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Form 10-Q for BOISE CASCADE CO


1-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Understanding Our Financial Information

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes in "Item 1. Financial Statements" of this Form 10-Q, as well as our 2012 Form 10-K. The following discussion includes statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements, along with any other nonhistorical statements in the discussion, are forward-looking. These forward-looking statements include, without limitation, any statement that may predict, indicate, or imply future results, performance, or achievements and may contain the words "may," "will," "expect," "believe," "should," "plan," "anticipate," and other similar expressions. All of these forward-looking statements are based on estimates and assumptions made by our management that, although believed by us to be reasonable, are inherently uncertain. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Item 1A. Risk Factors" in our 2012 Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission (SEC). There have been no material changes to our risk factors during the three months ended March 31, 2013, from those listed in our 2012 Form 10-K. We do not assume an obligation to update any forward-looking statement. Our future actual results may differ materially from those contained in or implied by any of the forward-looking statements in this Form 10-Q.

Background

Boise Cascade Company is a building products company headquartered in Boise, Idaho. As used in this Form 10-Q, the terms "Boise Cascade," "we," and "our" refer to Boise Cascade Company (formerly known as Boise Cascade, L.L.C.) and its consolidated subsidiaries. Boise Cascade completed an initial public offering of its common stock on February 11, 2013, discussed in Note 8, Stockholders' Equity, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1. Financial Statements" of this Form 10-Q.

Boise Cascade Company is a large, vertically-integrated wood products manufacturer and building materials distributor. We have three reportable segments: (i) Wood Products, which manufactures and sells engineered wood products (EWP), plywood, studs, particleboard, and ponderosa pine lumber; (ii) Building Materials Distribution, which is a wholesale distributor of building materials; and (iii) Corporate and Other, which includes corporate support staff services, related assets and liabilities, and foreign exchange gains and losses. For more information, see Note 11, Segment Information, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1. Financial Statements" of this Form 10-Q.

Executive Overview

We recorded income from operations of $24.6 million during the three months ended March 31, 2013, compared with income from operations of $6.2 million during the three months ended March 31, 2012. Our improved results were driven primarily by sales volume growth and commodity price increases. These changes are discussed further in "Our Operating Results" below.

On February 11, 2013, we issued 13,529,412 shares of common stock in our initial public offering. Following this initial public offering, we received proceeds of $262.7 million, net of underwriting discounts and offering expenses. At March 31, 2013, we had $233.5 million of cash and cash equivalents and $290.2 million of usable committed bank line availability. We generated $179.0 million of cash during the three months ended March 31, 2013, as cash provided by net proceeds from our initial public offering was offset partially by cash used for operations, net payments of $25.0 million on our $300 million senior secured asset-based revolving credit facility (Revolving Credit Facility), and capital spending. These changes are discussed further in "Liquidity and Capital Resources" below.

Demand for our products closely correlates with the level of residential construction activity in the U.S., which has historically been cyclical. As of April 2013, the Blue Chip Economic Indicators consensus forecast for 2013 single- and multi-family housing starts in the U.S. was 1.00 million units, compared with actual housing starts of 0.78 million in 2012 and 0.61 million in 2011, as reported by the U.S. Census Bureau. These amounts are below historical trends of approximately 1.4 million units per year over the 20 years prior to 2013. Single-family housing starts are a primary driver of our sales, and although 2013 housing starts are projected to be higher than in 2012, the mix of housing starts in recent years has included a lower proportion of single-family detached units, which typically have higher building product utilization per start than multi-family units. We


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estimate that a detached single-family unit uses approximately three times more building products than a typical multi-family unit, based on higher square footage per unit as well as greater materials usage per square foot.

Unemployment rates in the U.S. improved to 7.6% as of March 31, 2013, from 8.2% as of March 31, 2012. We believe continued employment growth and improved consumer confidence will be necessary to increase household formation rates. Improved household formation rates in turn will help stimulate new construction.

We expect to continue to experience demand below 20-year average historical levels for the products we manufacture and distribute. However, the housing industry has shown signs of improvement in the U.S., and we remain optimistic that the recent improvement in demand for our products will continue. Commodity wood product prices in first quarter 2013, including structural panels and lumber, were well above 5-year average historical levels. Future pricing could be volatile in response to operating rates and inventory levels in various distribution channels. We expect to manage our production levels to our sales demand, which will likely result in operating our engineered wood products facilities below their capacity until demand improves further.

