BlueLinx Holdings outlook revised to negative at S&P amid reduced earnings

Investing.com -- S&P Global Ratings has revised the outlook for BlueLinx Holdings Inc. to negative from stable due to reduced earnings and a slowdown in overall construction activities. The company’s credit measures have been negatively impacted, with S&P Global Ratings-adjusted leverage standing at around 5x, indicating a limited buffer against potential risks.

Despite affirming its ’B+’ issuer credit rating and the same issue-level rating on the company’s senior secured debt, S&P Global Ratings believes that BlueLinx’s credit measures could remain high over the next year. This outlook revision is largely due to the company’s significant correlation with housing and economic cycles. The reduction in demand and construction activities as a result of macroeconomic pressures has negatively affected the company’s earnings, eroding its credit safety net.

S&P Global Ratings anticipates that the company’s adjusted leverage could remain around 5x or slightly higher over the next year, leaving a minimal buffer against their 5x threshold for the rating. However, if business conditions improve beyond the next few quarters, it could lead to an increase in earnings and subsequent deleveraging.

Despite BlueLinx’s strong cash balance and ample liquidity, which provide some relief against the deteriorated financial performance and elevated credit measures, there are concerns if demand conditions remain subdued for a prolonged period or weaken more than expected. Specifically, for 2025, the company’s revenues are expected to be between $2.8 billion and $2.9 billion, with adjusted earnings estimated to be between $120 million and $130 million, resulting in adjusted EBITDA margins of 4%-5%.

For the 12 months ending March 29, 2025, BlueLinx’s S&P Global Ratings-adjusted leverage was 5.3x, a decline from 4.6x at the end of 2024. This is due to slower volumes and lower price realizations resulting from reduced residential construction activities, macroeconomic uncertainties, and affordability challenges.

Even under difficult business conditions, BlueLinx is expected to continue to generate free cash of $35 million to $45 million in 2025-2026. The company’s balance sheet strength, demonstrated by its large cash balance of $449 million at the end of the first quarter of 2025, and full revolver availability, provide ample liquidity. These factors, along with no upcoming debt maturities, somewhat offset the risk associated with elevated leverage.

S&P Global Ratings could lower the ratings over the next 12 months if adjusted earnings are 10% lower than their base-case scenario, causing leverage to remain above 5x or operating cash flow to debt declines under 10%. Such a scenario could occur if a severe recession further reduces demand for the company’s products, weakening earnings more or for longer than expected under the base-case scenario.

The outlook could be revised back to stable over the next 12 months if its adjusted earnings improve faster than expected, helped by improving demand conditions, such that leverage declines comfortably below 5x and these levels are viewed as sustainable.

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