UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

BlueLinx Holdings Inc.

(Exact name of registrant as specified in its charter)

Delaware		77-0627356
(State of Incorporation)		(I.R.S. Employer Identification No.)
4300 Wildwood Parkway, Atlanta, Georgia		30339
(Address of principal executive offices)		(Zip Code)

(770) 953-7000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 4, 2008 there were 32,378,860 shares of BlueLinx Holdings Inc. common stock, par value $0.01, outstanding.

 

 

BLUELINX HOLDINGS INC.

Form 10-Q

For the Quarterly Period Ended June 28, 2008

INDEX

		PAGE
PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements — BlueLinx Holdings Inc. (Unaudited)			3
Condensed Consolidated Statements of Operations			3
Condensed Consolidated Balance Sheets			5
Condensed Consolidated Statements of Cash Flows			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			33
PART II. OTHER INFORMATION			33
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			34
Item 4. Submission of Matters to a Vote of Security Holders			34
Item 6. Exhibits			35
Signatures			36
Exhibit Index			37
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BLUELINX HOLDINGS INC.

		Second Quarter
		Period from				Period from
		March 30, 2008				April 1, 2007
		to				to
		June 28, 2008				June 30, 2007
Net sales		$	834,669			$	1,081,990
Cost of sales			727,234				962,752
Gross profit			107,435				119,238
Operating expenses:
Selling, general, and administrative			81,227				93,346
Depreciation and amortization			5,103				5,335
Total operating expenses			86,330				98,681
Operating income			21,105				20,557
Non-operating expenses:
Interest expense			9,385				11,798
Other expense (income), net			190				(225	)
Income before provision for income taxes			11,530				8,984
Provision for income taxes			4,931				3,550
Net income		$	6,599			$	5,434
Basic weighted average number of common shares outstanding			31,079				30,848
Basic net income per share applicable to common stock		$	0.21			$	0.18
Diluted weighted average number of common shares outstanding			31,312				30,995
Diluted net income per share applicable to common stock		$	0.21			$	0.18
Dividends declared per share of common stock		$	—			$	0.125

See accompanying notes.

BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)

		Six Months Ended
		Period from				Period from
		December 29, 2007				December 31, 2006
		to				to
		June 28, 2008				June 30, 2007
Net sales		$	1,551,429			$	2,039,104
Cost of sales			1,366,191				1,816,111
Gross profit			185,238				222,993
Operating expenses:
Selling, general, and administrative			161,862				181,814
Depreciation and amortization			10,071				10,734
Total operating expenses			171,933				192,548
Operating income			13,305				30,445
Non-operating expenses:
Interest expense			18,739				22,404
Other expense (income), net			320				(608	)
(Loss) income before (benefit from) provision for income taxes			(5,754	)			8,649
(Benefit from) provision for income taxes			(1,762	)			3,404
Net (loss) income		$	(3,992	)		$	5,245
Basic weighted average number of common shares outstanding			31,003				30,824
Basic net (loss) income per share applicable to common stock		$	(0.13	)		$	0.17
Diluted weighted average number of common shares outstanding			31,003				30,945
Diluted net (loss) income per share applicable to common stock		$	(0.13	)		$	0.17
Dividends declared per share of common stock		$	—			$	0.25

See accompanying notes.

BLUELINX HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

		June 28, 2008				December 29, 2007
		(unaudited)
Assets:
Current assets:
Cash		$	29,791			$	15,759
Receivables, net			295,081				263,176
Inventories, net			315,368				335,887
Deferred income taxes			14,605				12,199
Other current assets			38,657				53,231
Total current assets			693,502				680,252
Property, plant, and equipment:
Land and land improvements			57,362				57,295
Buildings			98,550				98,420
Machinery and equipment			67,922				67,217
Construction in progress			1,360				4,212
Property, plant, and equipment, at cost			225,194				227,144
Accumulated depreciation			(60,954	)			(54,702	)
Property, plant, and equipment, net			164,240				172,442
Non-current deferred income taxes			2,218				2,628
Other assets			19,842				28,114
Total assets		$	879,802			$	883,436
Liabilities:
Current liabilities:
Accounts payable		$	176,600			$	164,717
Bank overdrafts			38,055				37,152
Accrued compensation			11,503				10,372
Current maturities of long-term debt			10,048				—
Other current liabilities			28,336				19,280
Total current liabilities			264,542				231,521
Non-current liabilities:
Long-term debt			451,000				478,535
Other long-term liabilities			13,016				18,557
Total liabilities			728,558				728,613
Shareholders’ Equity:
Common Stock, $0.01 par value, 100,000,000 shares authorized; 32,378,860 and 31,224,959 shares issued and outstanding at June 28, 2008 and December 29, 2007, respectively			324				312
Additional paid-in-capital			142,701				142,081
Accumulated other comprehensive income			5,207				5,426
Retained earnings			3,012				7,004
Total shareholders’ equity			151,244				154,823
Total liabilities and shareholders’ equity		$	879,802			$	883,436

See accompanying notes.

BLUELINX HOLDINGS INC.