Factors That Affect Our Operating Results

Our results of operations and financial performance are influenced by a variety of factors, including the following:

The commodity nature of our products and their price movements, which are driven largely by capacity utilization rates and industry cycles that affect supply and demand;

general economic conditions, including but not limited to housing starts, repair-and-remodel activity and light commercial construction, inventory levels of new and existing homes for sale, foreclosure rates, interest rates, unemployment rates, relative currency values, and mortgage availability and pricing, as well as other consumer financing mechanisms, that ultimately affect demand for our products;

the highly competitive nature of our industry;

availability and affordability of raw materials, including wood fiber, glues and resins, and energy;

the impact of actuarial assumptions and regulatory activity on pension costs and pension funding requirements;

the difficulty in offsetting fixed costs related to our recent capital investments if the housing market does not recover;

material disruptions at our manufacturing facilities;

the financial condition and creditworthiness of our customers;

concentration of our sales among a relatively small group of customers;

our substantial indebtedness, including the possibility that we may not generate sufficient cash flows from operations or that future borrowings may not be available in amounts sufficient to fulfill our debt obligations and fund other liquidity needs;

cost of compliance with government regulations, in particular environmental regulations;

labor disruptions, shortages of skilled and technical labor, or increased labor costs;

impairment of our long-lived assets;

the need to successfully implement succession plans for certain members of our senior management team;

our reliance on Boise Inc. for many of our administrative services;

major equipment failure;

severe weather phenomena such as drought, hurricanes, tornadoes, and fire;


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increased costs as a public company;

fluctuations in the market for our equity; and

the other factors described in "Item 1A. Risk Factors" in our 2012 Form 10-K.

Our Operating Results

The following tables set forth our operating results in dollars and as a
percentage of sales for the three months ended March 31, 2013 and 2012:

                                                                     Three Months Ended
                                                                          March 31
                                                                      2013           2012
                                                                         (millions)
Sales
Trade                                                            $    744.9       $ 587.0

Costs and expenses
Materials, labor, and other operating expenses (excluding
depreciation)                                                         644.8         510.1
Depreciation and amortization                                           8.5           8.1
Selling and distribution expenses                                      57.0          53.8
General and administrative expenses                                    10.0           9.0
Other (income) expense, net                                            (0.1 )        (0.4 )
                                                                      720.2         580.7

Income from operations                                           $     24.6       $   6.2

                                                                    (percentage of sales)
Sales
Trade                                                                 100.0  %      100.0  %

Costs and expenses
Materials, labor, and other operating expenses (excluding
depreciation)                                                          86.6  %       86.9  %
Depreciation and amortization                                           1.1           1.4
Selling and distribution expenses                                       7.7           9.2
General and administrative expenses                                     1.3           1.5
Other (income) expense, net                                               -          (0.1 )
                                                                       96.7  %       98.9  %

Income from operations                                                  3.3  %        1.1  %


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Sales Volumes and Prices

Set forth below are historical U.S. housing starts data, segment sales volumes
and average net selling prices for the principal products sold by our Wood
Products segment, and sales mix and gross margin information for our Building
Materials Distribution segment for the three months ended March 31, 2013 and
2012.

                                                                       Three Months Ended
                                                                            March 31
                                                                    2013                    2012
                                                                           (thousands)
U.S. Housing Starts (a)
Single-family                                                        135.1                   105.5
Multi-family                                                          75.6                    49.5
                                                                     210.7                   155.0

                                                                           (millions)
Segment Sales
Wood Products                                              $         269.2            $      211.1
Building Materials Distribution                                      581.1                   451.4
Intersegment eliminations                                           (105.5 )                 (75.6 )
                                                           $         744.9            $      587.0

                                                                           (millions)
Wood Products
Sales Volumes
Laminated veneer lumber (LVL) (cubic feet)                             2.7                     2.1
I-joists (equivalent lineal feet)                                       41                      30
Plywood (sq. ft.) (3/8" basis)                                         346                     328
Lumber (board feet)                                                     50                      41

                                                                       (dollars per unit)
Wood Products
Average Net Selling Prices
Laminated veneer lumber (LVL) (cubic foot)                 $         15.25            $      15.05
I-joists (1,000 equivalent lineal feet)                                964                     935
Plywood (1,000 sq. ft.) (3/8" basis)                                   331                     267
Lumber (1,000 board feet)                                              463                     414

                                                                (percentage of Building Materials
                                                                       Distribution sales)
Building Materials Distribution
Product Line Sales
Commodity                                                             54.1 %                  50.2 %
General line                                                          31.0 %                  36.5 %
Engineered wood                                                       14.9 %                  13.3 %

Gross margin percentage (b)                                           11.0 %                  11.5 %


_______________________________________

(a) Actual U.S. housing starts data as reported by the U.S. Census Bureau.

(b) We define gross margin as "Sales" less "Materials, labor, and other operating expenses (excluding depreciation)." Materials, labor, and other operating expenses for our Building Materials Distribution segment include primarily costs of inventory purchased for resale. Gross margin percentage is gross margin as a percentage of segment sales.


