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BCC > SEC Filings for BCC > Form 10-Q on 31-Jul-2013All Recent SEC Filings

Show all filings for BOISE CASCADE CO

Form 10-Q for BOISE CASCADE CO


31-Jul-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 set forth in Item 2 of Part II of this Form 10-Q and listed in other documents we file with the Securities and Exchange Commission (SEC). 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 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 $22.2 million during the three months ended June 30, 2013, compared with income from operations of $20.1 million during the three months ended June 30, 2012.

In our Wood Products segment, segment income improved $7.5 million to $23.0 million for the three months ended June 30, 2013, from $15.5 million for the three months ended June 30, 2012. The increase in segment income was driven primarily by higher plywood, EWP, and lumber sales prices, offset partially by higher wood fiber costs.

Despite an increase in sales during the three months ended June 30, 2013, Building Materials Distribution segment income decreased $4.7 million to $3.3 million for the three months ended June 30, 2013, from $8.0 million for the three months ended March 31, 2013. Commodity prices rose steadily in first quarter 2013 and then sharply declined throughout second quarter 2013. 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. In connection with our initial public offering, we received proceeds of $262.6 million, net of underwriting discounts and offering expenses. At June 30, 2013, we had $232.7 million of cash and cash equivalents and $290.7 million of unused committed bank line availability. We generated $178.2 million of cash during the six months ended June 30, 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 correlates with the level of residential construction activity in the U.S., which has historically been cyclical. As of July 2013, the Blue Chip Economic Indicators consensus forecast for 2013 single- and multi-


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family housing starts in the U.S. was 0.99 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 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 June 30, 2013, from 8.2% as of June 30, 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 five-year average historical levels but steadily declined throughout second quarter 2013. Future pricing could be volatile in response to industry 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 some of our 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;

actions of suppliers, customers and competitors, including merger and acquisition activities, plant closures and financial failures;

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;

attraction and retention of key management and other key employees;

our ability to successfully complete potential acquisitions or integrate efficiently acquired operations;


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

major equipment failure;

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

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 and six months ended June 30, 2013 and 2012:

                                                    Three Months Ended           Six Months Ended
                                                         June 30                     June 30
                                                     2013         2012          2013          2012
                                                                      (millions)
Sales                                            $   852.3      $ 732.9     $ 1,597.2      $ 1,319.9

Costs and expenses
Materials, labor, and other operating expenses
(excluding depreciation)                             751.0        632.6       1,395.8        1,142.7
Depreciation and amortization                          8.8          8.3          17.2           16.5
Selling and distribution expenses                     60.1         60.5         117.1          114.3
General and administrative expenses                   10.3         10.7          20.3           19.7
Other (income) expense, net                              -          0.7          (0.2 )          0.3
                                                     830.1        712.8       1,550.3        1,293.5

Income from operations                           $    22.2      $  20.1     $    46.9      $    26.4

                                                                 (percentage of sales)
Sales                                                100.0  %     100.0 %       100.0  %       100.0 %

Costs and expenses
Materials, labor, and other operating expenses
(excluding depreciation)                              88.1  %      86.3 %        87.4  %        86.6 %
Depreciation and amortization                          1.0          1.1           1.1            1.2
Selling and distribution expenses                      7.1          8.3           7.3            8.7
General and administrative expenses                    1.2          1.5           1.3            1.5
Other (income) expense, net                              -          0.1             -              -
                                                      97.4  %      97.3 %        97.1  %        98.0 %

Income from operations                                 2.6  %       2.7 %         2.9  %         2.0 %


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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 and six months ended June 30, 2013
and 2012.

                                             Three Months Ended                    Six Months Ended
                                                   June 30                             June 30
                                           2013                2012              2013             2012
                                                                  (thousands)
U.S. Housing Starts (a)
Single-family                                172.3              151.1               308.4          256.6
Multi-family                                  72.5               58.2               144.3          107.6
                                             244.8              209.3               452.7          364.2

                                                                  (millions)
Segment Sales
Wood Products                        $       280.4        $     241.8       $       549.6     $    453.0
Building Materials Distribution              681.5              580.5             1,262.6        1,032.0
Intersegment eliminations                   (109.6 )            (89.4 )            (215.1 )       (165.1 )
                                     $       852.3        $     732.9       $     1,597.2     $  1,319.9

                                                                  (millions)
Wood Products
Sales Volumes
Laminated veneer lumber (LVL) (cubic
feet)                                          2.7                2.3                 5.4            4.4
I-joists (equivalent lineal feet)               44                 39                  85             69
Plywood (sq. ft.) (3/8" basis)                 355                346                 701            674
Lumber (board feet)                             52                 49                 102             90