		Six Months Ended
		Period from				Period from
		December 29, 2007				December 31, 2006
		to				to
		June 28, 2008				June 30, 2007
Cash flows from operating activities:
Net (loss) income		$	(3,992	)		$	5,245
Adjustments to reconcile net (loss) income to cash provided by (used in) operations:
Depreciation and amortization			10,071				10,734
Amortization of debt issue costs			1,215				1,215
Deferred income tax benefit			(2,931	)			(1,563	)
Share-based compensation expense			1,119				2,227
Excess tax benefits from share-based compensation arrangements			(76	)			(60	)
Changes in assets and liabilities:
Receivables			(31,905	)			(98,255	)
Inventories			20,519				(59,536	)
Accounts payable			11,883				64,503
Changes in other working capital			22,283				8,840
Other			2,589				2,278
Net cash provided by (used in) operating activities			30,775				(64,372	)
Cash flows from investing activities:
Property, plant and equipment investments			(1,502	)			(10,027	)
Proceeds from disposition of assets			827				1,086
Net cash used in investing activities			(675	)			(8,941	)
Cash flows from financing activities:
Proceeds from stock options exercised			434				323
Excess tax benefits from share-based compensation arrangements			76				60
Net (decrease) increase in revolving credit facility			(17,487	)			94,073
Increase (decrease) in bank overdrafts			903				(15,678	)
Common stock dividends paid			—				(7,784	)
Other			6				33
Net cash (used in) provided by financing activities			(16,068	)			71,027
Increase (decrease) in cash			14,032				(2,286	)
Balance, beginning of period			15,759				27,042
Balance, end of period		$	29,791			$	24,756

See accompanying notes.

BLUELINX HOLDINGS INC.

1. Basis of Presentation and Background

Basis of Presentation

BlueLinx Holdings Inc. has prepared the accompanying Unaudited Condensed Consolidated Financial Statements, including its accounts and the accounts of its wholly-owned subsidiaries, in accordance with the instructions to Form 10-Q and therefore they do not include all of the information and notes required by United States generally accepted accounting principles (“GAAP”). These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 29, 2007, as filed with the Securities and Exchange Commission (“SEC”). Our fiscal year is a 52- or 53-week period ending on the Saturday closest to the end of the calendar year. Fiscal year 2008 and fiscal year 2007 contain 53 weeks and 52 weeks, respectively. BlueLinx Corporation is the wholly-owned operating subsidiary of BlueLinx Holdings Inc. and is referred to herein as the “operating subsidiary” when necessary.

We believe the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our financial position, results of operations and cash flows for the periods presented. The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material. In addition, the operating results for interim periods may not be indicative of the results of operations for a full year. We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors, with the second and third quarters typically accounting for the highest sales volumes. These seasonal factors are common in the building products distribution industry.

We are a leading distributor of building products in North America with approximately 2,500 employees. We offer approximately 10,000 products from over 750 suppliers to service more than 11,500 customers nationwide, including dealers, industrial manufacturers, manufactured housing producers and home improvement retailers. We operate our distribution business from sales centers in Atlanta and Denver, and our network of more than 70 warehouses and third-party operated warehouses.

2. Summary of Significant Accounting Policies

Earnings per Common Share

Basic and diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the period.

Except when the effect would be anti-dilutive, the diluted earnings per share calculation includes the dilutive effect of the assumed exercise of stock options and restricted stock using the treasury stock method. We have excluded stock options to purchase 1.1 million shares for the second quarter of fiscal 2008 because they were antidilutive. In addition, we excluded .4 million restricted stock and performance share awards for the second quarter of fiscal 2008 because they were antidilutive. For the second quarter of fiscal 2007 and for the first six months ended June 30, 2007, we excluded stock options to purchase 1.5 million shares because they were antidilutive.

Common Stock Dividends

In the past we have paid dividends on our common stock at the quarterly rate of $0.125 per share. However, on December 5, 2007, our Board of Directors suspended the payment of dividends on our common stock for an indefinite period of time. Resumption of the payment of dividends will depend on, among other things, business conditions in the housing industry, our results of operations, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our Board of Directors may deem relevant. Accordingly, we may not be able to resume the payment of dividends at the same quarterly rate in the future, if at all.

Income Taxes

Deferred income taxes are provided using the liability method under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Accordingly, deferred income taxes are recognized for differences between the income tax and financial reporting bases of our assets and liabilities based on enacted tax laws and tax rates applicable to the periods in which the differences are expected to affect taxable income.

In evaluating our ability to recover our deferred income tax assets we consider all available positive and negative evidence, including our past operating results, our ability to carryback losses against prior taxable income, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income.

Uncertain tax positions are recorded based on the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a discussion of whether to file or not to file a return in a particular jurisdiction).

For the second quarter of fiscal 2008 and for the first six months of fiscal 2008, we recognized $4.9 million of tax expense and $1.8 million of tax benefit, respectively. Our effective tax rate for these periods was 42.8% and 30.6%, respectively. For the second quarter of fiscal 2007 and for the first six months of fiscal 2007, our effective tax rate was 39.5% and 39.4%, respectively. The change in effective tax rate in both periods compared to 2007 primarily resulted from tax expense on Canadian earnings.

