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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|
| | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
| For the quarterly period ended | June 30, 2019 |
| | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
For the transition period from to |
Commission File Number: 001-35805
Boise Cascade Company
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 20-1496201 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1111 West Jefferson Street Suite 300
Boise, Idaho 83702-5389
(Address of principal executive offices) (Zip Code)
(208) 384-6161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
Securities registered pursuant to Section 12(b) of the Act: |
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | BCC | New York Stock Exchange |
There were 38,974,845 shares of the registrant's common stock, $0.01 par value per share, outstanding on July 26, 2019.
Table of Contents
PART I—FINANCIAL INFORMATION
| |
ITEM 1. | FINANCIAL STATEMENTS |
Boise Cascade Company Consolidated Statements of Operations (unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| (thousands, except per-share data) |
Sales | $ | 1,230,081 |
| | $ | 1,408,132 |
| | $ | 2,272,167 |
| | $ | 2,590,973 |
|
| | | | | | | |
Costs and expenses | |
| | |
| | |
| | |
|
Materials, labor, and other operating expenses (excluding depreciation) | 1,049,655 |
| | 1,193,918 |
| | 1,947,477 |
| | 2,203,696 |
|
Depreciation and amortization | 19,454 |
| | 24,296 |
| | 38,671 |
| | 46,407 |
|
Selling and distribution expenses | 98,866 |
| | 96,841 |
| | 185,892 |
| | 180,197 |
|
General and administrative expenses | 16,786 |
| | 19,977 |
| | 33,461 |
| | 35,863 |
|
Other (income) expense, net | 188 |
| | (956 | ) | | (120 | ) | | (1,050 | ) |
| 1,184,949 |
| | 1,334,076 |
| | 2,205,381 |
| | 2,465,113 |
|
| | | | | | | |
Income from operations | 45,132 |
| | 74,056 |
| | 66,786 |
| | 125,860 |
|
| | | | | | | |
Foreign currency exchange gain (loss) | 248 |
| | (172 | ) | | 410 |
| | (435 | ) |
Pension expense (excluding service costs) | (290 | ) | | (12,380 | ) | | (589 | ) | | (12,624 | ) |
Interest expense | (6,486 | ) | | (6,580 | ) | | (12,923 | ) | | (12,942 | ) |
Interest income | 416 |
| | 237 |
| | 908 |
| | 501 |
|
Change in fair value of interest rate swaps | (1,551 | ) | | 499 |
| | (2,534 | ) | | 2,140 |
|
| (7,663 | ) | | (18,396 | ) | | (14,728 | ) | | (23,360 | ) |
| | | | | | | |
Income before income taxes | 37,469 |
| | 55,660 |
| | 52,058 |
| | 102,500 |
|
Income tax provision | (9,751 | ) | | (13,835 | ) | | (12,951 | ) | | (23,625 | ) |
Net income | $ | 27,718 |
| | $ | 41,825 |
| | $ | 39,107 |
| | $ | 78,875 |
|
| | | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Basic | 39,087 |
| | 38,981 |
| | 38,986 |
| | 38,880 |
|
Diluted | 39,199 |
| | 39,403 |
| | 39,185 |
| | 39,384 |
|
| | | | | | | |
Net income per common share: | | | | | | | |
Basic | $ | 0.71 |
| | $ | 1.07 |
| | $ | 1.00 |
| | $ | 2.03 |
|
Diluted | $ | 0.71 |
| | $ | 1.06 |
| | $ | 1.00 |
| | $ | 2.00 |
|
| | | | | | | |
Dividends declared per common share | $ | 0.09 |
| | $ | 0.07 |
| | $ | 0.18 |
| | $ | 0.14 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
Boise Cascade Company Consolidated Statements of Comprehensive Income (unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| (thousands) |
Net income | $ | 27,718 |
| | $ | 41,825 |
| | $ | 39,107 |
| | $ | 78,875 |
|
Other comprehensive income, net of tax | | | | | | | |
Defined benefit pension plans | | | | | | | |
Actuarial gain, net of tax of $-, $3,383, $- and $3,383, respectively | — |
| | 9,957 |
| | — |
| | 9,957 |
|
Amortization of actuarial (gain) loss, net of tax of ($11), $90, ($22) and $298, respectively | (33 | ) | | 266 |
| | (65 | ) | | 879 |
|