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Sales

For the three months ended March 31, 2013, total sales increased $157.9 million, or 27%, to $744.9 million from $587.0 million during the three months ended March 31, 2012. The increase in sales was driven primarily by increases in sales volumes and prices for many of the products we manufacture and distribute. Average composite panel and average composite lumber prices for the three months ended March 31, 2013, were 50% and 43% higher, respectively, than in the same period in the prior year, as reflected by Random Lengths composite panel and lumber pricing. Increases in OSB and dimension lumber were the primary drivers of the price increases within the composite indexes. These price changes were a major contributor to the mix shift to a greater proportion of commodity sales, as well as an 18% increase in sales prices in our Building Materials Distribution segment when compared to the same quarter in the prior year. U.S. housing starts increased 36% in first quarter 2013, compared with the same period in the prior year. Single-family housing starts, which are a primary driver of our sales and typically result in higher building product utilization per start than multi-family units, experienced an increase of 28% for the quarter, compared with the same period in 2012.

Wood Products. Sales, including sales to our Building Materials Distribution segment, increased $58.1 million, or 28%, to $269.2 million for the three months ended March 31, 2013, from $211.1 million for the three months ended March 31, 2012. The increase in sales was due primarily to higher plywood prices and volumes, resulting in increases of $22.3 million and $4.8 million, respectively, as well as increased EWP volumes resulting in an increase of $20.3 million. Lumber sales volumes and prices also contributed $3.7 million and $2.4 million, respectively, to the increase in sales. Laminated veneer lumber (LVL) and I-joist sales volumes increased 28% and 37%, respectively, due to higher levels of residential construction activity, additional sales to existing customers, and sales to new EWP customers. In addition, lumber and plywood sales volumes increased 22% and 5%, respectively. Plywood and lumber prices increased 24% and 12%, respectively, while LVL and I-joist sales prices improved modestly by 1% and 3%, respectively.

Building Materials Distribution. Sales increased $129.7 million, or 29%, to $581.1 million for the three months ended March 31, 2013, from $451.4 million for the three months ended March 31, 2012. Commodity pricing increased significantly in the comparative periods, with the overall increase in sales driven primarily by improvements in sales prices and volumes of 18% and 9%, respectively. By product line, sales of EWP (substantially all of which is sourced through our Wood Products segment) increased 44%, or $26.5 million; commodity sales increased 39%, or $87.6 million; and general line product sales increased 9%, or $15.6 million.

Costs and Expenses

Materials, labor, and other operating expenses increased $134.7 million, or 26%, to $644.8 million for the three months ended March 31, 2013, compared with $510.1 million during the same period in the prior year. The increase primarily reflects higher manufacturing costs, including wood costs, labor, glues and resins, and energy, driven by higher sales volumes of EWP, lumber, and plywood in our Wood Products segment, as well as higher per-unit log costs, which increased approximately 10%, compared with the same period in 2012. However, materials, labor, and other operating expenses as a percentage of sales (MLO rate) in our Wood Products segment decreased by 160 basis points. The decrease in the MLO rate was primarily the result of improved leveraging of labor costs of 360 basis points due to higher sales, offset partially by increases in wood fiber costs and other manufacturing costs, including inventory purchased for resale, of 140 and 60 basis points, respectively. In addition, the increase in materials, labor, and other operating expenses was driven by higher purchased materials costs as a result of higher sales volumes in our Building Materials Distribution segment, as well as a 50-basis-point increase in the MLO rate, compared with the prior year, in our Building Materials Distribution segment.

Depreciation and amortization expenses were relatively flat for the three months ended March 31, 2013, compared with the same period in the prior year.

Selling and distribution expenses increased $3.2 million, or 6%, to $57.0 million for the three months ended March 31, 2013, compared with $53.8 million for the same period in the prior year. The increase was due primarily to higher employee-related expenses of $2.1 million and higher transportation costs in our Building Materials Distribution segment of $0.5 million due to increased sales volumes.

General and administrative expenses increased $1.0 million, or 11%, to $10.0 million for the three months ended March 31, 2013, compared with $9.0 million for the same period in the prior year. The increase was due primarily to higher professional service expenses of $0.6 million and higher employee-related expenses of $0.4 million.

For both the three months ended March 31, 2013 and 2012, other (income) expense, net, was insignificant.


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Income (Loss) From Operations

Income from operations increased $18.4 million to $24.6 million of income for the three months ended March 31, 2013, compared with $6.2 million for the three months ended March 31, 2012. Our improved financial results were driven primarily by higher sales volumes and prices for many of the products we manufacture and distribute, as well as leveraging of labor costs, as discussed above.

Wood Products. Segment income improved $10.0 million to $20.8 million of income for the three months ended March 31, 2013, from $10.8 million of income for the three months ended March 31, 2012. The increase in segment income was driven primarily by higher plywood, lumber, and EWP sales prices, as well as improved leveraging of selling and distribution expenses and depreciation and amortization. These improvements were offset partially by higher wood fiber costs.

