)
 
 
 
 
 
 
 
 
Basic income (loss) per share
$
0.71

 
$
0.67

 
$
0.63

 
$
(0.04
)
Diluted income (loss) per share
$
0.71

 
$
0.67

 
$
0.63

 
$
(0.04
)
 
 
 
 
 
 
 
 
Comprehensive income (loss):
 

 
 

 
 

 
 

Net income (loss)
$
6,695

 
$
6,301

 
$
5,908

 
$
(418
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation, net of tax
17

 

 
20

 
7

Amortization of unrecognized pension loss, net of tax
114

 
208

 
310

 
431

Pension curtailment, net of tax

 
(1,486
)
 

 
(632
)
Other
2

 
1

 
(17
)
 
16

Total other comprehensive income (loss)
133

 
(1,277
)
 
313

 
(178
)
Comprehensive income (loss)
$
6,828

 
$
5,024

 
$
6,221

 
$
(596
)
 
See accompanying Notes.
 


1




BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
June 27, 2020
 
December 28, 2019
ASSETS
Current assets:
 
 
 
Cash
$
11,530

 
$
11,643

Receivables, less allowances of $3,911 and $3,236, respectively
264,642

 
192,872

Inventories, net
313,979

 
345,806

Other current assets
26,509

 
27,718

Total current assets
616,660

 
578,039

Property and equipment, at cost
308,616

 
308,067

Accumulated depreciation
(122,123
)
 
(112,299
)
Property and equipment, net
186,493

 
195,768

Operating lease right-of-use assets
50,802

 
54,408

Goodwill
47,772

 
47,772

Intangible assets, net
22,591

 
26,384

Deferred tax assets
54,494

 
53,993

Other non-current assets
20,292

 
15,061

Total assets
$
999,104

 
$
971,425

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
 

 
 

Accounts payable
$
158,920

 
$
132,348

Accrued compensation
11,140

 
7,639

Current maturities of long-term debt, net of debt issuance costs of $74 and $74, respectively
2,176

 
2,176

Finance lease liabilities - short-term
5,958

 
6,486

Operating lease liabilities - short-term
6,633

 
7,317

Real estate deferred gains - short-term
4,040

 
3,935

Other current liabilities
11,011

 
11,222

Total current liabilities
199,878

 
171,123

Non-current liabilities:
 

 
 

Long-term debt, net of debt issuance costs of $10,915 and $12,481, respectively
377,880

 
458,439

Finance lease liabilities - long-term
266,622

 
191,525

Operating lease liabilities - long-term
44,169

 
47,091

Real estate deferred gains - long-term
79,984

 
81,886

Pension benefit obligation
22,109

 
23,420

Other non-current liabilities
26,710

 
24,024

Total liabilities
1,017,352

 
997,508

Commitments and Contingencies


 


STOCKHOLDERS’ DEFICIT:
 

 
 

Common Stock, $0.01 par value, 20,000,000 shares authorized,
9,461,412 and 9,365,768 outstanding on June 27, 2020 and December 28, 2019, respectively
95

 
94

Additional paid-in capital
262,587

 
260,974

Accumulated other comprehensive loss
(34,250
)
 
(34,563
)
Accumulated stockholders’ deficit
(246,680
)
 
(252,588
)
Total stockholders’ deficit
(18,248
)
 
(26,083
)
Total liabilities and stockholders’ deficit
$
999,104

 
$
971,425

See accompanying Notes.

2




BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 27, 2020
 
June 29, 2019
Cash flows from operating activities:
 
 
 
Net income (loss)
$
5,908

 
$
(418
)
Adjustments to reconcile net income (loss) to cash provided by (used in) operations:
 
 
 
Benefit from income taxes
(1,588
)
 
(175
)
Depreciation and amortization
14,698

 
14,831

Amortization of debt issuance costs
1,903

 
1,614

Gains from sales of property
(525
)
 
(9,760
)
Amortization of deferred gain
(1,967
)
 
(1,902
)
Share-based compensation
1,858

 
1,341

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(71,770
)
 
(53,608
)
Inventories
31,827

 
(16,800
)
Accounts payable
26,572

 
25,672

Prepaid and other current assets
(3,200
)
 
(8,078
)
Other assets and liabilities
9,185

 
(5,766
)
Net cash provided by (used in) operating activities
12,901

 
(53,049
)
 
 
 
 
Cash flows from investing activities:
 

 
 
Acquisition of business, net of cash acquired

 
6,009

Proceeds from sale of assets
102

 
10,758

Property and equipment investments
(1,752
)
 
(1,784
)
Net cash (used in) provided by investing activities
(1,650
)
 
14,983

 
 
 
 
Cash flows from financing activities:
 

 
 
Borrowings on revolving credit facilities
350,236

 
365,519

Repayments on revolving credit facilities
(354,509
)
 
(329,683
)
Repayments on term loan
(77,852
)
 
(31,899
)
Proceeds from real estate financing transactions
78,263

 
44,822

Debt financing costs
(2,665
)
 
(2,359
)
Repurchase of shares to satisfy employee tax withholdings
(254
)
 
(208
)
Principal payments on finance lease liabilities
(4,583
)
 
(4,403
)
Net cash (used in) provided by financing activities
(11,364
)
 
41,789

 
 
 
 
Net change in cash
(113
)
 
3,723

Cash at beginning of period
11,643

 
8,939

Cash at end of period
$
11,530

 
$
12,662

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Net income tax (refunds) payments during the period
$
(223
)
 
$
3,057

Interest paid during the period
$
24,416

 
$
27,278


See accompanying Notes.

3




BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(In thousands)
(Unaudited)
 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated Deficit
 
Stockholders’ Deficit Total
 
Shares
 
Amount
 
 
 
 
Balance, December 28, 2019
9,366

 
$
94

 
$
260,974

 
$
(34,563
)
 
$
(252,588
)
 
$
(26,083
)
Net loss

 

 

 

 
(787
)
 
(787
)
Foreign currency translation, net of tax

 

 

 
3

 

 
3

Unrealized gain from pension plan, net of tax

 

 

 
196

 

 
196

Vesting of restricted stock units
2

 

 

 

 

 

Compensation related to share-based grants

 

 
1,004

 

 

 
1,004

Repurchase of shares to satisfy employee tax withholdings
(1
)
 

 
(7
)
 

 

 
(7
)
Other

 

 
9

 
(19
)
 

 
(10
)
Balance, March 28, 2020
9,367

 
94

 
261,980

 
(34,383
)
 
(253,375
)
 
(25,684
)
Net income

 

 

 

 
6,695

 
6,695

Foreign currency translation, net of tax

 

 

 
17

 

 
17

Unrealized gain from pension plan, net of tax

 

 

 
114

 

 
114

Vesting of restricted stock units
122

 
1

 

 

 

 
1

Compensation related to share-based grants

 

 
854

 

 

 
854

Repurchase of shares to satisfy employee tax withholdings
(28
)
 

 
(247
)
 

 

 
(247
)
Other

 

 

 
2

 

 
2

Balance, June 27, 2020
9,461

 
$
95

 
$
262,587

 
$
(34,250
)
 
$
(246,680
)
 
$
(18,248
)

 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated Deficit
 
Stockholders’ Deficit Total
 
Shares
 
Amount
 
 
 
 
Balance, December 29, 2018
9,294

 
$
92

 
$
258,596

 
$
(37,129
)
 
$
(236,222
)
 
$
(14,663
)
Net loss

 

 

 

 
(6,719
)
 
(6,719
)
Adoption of ASC 842, net of tax

 

 

 

 
1,291

 
1,291

Foreign currency translation, net of tax

 

 

 
7

 

 
7

Unrealized gain from pension plan, net of tax

 

 

 
1,077

 

 
1,077

Vesting of restricted stock units
49

 
1

 

 

 

 
1

Compensation related to share-based grants

 

 
706

 

 

 
706

Other

 

 

 
15

 

 
15

Balance, March 30, 2019
9,343

 
93

 
259,302

 
(36,030
)
 
(241,650
)
 
(18,285
)
Net income

 

 

 

 
6,301

 
6,301

Foreign currency translation, net of tax

 

 

 

 

 

Unrealized loss from pension plan, net of tax

 

 

 
(1,278
)
 

 
(1,278
)
Vesting of restricted stock units
32

 
1

 

 

 

 
1

Compensation related to share-based grants

 

 
635

 

 

 
635

Repurchase of shares to satisfy employee tax withholdings
(10
)
 

 
(208
)
 

 

 
(208
)
Other

 

 
(2
)
 
1

 

 
(1
)
Balance, June 29, 2019
9,365

 
$
94

 
$
259,727

 
$
(37,307
)
 
$
(235,349
)
 
$
(12,835
)
 

See accompanying Notes.


4




BLUELINX HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 27, 2020
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim Condensed Consolidated Financial Statements include the accounts of BlueLinx Holdings Inc. and its wholly owned subsidiaries (“the Company”). Our independent registered public accounting firm has not audited the accompanying interim financial statements. We derived the condensed consolidated balance sheet at June 27, 2020, from the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 (the “Fiscal 2019 Form 10-K”), as filed with the Securities and Exchange Commission on March 11, 2020. In the opinion of our management, the condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of our statements of operations and comprehensive loss for the three and six months ended June 27, 2020, and June 29, 2019, our balance sheets at June 27, 2020, and December 28, 2019, our statements of cash flows for the six months ended June 27, 2020, and June 29, 2019, and our statements of stockholders’ deficit for the three and six months ended June 27, 2020, and June 29, 2019.
 