Effect of settlements, net of tax of $-, $3,044, $-, and $3,044, respectively | — |
| | 8,959 |
| | — |
| | 8,959 |
|
Other comprehensive income (loss), net of tax | (33 | ) | | 19,182 |
| | (65 | ) | | 19,795 |
|
Comprehensive income | $ | 27,685 |
| | $ | 61,007 |
| | $ | 39,042 |
| | $ | 98,670 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
Boise Cascade Company Consolidated Balance Sheets (unaudited) |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| (thousands) |
ASSETS | |
| | |
|
Current | |
| | |
|
Cash and cash equivalents | $ | 202,407 |
| | $ | 191,671 |
|
Receivables | | | |
|
Trade, less allowances of $744 and $1,062 | 316,698 |
| | 214,338 |
|
Related parties | 490 |
| | 436 |
|
Other | 11,476 |
| | 14,466 |
|
Inventories | 524,451 |
| | 533,049 |
|
Prepaid expenses and other | 17,745 |
| | 31,818 |
|
Total current assets | 1,073,267 |
| | 985,778 |
|
| | | |
Property and equipment, net | 464,095 |
| | 487,224 |
|
Operating lease right-of-use assets | 65,989 |
| | — |
|
Finance lease right-of-use assets | 20,301 |
| | — |
|
Timber deposits | 14,918 |
| | 12,568 |
|
Goodwill | 60,342 |
| | 59,159 |
|
Intangible assets, net | 18,409 |
| | 16,851 |
|
Deferred income taxes | 8,167 |
| | 8,211 |
|
Other assets | 7,323 |
| | 11,457 |
|
Total assets | $ | 1,732,811 |
| | $ | 1,581,248 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
Boise Cascade Company Consolidated Balance Sheets (continued) (unaudited) |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| (thousands, except per-share data) |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current | | | |
Accounts payable | | | |
Trade | $ | 273,570 |
| | $ | 210,587 |
|
Related parties | 1,633 |
| | 1,070 |
|
Accrued liabilities | | | |
Compensation and benefits | 64,912 |
| | 87,911 |
|
Interest payable | 6,735 |
| | 6,748 |
|
Other | 77,256 |
| | 63,509 |
|
Total current liabilities | 424,106 |
| | 369,825 |
|
| | | |
Debt | | | |
Long-term debt | 439,986 |
| | 439,428 |
|
| | | |
Other | | | |
Compensation and benefits | 43,548 |
| | 41,283 |
|
Operating lease liabilities, net of current portion | 60,289 |
| | — |
|
Finance lease liabilities, net of current portion | 21,701 |
| | — |
|
Deferred income taxes | 24,439 |
| | 19,218 |
|
Other long-term liabilities | 13,721 |
| | 38,904 |
|
| 163,698 |
| | 99,405 |
|
| | | |
Commitments and contingent liabilities |
|
| |
|
|
| | | |
Stockholders' equity | | | |
Preferred stock, $0.01 par value per share; 50,000 shares authorized, no shares issued and outstanding | — |
| | — |
|
Common stock, $0.01 par value per share; 300,000 shares authorized, 44,342 and 44,076 shares issued, respectively | 443 |
| | 441 |
|
Treasury stock, 5,367 shares at cost | (138,909 | ) | | (138,909 | ) |
Additional paid-in capital | 529,147 |
| | 528,654 |
|
Accumulated other comprehensive loss | (47,717 | ) | | (47,652 | ) |
Retained earnings | 362,057 |
| | 330,056 |
|
Total stockholders' equity | 705,021 |
| | 672,590 |
|
Total liabilities and stockholders' equity | $ | 1,732,811 |
| | $ | 1,581,248 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
Boise Cascade Company Consolidated Statements of Cash Flows (unaudited) |
| | | | | | | |
| Six Months Ended June 30 |
| 2019 | | 2018 |
| (thousands) |
Cash provided by (used for) operations | | | |
Net income | $ | 39,107 |
| | $ | 78,875 |
|
Items in net income not using (providing) cash | | | |
Depreciation and amortization, including deferred financing costs and other | 39,821 |
| | 47,416 |
|
Stock-based compensation | 4,069 |
| | 4,731 |
|
Pension expense | 911 |
| | 13,026 |
|
Deferred income taxes | 5,629 |
| | (1,092 | ) |
Change in fair value of interest rate swaps | 2,534 |
| | (2,140 | ) |
Other | (33 | ) | | (1,051 | ) |
Decrease (increase) in working capital, net of acquisitions | | | |
Receivables | (93,977 | ) | | (111,068 | ) |