Stock-Based Compensation

We have two stock-based compensation plans covering officers, directors and certain employees and consultants; the 2004 Long-Term Equity Incentive Plan (the “2004 Plan”) and the 2006 Long-Term Equity Incentive Plan (the “2006 Plan”). The plans are designed to motivate and retain individuals who are responsible for the attainment of our primary long-term performance goals. The plans provide a means whereby our employees and directors develop a sense of proprietorship and personal involvement in our development and financial success and encourage them to devote their best efforts to our business.

The 2004 Plan provides for the grant of nonqualified stock options, incentive stock options for shares of our common stock and restricted shares of our common stock to participants of the plan selected by our Board of Directors or a committee of the Board who administer the 2004 Plan. We reserved 2,222,222 shares of common stock for issuance under the 2004 Plan. The terms and conditions of awards under the 2004 Plan are determined by the administrator for each grant.

Unless otherwise determined by the administrator or as set forth in an award agreement, upon a “Liquidity Event,” all unvested awards will become immediately exercisable and the administrator may determine the treatment of all vested awards at the time of the Liquidity Event. A “Liquidity Event” is defined as (1) an event in which any person who is not an affiliate of us becomes the beneficial owner, directly or indirectly, of fifty percent or more of the combined voting power of our then outstanding securities or (2) the sale, transfer or other disposition of all or substantially all of our business, whether by sale of assets, merger or otherwise, to a person other than Cerberus.

On May 12, 2006 our stockholders approved the 2006 Plan. The 2006 Plan permits the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, cash-based awards, and other stock-based awards. We reserved 1,700,000 shares of our common stock for issuance under the 2006 Plan. The terms and conditions of awards under the 2006 Plan are determined by the administrator for each grant. Awards issued under the 2006 Plan are subject to accelerated vesting in the event of a change in control as such event is defined in the 2006 Plan.

At our annual meeting of stockholders on May 21, 2008, our stockholders approved an amendment to the 2006 Plan which increases the maximum number of shares of common stock we may issue under the 2006 Plan by 1,500,000 shares from 1,700,000 shares to 3,200,000 shares. The purpose of this amendment is to assure that we can continue to grant equity awards at levels determined appropriate by the Board.

On May 21, 2008, the Compensation Committee granted a restricted stock award of 250,000 restricted shares of the Company to Howard S. Cohen pursuant to the terms of his employment agreement. The restricted stock award issued to Mr. Cohen will vest in three equal annual installments beginning on March 10, 2009.

Compensation expense arising from stock-based awards granted to employees and non-employee directors is recognized as expense using the straight-line method over the vesting period. As of June 28, 2008, there was $2.1 million, $5.0 million, $1.2 million and $0.2 million of total unrecognized compensation expense related to stock options, restricted stock, performance shares and restricted stock units, respectively. The unrecognized compensation expense for these awards is expected to be recognized over a period of 2.7 years, 2.5 years, 2.5 years, and 1.3 years, respectively. As of June 30, 2007, there was $5.0 million, $3.3 million, $2.3 million and $1.7 million of total unrecognized compensation expense related to stock options, restricted stock, performance shares and restricted stock units, respectively. The unrecognized compensation expense for these awards is expected to be recognized over a period of 3.5 years, 2.6 years, 2.5 years, and 2.5 years, respectively.

For the second quarter of fiscal 2008 and for the first six months of fiscal 2008, our total stock-based compensation expense was $1.2 million. We also recognized related income tax benefits of $0.5 million for the second quarter of fiscal 2008 and for the first six months of fiscal 2008. For the second quarter of fiscal 2007 and for the first six months of fiscal 2007, our total stock-based compensation expense was $1.4 million and $2.2 million, respectively. We also recognized related income tax benefits of $0.5 million and $0.9 million for the second quarter of fiscal 2007 and for the first six months of fiscal 2007, respectively.

During the first six months of fiscal 2008 and the first six months of fiscal 2007, total stock options exercised were 115,758 and 86,019, respectively. These options were exercised in the first quarter of both periods.

The following table depicts the weighted average assumptions used in connection with the Black-Scholes-Merton option pricing model to estimate the fair value of stock options granted during the first six months of fiscal 2008:

		Period from December 29, 2007 to June 28, 2008
		Time-Based				Performance-Based				Performance-Based
		Options**				Options**				Options***
Risk free interest rate			2.70	%			2.62	%			2.11	%
Expected dividend yield			0.0	%			0.0	%			0.0	%
Expected life		6 years				4 years				1 year
Expected volatility			48	%			48	%			48	%
Weighted average fair value		$	2.27			$	0.67			$	1.31

All options granted during the first six months of fiscal 2008 were granted in the first quarter.

The following table depicts the weighted average assumptions used in connection with the Black-Scholes-Merton option pricing model to estimate the fair value of stock options granted during the first six months of fiscal 2007:

		Period from December 31, 2006 to June 30, 2007
		Time-Based				Performance-Based				Performance-Based
		Options*				Options**				Options***
Risk free interest rate			4.78	%			4.81	%			5.09	%
Expected dividend yield			4.46	%			4.52	%			4.52	%
Expected life		7 years				5 years				1 year
Expected volatility			45	%			45	%			45	%
Weighted average fair value		$	3.77			$	2.83			$	6.97

All options granted during the first six months of fiscal 2007 occurred in the first quarter.