We have condensed or omitted certain notes and other information from the interim condensed consolidated financial statements presented in this report. Therefore, these condensed consolidated interim financial statements should be read in conjunction with the Fiscal 2019 Form 10-K. In addition, certain prior period amounts have been reclassified to conform to the current period's presentation. These reclassifications did not materially impact operating income or consolidated net income (loss). The results for the three and six months ended June 27, 2020, are not necessarily indicative of results that may be expected for the full year ending January 2, 2021, or any other interim period.
We operate on a 5-4-4 fiscal calendar. Our fiscal year ends on the Saturday closest to December 31 of that fiscal year and may comprise 53 weeks in certain years. Our 2020 fiscal year contains 53 weeks and ends on January 2, 2021. Fiscal 2019 contained 52 weeks and ended on December 28, 2019.
Our financial statements are prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP), which requires us to make estimates based on assumptions about current and, for some estimates, future economic and market conditions, which affect reported amounts and related disclosures in our financial statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. Some of our estimates may be affected by the ongoing novel coronavirus (COVID-19) pandemic. The severity, magnitude, and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing, and difficult to predict. As a result, our accounting estimates and assumptions may change over time in response to COVID-19.
On April 13, 2018, we completed the acquisition of Cedar Creek Holdings, Inc. (“Cedar Creek”). Results for Cedar Creek are included in the consolidated financial information presented herein.
Reclassification of Prior Period Presentation
An adjustment has been made to the Condensed Consolidated Statements of Cash Flows for the six months ended June 27, 2020, and June 29, 2019, to include outstanding payments as part of the change in accounts payable within cash flows from operating activities.  In previous periods, this change was included within cash flows from financing activities. 

We have reclassified certain costs within the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months and six months ended June 27, 2020, and June 29, 2019, from selling, general and administrative to other operating expenses. These costs primarily relate to the integration of the acquisition of Cedar Creek.
Recently Adopted Accounting Standards
Leases.  In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” Topic 842 establishes a new lease accounting model. The most significant changes include the clarification of the definition of a lease, the requirement for lessees to recognize for all leases a right-of-use asset and a

5




corresponding lease liability in the consolidated balance sheet, and additional quantitative and qualitative disclosures which are designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. Expenses are recognized in the consolidated statement of income in a manner similar to prior accounting guidance. Lessor accounting under the new standard is substantially unchanged. We adopted this standard, and all related amendments thereto, effective December 30, 2018, the first day of our 2019 fiscal year, using a modified retrospective approach, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods presented. We have elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We have made an accounting policy election to keep leases with an initial term of 12 months or less off of the consolidated balance sheet. We implemented internal controls and a lease accounting information system to enable the preparation of financial information required by the new standard. The adoption of Topic 842 had a material impact on our condensed consolidated balance sheets but did not have a material impact on our condensed consolidated statements of operations and comprehensive loss. The most significant impact was the recognition of right-of-use assets and lease liabilities of $57.5 million on the condensed consolidated balance sheet as of the adoption date. Additionally, $1.7 million of deferred gains associated with sale-leaseback transactions was recorded as a cumulative-effect adjustment to accumulated deficit.
Accounting Standards Effective in Future Periods

Credit Impairment Losses. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This ASU sets forth a current expected credit loss (“CECL”) model which requires the measurement of all expected credit losses for financial instruments or other assets (e.g., trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model, is applicable to the measurement of credit losses on financial assets measured at amortized cost, and applies to some off-balance sheet credit exposures. The standard also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. ASU 2019-10 extended the effective date of ASU 2016-13 to interim and annual periods beginning after December 22, 2022, for certain public business entities, including smaller reporting companies. We have not completed our assessment of the standard, but we do not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
Defined Benefit Pension Plan. In August 2018, the FASB issued ASU No. 2018-14, “Compensation-Retirement-Benefits-Defined Benefit Plans-General (Subtopic 715-20).” The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing six previously required disclosures and adding two. The amendments also clarify certain other disclosure requirements. The amendments in this standard are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We have not completed our assessment of the standard, but we do not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
Income Taxes. In December 2019, the FASB issued ASU No.2019-12, “Income taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. The amendments in this standard are effective for interim periods and fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently assessing the impact of the new guidance, but do not expect the adoption to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
2. Goodwill and Other Intangible Assets
In connection with the acquisition of Cedar Creek, we acquired certain intangible assets. As of June 27, 2020, our intangible assets consist of goodwill and other intangible assets including customer relationships, noncompete agreements, and trade names.
Goodwill
Goodwill is the excess of the cost of an acquired entity over the fair value of tangible and intangible assets (including customer relationships, noncompete agreements, and trade names) acquired, and liabilities assumed, under acquisition accounting for business combinations. As of June 27, 2020, goodwill was $47.8 million.
Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to a reporting unit and to determine if the fair value of the reporting unit’s goodwill is less than its carrying amount.

6




We evaluate goodwill for impairment during the fourth quarter of each fiscal year. In addition, we will evaluate the carrying value for impairment between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Such events and indicators may include, without limitation, significant declines in the industries in which our products are used, significant changes in capital market conditions, and significant changes in our market capitalization. Our one reporting unit has a fair value that exceeds its book value, but a negative carrying amount of net assets, as of June 27, 2020.
Definite-Lived Intangible Assets.
On June 27, 2020, the gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets were as follows:
 
 
Gross carrying amounts
 
Accumulated
Amortization
(1) 
Net carrying amounts
 
 
     (In thousands)
Customer relationships
 
$
25,500

 
$
(8,393
)
 
$
17,107

Noncompete agreements
 
8,254

 
(4,564
)
 
3,690

Trade names
 
6,826

 
(5,032
)
 
1,794

Total
 
$
40,580

 
$
(17,989
)
 
$
22,591


(1) Intangible assets except customer relationships are amortized on a straight-line basis. Customer relationships are amortized on a double declining balance method.
Amortization Expense
The weighted average estimated useful life remaining for customer relationships, noncompete agreements, and trade names is approximately 10 years, 2 years, and 1 year, respectively. Amortization expense for the definite-lived intangible assets was $1.8 million and $3.8 million for the three- and six-month periods ended June 27, 2020, respectively. For the three- and six-month periods ended June 30, 2019, amortization expense was $2.0 million and $4.1 million, respectively.
Estimated amortization expense for definite-lived intangible assets for the remaining portion of 2020 and the next four fiscal years is as follows:
 
 
Estimated Amortization
 
 
(In thousands)
2020
 
$
3,645

2021
 
4,973

2022
 
3,111

2023
 
1,807

2024
 
1,505



3. Revenue Recognition
We recognize revenue when control of promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Contracts with our customers are generally in the form of standard terms and conditions of sale. From time to time, we may enter into specific contracts with some of our larger customers, which may affect delivery terms. Performance obligations in our contracts generally consist solely of delivery of goods. For all sales channel types, consisting of warehouse, direct, and reload sales, we typically satisfy our performance obligations upon shipment. Our customer payment terms are typical for our industry and may vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not deemed to be significant by us. For certain sales channels and/or products, our standard terms of payment may be as early as ten days.

7




In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis. Customer consigned inventory is maintained and stored by certain customers; however, ownership and risk of loss remain with us.
All revenues recognized are net of trade allowances (i.e., rebates), cash discounts, and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Adjustments to earnings resulting from revisions to estimates on discounts and returns have been insignificant for each of the reported periods. Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration.
The following table presents our revenues disaggregated by revenue source. Certain prior year amounts have been reclassified to conform to the current year product mix of structural and specialty products. Sales and usage-based taxes are excluded from revenues.
 
Three Months Ended
 
Six Months Ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
 
(In thousands)
 
(In thousands)
Structural products
$
249,571

 
$
224,528

 
$
490,349

 
$
421,314

Specialty products
449,205

 
481,920

 
870,497

 
923,835

Total net sales
$
698,776

 
$
706,448

 
$
1,360,846

 
$
1,345,149


The following table presents our revenues disaggregated by sales channel. Following the acquisition and integration of Cedar Creek, our reload sales were less distinct from warehouse sales, as they have been classified in prior periods. In addition, from time to time we may also make changes to certain intercompany allocations amongst sales channels. As a result, certain prior period amounts have been reclassified to conform to the current period revenues disaggregated by sales channel. Such reclassifications do not have an impact on total net sales as reported in any period. Sales and usage-based taxes are excluded from revenues.
 
Three Months Ended
 
Six Months Ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
 
(In thousands)
 
(In thousands)
Warehouse and reload
$
601,279

 
$
594,024

 
$
1,163,472

 
$
1,117,250

Direct
107,848

 
121,856

 
217,129

 
245,212

Customer discounts and rebates
(10,351
)
 
(9,432
)
 
(19,755
)
 
(17,313
)
Total net sales
$
698,776

 
$
706,448

 
$
1,360,846

 
$
1,345,149



Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general, and administrative expense.

We have made an accounting policy election to treat outbound shipping and handling activities as an expense.

4. Assets Held for Sale

Three of our non-operating properties were designated as held for sale as of June 27, 2020. These properties consisted of three former distribution facilities located in the Midwest and Southeast. We vacated these properties and designated them as held for sale during fiscal 2019 due to their proximity to other locations after the Cedar Creek acquisition. As of June 27, 2020, and December 28, 2019, the net book value of total assets held for sale was $1.1 million and was included in “Other current assets” in our Condensed Consolidated Balance Sheets. We continue to actively market all properties that are designated as held for sale, and we plan to sell these properties within the next 12 months.

8





5. Long-Term Debt

As of June 27, 2020, and December 28, 2019, long-term debt consisted of the following:
 
June 27, 2020
 
December 28, 2019
(In thousands)
Revolving Credit Facility (1)
$
322,223

 
$
326,496

Term Loan Facility (2)
68,822

 
146,674

Finance lease obligations (3)
272,580

 
198,011

 
663,625

 
671,181

Unamortized debt issuance costs
(10,989
)
 
(12,555
)
 
652,636

 
658,626

Less: current maturities of long-term debt
8,134

 
8,662

Long-term debt, net of current maturities
$
644,502

 
$
649,964


(1) The weighted average interest rate was 2.6 percent and 3.9 percent as of June 27, 2020 and December 28, 2019, respectively.
(2) The weighted average interest rate was 8.0 percent and 8.7 percent as of June 27, 2020 and December 28, 2019, respectively.
(3) Refer to Note 8, Leases, for interest rates associated with finance lease obligations.

Revolving Credit Facility

We have a revolving credit facility that we entered into in April 2018 with Wells Fargo Bank, National Association, as administrative agent, and certain other financial institutions party thereto (the “Revolving Credit Facility”), with a maturity date of October 10, 2022. The Revolving Credit facility includes a committed senior secured asset-based revolving loan and letter of credit facility of up to $600 million, and an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to $150 million. Our obligations under the Revolving Credit Facility are secured by a security interest in substantially all of our assets other than real property.

