Financial Instruments, Derivatives and Hedging Activities

3 Months Ended

Mar. 30, 2013

Financial Instruments, Derivatives and Hedging Activities

10. Financial Instruments, Derivatives and Hedging Activities

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, trade accounts receivable, other assets (non-derivatives), short-term borrowings and trade accounts payable approximate fair value because of the short maturity of these instruments. The following table presents the carrying amounts and estimated fair values of the Company’s other financial instruments at March 30, 2013 and December 29, 2012. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.

	March 30, 2013
	Fair Value								Carrying Amount
	Level 1		Level 2		Level 3		Total
	(thousands)
Financial assets:
Timber notes receivable - Wells	$	—	$	973,539	$	—	$	973,539	$	817,500
Boise Investment	$	—	$	206,854	$	—	$	206,854	$	91,693
Financial liabilities:
Recourse debt	$	83,435	$	150,770	$	—	$	234,205	$	237,159
Non-recourse debt - Wells	$	—	$	892,420	$	—	$	892,420	$	735,000
	December 29, 2012
	Fair Value								Carrying Amount
	Level 1		Level 2		Level 3		Total
	(thousands)
Financial assets:
Timber notes receivable - Wells	$	—	$	986,365	$	—	$	986,365	$	817,500
Financial liabilities:
Recourse debt	$	—	$	229,431	$	—	$	229,431	$	236,194
Non-recourse debt - Wells	$	—	$	903,912	$	—	$	903,912	$	735,000

In establishing a fair value, there is a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The basis of the fair value measurement is categorized in three levels, in order of priority, described as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or financial instruments for which all significant inputs are observable either directly or indirectly.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable thus reflecting assumptions about the market participants.

The carrying amounts shown in the table are included in the Consolidated Balance Sheets under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

• Timber notes receivable: Timber notes receivable as of March 30, 2013 consists solely of the Wells Guaranteed Installment Notes. The fair value of the Wells Guaranteed Installment Notes is determined as the present value of expected future cash flows discounted at the current interest rate for loans of similar terms with comparable credit risk (Level 2 inputs).

• Boise Investment: The fair value of the Boise Investment is calculated as the sum of the market value of OfficeMax’s indirect investment in Boise Cascade Company, the primary investment of Boise Cascade Holdings, Inc., plus OfficeMax’s portion of any cash held by Boise Cascade Holdings, L.L.C. as of the balance sheet date (together, Level 2 inputs). OfficeMax’s indirect investment in Boise Cascade Company is calculated using the number of shares OfficeMax indirectly holds in Boise Cascade Company multiplied by the closing stock price of Boise Cascade Company as of the last trading day prior to the balance sheet date. Prior to the first quarter of 2013, it was not considered practicable to estimate the fair value of the Boise Investment. Boise Cascade Holdings, L.L.C. and its subsidiaries were untraded companies without observable market inputs. However, as discussed in Note 8, “Investment in Boise Cascade Holdings, L.L.C.,” Boise Cascade Company became a publicly traded company through the Boise IPO executed in the first quarter of 2013. As of March 30, 2013, the Boise Investment constitutes an indirect interest in Boise Cascade Company’s publicly traded securities (NYSE: BCC). The availability of quoted market prices for the indirect investment makes the estimate of fair value practicable beginning in the first quarter of 2013.

• Recourse debt: The Company’s debt instruments are not widely traded. Recourse debt for which there were trades on the last day of the period (the “measurement date”) was valued using the unadjusted quoted price from the last trade on the measurement date (Level 1 input). Recourse debt for which there were no transactions on the measurement date was valued based on quoted market prices near the measurement date when available or by discounting the future cash flows of each instrument using rates based on the most recently observable trade or using rates currently offered to the Company for similar debt instruments of comparable maturities (Level 2 inputs).

• Non-recourse debt: Non-recourse debt as of March 30, 2013 consists solely of the Securitization Notes supported by Wells. The fair value of the Securitization Notes supported by Wells is estimated by discounting the future cash flows of the instrument at rates currently available to the Company for similar instruments of comparable maturities (Level 2 inputs).

During the first three months of 2013, there were no significant changes to the techniques used to measure fair value except as noted above for the estimate of fair value of the Boise Investment. Other than routine borrowings and payments of recourse debt, there were no changes to the financial instruments for which fair value is being calculated. Any changes in the level of inputs for recourse debt is due to the existence or nonexistence of trades on the measurement date from which to obtain unadjusted quoted prices.

Derivatives and Hedging Activities

Changes in foreign currency exchange rates expose us to financial market risk. We occasionally use derivative financial instruments, such as forward exchange contracts, to manage our exposure associated with commercial transactions and certain liabilities that are denominated in a currency other than the currency of the operating unit entering into the underlying transaction. We do not enter into derivative instruments for any other purpose. We do not speculate using derivative instruments. The fair values of derivative financial instruments were not material at the end of the first quarter of 2013 or at 2012 fiscal year-end.