In determining the expected life, we did not rely on our historical exercise data as it does not provide a reasonable basis upon which to estimate future expected lives due to limited experience of employee exercises. Instead, we followed a simplified method based on the vesting term and contractual term as permitted under SEC Staff Accounting Bulletin No. 107.

The expected volatility is based on the historical volatility of our common stock.

The range of risk-free rates used for the first six months of fiscal 2008 and for the first six months of fiscal 2007 was from 2.11% to 2.70% and 4.78% to 5.10%, respectively. These rates were based on the U.S. Treasury yield with a term that is consistent with the expected life of the stock options.

Impairment of Long-Lived Assets

Long-lived assets, including property and equipment and intangible assets with definite useful lives, are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use internal cash flow estimates, quoted market prices when available and independent appraisals as appropriate to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate. If these projected cash flows are less than the carrying amount, an impairment loss is recognized based on the fair value of the asset less any costs of disposition. Our judgment regarding the existence of impairment indicators is based on market and operational performance.

During the second quarter of fiscal 2008, we recorded a non-cash impairment charge of $0.7 million ($0.4 million after tax) to reduce the carrying value of certain long-lived assets to fair value. This impairment charge was included in “Selling, general and administrative” expense on our Consolidated Statement of Operations for the second quarter and the first six months of fiscal 2008.

3. Exit Costs

During the second quarter of fiscal 2008 and the fourth quarter of fiscal 2007, we vacated leased office space and certain distribution facilities. We accounted for these transactions in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires that a liability be recognized for a cost associated with an exit or disposal activity at fair value in the period in which it is incurred or when the entity ceases using the right conveyed by a contract (i.e., the right to use a leased property). Our exit cost charges include the estimated losses on the vacated facilities based on our contractual obligations net of estimated sublease income based on current comparable market rates for leases. We will reassess this liability periodically based on market conditions. Revisions to our estimates of this liability could materially impact our operating results and financial position in future periods if anticipated events and key assumptions, such as the timing and amounts of sublease rental income, either do not materialize or change. These costs were included in “Selling, general and administrative” expense in the Consolidated Statement of Operations and in “Other current liabilities”, and in “Other non-current liabilities” on the Consolidated Balance Sheet at June 28, 2008 and December 29, 2007.

The following table displays the exit activity and liability balances for the first six months of fiscal 2008 (in thousands):

		Exit Costs
Balance at December 29, 2007		$	11,326
Charges			347
Payments			(1,074	)
Accretion of liability			409
Balance at June 28, 2008		$	11,008

We did not incur any exit charges during the first six months of fiscal 2007.

4. Comprehensive Income (Loss)

The calculation of comprehensive income (loss) is as follows (in thousands):

		Second Quarter
		Period from				Period from
		March 30, 2008				April 1, 2007
		to				to
		June 28, 2008				June 30, 2007
Net income		$	6,599			$	5,434
Other comprehensive income:
Foreign currency translation, net of taxes			151				921
Unrealized gain from cash flow hedge, net of taxes			3,009				1,557
Comprehensive income		$	9,759			$	7,912

		Six Months Ended
		Period from				Period from
		December 29, 2007				December 31, 2006
		to				to
		June 28, 2008				June 30, 2007
Net (loss) income		$	(3,992	)		$	5,245
Other comprehensive (loss) income:
Foreign currency translation, net of taxes			(396	)			913
Unrealized gain from cash flow hedge, net of taxes			178				1,284
Comprehensive (loss) income		$	(4,210	)		$	7,442

5. Employee Benefits

Defined Benefit Pension Plans

Most of our hourly employees participate in noncontributory defined benefit pension plans. These include a plan that is administered solely by us (the “hourly pension plan”) and union-administered multiemployer plans. Our funding policy for the hourly pension plan is based on actuarial calculations and the applicable requirements of federal law. We do not expect to make any contributions to the hourly pension plan in fiscal 2008. Benefits under the majority of plans for hourly employees (including multiemployer plans) are primarily related to years of service.

Net periodic pension cost for our pension plans included the following:

		Second Quarter
		Period from				Period from
		March 30, 2008				April 1, 2007
		to				to
		June 28, 2008				June 30, 2007
		(In thousands)
Service cost		$	561			$	626
Interest cost on projected benefit obligation			1,109				1,054
Expected return on plan assets			(1,501	)			(1,356	)
Amortization of unrecognized gain			(91	)			—
Amortization of unrecognized prior service cost			—				1
Net periodic pension cost		$	78			$	325

		Six Months Ended
		Period from				Period from
		December 29, 2007				December 31, 2006
		to				to
		June 28, 2008				June 30, 2007
		(In thousands)
Service cost		$	1,122			$	1,252
Interest cost on projected benefit obligation			2,218				2,108
Expected return on plan assets			(3,002	)			(2,712	)
Amortization of unrecognized gain			(182	)			—
Amortization of unrecognized prior service cost			1				2
Net periodic pension cost		$	157			$	650

6. Revolving Credit Facility

As of June 28, 2008, we had outstanding borrowings of $166 million and excess availability of $271 million under the terms of our revolving credit facility. Based on borrowing base limitations, we classify the lowest projected balance of the credit facility over the next twelve months of $156 million as long-term debt. The revolving credit facility contains customary negative covenants and restrictions for asset based loans, with which we are in compliance.