Loans under the Revolving Credit Facility bear interest at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.75 percent to 2.25 percent, with the amount of such margin determined based upon the average of our excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on LIBOR, or (ii) the administrative agent’s base rate plus a margin ranging from 0.75 percent to 1.25 percent, with the amount of such margin determined based upon the average of our excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on the base rate.
We amended the Revolving Credit Facility on January 31, 2020, to provide that (i) the “Seasonal Period” will run from November 15, 2019, through July 15, 2020, for the calendar year 2019, and from December 15 of each calendar year through April 15 of each immediately succeeding calendar year for the calendar year 2020 and thereafter, and (ii) the measurement period in the definition of “Cash Dominion Event” will be five consecutive business days instead of three consecutive business days. The adjustment to the Seasonal Period better aligns advance rates under the Revolving Credit Facility with the seasonality in our business and provided us with an enhanced borrowing base and greater liquidity through July 15, 2020.
As of June 27, 2020, we had outstanding borrowings of $322.2 million, excess availability of $138.1 million, and a weighted average interest rate of 2.6 percent. As of December 28, 2019, our principal balance was $326.5 million, excess availability was $80.0 million, and our weighted average interest rate was 3.9 percent.
The Revolving Credit Facility contains certain financial and other covenants, and our right to borrow under the Revolving Credit Facility is conditioned upon, among other things, our compliance with these covenants. We were in compliance with all covenants under the Revolving Credit Facility as of June 27, 2020.

Term Loan Facility

We have a term loan facility that we entered into in April 2018 with HPS Investments Partners, LLC, as administrative and collateral agent, and certain other financial institutions party thereto (the “Term Loan Facility”), with a maturity date of

9




October 13, 2023. The Term Loan Facility provides for a senior secured first lien loan facility in an initial aggregate principal amount of $180 million and is secured by a security interest in substantially all of our assets.
The Term Loan Facility requires monthly interest payments, and also requires quarterly principal payments of $402,282, in arrears, with the remaining balance due on the maturity date. The Term Loan Facility also requires certain mandatory prepayments of outstanding loans, subject to certain exceptions. The Term Loan Facility requires maintenance of a total net leverage ratio of 8.75 to 1.00 for the quarter ending June 27, 2020 and the third quarter of 2020, and 5.25 to 1.00 for the fourth quarter of 2020; ratio levels generally reduce over the remaining term of the Term Loan Facility. We were in compliance with all covenants under the Term Loan Facility as of June 27, 2020.
Borrowings under the Term Loan Facility may be made as Base Rate Loans or Eurodollar Rate Loans. The Base Rate Loans will bear interest at the rate per annum equal to (i) the greatest of the (a) U.S. prime lending rate published in The Wall Street Journal, (b) the Federal Funds Effective Rate plus 0.50 percent, and (c) the sum of the Adjusted Eurodollar Rate of one month plus 1.00 percent, provided that the Base Rate shall at no time be less than 2.00 percent per annum; plus (ii) the Applicable Margin, as described below. Eurodollar Rate Loans will bear interest at the rate per annum equal to (i) the ICE Benchmark Administration LIBOR Rate, provided that the Adjusted Eurodollar Rate shall at no time be less than 1.00 percent per annum; plus (ii) the Applicable Margin. The Applicable Margin will be 6.00 percent with respect to Base Rate Loans and 7.00 percent with respect to Eurodollar Rate Loans.
We amended the Term Loan Facility on December 31, 2019, to extend the period for satisfying the designated principal balance level required to maintain the modified total net leverage ratio covenant levels for the 2019 fourth and subsequent quarters thereunder, which was satisfied on January 31, 2020, through repayments from proceeds from the real estate financing transactions described in Note 8. On February 28, 2020, we further amended the Term Loan Facility to provide that we would not be subject to the facility’s total net leverage ratio covenant from and after the time, and then for so long as, the principal balance level under the facility is less than $45 million. On April 1, 2020, we amended the Term Loan Facility to, among other things, modify the total net leverage ratio covenant levels for the 2020 second and third quarters. All other total net leverage ratio covenant levels for prior and future quarters were unchanged.
As of June 27, 2020, we had outstanding borrowings of $68.8 million under the Term Loan Facility and an interest rate of 8.0 percent per annum. As of December 28, 2019, our principal balance was $146.7 million with an interest rate of 8.7 percent per annum. The decrease in the outstanding borrowings was due to net proceeds of the real estate financing transactions described in Note 8 being applied to the Term Loan Facility.

Finance Lease Obligations

Our finance lease liabilities consist of leases related to equipment and vehicles, and real estate, with the majority of those finance leases related to real estate. For more information on our finance lease obligations, refer to Note 8, Leases.

6. Net Periodic Pension (Benefit) Cost
The following table shows the components of our net periodic pension (benefit) cost:
 
Three Months Ended
 
Six Months Ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
 
(In thousands)
 
(In thousands)
Service cost
$

 
$
48

 
$

 
$
161

Interest cost on projected benefit obligation
723

 
973

 
1,446

 
2,018

Expected return on plan assets
(1,210
)
 
(1,295
)
 
(2,420
)
 
(2,489
)
Amortization of unrecognized loss
263

 
279

 
526

 
580

Net periodic pension (benefit) cost
$
(224
)
 
$
5

 
$
(448
)
 
$
270


7. Stock Compensation
Stock Compensation Expense
During the three months ended June 27, 2020, and June 29, 2019, we incurred stock compensation expense of $0.9 million and $0.6 million, respectively. During the six months ended June 27, 2020, and June 29, 2019, we incurred stock compensation

10




expense of $1.9 million and $1.3 million, respectively. The increase in our stock compensation expense for the three- and six-month periods is attributable to having more outstanding equity-based awards during these periods than in the prior year and the vesting of awards in connection with the departure of certain employees.
8. Leases
We have operating and finance leases for certain of our distribution facilities, office space, land, mobile fleet, and equipment. Many of our leases are non-cancelable and typically have a defined initial lease term, and some provide options at our election to renew for specified periods of time. The majority of our leases have remaining lease terms of 1 year to 15 years, some of which include one or more options to extend the leases for 5 years. Our leases generally provide for fixed annual rentals. Certain of our leases include provisions for escalating rent based on, among other things, contractually defined increases and/or changes in the Consumer Price Index (“CPI”). Some of our leases require us to pay taxes, insurance, and maintenance expenses associated with the leased assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We determine if an arrangement is a lease at inception and assess lease classification as either operating or finance at lease inception or modification. Operating lease right-of use (“ROU”) assets and liabilities are presented separately on the condensed consolidated balance sheets. Finance lease ROU assets are included in property and equipment and the finance lease obligations are presented separately in the condensed consolidated balance sheet. When a lease does not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. We have also made the accounting policy election to not separate lease components from non-lease components related to our mobile fleet asset class.
Finance Lease Liabilities
Our finance lease liabilities consist of leases related to equipment and vehicles, and real estate. As noted in the table below, a majority of our finance leases, formally known as capital leases, relate to real estate.

During 2017 and 2018, we entered into real estate financing transactions on warehouse facilities in Tampa, FL; Ft. Worth, TX; Bellingham, PA; Frederick, MD; Lawrenceville, GA; and Raleigh, NC. These transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms of 15 years with multiple 5-year renewal options, with one having a single 10-year renewal option. We accounted for these transactions in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 840, which was the lease accounting standard in effect at the inception of these arrangements. We have recorded these transactions as finance lease liabilities on our balance sheet. As of June 27, 2020 and December 28, 2019, total unrecognized deferred gains related to these transactions were $84.0 and $85.8 million, respectively.

On May 19, 2019, we completed a real estate financing transaction on a warehouse facility in University Park, IL for net proceeds of $21.8 million. On June 20, 2019, we completed a real estate financing transaction on a warehouse facility in Yulee, FL for net proceeds of $13.3 million. These two transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms of 15 years with multiple 5-year renewal options. Gross proceeds of these transactions were $45.0 million.

On December 31, 2019, we completed real estate financing transactions on warehouse facilities in Madison, TN; Kansas City, MO; Richmond, VA; and Bridgeton, MO for aggregate net proceeds of $27.2 million. On January 31, 2020, we completed real estate financing transactions on warehouse facilities in Charlotte, NC; Memphis, TN; Independence, KY: San Antonio, TX; Portland, ME; Denville, NJ; Yaphank, NY; Pensacola, FL; and Tallmadge, OH for aggregate net proceeds of $34.1 million. On February 28, 2020, we completed a real estate financing transaction on a warehouse facility in Elkhart, IN for net proceeds of $7.5 million. These transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms from 15 years to 18 years with multiple 5-year renewal options. Gross proceeds of these transactions were $78.3 million.

We determined that the transactions in fiscal 2019 and in the current fiscal year did not qualify as sales in accordance with ASC 842. Therefore, for accounting purposes, the transactions were not accounted for as sale-leaseback transactions, and no gain or loss was recorded. We determined that these leases qualified for finance lease treatment and recorded them accordingly. The net book value of the assets related to these transactions remains on our books as property and equipment and we continue to depreciate the assets over their remaining useful lives.


