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BCC > SEC Filings for BCC > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for BOISE CASCADE CO

Form 10-Q for BOISE CASCADE CO


14-Nov-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 10, 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 13, 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 $30.5 million during the three months ended September 30, 2013, compared with income from operations of $28.1 million during the three months ended September 30, 2012.

In our Building Materials Distribution segment, income improved $7.6 million to $17.9 million for the three months ended September 30, 2013, from $10.3 million for the three months ended September 30, 2012. The increase in segment income was driven primarily by higher gross margin dollars generated as a result of improved sales volumes. In our Wood Products segment, income decreased by $4.6 million to $17.9 million for the three months ended September 30, 2013, from $22.5 million for the three months ended September 30, 2012. The decline was due primarily to higher wood fiber costs and lower plywood sales prices, offset partially by higher EWP and lumber sales prices. These changes are discussed further in "Our Operating Results" below.

On September 30, 2013, we completed the acquisition of 100% of the outstanding limited liability company interests of both Chester Wood Products LLC and Moncure Plywood LLC (Wood Resources LLC Southeast Operations) for an aggregate purchase price of $102.0 million, subject to post-closing adjustments based upon a working capital target (Acquisition). These facilities will complement our existing Wood Products business and enable us to better serve our customers in the eastern and southeastern United States.

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 $262.5 million, net of underwriting discounts and offering expenses. At September 30, 2013, we had $157.0 million of cash and cash equivalents and $274.7 million of unused committed bank line availability. Cash increased $102.5 million during the nine months ended September 30, 2013, as cash provided by net proceeds from our initial public offering, the issuance of an additional $50 million in aggregate principal amount of Senior


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Notes, and cash provided by operations was partially offset by the $100.0 million repurchase of common stock from BC Holdings in the Repurchase, the Acquisition, 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. While the consensus estimate for 2013 total U.S. housing starts has drifted lower the last several months, as of October 2013, the Blue Chip Economic Indicators consensus forecast for 2013 single- and multi-family housing starts in the U.S. was 0.93 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 7.2% as of September 30, 2013, from 7.8% as of September 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. Composite structural panel and lumber prices have been volatile thus far in 2013, with first quarter 2013 pricing well above five-year average historical levels followed by a sharp decline throughout second quarter 2013. During third quarter 2013, composite structural panel prices transacted within a generally narrow range and ended the quarter modestly above end of second quarter levels. Composite lumber prices improved steadily during third quarter 2013 and at the end of the third quarter were 18% above end of second quarter levels. Future pricing could be volatile in response to industry operating rates, inventory levels in various distribution channels, and seasonal demand patterns. 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;


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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;

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.


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Our Operating Results

The following tables set forth our operating results in dollars and as a
percentage of sales for the three and nine months ended September 30, 2013 and
2012:

                                                    Three Months Ended          Nine Months Ended
                                                       September 30                September 30
                                                     2013         2012          2013          2012
                                                                      (millions)
Sales                                            $   878.0      $ 764.6     $ 2,475.2      $ 2,084.5

Costs and expenses
Materials, labor, and other operating expenses
(excluding depreciation)                             759.8        653.1       2,155.6        1,795.9
Depreciation and amortization                          9.0          8.5          26.2           24.9
Selling and distribution expenses                     66.2         62.6         183.4          176.9
General and administrative expenses                   12.9         12.2          33.2           31.9
Other (income) expense, net                           (0.4 )        0.1          (0.5 )          0.4
                                                     847.5        736.5       2,397.8        2,030.0

Income from operations                           $    30.5      $  28.1     $    77.3      $    54.5

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

Costs and expenses
Materials, labor, and other operating expenses
(excluding depreciation)                              86.5  %      85.4 %        87.1  %        86.2 %
Depreciation and amortization                          1.0          1.1           1.1            1.2
Selling and distribution expenses                      7.5          8.2           7.4            8.5
General and administrative expenses                    1.5          1.6           1.3            1.5
Other (income) expense, net                              -            -             -              -
                                                      96.5  %      96.3 %        96.9  %        97.4 %

Income from operations                                 3.5  %       3.7 %         3.1  %         2.6 %


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Sales Volumes and Prices

Set forth below are 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 nine months ended September 30, 2013 and 2012.