Inventories | 13,324 |
| | (89,051 | ) |
Prepaid expenses and other | (4,773 | ) | | (4,361 | ) |
Accounts payable and accrued liabilities | 45,355 |
| | 134,498 |
|
Pension contributions | (927 | ) | | (1,042 | ) |
Income taxes payable | 16,735 |
| | 18,586 |
|
Other | (923 | ) | | 1,009 |
|
Net cash provided by operations | 66,852 |
| | 88,336 |
|
| | | |
Cash provided by (used for) investment | |
| | |
|
Expenditures for property and equipment | (32,824 | ) | | (28,327 | ) |
Acquisitions of businesses and facilities | (15,675 | ) | | (17,577 | ) |
Proceeds from sale of facilities | 2,493 |
| | — |
|
Proceeds from sales of assets and other | 1,395 |
| | 321 |
|
Net cash used for investment | (44,611 | ) | | (45,583 | ) |
| | | |
Cash provided by (used for) financing | | | |
Borrowings of long-term debt, including revolving credit facility | 5,500 |
| | 7,500 |
|
Payments of long-term debt, including revolving credit facility | (5,500 | ) | | (7,500 | ) |
Tax withholding payments on stock-based awards | (3,574 | ) | | (5,120 | ) |
Dividends paid on common stock | (7,562 | ) | | (5,481 | ) |
Other | (369 | ) | | 719 |
|
Net cash used for financing | (11,505 | ) | | (9,882 | ) |
| | | |
Net increase in cash and cash equivalents | 10,736 |
| | 32,871 |
|
| | | |
Balance at beginning of the period | 191,671 |
| | 177,140 |
|
| | | |
Balance at end of the period | $ | 202,407 |
| | $ | 210,011 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
Boise Cascade Company Consolidated Statements of Stockholders' Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
| Shares | | Amount | | Shares | | Amount | | | | |
| (thousands) |
Balance at December 31, 2018 | 44,076 |
| | $ | 441 |
| | 5,367 |
| | $ | (138,909 | ) | | $ | 528,654 |
| | $ | (47,652 | ) | | $ | 330,056 |
| | $ | 672,590 |
|
Net income | | | | | | | | | | | | | 11,389 |
| | 11,389 |
|
Other comprehensive loss | | | | | | | | | | | (32 | ) | | | | (32 | ) |
Common stock issued | 265 |
| | 2 |
| | | | | | | | | | | | 2 |
|
Stock-based compensation | | | | | | | | | 2,200 |
| | | | | | 2,200 |
|
Common stock dividends ($0.09 per share) | | | | | | | | | | | | | (3,561 | ) | | (3,561 | ) |
Tax withholding payments on stock-based awards | | | | | | | | | (3,569 | ) | | | | | | (3,569 | ) |
Other | | | | | | | | | (2 | ) | | | | | | (2 | ) |
Balance at March 31, 2019 | 44,341 |
| | $ | 443 |
| | 5,367 |
| | $ | (138,909 | ) | | $ | 527,283 |
| | $ | (47,684 | ) | | $ | 337,884 |
| | $ | 679,017 |
|
Net income | | | | | | | | | | | | | 27,718 |
| | 27,718 |
|
Other comprehensive loss | | | | | | | | | | | (33 | ) | | | | (33 | ) |
Common stock issued | 1 |
| | — |
| | | | | | | | | | | | — |
|
Stock-based compensation | | | | | | | | | 1,869 |
| | | | | | 1,869 |
|
Common stock dividends ($0.09 per share) | | | | | | | | | | | | | (3,545 | ) | | (3,545 | ) |
Tax withholding payments on stock-based awards | | | | | | | | | (5 | ) | | | | | | (5 | ) |
Balance at June 30, 2019 | 44,342 |
| | $ | 443 |
| | 5,367 |
| | $ | (138,909 | ) | | $ | 529,147 |
| | $ | (47,717 | ) | | $ | 362,057 |
| | $ | 705,021 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
Boise Cascade Company Consolidated Statements of Stockholders' Equity (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
| Shares | | Amount | | Shares | | Amount | | | | |
| (thousands) |
Balance at December 31, 2017 | 43,748 |
| | $ | 437 |
| | 5,167 |
| | $ | (133,979 | ) | | $ | 523,550 |
| | $ | (76,702 | ) | | $ | 361,243 |
| | $ | 674,549 |
|
Net income | | | | | | | | | | | | | 37,050 |
| | 37,050 |
|
Other comprehensive income | | | | | | | | | | | 613 |
| | | | 613 |
|
Common stock issued | 292 |
| | 3 |
| | | | | | | | | | | | 3 |
|
Stock-based compensation | | | | | | | | | 2,286 |
| | | | | | 2,286 |
|