11




A portion of our real estate lease cost is generally subject to annual changes in the Consumer Price Index (“CPI”). The known changes to lease payments are included in the lease liability at lease commencement. Unknown changes related to CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. In addition, a subset of our vehicle lease cost is considered variable.
The following table presents our assets and liabilities related to our leases as of June 27, 2020 and December 28, 2019:
 
June 27, 2020
 
December 28, 2019
(In thousands)
Assets
Classification
 
 
 
Operating lease right-of-use assets
Operating lease right of use assets
$
50,802

 
$
54,408

Finance lease right-of-use assets (1)
Property and equipment, net
153,176

 
141,922

Total lease right-of-use assets
 
$
203,978

 
$
196,330

 
 
 
 
 
Liabilities
 
 
 
 
Current portion
 
 
 
 
Operating lease liabilities
Operating lease liabilities - short term
$
6,633

 
$
7,317

Finance lease liabilities
Finance lease liabilities - short term
5,958

 
6,486

Non-current portion
 
 
 
 
Operating lease liabilities
Operating lease liabilities - long term
44,169

 
47,091

Finance lease liabilities
Finance lease liabilities - long term
266,622

 
191,525

Total lease liabilities
 
$
323,382

 
$
252,419

(1) Finance lease right-of-use assets are presented net of accumulated amortization of $51.3 and $30.8 million as of June 27, 2020 and December 28, 2019, respectively.
The components of lease expense were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 27, 2020
 
June 29, 2019
June 27, 2020
 
June 29, 2019
 
(In thousands)
 
(In thousands)
Operating lease cost:
$
2,977

 
$
2,991

 
$
6,098

 
$
6,135

Finance lease cost:
 
 
 
 
 
 
 
   Amortization of right-of-use assets
$
3,513

 
$
3,220

 
$
6,878

 
$
6,117

   Interest on lease liabilities
6,557

 
4,130

 
12,721

 
7,378

Total finance lease costs
$
10,070

 
$
7,350

 
$
19,599

 
$
13,495


12




Supplemental cash flow information related to leases was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
 
(In thousands)
 
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
 
 
 
 
   Operating cash flows from operating leases
$
2,860

 
$
3,064

 
$
5,633

 
$
5,967

   Operating cash flows from finance leases
6,557

 
3,236

 
12,721

 
6,484

   Financing cash flows from finance leases
2,403

 
2,216

 
4,583

 
4,403

Right-of-use assets obtained in exchange for lease obligations
 
 
 
 
 
 
 
   Operating leases
$

 
$

 
$

 
$

   Finance leases

 
3,462

 

 
4,250


Supplemental balance sheet information related to leases was as follows:
 
June 27, 2020
 
December 28, 2019
 
(In thousands)
Finance leases
 
 
 
   Property and equipment
$
204,431

 
$
172,720

   Accumulated depreciation
(51,255
)
 
(30,798
)
Property and equipment, net
$
153,176

 
$
141,922

Weighted Average Remaining Lease Term (in years)
 
 
 
   Operating leases
11.66

 
11.71

   Finance leases
16.58

 
17.12

Weighted Average Discount Rate
 
 
 
   Operating leases
9.40
%
 
9.34
%
   Finance leases
9.75
%
 
10.11
%

The major categories of our finance lease liabilities as of June 27, 2020 and December 28, 2019 are as follows:
 
June 27, 2020
 
December 28, 2019
 
(In thousands)
Equipment and vehicles
$
29,162

 
$
32,471

Real estate
243,418

 
165,540

Total finance leases
$
272,580

 
$
198,011



13




As of June 27, 2020, maturities of lease liabilities were as follows:
 
Operating leases
 
Finance leases
 
(In thousands)
2020
$
11,109

 
$
15,385

2021
8,821

 
29,150

2022
7,876

 
28,449

2023
6,794

 
28,121

2024
6,441

 
27,793

Thereafter
47,514

 
408,524

Total lease payments
$
88,555

 
$
537,422

Less: imputed interest
(37,753
)
 
(264,842
)
Total
$
50,802

 
$
272,580



On December 28, 2019, maturities of lease liabilities were as follows:

 
Operating leases
 
Finance leases
 
(In thousands)
2020
$
11,348

 
$
24,002

2021
10,111

 
23,052

2022
8,048

 
22,230

2023
7,330

 
21,854

2024
6,413

 
21,380

Thereafter
50,901

 
327,439

Total lease payments
$
94,151

 
$
439,957

Less: imputed interest
(39,743
)
 
(241,946
)
Total
$
54,408

 
$
198,011



9. Commitments and Contingencies
Environmental and Legal Matters
From time to time, we are involved in various proceedings incidental to our businesses, and we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Although the ultimate outcome of these proceedings cannot be determined with certainty, based on presently available information management believes that adequate reserves have been established for probable losses with respect thereto and receivables recorded for expected receipts from settlements. Management further believes that, while the ultimate outcome of one or more of these matters could be material to operating results in any given quarter, it will not have a materially adverse effect on our consolidated financial condition, our results of operations, or our cash flows.
Collective Bargaining Agreements
As of June 27, 2020, we had 2,000 employees on a full-time basis, and approximately 21 percent of our employees were represented by various local labor union Collective Bargaining Agreements (“CBAs”). Approximately 1 percent of our employees are covered by three CBAs that are up for renewal in fiscal 2020. As of June 27, 2020, one of these CBAs was renewed and the remaining two are expected to be renegotiated later this year.
10. Accumulated Other Comprehensive Loss
Comprehensive loss includes both net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) results from items deferred from recognition into our Condensed Consolidated Statements of Operations and Comprehensive Loss. Accumulated other comprehensive loss is separately presented on our Condensed Consolidated Balance Sheets as part of stockholders’ deficit.

14




The changes in balances for each component of accumulated other comprehensive loss for the six months ended June 27, 2020, were as follows:
 
Foreign currency, net
of tax
 
Defined
benefit pension
plan, net of tax
 
Other,
net of tax
 
Total Accumulated Other Comprehensive Loss
 
(In thousands)
December 28, 2019, beginning balance
$
666

 
$
(35,441
)
 
$
212

 
$
(34,563
)
Other comprehensive income, net of tax (1)
20

 
310

 
(17
)
 
313

June 27, 2020, ending balance, net of tax
$
686

 
$
(35,131
)
 
$
195

 
$
(34,250
)

(1) For the six months ended June 27, 2020, the actuarial loss recognized in the Condensed Consolidated Statements of Operations and Comprehensive Loss as a component of net periodic pension cost was $0.5 million, net of tax of $0.2 million. Please see Note 6, Net Periodic Pension (Benefit) Cost, for further information.

11. Income Taxes

Our effective tax rate for the three months ended June 27, 2020, and June 29, 2019, was 33.9 percent and 27.2 percent, respectively. Our effective tax rate for the three months ended June 27, 2020 was impacted by (i) recording discrete tax expense of $0.4 million for a shortfall on the vesting of our restricted stock units, (ii) the permanent addback of certain nondeductible expenses, including meals and entertainment and officer’s compensation, and (iii) the effect of the partial valuation allowance for separate company state income tax losses and previously nondeductible interest under 163(j) of the Internal Revenue Code (“IRC”). Our effective tax rate for the three months ended June 29, 2019, was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, and the effect of the partial valuation allowance for separate company state income tax losses. In addition, we recorded discrete tax expense of $0.2 million for a shortfall on the vesting of our restricted stock units, which was offset by a $0.2 million discrete tax benefit for claiming tax credits.

Our effective tax rate was (36.8) percent and 29.5 percent, for the first six months of fiscal 2020 and 2019, respectively. Our effective tax rate for the six months ended June 27, 2020 was impacted by (i) the discrete tax benefit of $3.9 million resulting from the release of the valuation allowance associated with the nondeductible interest expense under Section 163(j) of the IRC as a result of changes under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was enacted on March 27, 2020, and contained, among other things, several tax-based measures meant to counteract the effects of the COVID-19 pandemic, to increase the allowable percentage from 30 percent of adjusted taxable income to 50 percent of adjusted taxable income, (ii) recording discrete tax expense of $0.4 million for a shortfall on the vesting of our restricted stock units, (iii) the permanent addback of certain nondeductible expenses, including meals and entertainment and nondeductible compensation, and (iv) the effect of the partial valuation allowance for separate company state income tax losses and previously nondeductible interest expense under Section 163(j) of the IRC. Our effective tax rate for the six months ended June 29, 2019, was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation and the effect of the valuation allowance for separate company state income tax losses. In addition, during the first six months of fiscal 2019, we recorded discrete tax expense of $0.2 million for a shortfall on vesting of our restricted stock units, which was offset by a $0.2 million discrete tax benefit for claiming state tax credits.

Our financial statements contain certain deferred tax assets which primarily resulted from tax benefits associated with the loss before income taxes in prior years, as well as net deferred income tax assets resulting from other temporary differences related to certain reserves, pension obligations, and differences between book and tax depreciation and amortization. We record a valuation allowance against our net deferred tax assets when we determine that, based on the weight of available evidence, it is more likely than not that our net deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences can be carried forward under tax law. Currently, we have a valuation allowance that covers (i) our separate company state net operating loss carryforwards and (ii) disallowed interest calculated pursuant to the changes made by the Tax Cuts and Jobs Act of 2017, as adjusted by the CARES Act.

At the end of each quarter, we evaluate the weight of available evidence (both positive and negative). We considered the recent reported income generated in the current quarter and prior years (adjusted for unusual one-time items) and income generated in 2017, including the prior year income from Cedar Creek. We also considered evidence related to the four sources of taxable income to determine whether such positive evidence outweighed the negative evidence. The evidence considered included:

15





future reversals of existing taxable temporary differences;
future taxable income exclusive of reversing temporary differences and carryforwards;
taxable income in prior carryback years if carryback is permitted under the tax law; and
tax planning strategies.

At the end of the first two fiscal quarters of 2020 and 2019, in our evaluation of the weight of available evidence, we concluded that the weight of the positive evidence outweighed the negative evidence. In addition to the evidence discussed above, we considered as positive evidence forecasted future taxable income, the detail scheduling of the timing of the reversal of our deferred tax assets and liabilities, and the evidence from business and tax planning strategies described below. Although we believe our estimates are reasonable, the ultimate determination of the appropriate amount of valuation allowance involves significant judgments. We believe that the change in control under IRC Section 382 resulting from the completion of the secondary offering on October 23, 2017, will not cause any of our federal net operating losses to expire unused because management has been effectively implementing a real estate strategy involving the sale and leaseback of real estate. This strategy is further supported by the transactions involving four warehouses in January 2018 and two warehouses during 2019. In the first quarter of 2020, the Company executed three more sale and leaseback transactions, involving a total of fourteen warehouse locations. Additionally, the acquisition of Cedar Creek did not generate any limitations under IRC Section 382 on Cedar Creek’s tax assets. We will continue to monitor any changes to our results of operations that may affect our estimates, including any impact of COVID-19 if applicable.