On June 12, 2006, we entered into an interest rate swap agreement with Goldman Sachs Capital Markets, to hedge against interest rate risks related to our variable rate revolving credit facility. The interest rate swap has a notional amount of $150 million and the terms call for us to receive interest monthly at a variable rate equal to the 30-day LIBOR and to pay interest monthly at a fixed rate of 5.4%. This interest rate swap is designated as a cash flow hedge.

We expect the hedge to be highly effective in offsetting changes in expected cash flows, as, at inception, the critical terms of the interest rate swap generally match the critical terms of the variable rate revolving credit facility. Fluctuations in the fair value of the ineffective portion, if any, of the cash flow hedge are reflected in earnings. For the first six months of fiscal 2008 and for the first six months of fiscal 2007, we recognized immaterial amounts of expense related to the ineffective portion of the hedge.

At June 28, 2008 and December 29, 2007, the fair value of the interest rate swap was a liability of $6.9 million and $7.1 million, respectively. These balances were included in “Other current liabilities” and “Other long-term liabilities” on the Condensed Consolidated Balance Sheet. Accumulated other comprehensive income at June 28, 2008 and December 29, 2007 included the net loss on the cash flow hedge (net of tax) of $4.1 million and $4.3 million, respectively, which reflects the cumulative amount of comprehensive loss in connection with the change in fair value of the swap.

During the second quarter of fiscal 2008, we negotiated the release of cash collateral held for purposes of securing the interest rate swap and replaced that collateral with letters of credit. As of June 28, 2008, we had outstanding letters of credit totaling $15.8 million, primarily for purposes of securing collateral requirements under the casualty insurance programs for us, the interest rate swap, and for guaranteeing payment of international purchases based on the fulfillment of certain conditions.

7. Mortgage

On June 9, 2006, certain special purpose entities that are wholly-owned subsidiaries of us entered into a $295 million mortgage loan with the German American Capital Corporation. The mortgage has a term of ten years and is secured by 57 distribution facilities and 1 office building owned by the special purpose entities. The stated interest rate on the mortgage is fixed at 6.35%. German American Capital Corporation assigned half of its interest in the mortgage loan to Wachovia Bank, National Association.

The mortgage loan requires interest-only payments for the first five years followed by level monthly payments of principal and interest based on an amortization period of thirty years. The balance of the loan outstanding at the end of ten years will then become due and payable. The principal will be paid in the following increments (in thousands):

2011		$	1,511
2012			3,172
2013			3,437
2014			3,665
2015			3,908
Thereafter		$	279,307

8. Fair Value Measurements

In September 2006, the FASB issued  SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years.  In February 2008, FSP 157-1 Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 was issued. FSP 157-1 removed leasing transactions accounted for under Statement 13 and related guidance from the scope of SFAS No. 157.  FSP 157-2 Partial Deferral of the Effective Date of Statement 157 deferred the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.

SFAS No. 157, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  SFAS No. 157 classifies inputs used to measure fair value into the following hierarchy:

	Level 1		Unadjusted quoted prices in active markets for identical assets or liabilities.
	Level 2		Unadjusted quoted prices in active markets for similar assets or liabilities, or Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or Inputs other than quoted prices that are observable for the asset or liability.
	Level 3		Unobservable inputs for the asset or liability.

We are exposed to market risks from changes in interest rates, which may affect our operating results and financial position.  When deemed appropriate, we minimize our risks from interest rate fluctuations through the use of an interest rate swap.  This derivative financial instrument is used to manage risk and is not used for trading or speculative purposes.  The swap is valued using a valuation model that has inputs other than quoted market prices that are both observable and unobservable.

We endeavor to utilize the best available information in measuring the fair value of the interest rate swap.  The interest rate swap is classified in its entirety based on the lowest level of input that is significant to the fair value measurement.  We have determined that our interest rate swap is a level 3 liability in the fair value hierarchy.  The fair value of the interest rate swap was $6.9 million as of June 28, 2008.  

The implementation of SFAS No. 157 for financial assets and financial liabilities, effective December 30, 2007, did not have a material impact on our consolidated financial position and results of operations.  We are currently assessing the impact of SFAS No. 157 for pension related financial assets and nonfinancial assets and nonfinancial liabilities on our consolidated financial position and results of operations.

9. Related Party Transactions

Cerberus Capital Management, L.P., our equity sponsor, retains consultants that specialize in operations management and support and who provide Cerberus with consulting advice concerning portfolio companies in which funds and accounts managed by Cerberus or its affiliates have invested. From time to time, Cerberus makes the services of these consultants available to Cerberus portfolio companies. We believe that the terms of these consulting arrangements are favorable to us, or, alternatively, are materially consistent with those terms that would have been obtained by us in an arrangement with an unaffiliated third party. We have normal service, purchase and sales arrangements with other entities that are owned or controlled by Cerberus. We believe that these transactions are at arms’ length terms and are not material to our results of operations or financial position.