                                             Three Months Ended                   Nine Months Ended
                                                September 30                         September 30
                                           2013                2012              2013             2012
                                                                  (millions)
Segment Sales
Wood Products                        $       283.2        $     259.8       $       832.8     $    712.7
Building Materials Distribution              721.5              605.2             1,984.1        1,637.2
Intersegment eliminations                   (126.7 )           (100.4 )            (341.8 )       (265.4 )
                                     $       878.0        $     764.6       $     2,475.2     $  2,084.5

                                                                  (millions)
Wood Products
Sales Volumes
Laminated veneer lumber (LVL) (cubic
feet)                                          3.0                2.6                 8.4            7.0
I-joists (equivalent lineal feet)               51                 42                 135            110
Plywood (sq. ft.) (3/8" basis)                 344                343               1,045          1,018
Lumber (board feet)                             50                 50                 152            140

                                                              (dollars per unit)
Wood Products
Average Net Selling Prices
Laminated veneer lumber (LVL) (cubic
foot)                                $       15.85        $     14.75       $       15.60     $    14.90
I-joists (1,000 equivalent lineal
feet)                                        1,017                915                 992            925
Plywood (1,000 sq. ft.) (3/8" basis)           303                318                 321            292
Lumber (1,000 board feet)                      515                430                 498            431

                                             (percentage of Building Materials Distribution sales)
Building Materials Distribution
Product Line Sales
Commodity                                     49.5 %             49.4 %              51.4 %         49.1 %
General line                                  33.9 %             36.2 %              33.3 %         37.1 %
Engineered wood                               16.6 %             14.4 %              15.3 %         13.8 %

Gross margin percentage (a)                   11.6 %             12.0 %              10.6 %         11.8 %


_______________________________________

(a) 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.

Sales

For the three months ended September 30, 2013, total sales increased $113.4 million, or 15%, to $878.0 million from $764.6 million during the three months ended September 30, 2012. For the nine months ended September 30, 2013, total sales increased $390.7 million, or 19%, to $2,475.2 million from $2,084.5 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. Using the available July and August 2013 data, total U.S. housing starts increased 18%, with single-family starts up 15% from the same period in 2012. On a year-to-date basis through August, total housing starts increased 23%, with single-family starts


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up 19% from the same period in 2012. Single-family housing starts are a primary driver of our sales and typically result in higher building product utilization per start than multi-family units. Average composite lumber prices for the three months ended September 30, 2013, were 7% higher, while average composite panel prices were 9% lower than in the same period in the prior year, as reflected by Random Lengths composite lumber and panel pricing.

Wood Products. Sales, including sales to our Building Materials Distribution segment, increased $23.4 million, or 9%, to $283.2 million for the three months ended September 30, 2013, from $259.8 million for the three months ended September 30, 2012. The increase in sales was due primarily to higher EWP volumes and prices, resulting in increases of $14.0 million and $10.2 million, respectively, as well as increased lumber prices, resulting in an increase of $4.3 million. These increases were offset partially by a decrease of $5.0 million due to lower plywood prices. I-joist and laminated veneer lumber (LVL) sales volumes increased 21% and 16%, respectively, due to higher levels of residential construction activity. In addition, lumber prices increased 20%, while I-joist and LVL sales prices improved 11% and 7%, respectively. Plywood sales prices decreased 5%.

For the nine months ended September 30, 2013, sales, including sales to our Building Materials Distribution segment, increased $120.1 million, or 17%, to $832.8 million from $712.7 million for the same period in the prior year. The increase in sales was due primarily to increased EWP volumes and prices, resulting in increases of $45.3 million and $18.8 million, respectively, as well as higher plywood prices and volumes, resulting in increases of $30.6 million and $7.9 million, respectively. Lumber sales prices and volumes also contributed $10.1 million and $5.2 million, respectively, to the increase in sales. I-joist and LVL sales volumes increased 23% and 20%, respectively. In addition, lumber and plywood prices increased 16% and 10%, respectively, while I-joist and LVL sales prices improved 7% and 5%, respectively. Lumber and plywood sales volumes increased 9% and 3%, respectively.

Building Materials Distribution. Sales increased $116.3 million, or 19%, to $721.5 million for the three months ended September 30, 2013, from $605.2 million for the three months ended September 30, 2012. Compared with the same quarter in the prior year, the overall increase in sales was driven primarily by improvements in sales volumes and prices of 16% and 2%, respectively. By product line, commodity sales increased 20%, or $58.3 million; sales of EWP
(substantially all of which is sourced through our Wood Products segment)
increased 37%, or $32.3 million; and general line product sales increased 12%, or $25.7 million.

During the nine months ended September 30, 2013, sales increased $347.0 million, or 21%, to $1,984.1 million from $1,637.2 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 both sales prices and volumes of 10%. By product line, commodity sales increased 27%, or $216.3 million; sales of EWP increased 35%, or $78.8 million; and general line product sales increased 9%, or $51.9 million.