Common stock dividends ($0.07 per share) | | | | | | | | | | | | | (2,793 | ) | | (2,793 | ) |
Tax withholding payments on stock-based awards | | | | | | | | | (5,117 | ) | | | | | | (5,117 | ) |
Proceeds from exercise of stock options | | | | | | | | | 464 |
| | | | | | 464 |
|
Other | | | | | | | | | (3 | ) | | | | | | (3 | ) |
Balance at March 31, 2018 | 44,040 |
| | $ | 440 |
| | 5,167 |
| | $ | (133,979 | ) | | $ | 521,180 |
| | $ | (76,089 | ) | | $ | 395,500 |
| | $ | 707,052 |
|
Net income | | | | | | | | | | | | | 41,825 |
| | 41,825 |
|
Other comprehensive income | | | | | | | | | | | 19,182 |
| | | | 19,182 |
|
Common stock issued | 18 |
| | 1 |
| | | | | | | | | | | | 1 |
|
Stock-based compensation | | | | | | | | | 2,445 |
| | | | | | 2,445 |
|
Common stock dividends ($0.07 per share) | | | | | | | | | | | | | (2,791 | ) | | (2,791 | ) |
Tax withholding payments on stock-based awards | | | | | | | | | (3 | ) | | | | | | (3 | ) |
Proceeds from exercise of stock options | | | | | | | | | 478 |
| | | | | | 478 |
|
Other | | | | | | | | | (1 | ) | | | | | | (1 | ) |
Balance at June 30, 2018 | 44,058 |
| | $ | 441 |
| | 5,167 |
| | $ | (133,979 | ) | | $ | 524,099 |
| | $ | (56,907 | ) | | $ | 434,534 |
| | $ | 768,188 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
Condensed Notes to Unaudited Quarterly Consolidated Financial Statements
| |
1. | Nature of Operations and Consolidation |
Nature of Operations
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 and its consolidated subsidiaries. We are one of the largest producers of engineered wood products (EWP) and plywood in North America and a leading United States (U.S.) wholesale distributor of building products.
We operate our business using two reportable segments: (1) Wood Products, which primarily manufactures EWP and plywood, and (2) Building Materials Distribution, which is a wholesale distributor of building materials. For more information, see Note 13, Segment Information.
Consolidation
The accompanying quarterly consolidated financial statements have not been audited by an independent registered public accounting firm but, in the opinion of management, include all adjustments necessary to present fairly the financial position, results of operations, cash flows, and stockholders' equity for the interim periods presented. Except as disclosed within these condensed notes to unaudited quarterly consolidated financial statements, the adjustments made were of a normal, recurring nature. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The quarterly consolidated financial statements include the accounts of Boise Cascade and its subsidiaries after elimination of intercompany balances and transactions. Quarterly results are not necessarily indicative of results that may be expected for the full year. These condensed notes to unaudited quarterly consolidated financial statements should be read in conjunction with our 2018 Form 10-K and the other reports we file with the Securities and Exchange Commission (SEC).
| |
2. | Summary of Significant Accounting Policies |
Accounting Policies
The complete summary of significant accounting policies is included in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our 2018 Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, intangible assets, and other long-lived assets; legal contingencies; guarantee obligations; indemnifications; assumptions used in retirement, medical, and workers' compensation benefits; assumptions used in the determination of right-of-use assets and related lease liabilities; stock-based compensation; fair value measurements; income taxes; and vendor and customer rebates, among others. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For revenue disaggregated by major product line for each reportable segment, see Note 13, Segment Information.