12. Income (Loss) per Share
We calculate basic income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. We calculate diluted income (loss) per share using the treasury stock method, by dividing net income (loss) by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including restricted stock units, and performance units. Due to the financial results for the six month period ended June 27, 2019, 0.1 million of incremental shares were excluded from the computation of diluted weighted averages outstanding, because their effect would be anti-dilutive.
The reconciliation of basic net income (loss) and diluted net income (loss) per common share for the three- and six-month periods ended June 27, 2020, and June 29, 2019, were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
 
(In thousands, except per share data)
 
(In thousands, except per share data)
Net income (loss)
$
6,695

 
$
6,301

 
$
5,908

 
$
(418
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
9,395

 
9,351

 
9,381

 
9,344

Dilutive effect of share-based awards
7

 
8

 
2

 

Weighted-average shares outstanding - diluted
9,402

 
9,359

 
$
9,383

 
$
9,344

 
 
 
 
 
 
 
 
Basic income (loss) per share
$
0.71

 
$
0.67


$
0.63


$
(0.04
)
Diluted income (loss) per share
$
0.71

 
$
0.67


$
0.63


$
(0.04
)


16




ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading distributor of building and industrial products in the U.S with a combination of market position and geographic coverage, the buying power of certain centralized procurement, and the strength of a locally focused sales force. BlueLinx is able to provide a wide range of value-added services and solutions to our customers and suppliers. We are headquartered in Marietta, Georgia, and we operate our distribution business through a broad network of distribution centers. We serve many major metropolitan areas in the U.S. and deliver building and industrial products to a variety of wholesale and retail customers. We distribute products in two principal categories: structural products and specialty products. Structural products include primarily plywood, oriented strand board, rebar and remesh, lumber, spruce and other wood products primarily used for structural support in construction projects. Structural products represented between 31 percent and 37 percent of our net sales over the past twelve months. Specialty products include primarily engineered wood products, moulding, siding and trim, cedar, metal products (excluding rebar and remesh), and insulation. Specialty products represented between 63 percent and 69 percent of our net sales over the past twelve months.
On April 13, 2018, we completed the acquisition of Cedar Creek. Cedar Creek was established in 1977 as a wholesale building materials distribution company that distributed wood products across the United States. Its products included specialty lumber, oriented strand board, siding, cedar, spruce, engineered wood products, and other building products. This acquisition allowed us to expand our product offerings, while maintaining our existing geographical footprint.
Recent Developments - Update on Impact of COVID-19 Pandemic
A novel strain of coronavirus (COVID-19) was first identified in December 2019 in certain Far East and European countries. On March 11, 2020, the spread of COVID-19 was declared a global pandemic by the World Health Organization, with a high concentration of cases in the United States. In response to the pandemic, governmental authorities around the world implemented numerous measures to combat the virus, such as travel bans and restrictions, quarantines, “shelter-in-place” orders, and business shutdowns. Over the course of the second quarter, these measures were successful in containing and reducing the spread of the COVID-19 virus in many locations, and many governmental authorities have begun to ease restrictions and execute plans to re-open businesses. However, the rates of infection, hospitalization, and mortality associated with the virus continue to fluctuate, and in some cases, they have increased, in many U.S. states. The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional, and national economies.

We began preparations for the pandemic in late February, and in early March we implemented policies and procedures to protect our associates, serve our customers, and support our suppliers. We also moved quickly to develop plans and take actions designed to give us financial and operating flexibility during the pandemic and over the course of the second quarter we continued to execute on those plans. To date, our business has been designated as “essential” in all states in which we operate, and we have continued to operate and provide service to our customers and suppliers. Also, notably, we have not experienced any significant supply chain disruptions as a result of the pandemic, and our supply chain has remained intact in all material respects.

During the quarter, our cross-functional COVID-19 Disaster Response Team implemented safety and hygiene protocols consistent with the Centers for Disease Control and Prevention (“CDC”) and local guidance, including mandating the use of face coverings where their use is required by local order; implementing enhanced cleaning and disinfecting procedures; using social distancing guidelines and physical separation where required; establishing more restrictive travel policies; implementing no-contact rules and visitor guidelines; implementing enhanced safety procedures for our drivers such as including contactless delivery procedures; using mobile work arrangements for employees whose work can be done remotely; and developing rapid response procedures for presumptive and confirmed COVID-19 cases at any of our locations.

We also took action on plans designed to reduce our cost structure, strengthen our balance sheet, and further increase liquidity in response to the pandemic. We took steps to reduce operating costs and optimize liquidity by pausing new hiring; limiting non-essential spending; closely monitoring and reviewing credit lines, open orders, overpaid accounts, and receivables aging; making substantial headcount and variable operating expense reductions in local markets correlating to demand declines; closely assessing and monitoring inventory availability and purchasing; placing approximately 15 percent of our corporate workforce on furlough, and making targeted reductions in corporate headcount; utilizing certain provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act; and ongoing review and monitoring of payroll and branch expenses. While

17




some of these actions are temporary in nature, we expect to sustain many of the cost reduction actions long-term, and we continue to remain focused on our cost structure and liquidity as the pandemic continues.

Overall, the impact of the pandemic on our business during the second quarter of 2020 was not as significant as we originally anticipated. Net sales and gross margin declined in April relative to the prior year period, but the commodity market for structural products began to stabilize and rebound in May and June. For the second quarter of 2020, net sales declined $7.7 million, primarily driven by the 2019 discontinuation of a siding product, and net income improved $0.4 million compared to the second quarter of 2019. For the first six months of 2020, net sales increased $15.7 million and net income improved $6.3 million as we moved from a net loss for the first six months of 2019 to net income for the first six months of 2020.

The extent of the impact of the pandemic on our business and sales for the second half of 2020 will depend on future developments, including, among others, the duration of the pandemic, the success of actions taken by governmental authorities to contain the pandemic and address its impact, the success of local return to work and business reopening plans, and the impact the COVID-19 pandemic has on demand in the markets we service. The trajectory of the pandemic continues to evolve rapidly, and we cannot predict the extent to which our financial condition, results of operations, or cash flows will ultimately be impacted. We are closely monitoring the impact of the pandemic on industry conditions, the progress of local return to work and reopening plans, and any pandemic-related restrictions that may have an impact on our business.
Industry Conditions
Many of the factors that cause our operations to fluctuate have historically been seasonal or cyclical in nature and we expect that to continue. Our operating results have historically been generally correlated with the level of single-family residential housing starts in the U.S. However, at any time, the demand for new homes is dependent on a variety of factors, including job growth, changes in population and demographics, the availability and cost of mortgage financing, the supply of new and existing homes, and consumer confidence.

The COVID-19 pandemic had a significant negative effect on single family housing starts during the second quarter of 2020. The U.S. Census Bureau reported that single family housing starts were down 13 percent for the second quarter of 2020 compared to the second quarter of 2019. However, the trend showed strong improvement over the course of the quarter. Housing starts declined 23 percent in April, 15 percent in May, and 2 percent in June, all compared to the same months in 2019. Additionally, July data from the National Association of Home Builders/Wells Fargo Housing Market Index shows a positive outlook in builder confidence in the market for newly built single-family homes. Low interest rates, shortages in existing home inventory, and a growing trend toward relocating away from populated metropolitan areas to areas with single-family homes may help drive long-term improvement in single-family housing starts.

Our operating results are also affected by commodity pricing, primarily the markets for wood-based commodities that we classify as structural products. After declining in the early part of April, lumber and panel prices increased for the balance of the quarter, staying at or above price levels from the second quarter of 2019. These market trends resulted in favorable revenue comparisons and enhanced gross margins in the second quarter of 2020 for many of the structural products that we sell.

Factors That Affect Our Operating Results
Our results of operations and financial performance are influenced by a variety of factors, including the following: the COVID-19 pandemic and other contagious illness outbreaks and their potential effects on our industry, suppliers and supply chains, and customers, our business, results of operations, cash flows, financial condition, and future prospects; changes in the prices, supply and/or demand for products that we distribute; inventory management and commodities pricing; new housing starts; repair and remodeling activity; general economic and business conditions in the U.S.; disintermediation by our customers and suppliers; acceptance by our customers of our branded and privately branded products; financial condition and credit worthiness of our customers; supply from key vendors; reliability of the technologies we utilize; activities of competitors; changes in significant operating expenses; fuel costs; risk of losses associated with accidents; exposure to product liability claims and other legal proceedings; changes in the availability of capital and interest rates; adverse weather patterns or conditions; acts of cyber intrusion or other disruptions to our information technology systems; tariffs, anti-dumping and counter-vailing duties, anti-dumping charges, and similar import costs and restrictions; and variations in the performance of the financial markets, including the credit markets.

18




Results of Operations
The following table sets forth our results of operations for the second quarter of fiscal 2020 and fiscal 2019:

Second Quarter of Fiscal 2020
 
% of
Net
Sales
 
Second Quarter of Fiscal 2019
 
% of
Net
Sales
 
(In thousands)
 
 
 
(In thousands)
 
 
Net sales
$
698,776

 
100.0%
 
$
706,448

 
100.0%
Gross profit
100,820

 
14.4%
 
94,167

 
13.3%
Selling, general, and administrative
69,710

 
10.0%
 
70,150

 
9.9%
Depreciation and amortization
7,063

 
1.0%
 
7,503

 
1.1%
Gains from sales of property

 
0.0%
 
(9,760
)
 
(1.4)%
Other operating expenses
1,962

 
0.3%
 
3,951

 
0.6%
Operating income
22,085

 
3.2%
 
22,323

 
3.2%
Interest expense, net
11,535

 
1.7%
 
13,717

 
1.9%
Other expense (income), net
417

 
0.1%
 
(45
)
 
0.0%
Income before provision for income taxes
10,133

 
1.5%
 
8,651

 
1.2%
Provision for income taxes
3,438

 
0.5%
 
2,350

 
0.3%
Net income
$
6,695

 
1.0%
 
$
6,301

 
0.9%

The following table sets forth our results of operations for the six-month periods of fiscal 2020 and fiscal 2019:
 
First Six Months of Fiscal 2020
 
% of
Net
Sales
 
First Six Months of 2019
 
% of
Net
Sales
 
(In thousands)
 
 
 
(In thousands)
 
 
Net sales
$
1,360,846

 
100.0%
 
$
1,345,149

 
100.0%
Gross profit
194,029

 
14.3%
 
180,212

 
13.4%
Selling, general, and administrative
143,314

 
10.5%
 
139,235

 
10.4%
Depreciation and amortization
14,698

 
1.1%
 
14,831

 
1.1%
Gains from sales of property
(525
)
 