10. Commitments and Contingencies

Environmental and Legal Matters

From time to time, we are involved in various proceedings incidental to our businesses and we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Although the ultimate outcome of these proceedings cannot be determined with certainty, based on presently available information management believes that adequate reserves have been established for probable losses with respect thereto. Management further believes that the ultimate outcome of these matters could be material to operating results in any given quarter but will not have a materially adverse effect on our long-term financial condition, our results of operations, or our cash flows.

Collective Bargaining Agreements

As of June 28, 2008, approximately 31% of our total work force is covered by collective bargaining agreements. Collective bargaining agreements representing approximately 7% of our work force will expire within one year.

Preference Claim

On November 19, 2004, we received a letter from Wickes Lumber, or Wickes, asserting that approximately $16 million in payments received by the Division during the 90-day period prior to Wickes’ January 20, 2004 Chapter 11 filing were preferential payments under section 547 of the United States Bankruptcy Code. On October 14, 2005, Wickes Inc. filed a lawsuit in the United States Bankruptcy Court for the Northern District of Illinois titled “Wickes Inc. v. Georgia Pacific Distribution Division (BlueLinx),” (Bankruptcy Adversary Proceeding No. 05-2322) asserting its claim. On November 14, 2005, we filed an answer to the complaint denying liability. Although the ultimate outcome of this matter cannot be determined with certainty, we believe Wickes’ assertion to be without merit and, in any event, subject to one or more complete defenses, including, but not limited to, that the payments were made and received in the ordinary course of business and were a substantially contemporaneous exchange for new value given to Wickes.

Supply Agreement with Georgia-Pacific

On May 7, 2004, we entered into a multi-year supply agreement with Georgia-Pacific. Under the agreement, we have exclusive distribution rights on certain products and certain customer segments. Georgia-Pacific is our largest vendor, with Georgia-Pacific products representing approximately 25% of our purchases during fiscal 2007. On June 6, 2008, Georgia-Pacific notified us of its intent to terminate this supply agreement, effective May 7, 2010. Georgia-Pacific and BlueLinx are currently in discussions regarding a new agreement which would govern the purchase, supply and distribution arrangements between the two parties after May 7, 2010. Georgia-Pacific and BlueLinx are continuing to work together pursuant to the terms of the existing Supply Agreement.

The Supply Agreement details distribution rights by product categories, including exclusivity rights and minimum supply volume commitments from Georgia-Pacific with respect to certain products. This Supply Agreement also details our purchase obligations by product categories, including minimum purchase volume commitments with respect to most of the products supplied to us. In addition, the Supply Agreement also provides for advertising, marketing and promotion arrangements between BlueLinx and Georgia-Pacific for certain products.

In June 2008, the FASB issued FSP No. Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP 03-6-1”). FSP 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method described in SFAS No. 128, “Earnings Per Share.” This FSP is effective for us on January 1, 2009 and requires all presented prior-period earnings per share data to be adjusted retrospectively. We are still in the process of evaluating the impact FSP 03-6-1 will have on our Consolidated Financial Statements. For additional information about our share-based payment awards, refer to Note 2 of the Notes to Consolidated Financial Statements in our Form 10-K.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. This FSP is effective for us on January 1, 2009. We are still in the process of evaluating the impact FSP 142-3, but do not expect it to have a material impact on our Consolidated Financial Statements.

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is effective, on a prospective basis, for fiscal years beginning after November 15, 2008. We are in the process of evaluating the new disclosure requirements under SFAS 161.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. We are currently assessing the impact of SFAS No. 160 on our consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS 141 (revised 2007) Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. We are currently evaluating the potential impact, if any, of the adoption of SFAS 141R on our consolidated financial position, results of operations and cash flows.

12. Subsequent Event

On July 15, 2008, our board of directors approved a plan to exit our custom milling operations in California.  We are taking this action primarily based on our analysis of the impact of unfavorable market conditions on the business.  We expect to complete the closure of the milling operation during the third quarter of fiscal 2008.  We expect to incur a pre-tax charge of approximately $4 million, or an after tax charge of approximately $0.08 per diluted share related to this action in the third quarter.  Approximately $1.5 million of the total charge will require cash expenditures during the third quarter.

13. Unaudited Supplemental Condensed Consolidating Financial Statements

The unaudited condensed consolidating financial information as of June 28, 2008 and December 29, 2007 and for the periods from March 30, 2008 to June 28, 2008 and April 1, 2007 to June 30, 2007 is provided due to restrictions in our revolving credit facility that limit distributions by BlueLinx Corporation, our wholly-owned operating subsidiary, to us, which, in turn, may limit our ability to pay dividends to holders of our common stock (see our Annual Report on Form 10-K for the year ended December 29, 2007, for a more detailed discussion of these restrictions and the terms of the facility). Also included in the supplemental condensed consolidated financial statements are sixty-one single member limited liability companies, which are wholly owned by us (the “LLC subsidiaries”). The LLC subsidiaries own certain warehouse properties that are occupied by BlueLinx Corporation, each under the terms of a master lease agreement. Certain of the warehouse properties collateralize a mortgage loan and none of the properties are available to satisfy the debts and other obligations of either BlueLinx Corporation or us.