Fees for shipping and handling charged to customers for sales transactions are included in "Sales" in our Consolidated Statements of Operations. When control over products has transferred to the customer, we have elected to recognize costs related to shipping and handling as an expense. For our Wood Products segment, costs related to shipping and handling are included in "Materials, labor, and other operating expenses (excluding depreciation)" in our Consolidated Statements of Operations. In our Wood Products segment, we view our shipping and handling costs as a cost of the manufacturing process and the movement of product to our end customers. For our Building Materials Distribution segment, costs related to shipping and handling of $43.4 million and $40.8 million, for the three months ended June 30, 2019 and 2018, respectively, and $80.3 million and $74.3 million for the six months ended June 30, 2019 and 2018, respectively, are included in "Selling and distribution expenses" in our Consolidated Statements of Operations. In our Building Materials Distribution segment, our activities relate to the purchase and resale of finished product, and excluding shipping and handling costs from “Materials, labor, and other operating expenses (excluding depreciation)” provides us a clearer view of our operating performance and the effectiveness of our sales and purchasing functions.
Customer Rebates and Allowances
Rebates are provided to our customers and our customers' customers based on the volume of their purchases, among other factors such as customer loyalty, conversion, and commitment. We provide the rebates to increase the sell-through of our products. Rebates are generally estimated based on the expected amount to be paid and recorded as a decrease in "Sales." At June 30, 2019, and December 31, 2018, we had $51.9 million and $52.1 million, respectively, of rebates payable to our customers recorded in "Accrued liabilities, Other" on our Consolidated Balance Sheets.
Vendor Rebates and Allowances
We receive rebates and allowances from our vendors under a number of different programs, including vendor marketing programs. At June 30, 2019, and December 31, 2018, we had $6.1 million and $9.7 million, respectively, of vendor rebates and allowances recorded in "Receivables, Other" on our Consolidated Balance Sheets. Rebates and allowances received from our vendors are recognized as a reduction of "Materials, labor, and other operating expenses (excluding depreciation)" when the product is sold, unless the rebates and allowances are linked to a specific incremental cost to sell a vendor's product. Amounts received from vendors that are linked to specific selling and distribution expenses are recognized as a reduction of "Selling and distribution expenses" in the period the expense is incurred.
Inventories
Inventories included the following (work in process is not material):
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (thousands) |
Finished goods and work in process | | $ | 445,321 |
| | $ | 441,774 |
|
Logs | | 40,837 |
| | 54,301 |
|
Other raw materials and supplies | | 38,293 |
| | 36,974 |
|
| | $ | 524,451 |
| | $ | 533,049 |
|
Property and Equipment
Property and equipment consisted of the following asset classes:
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (thousands) |
Land | | $ | 39,304 |
| | $ | 38,888 |
|
Buildings (a) | | 137,050 |
| | 164,878 |
|
Improvements | | 58,477 |
| | 49,509 |
|
Mobile equipment, information technology, and office furniture | | 155,117 |
| | 150,712 |
|
Machinery and equipment | | 643,818 |
| | 629,337 |
|
Construction in progress | | 37,195 |
| | 31,015 |
|
| | 1,070,961 |
| | 1,064,339 |
|
Less accumulated depreciation | | (606,866 | ) | | (577,115 | ) |
| | $ | 464,095 |
| | $ | 487,224 |
|
___________________________________
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy under GAAP gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value (Level 1). If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly (Level 2). If quoted prices for identical or similar assets are not available or are unobservable, we may use internally developed valuation models, whose inputs include bid prices, and third-party valuations utilizing underlying asset assumptions (Level 3).
Financial Instruments
Our financial instruments are cash and cash equivalents, accounts receivable, accounts payable, long-term debt, and interest rate swaps. Our cash is recorded at cost, which approximates fair value, and our cash equivalents are money market funds. As of June 30, 2019, and December 31, 2018, we held $167.3 million and $160.4 million, respectively, in money market funds that are measured at fair value on a recurring basis using Level 1 inputs. The recorded values of accounts receivable and accounts payable approximate fair values based on their short-term nature. At June 30, 2019, and December 31, 2018, the book value of our fixed-rate debt for each period was $350.0 million, and the fair value was estimated to be $355.7 million and $328.1 million, respectively. The difference between the book value and the fair value is derived from the difference between the period-end market interest rate and the stated rate of our fixed-rate, long-term debt. We estimated the fair value of our fixed-rate debt using quoted market prices of our debt in inactive markets (Level 2 inputs). The interest rate on our term loans is based on market conditions such as the London Interbank Offered Rate (LIBOR) or a base rate. Because the interest rate on the term loans is based on current market conditions, we believe that the estimated fair value of the outstanding balance on our term loans approximates book value. As discussed below, we also have interest rate swaps to mitigate our variable interest rate exposure, the fair value of which is measured based on Level 2 inputs.