                                                              (dollars per unit)
Wood Products
Average Net Selling Prices
Laminated veneer lumber (LVL) (cubic
foot)                                $       15.67        $     14.94       $       15.46     $    15.00
I-joists (1,000 equivalent lineal
feet)                                          989                928                 977            931
Plywood (1,000 sq. ft.) (3/8" basis)           328                290                 330            278
Lumber (1,000 board feet)                      515                448                 490            432

                                             (percentage of Building Materials Distribution sales)
Building Materials Distribution
Product Line Sales
Commodity                                     51.2 %             48.0 %              52.5 %         48.9 %
General line                                  34.5 %             38.6 %              32.9 %         37.7 %
Engineered wood                               14.3 %             13.4 %              14.6 %         13.4 %

Gross margin percentage (b)                    9.1 %             11.8 %              10.0 %         11.7 %


_______________________________________

(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 June 30, 2013, total sales increased $119.4 million, or 16%, to $852.3 million from $732.9 million during the three months ended June 30, 2012. For the six months ended June 30, 2013, total sales increased $277.3 million, or 21%, to $1,597.2 million from $1,319.9 million for the same period in the prior year. 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 June 30, 2013, were 26% and 17% higher, respectively, than in the same period in the prior year, as reflected by Random Lengths composite panel and lumber pricing. Increases in oriented strand board (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 increase in sales prices in our Building Materials Distribution segment when compared with the same periods in the prior year. U.S. housing starts increased 17% in second 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 14% for the quarter, compared with the same period in 2012.

Wood Products. Sales, including sales to our Building Materials Distribution segment, increased $38.6 million, or 16%, to $280.4 million for the three months ended June 30, 2013, from $241.8 million for the three months ended June 30, 2012. The increase in sales was due primarily to higher plywood prices and volumes, resulting in increases of $13.7 million and $2.5 million, respectively, as well as increased EWP volumes and prices, resulting in increases of $11.1 million and $4.6 million, respectively. Lumber sales prices and volumes also contributed $3.5 million and $1.3 million, respectively, to the increase in sales. Laminated veneer lumber (LVL) and I-joist sales volumes increased 18% and 14%, respectively, due to higher levels of residential construction activity. In addition, plywood and lumber prices increased 13% and 15%, respectively, while LVL and I-joist sales prices improved 5% and 7%, respectively. Plywood and lumber sales volumes increased 2% and 6%, respectively.

For the six months ended June 30, 2013, sales, including sales to our Building Materials Distribution segment, increased $96.6 million, or 21%, to $549.6 million from $453.0 million for the same period in the prior year. The increase in sales was due primarily to higher plywood prices and volumes, resulting in increases of $35.9 million and $7.4 million, respectively, as well as increased EWP volumes and prices, resulting in increases of $30.4 million and $6.4 million, respectively. Lumber sales volumes and prices also contributed $5.1 million and $5.8 million, respectively, to the increase in sales. LVL and I-joist sales volumes increased 23% and 24%, respectively. In addition, plywood and lumber prices increased 19% and 13%, respectively, while LVL and I-joist sales prices improved 3% and 5%, respectively. Lumber and plywood sales volumes increased 13% and 4%, respectively.

Building Materials Distribution. Sales increased $101.0 million, or 17%, to $681.5 million for the three months ended June 30, 2013, from $580.5 million for the three months ended June 30, 2012. Commodity pricing was higher, compared with the same quarter in the prior year, with the overall increase in sales driven primarily by improvements in sales prices and volumes of 12% and 5%, respectively. By product line, sales of EWP (substantially all of which is sourced through our Wood Products segment) increased 26%, or $20.0 million; commodity sales increased 25%, or $70.4 million; and general line product sales increased 5%, or $10.6 million.

During the six months ended June 30, 2013, sales increased $230.6 million, or 22%, to $1,262.6 million from $1,032.0 million for the same period in the prior year. Commodity pricing was higher, compared with the same period in the prior year, with the overall increase in sales driven primarily by improvements in sales prices and volumes of 15% and 7%, respectively. By product line, sales of EWP increased 34%, or $46.5 million; commodity sales increased 31%, or $158.0 million; and general line product sales increased 7%, or $26.1 million.

Costs and Expenses

Materials, labor, and other operating expenses (excluding depreciation) increased $118.4 million, or 19%, to $751.0 million for the three months ended June 30, 2013, compared with $632.6 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. These increases were 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 11%, compared with the same period in 2012. In addition, costs of OSB, which is used as the vertical web used to assemble I-joists, increased 69% on a per-unit basis. However, materials, labor, and other operating expenses as a percentage of sales (MLO rate) in our Wood Products segment decreased by 80 basis points. The decrease in the MLO rate was primarily the result of improved leveraging of labor costs and other manufacturing costs of 230 and 310 basis points, respectively, due to higher sales, offset partially by increases in wood fiber costs of 460 basis points. In our Building Materials Distribution segment, the increase in materials, labor, and other operating expenses was driven by


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higher purchased materials costs as a result of higher sales volumes, as well as a 270-basis-point increase in the MLO rate, compared with second quarter 2012. This increase in the MLO rate was driven primarily by a steady decline in commodity prices throughout second quarter 2013, declining more than 25% since early April 2013. In our Building Materials Distribution Segment, periods of increasing prices provide the opportunity for higher sales and increased margins, while declining price environments may result in declines in sales and profitability and lower of cost or market inventory write-downs, as we experienced during second quarter 2013.