Building Materials Distribution. Segment income (loss) improved $8.8 million to $8.0 million of income for the three months ended March 31, 2013, from a $0.8 million loss for the three months ended March 31, 2012. The improvement in segment income was driven primarily by a higher gross margin of $12.2 million, which was generated by increased sales, offset partially by a decline in gross margin percentage of 50 basis points, compared with the same period in the prior year. While total selling and distribution expenses increased 6%, these costs decreased as a percentage of segment sales by 180 basis points, as selling and distribution expenses did not increase at the same rate as sales.

Income Tax (Provision) Benefit

On February 4, 2013, we converted from a limited liability company to a corporation. In addition, we elected to be treated as a corporation for federal and state income tax purposes effective as of January 1, 2013. Therefore, we are subject to federal and state income tax expense beginning January 1, 2013. As a result of our conversion to a corporation, we recorded deferred tax assets, net of deferred tax liabilities, of $68.7 million on our Consolidated Balance Sheet, the effect of which was recorded as an income tax benefit in our Consolidated Statement of Operations during the three months ended March 31, 2013. As a corporation, we are subject to typical corporate U.S. federal and state income tax rates, which results in a statutory tax rate of approximately 38% under current tax law. For the three months ended March 31, 2013, excluding the discrete establishment of net deferred tax assets, we recorded $7.6 million of income tax expense and had an effective rate of 38.3%. During the three months ended March 31, 2013, the primary reason for the difference from the federal statutory income tax rate of 35% was the effect of state taxes.

Prior to January 1, 2013, as a limited liability company, we were not subject to entity-level federal or state income taxation. Our income tax provision generally consisted of income taxes payable to state jurisdictions that did not allow for the income tax liability to be passed through to our former sole member as well as income taxes payable by our separate subsidiaries that are taxed as corporations. As a limited liability company, we had an effective tax rate of less than 1%.

Liquidity and Capital Resources

On February 11, 2013, we issued 13,529,412 shares of common stock in our initial public offering. Following this initial public offering, we received proceeds of approximately $262.7 million, net of underwriting discounts and offering expenses. We used $25.0 million of the net proceeds to repay borrowings under our Revolving Credit Facility, and we intend to use the remainder for general corporate purposes.

We ended first quarter 2013 with $233.5 million of cash and $250.0 million of long-term debt. At March 31, 2013, we had $523.8 million of available liquidity (cash and cash equivalents and unused borrowing capacity under our Revolving Credit Facility). We generated $179.0 million of cash during the three months ended March 31, 2013, as cash provided by net proceeds from our initial public offering was offset by cash used for operations, net payments of $25.0 million on our Revolving Credit Facility, and capital spending, as discussed below.

We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations, working capital, and pension contributions for at least the next 12 months. In response to the continued economic uncertainty and to conserve our liquidity, we will continue to manage production levels to sales demand.


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Sources and Uses of Cash

We generate cash primarily from sales of our products, short-term and long-term borrowings, and equity offerings. Our primary uses of cash are for expenses related to the manufacture and distribution of building products, including inventory purchased for resale, fiber, labor, energy, and glues and resins. In addition to paying for ongoing operating costs, we use cash to invest in our business, repay debt, and meet our contractual obligations and commercial commitments. Below is a discussion of our sources and uses of cash for operating activities, investment activities, and financing activities.

                              Three Months Ended
                                   March 31
                              2013          2012
                                 (thousands)
Cash used for operations   $ (53,742 )   $ (9,961 )
Cash used for investment      (4,805 )     (8,053 )
Cash provided by financing   237,587            -

Operating Activities

For the three months ended March 31, 2013, our operating activities used $53.7 million of cash, compared with $10.0 million of cash used for operations in the same period in 2012. The $53.7 million of cash used for operations was due primarily to a $72.8 million increase in working capital and pension contributions of $9.7 million, offset partially by $24.4 million of income (before noncash income and expenses). The $10.0 million of cash used for operations during the three months ended March 31, 2012, was driven primarily by increases in working capital of $18.5 million and pension contributions of $3.9 million, offset partially by $13.2 million of income (before noncash income and expenses).

The increases in working capital in both periods were attributable primarily to higher receivables and inventories, offset partially by an increase in accounts payable and accrued liabilities. The increases in receivables in both periods primarily reflect increased sales of approximately 36% and 23%, comparing sales for the months of March 2013 and 2012 with sales for the months of December 2012 and 2011, respectively. The increase in inventories during the three months ended March 31, 2013, represents normal seasonal inventory build, product line expansions, and cost inflation on inventory purchased for resale and key raw materials we consume in the manufacture of wood products. The increase in accounts payable and accrued liabilities provided $57.5 million of cash during the three months ended March 31, 2013, compared with $58.8 million in the same period a year ago.

Investment Activities

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