0.0%
 
(9,760
)
 
(0.7)%
Other operating expenses
6,127

 
0.5%
 
9,276

 
0.7%
Operating income
30,415

 
2.2%
 
26,630

 
2.0%
Interest expense, net
25,915

 
1.9%
 
27,118

 
2.0%
Other expense, net
180

 
0.0%
 
105

 
0.0%
Income (loss) before benefit from income taxes
4,320

 
0.3%
 
(593
)
 
0.0%
Benefit from income taxes
(1,588
)
 
(0.1)%
 
(175
)
 
0.0%
Net income (loss)
$
5,908

 
0.4%
 
$
(418
)
 
0.0%

The following table sets forth net sales by product category for the three and six-month periods ending June 27, 2020, and June 29, 2019:
 
Three Months Ended
 
Six Months Ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
 
(In thousands)
 
(In thousands)
Structural products
$
249,571

 
$
224,528

 
$
490,349

 
$
421,314

Specialty products
449,205

 
481,920

 
870,497

 
923,835

Net sales
$
698,776

 
$
706,448


$
1,360,846


$
1,345,149



19




The following table sets forth gross profit and gross margin percentages by product category for the three and six-month periods of fiscal 2020 and 2019:
 
Three Months Ended
 
Six Months Ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
 
(Dollars in thousands)
 
(Dollars in thousands)
Structural products
$
23,100

 
$
17,388

 
$
47,334

 
$
36,121

Specialty products
77,720

 
76,779

 
146,695

 
144,091

Gross profit
$
100,820


$
94,167


$
194,029


$
180,212

Gross margin percentage by category
 

 
 

 
 

 
 

Structural products
9.3
%
 
7.7
%
 
9.7
%
 
8.6
%
Specialty products
17.3
%
 
15.9
%
 
16.9
%
 
15.6
%
Total
14.4
%
 
13.3
%
 
14.3
%
 
13.4
%

Second Quarter of Fiscal 2020 Compared to Second Quarter of Fiscal 2019

Net sales.  For the second quarter of fiscal 2020, net sales decreased 1.1 percent, or $7.7 million, compared to the second quarter of fiscal 2019. The sales decrease was driven by the loss of $15.9 million of sales related to a siding program that was discontinued in conjunction with our Cedar Creek integration activities in the prior year, partially offset by an increase in sales volume for our structural products and commodity price inflation.
Gross profit and gross margin.  For the second quarter of fiscal 2020, gross profit increased by $6.7 million, or 7.1 percent, compared to the second quarter of fiscal 2019, primarily due to improved gross margins on both our specialty and structural products businesses. Gross margin during the same period was 14.4 percent, an increase compared to 13.3 percent in the second quarter of fiscal 2019.
Selling, general, and administrative expenses.  The decrease in selling, general, and administrative expenses of 0.6 percent, or $0.4 million, for the second quarter of fiscal 2020, compared to the second quarter of fiscal 2019, is primarily due to decreases in our operational and logistics expenses, along with reductions in our fixed cost structure, partially offset by an increase in incentive compensation of approximately $4.0 million.
Depreciation and amortization expense. For the second quarter of fiscal 2020, depreciation and amortization expense decreased by $0.4 million to $7.1 million due to a lower base of depreciable assets.
Gains from sales of property. Gains from sales of property decreased by $9.8 million for the second quarter of fiscal 2020, compared to the second fiscal quarter of 2019, as we sold no property during the second quarter of 2020.
Other operating expenses. For the second quarter of fiscal 2020, other operating expenses decreased by $2.0 million, or 50.3 percent, compared to the second quarter of fiscal 2019, primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition, partially offset by severance expense incurred in relation to headcount reductions that occurred during the quarter.
Interest expense, net. Interest expense decreased by $2.2 million for the second quarter of fiscal 2020, compared to the second quarter of fiscal 2019. The decrease was largely attributable to a decrease in the average debt balance, as well as a reduction in the variable LIBOR rate that is a component of the interest rate on the Revolving Credit Facility and Term Loan Facility.
Provision for income taxes. Our effective tax rate was 33.9 percent and 27.2 percent for the second quarter of fiscal 2020 and 2019, respectively. Our effective tax rate for the second quarter of fiscal 2020 was impacted by (i) discrete tax expense of $0.4 million for a shortfall on restricted stock unit vesting, (ii) the permanent addback of certain nondeductible expenses, including meals and entertainment and officer’s compensation, and (iii) the effect of the partial valuation allowance for separate company state income tax losses and previously nondeductible interest under 163(j) of the IRC. Our effective tax rate for the second quarter of fiscal 2019 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, and the effect of the partial valuation allowance for separate company state income tax losses. In addition, we recorded discrete tax expense of $0.2 million for a shortfall on vesting of our restricted stock units, which was offset by a $0.2 million discrete tax benefit for claiming state tax credits.
Net income. Our net income improved over the prior year period due to increased gross margins and reduced costs.

20




First Six Months of Fiscal 2020 Compared to First Six Months of Fiscal 2019
Net sales.  For the first six months of fiscal 2020, net sales increased 1.2 percent, or $15.7 million, compared to the first six months of fiscal 2019. The sales increase was driven by higher sales volumes and commodity price inflation, partially offset by the loss of $47.8 million of sales related to a siding program that was discontinued in conjunction with our Cedar Creek integration activities in the prior year.
Gross profit and gross margin.  For the first six months of fiscal 2020, gross profit increased by $13.8 million, or 7.7 percent, compared to the first six months of fiscal 2019, primarily due to increased sales revenue and improved gross margins on both our specialty and structural products businesses. Gross margin during the same period was 14.3 percent, an increase compared to 13.4 percent in the first six months of fiscal 2019.
Selling, general, and administrative expenses.  The increase in selling, general, and administrative expenses of 2.9 percent, or $4.1 million, for the first six months of fiscal 2020, compared to the first six months of fiscal 2019, is primarily due to an increase in incentive compensation of approximately $4.0 million.
Depreciation and amortization expense. For the first six months of fiscal 2020, depreciation and amortization expense decreased by $0.1 million to $14.7 million compared to the first six months of fiscal 2019, due to a lower base of depreciable assets.
Gains from sales of property. Gains from sales of property decreased by $9.2 million for the first six months of fiscal 2020, compared to the first six months of fiscal 2019, due to only minor adjustments to previous transactions being recorded in 2020.
Other operating expenses. For the first six months of fiscal 2020, other operating expenses decreased by $3.1 million, or 33.9 percent, compared to the first six months of fiscal 2019, primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition, partially offset by severance expense incurred in relation to headcount reductions that occurred during the quarter.
Interest expense. Interest expense decreased by $1.2 million for the first six months of fiscal 2020, compared to the first six months of fiscal 2019. The decrease was largely attributable to a decrease in the average debt balance, as well as a reduction in the variable LIBOR rate that is a component of the interest rate on the Revolving Credit Facility and Term Loan Facility.
Benefit from income taxes. Our effective tax rate was (36.8) percent and 29.5 percent for the first six months of fiscal 2020 and 2019, respectively. Our effective tax rate for the first six months of fiscal 2020 was impacted by (i) the discrete tax benefit of $3.9 million resulting from the release of the valuation allowance associated with the nondeductible interest expense under IRC Section 163(j) as a result of the CARES Act changing the allowable percentage from 30 percent of adjusted taxable income to 50 percent of adjusted taxable income, (ii) recording discrete tax expense of $0.4 million for a shortfall on vesting of our restricted stock units, (iii) the permanent addback of certain nondeductible expenses, including meals and entertainment and nondeductible compensation, and (iv) the effect of the partial valuation allowance for separate company state income tax losses and previously nondeductible interest expense under Section 163(j) of the IRC. Our effective tax rate for the first six months of fiscal 2019 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, and the effect of the partial valuation allowance for separate company state income tax losses. In addition, we recorded discrete tax expense of $0.2 million for a shortfall on vesting of our restricted stock units, which was offset by a $0.2 million discrete tax benefit for claiming state tax credits.
Net income (loss). Our net loss improved to net income from the prior year period due to higher sales, increased gross margins, and reduced costs associated with the acquisition of Cedar Creek.
Seasonality
We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors common in the building products distribution industry. The first and fourth fiscal quarters are typically our lower volume quarters, due to the impact of poor weather on the construction market. Our second and third fiscal quarters are typically our higher volume quarters, reflecting an increase in construction, due to more favorable weather conditions. Assuming no change in underlying inventory costs, our working capital generally increases in the fiscal second and third quarters, reflecting increased seasonal demand. However, due to the COVID-19 pandemic, we could experience disruptions to our typical seasonality trends during the rest of 2020.

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Liquidity and Capital Resources
We expect our primary sources of liquidity to be cash flows from sales in the normal course of our operations and borrowings under our Revolving Credit Facility. We expect that these sources will fund our ongoing cash requirements for the foreseeable future. We believe that, assuming that our operations are not significantly impacted by the COVID-19 pandemic for a prolonged period, our sales in the normal course of our operations, and amounts currently available from our Revolving Credit Facility and other sources, will be sufficient to fund our routine operations, including working capital requirements, for at least the next twelve months.
Revolving Credit Facility
In April 2018, we amended and restated our Revolving Credit Facility to provide for a senior secured revolving loan and letter of credit facility of up to $600 million and an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to $150 million. If we obtain the full amount of the additional increases in commitments, the Revolving Credit Facility will allow borrowings of up to $750 million. Borrowings under the Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the Revolving Credit Facility). Letters of credit in an aggregate amount of up to $30 million are also available under the Revolving Credit Facility, which would reduce the amount of the revolving loans available thereunder. Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.75 percent to 2.25 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on LIBOR, or (ii) the administrative agent’s base rate plus a margin ranging from 0.75 percent to 1.25 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate.
If excess availability falls below the greater of (i) $50 million and (ii) 10 percent of the lesser of (a) the borrowing base and (b) the maximum permitted credit at such time, the Revolving Credit Facility requires maintenance of a fixed charge coverage ratio of 1.0 to 1.0 until excess availability has been at least the greater of (i) $50 million and (ii) 10 percent of the lesser of (a) the borrowing base and (b) the maximum permitted credit at such time for a period of 30 consecutive days.