The condensed consolidating statement of operations for BlueLinx Holdings Inc. for the period from March 30, 2008 to June 28, 2008 follows (in thousands):

		BlueLinx
		Holdings				BlueLinx				LLC
		Inc.				Corporation				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	834,669			$	7,618			$	(7,618	)		$	834,669
Cost of sales			—				727,234				—				—				727,234
Gross profit			—				107,435				7,618				(7,618	)			107,435
Operating expenses:
Selling, general and administrative			332				88,393				120				(7,618	)			81,227
Depreciation and amortization			—				4,033				1,070				—				5,103
Total operating expenses			332				92,426				1,190				(7,618	)			86,330
Operating income (loss)			(332	)			15,009				6,428				—				21,105
Non-operating expenses:
Interest expense			—				4,493				4,892				—				9,385
Other expense (income), net			—				190				—				—				190
Income before provision for (benefit from) income taxes			(332	)			10,326				1,536				—				11,530
Provision for (benefit from) income taxes			(129	)			4,461				599				—				4,931
Equity in income (loss) of subsidiaries			6,802				—				—				(6,802	)			—
Net income (loss)		$	6,599			$	5,865			$	937			$	(6,802	)		$	6,599

The condensed consolidating statement of operations for BlueLinx Holdings Inc. for the period from April 1, 2007 to June 30, 2007 follows (in thousands):

		BlueLinx
		Holdings				BlueLinx				LLC
		Inc.				Corporation				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	1,081,990			$	7,518			$	(7,518	)		$	1,081,990
Cost of sales			—				962,752				—				—				962,752
Gross profit			—				119,238				7,518				(7,518	)			119,238
Operating expenses:
Selling, general and administrative			279				100,459				126				(7,518	)			93,346
Depreciation and amortization			—				4,276				1,059				—				5,335
Total operating expenses			279				104,735				1,185				(7,518	)			98,681
Operating income (loss)			(279	)			14,503				6,333				—				20,557
Non-operating expenses:
Interest expense			—				6,905				4,893				—				11,798
Other expense (income), net			—				(219	)			(6	)			—				(225	)
Income before provision for (benefit from) income taxes			(279	)			7,817				1,446				—				8,984
Provision for (benefit from) income taxes			(109	)			3,095				564				—				3,550
Equity in income (loss) of subsidiaries			5,604				—				—				(5,604	)			—
Net income (loss)		$	5,434			$	4,722			$	882			$	(5,604	)		$	5,434

The condensed consolidating statement of operations for BlueLinx Holdings Inc. for the period from December 29, 2007 to June 28, 2008 follows (in thousands):

		BlueLinx
		Holdings				BlueLinx				LLC
		Inc.				Corporation				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	1,551,429			$	15,235			$	(15,235	)		$	1,551,429
Cost of sales			—				1,366,191				—				—				1,366,191
Gross profit			—				185,238				15,235				(15,235	)			185,238
Operating expenses:
Selling, general and administrative			646				176,211				240				(15,235	)			161,862
Depreciation and amortization			—				7,931				2,140				—				10,071
Total operating expenses			646				184,142				2,380				(15,235	)			171,933
Operating income (loss)			(646	)			1,096				12,855				—				13,305
Non-operating expenses:
Interest expense			—				8,955				9,784				—				18,739
Other expense (income), net			—				333				(13	)			—				320
Income before provision for (benefit from) income taxes			(646	)			(8,192	)			3,084				—				(5,754	)
Provision for (benefit from) income taxes			(252	)			(2,713	)			1,203				—				(1,762	)
Equity in income (loss) of subsidiaries			(3,598	)			—				—				3,598				—
Net income (loss)		$	(3,992	)		$	(5,479	)		$	1,881			$	3,598			$	(3,992	)

The condensed consolidating statement of operations for BlueLinx Holdings Inc. for the period from December 31, 2006 to June 30, 2007 follows (in thousands):

		BlueLinx
		Holdings				BlueLinx				LLC
		Inc.				Corporation				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	2,039,104			$	15,036			$	(15,036	)		$	2,039,104
Cost of sales			—				1,816,111				—				—				1,816,111
Gross profit			—				222,993				15,036				(15,036	)			222,993
Operating expenses:
Selling, general and administrative			716				195,891				243				(15,036	)			181,814
Depreciation and amortization			—				8,618				2,116				—				10,734
Total operating expenses			716				204,509				2,359				(15,036	)			192,548
Operating income (loss)			(716	)			18,484				12,677				—				30,445
Non-operating expenses:
Interest expense			—				12,620				9,784				—				22,404
Other expense (income), net			—				(367	)			(241	)			—				(608	)
Income before provision for (benefit from) income taxes			(716	)			6,231				3,134				—				8,649
Provision for (benefit from) income taxes			(279	)			2,461				1,222				—				3,404
Equity in income (loss) of subsidiaries			5,682				—				—				(5,682	)			—
Net income (loss)		$	5,245			$	3,770			$	1,912			$	(5,682	)		$	5,245