For the six months ended June 30, 2013, materials, labor, and other operating expenses (excluding depreciation) increased $253.1 million, or 22%, to $1,395.8 million, compared with $1,142.7 million in the same period in the prior year. The increase primarily reflects higher manufacturing costs, including wood costs, labor, glues and resins, and energy. These increases were driven by higher sales volumes of EWP, lumber, and plywood in our Wood Products segment, as well as higher per-unit OSB and log costs, which increased approximately 70% and 10%, respectively, compared with the same period in 2012. However, the MLO rate in our Wood Products segment decreased by 120 basis points. The decrease in the MLO rate was primarily the result of improved leveraging of labor costs and other manufacturing costs of 290 and 140 basis points, respectively, due to higher sales, offset partially by increases in wood fiber costs of 310 basis points. 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 170-basis-point increase in the MLO rate, compared with the prior year, in our Building Materials Distribution segment.

Depreciation and amortization expenses increased $0.5 million, or 5%, to $8.8 million for the three months ended June 30, 2013, compared with $8.3 million during the same period in the prior year. For the six months ended June 30, 2013, these expenses increased $0.7 million, or 5%, to $17.2 million, compared with $16.5 million in the same period in the prior year. The increases in both periods were due primarily to purchases of property and equipment.

Selling and distribution expenses decreased $0.4 million, or 1%, to $60.1 million for the three months ended June 30, 2013, compared with $60.5 million for the same period in the prior year. The decrease was due primarily to lower incentive compensation expenses of $2.3 million, offset partially by higher transportation costs in our Building Materials Distribution segment of $0.7 million due to increased sales volumes and an increase in other variable expenses. During the six months ended June 30, 2013, these costs increased $2.8 million, or 2%, to $117.1 million, compared with $114.3 million during the same period in 2012. The increase was due primarily to higher transportation and payroll costs in our Building Materials Distribution segment of $1.3 million and $1.2 million, respectively, due to increased sales volumes and an increase in other variable expenses, offset partially by lower incentive compensation expenses of $1.5 million.

General and administrative expenses decreased $0.4 million, or 4%, to $10.3 million for the three months ended June 30, 2013, compared with $10.7 million for the same period in the prior year. The decrease was due primarily to lower employee-related expenses of $1.3 million, offset partially by higher professional service expenses of $0.5 million. For the six months ended June 30, 2013, these expenses increased $0.6 million, or 3%, to $20.3 million, compared with $19.7 million during the same period in 2012. The increase was due primarily to higher professional service expenses of $1.1 million, offset partially by lower employee-related expenses of $0.8 million.

For the three and six months ended June 30, 2013 and 2012, other (income) expense, net, was insignificant.

Income (Loss) From Operations

Income from operations increased $2.1 million to $22.2 million of income for the three months ended June 30, 2013, compared with $20.1 million for the three months ended June 30, 2012. Income from operations increased $20.5 million to $46.9 million of income for the six months ended June 30, 2013, compared with $26.4 million for the six months ended June 30, 2012.

Wood Products. Segment income improved $7.5 million to $23.0 million for the three months ended June 30, 2013, from $15.5 million for the three months ended June 30, 2012. For the six months ended June 30, 2013, segment income increased $17.5 million to $43.9 million from $26.4 million for the six months ended June 30, 2012. The increase in segment income for both comparative periods was driven primarily by higher plywood, EWP, and lumber sales prices. These improvements were offset partially by higher wood fiber costs.

Building Materials Distribution. Segment income decreased $5.4 million to $3.3 million for the three months ended June 30, 2013, from $8.7 million for the three months ended June 30, 2012. The decline in segment income was driven primarily by a lower gross margin of $6.3 million, or a decline in gross margin percentage of 270 basis points, resulting from a steady decline in commodity prices throughout second quarter 2013. While commodity price increases for the comparative


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period contributed to sales increases, the steady downward trajectory in commodity prices during second quarter 2013 negatively affected gross margins, which include lower of cost or market inventory write-downs during the quarter. Total selling and distribution expenses were relatively flat for the three months ended June 30, 2013, compared with the same period in the prior year, although costs decreased as a percentage of segment sales by 140 basis points.

For the six months ended June 30, 2013, segment income improved $3.4 million to $11.3 million from $7.9 million for the six months ended June 30, 2012. The . . .

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