We amended the Revolving Credit Facility on January 31, 2020, to provide that (i) the “Seasonal Period” will run from November 15, 2019, through July 15, 2020, for the calendar year 2019, and from December 15 of each calendar year through April 15 of each immediately succeeding calendar year for the calendar year 2020 and thereafter, and (ii) the measurement period in the definition of “Cash Dominion Event” will be five consecutive business days instead of three consecutive business days.
As of June 27, 2020, we had outstanding borrowings of $322.2 million, excess availability of $138.1 million, and a weighted average interest rate of 2.6 percent under the Revolving Credit Facility. As of December 28, 2019, our principal balance was $326.5 million, excess availability was $80.0 million, and our weighted average interest rate was 3.9 percent.
We were in compliance with all covenants under the Revolving Credit Facility as of June 27, 2020.
Term Loan Facility
In April 2018, we entered into our Term Loan Facility with HPS Investment Partners, LLC, and other financial institutions as party thereto, which provides for a term loan of $180 million secured by substantially all of our assets. Borrowings under the Term Loan Facility may be made as Base Rate Loans or Eurodollar Rate Loans. The Base Rate Loans will bear interest at the rate per annum equal to (i) the greatest of the (a) U.S. prime lending rate published in The Wall Street Journal, (b) the Federal Funds Effective Rate plus 0.50 percent, and (c) the sum of the Adjusted Eurodollar Rate of one month plus 1.00 percent, provided that the Base Rate shall at no time be less than 2.00 percent per annum; plus (ii) the Applicable Margin, as described below. Eurodollar Rate Loans will bear interest at the rate per annum equal to (i) the ICE Benchmark Administration LIBOR Rate, provided that the Adjusted Eurodollar Rate shall at no time be less than 1.00 percent per annum; plus (ii) the Applicable Margin. The Applicable Margin will be 6.00 percent with respect to Base Rate Loans and 7.00 percent with respect to Eurodollar Rate Loans.
We amended the Term Loan Facility on December 31, 2019, to extend the period for satisfying the designated principal balance level required to maintain the modified total net leverage ratio covenant levels for the 2019 fourth and subsequent quarters thereunder, which was satisfied on January 31, 2020, through repayments from proceeds from the real estate financing transactions described in Note 8. On February 28, 2020, we further amended the Term Loan Facility to provide that we would not be subject to the facility’s total net leverage ratio covenant from and after the time, and then for so long as, the principal balance level under the facility is less than $45 million. On April 1, 2020, we amended the Term Loan Facility by, among other

22




things, modifying the total net leverage ratio covenant levels for the 2020 second and third quarters. All other total net leverage ratio covenant levels for prior and future quarters were unchanged.

The Term Loan Facility permits us to enter into real estate sale leaseback transactions with the net proceeds therefrom to be used for repayment of indebtedness under the facility, subject to payment of an applicable prepayment premium. In addition, proceeds from the sale of “Specified Properties” will be used for the repayment of indebtedness under the Term Loan Facility, subject to payment of an applicable prepayment premium, or, under certain circumstances, repayment of indebtedness under our Revolving Credit Facility.

Unless and until the total net leverage ratio covenant is eliminated, the Term Loan Facility requires maintenance of a total net leverage ratio of 8.75 to 1.00 for the quarter ending June 27, 2020, and the third quarter of 2020, and 5.25 to 1.00 for the fourth quarter of 2020, with ratio levels generally reducing over the remaining term of the Term Loan Facility.

The calculation of the total net leverage ratio for any period is generally determined by taking our “Consolidated Total Debt” and dividing it by our “Consolidated EBITDA,” as those terms are defined in the Term Loan Facility. “Consolidated Total Debt” is generally determined by adding the balance of our term loan, the prior month’s average balance of our Revolving Credit Facility, and our equipment finance lease liability, and reducing that amount by unrestricted cash up to $10.0 million.  On June 27, 2020, the Term Loan Facility balance was $68.8 million, the average balance of the Revolving Credit Facility for the prior month was $320.1 million, our equipment finance lease liability was $29.2 million, and unrestricted cash was $10.0 million.  Liabilities related to sale-leaseback transactions are excluded from the calculation.  “Consolidated EBITDA” is generally determined by taking the Adjusted EBITDA that we report for the most recent four consecutive quarters and adjusting items specified under the Term Loan Facility. The adjustments to Adjusted EBITDA for calculating Consolidated EBITDA under the Term Loan Facility as of the end of the second quarter of 2020 for the most recent four consecutive quarters were approximately $3.0 million.

We were in compliance with all covenants under the Term Loan Facility as of June 27, 2020.
As of June 27, 2020, we had outstanding borrowings of $68.8 million under our Term Loan Facility and an interest rate of 8.0 percent per annum. As of December 28, 2019, our principal balance was $146.7 million with an interest rate of 8.7 percent per annum. The decrease in the outstanding borrowings was due to net proceeds of the real estate financing transactions described in Note 8 being applied to the Term Loan Facility.
Finance Lease Commitments
Our finance lease liabilities consist of leases related to equipment and vehicles, and to real estate, with the majority of those finance lease commitments relating to the real estate financing transactions that we have completed in recent years. During fiscal 2017 and 2018, we completed real estate financing transactions on six warehouse facilities; during 2019, we completed real estate financing transactions on two warehouse facilities; and, to date in fiscal 2020, we completed real estate financing transactions on fourteen warehouse facilities. We recognized finance lease assets and obligations as a result of each of these transactions. Our total finance lease commitments, including the properties associated with these transactions, totaled $272.6 million as of June 27, 2020.
Interest Rates
Our Revolving Credit Facility and our Term Loan Facility include available interest rate options based on the London Inter-bank Offered Rate (LIBOR). It is widely expected that LIBOR will be discontinued after 2021, and the U.S. and other countries are currently working to replace LIBOR with alternative reference rates. The consequences of these developments with respect to LIBOR cannot be entirely predicted; however, we do not believe that the discontinuation of LIBOR as a reference rate in our loan agreements will have a material adverse effect on our financial position or materially affect our interest expense.











23




Sources and Uses of Cash
Operating Activities
Net cash provided by operating activities for the first six months of fiscal 2020 was $12.9 million, compared to net cash used in operating activities of $53.0 million in the first six months of fiscal 2019. The increase in cash provided by operating activities during the first six months of fiscal 2020 was a result of reporting net income for the current period and a decrease in working capital compared to the prior year period.
Investing Activities
Net cash used in investing activities for the first six months of fiscal 2020 was $1.7 million compared to net cash provided by investing activities of $15.0 million in the first six months of fiscal 2019. The net cash provided by investing activities in the prior year was due to $6.0 million that was returned from escrow after the Cedar Creek acquisition was finalized and $10.8 million of proceeds from asset sales, offset by cash paid for property and equipment investments of $1.8 million; cash paid for property and equipment investments was consistent in both periods.
Financing Activities
Net cash used in financing activities totaled $11.4 million for the first six months of fiscal 2020, compared to net cash provided by financing activities of $41.8 million for the first six months of fiscal 2019. The decrease in net cash provided by financing activities is primarily due to an increase in repayments on our Revolving Credit Facility and Term Loan Facility of $70.8 million and a reduction in borrowings on our Revolving Credit Facility of $15.3 million, offset by an increase in proceeds from real estate financing transactions of $33.4 million.
Operating Working Capital (1) 
Selected financial information
 
June 27, 2020
 
December 28, 2019
 
June 29, 2019
 
(In thousands)
Current assets:
 
 
 
 
 
Cash
$
11,530

 
$
11,643

 
$
12,662

Receivables, less allowance for doubtful accounts
264,642

 
192,872

 
262,042

Inventories, net
313,979

 
345,806

 
358,652

 
$
590,151

 
$
550,321

 
$
633,356

 
 
 
 
 
 
Current liabilities:
 

 
 

 
 
Accounts payable (2)
$
158,920

 
$
132,348

 
$
174,860

 
$
158,920

 
$
132,348

 
$
174,860

 
 
 
 
 
 
Operating working capital
$
431,231

 
$
417,973

 
$
458,496


(1) Operating working capital is defined as the sum of cash, receivables, and inventory less accounts payable.
(2) Accounts payable includes outstanding payments of $19.5 million, $16.1 million, and $37.1 million as of June 27, 2020, December 28, 2019, and June 29, 2019, respectively. Outstanding payments represent outstanding checks and electronic payments that have not been presented for payment as of the end of the period; these amounts are typically funded within 24 hours.
Operating working capital is an important measurement we use to determine the efficiencies of our operations and our ability to readily convert assets into cash.
Operating working capital of $431.2 million on June 27, 2020, compared to $418.0 million as of December 28, 2019, increased on a net basis by approximately $13.3 million. The increase in operating working capital is primarily driven by seasonal increases in accounts receivable, offset by decreases in inventory due to the company’s tighter management of inventory levels. The net increase in current assets was offset by an increase in accounts payable due to recent inventory purchases during the month of June.


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Operating working capital of $431.2 million on June 27, 2020, compared to $458.5 million as of June 29, 2019, decreased by $27.3 million, driven by decreases in the company’s inventory level, offset by a decrease in accounts payable.

Critical Accounting Policies

The preparation of our consolidated financial statements and related disclosures in conformity with GAAP requires our management to make judgments and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. There have been no material changes to our critical accounting policies from the information provided in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019.