Costs and Expenses

Materials, labor, and other operating expenses (excluding depreciation) increased $106.7 million, or 16%, to $759.8 million for the three months ended September 30, 2013, compared with $653.1 million during the same period in the prior year. 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 40-basis-point increase in materials, labor, and other operating expenses as a percentage of sales (MLO rate), compared with third quarter 2012, in our Building Materials Distribution segment. In our Wood Products segment, 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 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 oriented strand board (OSB), which is used as the vertical web to assemble I-joists, increased 4% on a per-unit basis. The MLO rate in our Wood Products segment increased by 270 basis points. The increase in the MLO rate was primarily the result of increases in wood fiber costs of 360 basis points, offset partially by improved leveraging of labor costs of 90 basis points due to higher sales.

For the nine months ended September 30, 2013, materials, labor, and other operating expenses (excluding depreciation) increased $359.7 million, or 20%, to $2,155.6 million, compared with $1,795.9 million in the same period in the prior year. 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 120-basis-point increase in the MLO rate, compared with the prior year, in our Building Materials Distribution segment. In our Wood Products segment, 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 44% and 10%, respectively, compared with the same period in 2012. The MLO


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rate in our Wood Products segment increased by 20 basis points. The increase in the MLO rate was primarily the result of increases in wood fiber costs of 330 basis points, offset partially by improved leveraging of labor costs and other manufacturing costs of 220 and 90 basis points, respectively, due to higher sales.

Depreciation and amortization expenses increased $0.5 million, or 6%, to $9.0 million for the three months ended September 30, 2013, compared with $8.5 million during the same period in the prior year. For the nine months ended September 30, 2013, these expenses increased $1.3 million, or 5%, to $26.2 million, compared with $24.9 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 increased $3.6 million, or 6%, to $66.2 million for the three months ended September 30, 2013, compared with $62.6 million for the same period in the prior year. The increase was due primarily to higher payroll and transportation costs in our Building Materials Distribution segment of $1.8 million and $1.1 million, respectively, due to increased sales volumes and an increase in other variable expenses, offset partially by lower incentive compensation expenses of $0.4 million. During the nine months ended September 30, 2013, these costs increased $6.5 million, or 4%, to $183.4 million, compared with $176.9 million during the same period in 2012. The increase was due primarily to higher payroll and transportation costs in our Building Materials Distribution segment of $4.2 million and $2.4 million, respectively, due to increased sales volumes and an increase in other variable expenses, offset partially by lower incentive compensation expenses of $1.9 million.

General and administrative expenses increased $0.7 million, or 6%, to $12.9 million for the three months ended September 30, 2013, compared with $12.2 million for the same period in the prior year. The increase was due primarily to higher professional services, including secondary offering expenses, of $1.0 million, as well as increased payroll and travel expenses of $0.4 million and $0.5 million, respectively, offset partially by lower incentive compensation expenses of $1.5 million. For the nine months ended September 30, 2013, these expenses increased $1.3 million, or 4%, to $33.2 million, compared with $31.9 million during the same period in 2012. The increase was due primarily to higher professional service, payroll, and travel expenses of $2.1 million, $0.8 million, and $0.6 million, respectively, offset partially by lower incentive compensation expenses of $2.7 million.

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

Income (Loss) From Operations

Income from operations increased $2.4 million to $30.5 million of income for the three months ended September 30, 2013, compared with $28.1 million for the three months ended September 30, 2012. Income from operations increased $22.8 million to $77.3 million of income for the nine months ended September 30, 2013, compared with $54.5 million for the nine months ended September 30, 2012.

Wood Products. Segment income decreased $4.6 million to $17.9 million for the three months ended September 30, 2013, from $22.5 million for the three months ended September 30, 2012. The decline was due primarily to higher wood fiber costs and lower plywood sales prices, offset partially by higher EWP and lumber sales prices. For the nine months ended September 30, 2013, segment income increased $13.0 million to $61.8 million from $48.8 million for the nine months ended September 30, 2012. The increase was driven primarily by higher plywood, EWP, and lumber sales prices, as well as higher sales volumes of plywood and EWP. These improvements were offset partially by higher wood fiber costs, as well as lower margins on inventory purchased for resale in support of customer programs.

Building Materials Distribution. Segment income increased $7.6 million to $17.9 million for the three months ended September 30, 2013, from $10.3 million for the three months ended September 30, 2012. The increase in segment income was driven primarily by a higher gross margin of $11.4 million as a result of improved sales volumes. While total selling and distribution expenses increased $4.1 million for the three months ended September 30, 2013, compared with the same period in the prior year, these costs decreased as a percentage of segment sales by 90 basis points, as selling and distribution expenses did not increase at the same rate as sales.

For the nine months ended September 30, 2013, segment income improved $10.9 million to $29.1 million from $18.2 million for the nine months ended September 30, 2012. The improvement in segment income was driven primarily by a . . .

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