The condensed consolidating balance sheet for BlueLinx Holdings Inc. as of June 28, 2008 follows (in thousands):

						BlueLinx
		BlueLinx				Corporation
		Holdings				and				LLC
		Inc.				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets:
Current assets:
Cash		$	4			$	29,724			$	63			$	—			$	29,791
Receivables			—				295,081				—				—				295,081
Inventories			—				315,368				—				—				315,368
Deferred income taxes			—				14,633				—				(28	)			14,605
Other current assets			100				38,557				—				—				38,657
Intercompany receivable			22,044				—				—				(22,044	)			—
Total current assets			22,148				693,363				63				(22,072	)			693,502
Property, plant and equipment:
Land and land improvements			—				3,067				54,295				—				57,362
Buildings			—				7,520				91,030				—				98,550
Machinery and equipment			—				67,922				—				—				67,922
Construction in progress			—				1,360				—				—				1,360
Property, plant and equipment, at cost			—				79,869				145,325				—				225,194
Accumulated depreciation			—				(43,340	)			(17,614	)			—				(60,954	)
Property, plant and equipment, net			—				36,529				127,711				—				164,240
Investment in subsidiaries			129,242				—				—				(129,242	)			—
Deferred income taxes			—				3,496				—				(1,278	)			2,218
Other non-current assets			—				14,864				4,978				—				19,842
Total assets		$	151,390			$	748,252			$	132,752			$	(152,592	)		$	879,802
Liabilities :
Current liabilities:
Accounts payable		$	118			$	176,482			$	—			$	—			$	176,600
Bank overdrafts			—				38,055				—				—				38,055
Accrued compensation			—				11,503				—				—				11,503
Deferred income taxes			28				—				—				(28	)			—
Current maturities of long-term debt			—				10,048				—				—				10,048
Other current liabilities			—				23,164				5,172				—				28,336
Intercompany payable			—				21,792				252				(22,044	)			—
Total current liabilities			146				281,044				5,424				(22,072	)			264,542
Non-current liabilities:
Long-term debt			—				156,000				295,000				—				451,000
Deferred income taxes			—				—				1,278				(1,278	)			—
Other long-term liabilities			—				13,016				—				—				13,016
Total liabilities			146				450,060				301,702				(23,350	)			728,558
Shareholders’ Equity/Parent’s Investment			151,244				298,192				(168,950	)			(129,242	)			151,244
Total liabilities and equity		$	151,390			$	748,252			$	132,752			$	(152,592	)		$	879,802

The condensed consolidating balance sheet for BlueLinx Holdings Inc. as of December 29, 2007 follows (in thousands):

						BlueLinx
		BlueLinx				Corporation				LLC
		Holdings Inc.				and Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets:
Current assets:
Cash		$	3			$	15,699			$	57			$	—			$	15,759
Receivables			—				263,176				—				—				263,176
Inventories			—				335,887				—				—				335,887
Deferred income taxes			—				12,277				—				(78	)			12,199
Other current assets			271				52,960				—				—				53,231
Intercompany receivable			18,103				611				—				(18,714	)			—
Total current assets			18,377				680,610				57				(18,792	)			680,252
Property, plant and equipment:
Land and land improvements			—				3,000				54,295				—				57,295
Buildings			—				7,390				91,030				—				98,420
Machinery and equipment			—				67,217				—				—				67,217
Construction in progress			—				4,212				—				—				4,212
Property, plant and equipment, at cost			—				81,819				145,325				—				227,144
Accumulated depreciation			—				(39,228	)			(15,474	)			—				(54,702	)
Property, plant and equipment, net			—				42,591				129,851				—				172,442
Investment in subsidiaries			137,155				—				—				(137,155	)			—
Non-current deferred income taxes			—				4,327				—				(1,699	)			2,628
Other non-current assets			—				22,822				5,292				—				28,114
Total assets		$	155,532			$	750,350			$	135,200			$	(157,646	)		$	883,436
Liabilities:
Current liabilities:
Accounts payable		$	20			$	164,697			$	—			$	—			$	164,717
Bank overdrafts			—				37,152				—				—				37,152
Accrued compensation			—				10,372				—				—				10,372
Deferred income taxes			78				—				—				(78	)			—
Other current liabilities			—				15,145				4,135				—				19,280
Intercompany payable			611				17,632				471				(18,714	)			—
Total current liabilities			709				244,998				4,606				(18,792	)			231,521
Non-current liabilities:
Long-term debt			—				183,535				295,000				—				478,535
Deferred income taxes			—				—				1,699				(1,699	)			—
Other non-current liabilities			—				18,557				—				—				18,557
Total liabilities			709				447,090				301,305				(20,491	)			728,613
Shareholders’ Equity/Parent’s Investment			154,823				303,260				(166,105	)			(137,155	)			154,823
Total liabilities and equity		$	155,532			$	750,350			$	135,200			$	(157,646	)		$	883,436