Forward-Looking Statements

This report contains forward-looking statements. Forward-looking statements include, without limitation, any statement that predicts, forecasts, indicates or implies future results, performance, liquidity levels or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will be,” “will likely continue,” “will likely result” or words or phrases of similar meaning. The forward-looking statements in this report include statements about the COVID-19 pandemic, its duration and effects, and its potential effects on our business and results of operations; anticipated effects of adopting certain accounting standards; estimated future annual amortization expense; potential changes to estimates made in connection with revenue recognition; the expected outcome of legal proceedings; industry conditions; seasonality; and liquidity and capital resources.
Forward-looking statements are based on estimates and assumptions made by our management that, although believed by us to be reasonable, are inherently uncertain. Forward-looking statements involve risks and uncertainties that may cause our business, strategy, or actual results to differ materially from the forward-looking statements. These risks and uncertainties include those discussed under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 28, 2019, and those discussed elsewhere in this report (including Item 1A of Part II of this report) and in future reports that we file with the SEC. We operate in a changing environment in which new risks can emerge from time to time. It is not possible for management to predict all of these risks, nor can it assess the extent to which any factor, or a combination of factors, may cause our business, strategy, or actual results to differ materially from those contained in forward-looking statements. Factors that may cause these differences include, among other things: the COVID-19 pandemic and other contagious illness outbreaks and their potential effects on our industry, suppliers and supply chain, and customers, and our business, results of operations, cash flows, financial condition, and future prospects; our ability to integrate and realize anticipated synergies from acquisitions; loss of material customers, suppliers, or product lines in connection with acquisitions; operational disruption in connection with the integration of acquisitions; our indebtedness and its related limitations; sufficiency of cash flows and capital resources; our ability to monetize real estate assets; fluctuations in commodity prices; adverse housing market conditions; disintermediation by customers and suppliers; changes in prices, supply and/or demand for our products; inventory management; competitive industry pressures; industry consolidation; product shortages; loss of and dependence on key suppliers and manufacturers; import taxes and costs, including new or increased tariffs, anti-dumping duties, countervailing duties or similar duties; our ability to successfully implement our strategic initiatives; fluctuations in operating results; sale-leaseback transactions and their effects; real estate leases; changes in interest rates; exposure to product liability claims; our ability to complete offerings under our shelf registration statement on favorable terms, or at all; changes in our product mix; petroleum prices; information technology security and business interruption risks; litigation and legal proceedings; natural disasters and unexpected events; activities of activist stockholders; labor and union matters; limits on net operating loss carryovers; pension plan assumptions and liabilities; risks related to our internal controls; retention of associates and key personnel; federal, state, local and other regulations, including environmental laws and regulations; and changes in accounting principles. Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Our management performed an evaluation, as of the end of the period covered by this report on Form 10-Q, under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

During the period covered by this report, other than described below, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.






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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the second quarter of fiscal 2020, there were no material changes to our legal proceedings as disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019. 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
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A.Risk Factors" in our Annual Report on Form 10-K for the year ended December 28, 2019, as updated and supplemented below, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

Our business, results of operations, and financial condition may be materially adversely impacted by the COVID-19 pandemic.

A novel strain of coronavirus (COVID-19) was first identified in December 2019 in certain Far East and European countries. On March 11, 2020, the spread of COVID-19 was declared a global pandemic by the World Health Organization, with a high concentration of cases in the United States. On March 13, 2020, the United States declared a national emergency concerning the pandemic, and many U.S. states and municipalities have declared public health emergencies. In response, U.S. federal, state, and local governments and agencies have enacted wide-ranging actions to combat the pandemic, including “shelter-in-place” orders and quarantines, social distancing mandates, and face covering and hygiene protocols. In addition, some U.S. states and municipalities have placed significant limits on non-essential construction projects. These actions have substantially restricted daily activities for individuals and businesses, and have caused many businesses to curtail or cease normal operations.

The widespread health crisis created by the COVID-19 pandemic and the actions taken to combat it have had a significant adverse effect on the economies and financial markets of the U.S. and many other countries. The U.S. has experienced deteriorating economic conditions in many major markets, including increased unemployment, decreases in disposable income, declines in consumer confidence, general economic slowdowns, and significant volatility in financial markets. These deteriorating economic conditions may reduce demand for our products, which could materially reduce our sales and profitability. In addition, any bankruptcy or financial distress of our customers or suppliers due to deterioration in economic conditions could result in other significant negative impacts to our business including reduced sales, decreased collectability of accounts receivable, impaired credit, an ineffective supply chain, loss of credit from our suppliers, and a reduction in certain key product brands. Deteriorating economic conditions and reduced sales and profitability could also limit the availability of credit, or increase our borrowing costs, including by requiring additional collateral. We also may be required to record impairment charges with respect to assets whose fair values may be negatively affected by the effects of the pandemic on our operations.

In addition, although our operations and those of most of our direct customers and suppliers are currently considered “essential” and are therefore exempt from state and local business closure orders, these exemptions may not mitigate the impact to our markets caused by the COVID-19 pandemic, and they may be curtailed or revoked in the future. If these exemptions are curtailed or revoked, it could require us, or our customers or suppliers, to further limit our operations or suspend them altogether, which would adversely impact our business, operating results, and financial condition. The pandemic has also caused, and may continue to cause, disruption to the global supply chain, which could impact our ability to source products from our suppliers, many of whom are located outside of the United States, including China.

In response to the pandemic, we have instituted a number of actions to protect our workforce, including restricting business travel, imposing mandatory quarantine periods for employees who have traveled to areas impacted by the pandemic, modifying office functions to allow employees to work remotely, and modifying our warehouse and delivery operations to enforce enhanced safety protocols around social distancing, hygiene, and health screening. While all of these steps are necessary and appropriate in light of the pandemic, they, coupled with state and local business closure orders and regulations, do impact our ability to operate our business in its ordinary and traditional course, and they have and may continue to cause us to experience reductions in productivity and disruptions to our business routines while they remain in place.

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While many states have begun the process of lifting or curtaining shelter-in-place, business closure, and related orders, the rates of infection, hospitalization, and mortality associated with the COVID-19 virus continue to fluctuate, and have increased in some localities. The potential magnitude or duration of the business and economic impacts from this pandemic continue to remain uncertain, and many of the associated negative trends may continue through fiscal 2020. While the initial negative impact on our business from the COVID-19 pandemic has not been as significant as we initially expected, it could become more severe. Any of the negative impacts of the COVID-19 pandemic, including those described above, alone or in combination with others, may have a material adverse effect on our results of operations, financial condition, and cash flows. In addition, any of these negative impacts, alone or in combination with others, could exacerbate many of the risks described in Part I, “Item 1A. Risk Factors”, in our Annual Report on Form 10-K for the year ended December 28, 2019, and the other risks described in this report. The full extent to which the COVID-19 pandemic will negatively affect our results of operations, financial condition, and cash flows will depend on future developments that are highly uncertain and cannot be predicted.

We have been notified that we are not in compliance with certain listing standards of the New York Stock Exchange (NYSE), and we may be unable to regain compliance.

On April 22, 2020, we were notified by the NYSE that we were not in compliance with the continued listing standards set forth in Section 802.01B of the New York Stock Exchange Listed Company Manual because our average global market capitalization over a consecutive 30 trading-day period was less than $50 million, and, at the same time, our stockholders’ equity was less than $50 million.

On April 28, 2020, we submitted, and on May 14, 2020, the NYSE accepted, our plan to regain conformity with this NYSE listing standard by January 1, 2022, in accordance with NYSE rules. Our common stock will continue to be listed and traded on the NYSE during the cure period, subject to our compliance with other continued listing standards, and we will be subject to quarterly monitoring by the NYSE for compliance with the plan. The NYSE will deem us to have regained compliance if, during the cure period, we comply with the relevant continued listing standards, or qualify under an original listing standard, for a period of two consecutive quarters. Until the NYSE determines that we have regained compliance, our common stock trading symbol of “BXC” will have an added designation of “.BC” to indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards. If we fail to comply with the plan, do not meet continued listing standards at the end of the allowed cure period, or in the event that our common stock trades at levels viewed to be abnormally low by the NYSE, our common stock will be subject to the prompt initiation of NYSE suspension and delisting procedures. There can be no assurance that our plans to regain compliance will be successful.

We believe that the erosion of our average market capitalization was a direct result of the effects of the COVID-19 pandemic on the stock market, and we expect that a return to normalcy in the stock market should return our market capitalization to a compliant level. Our 30 trading-day average global market capitalization was $69.8 million and $91.0 million at June 27, 2020, and July 31, 2020, respectively, in each case in excess of the $50 million required by the listing standard; however, a delisting would have an adverse effect on the liquidity of our common stock and, as a result, the market price for our common stock might decline if our common stock is delisted. Delisting could also make it more difficult for us to raise additional capital.



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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company’s common stock repurchase activity for each month of the quarter ended June 27, 2020:
 
  
 
 
  Total Number  
  
 
 
 
 
 
 
Shares
Average Price
Period
 
 
Purchased(1)
  Paid Per Share  
March 29 - May 2, 2020
 

  
$

May 3 - May 30, 2020
 

  
$

May 31 - June 27, 2020
 
27,522

  
$
8.98

Total
 
 
27,522

  
 
 
 
 
 
 
 
 
 
 
(1)
The Company did not repurchase any of its equity securities during the period covered by this report pursuant to any publicly announced plan or program, and no such plan or program is presently in effect. All purchases reflected in the table above pertain to purchases of common stock by the Company in connection with tax withholding obligations of the Company’s employees upon the vesting of such employees’ restricted stock awards.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
On August 3, 2020, in light of the performance by the Company during its 2020 second fiscal quarter and July, the Compensation Committee of the Company’s Board of Directors (the “Committee”) rescinded the voluntary reduction of the base salary of the Company’s President and Chief Executive Officer, Mitchell B. Lewis, and reinstated his annual base salary of $850,000 effective August 1, 2020. Mr. Lewis’s base salary had been reduced to, and paid at, $1 per month for the months of April through July 2020 at the request of Mr. Lewis and pursuant to the Committee’s previous approval.



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ITEM 6. EXHIBITS
Exhibit
Number
 
Description
10.1
 
10.2
*
31.1
*
31.2
*
32.1
**
32.2
**
101.Def
 
Definition Linkbase Document.
101.Pre
 
Presentation Linkbase Document.
101.Lab
 
Labels Linkbase Document.
101.Cal
 
Calculation Linkbase Document.
101.Sch
 
Schema Document.
101.Ins
 
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
 
 
 
 
*
Filed herewith.
 
**
Exhibit is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended.


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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
 
BlueLinx Holdings Inc.
 
 
 
(Registrant)
 
 
 
 
 
Date: August 3, 2020
By:
/s/ Kelly C. Janzen
 
 
 
Kelly C. Janzen
 
 
 
Senior Vice President and Chief Financial Officer
 
 


31