Interest Rate Risk and Interest Rate Swaps
We are exposed to interest rate risk arising from fluctuations in variable-rate LIBOR on our term loans and when we have loan amounts outstanding on our Revolving Credit Facility. At June 30, 2019, we had $95.0 million of variable-rate debt outstanding. Our objective is to limit the variability of interest payments on our debt. To meet this objective, in 2016 we entered into receive-variable, pay-fixed interest rate swaps to change the variable-rate cash flow exposure to fixed-rate cash flows. In accordance with our risk management strategy, we actively monitor our interest rate exposure and use derivative instruments from time to time to manage the related risk.
On February 16, 2016, and March 31, 2016, we entered into interest rate swap agreements with notional principal amounts of $50.0 million and $75.0 million, respectively, to offset risks associated with the variability in cash flows relating to interest payments that are based on one-month LIBOR. We do not speculate using derivative instruments. At June 30, 2019, and December 31, 2018, the notional principal amount of our interest rate swap agreements was $95.0 million after liquidating $30.0 million of the interest rate swap with original notional principal amount of $75.0 million in November 2018.
Under the interest rate swaps, we receive LIBOR-based variable interest rate payments and make fixed interest rate payments, thereby fixing the interest rate on $95.0 million of variable rate debt exposure. Payments on the interest rate swaps with notional principal amounts of $50.0 million and $45.0 million are due on a monthly basis at an annual fixed rate of 1.007% and 1.256%, respectively, and expire in February 2022 and March 2022, respectively. The interest rate swap agreements were not designated as cash flow hedges, and as a result, all changes in the fair value are recognized in "Change in fair value of interest rate swaps" in our Consolidated Statements of Operations rather than through other comprehensive income. At June 30, 2019, and December 31, 2018, we recorded long-term assets of $1.2 million and $3.8 million, respectively, in "Other assets" on our Consolidated Balance Sheets, representing the fair value of the interest rate swap agreements. The swaps were valued based on observable inputs for similar assets and liabilities and other observable inputs for interest rates and yield curves (Level 2 inputs).
Concentration of Credit Risk
We are exposed to credit risk related to customer accounts receivable. In order to manage credit risk, we consider customer concentrations and current economic trends and monitor the creditworthiness of significant customers based on ongoing credit evaluations. At June 30, 2019, receivables from two customers each accounted for approximately 14% of total receivables. At December 31, 2018, receivables from two customers accounted for approximately 13% and 11%, respectively, of total receivables. No other customer accounted for 10% or more of total receivables.
New and Recently Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU provides guidance on implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract. The guidance aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in such a CCA. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We currently do not expect the adoption of the guidance to have a material effect on our financial statements, but will continue to monitor the standard through the effective date.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU amends ASC 715 to remove disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant related to defined benefit pension and other postretirement plans. The ASU's changes related to disclosures are part of the FASB's disclosure framework project. The updated guidance is effective retrospectively for annual reporting periods ending after December 15, 2020, with early adoption permitted. We are currently evaluating the effects of this ASU on our disclosures in the notes to our financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU amends ASC 820 to remove disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant related to recurring and nonrecurring fair value measurements. The ASU's changes related to disclosures are part of the FASB's disclosure framework project. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We currently do not expect the adoption of the guidance to have a material effect on our disclosures, but will continue to monitor the standard through the effective date.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This ASU sets forth a "current expected credit loss" (CECL) model which requires the measurement of all expected credit losses for financial instruments or other assets (e.g. trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of
credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. This ASU is effective for annual reporting periods ending after December 15, 2019, using a modified retrospective approach. We are currently evaluating the effects of this ASU on our financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This amendment requires a lessee to recognize a right-of-use (ROU) asset and an associated lease liability on the balance sheet for all leases (whether operating or finance leases) with a term longer than 12 months. For leases defined as finance leases under the new standard, the lessee subsequently recognizes interest expense and amortization of the ROU asset, similar to accounting for capital leases under the previous lease standard. For leases defined as operating leases under the new standard, the lessee subsequently recognizes straight-line lease expense over the life of the lease. We adopted this standard effective January 1, 2019. The new lease standard had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated statements of operations or cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. See Note 8, Leases, for additional information on the impact of this standard on our accounting for leases and additional required qualitative disclosures of our lease policies.
There were no other accounting standards recently issued that had or are expected to have a material impact on our consolidated financial statements and associated disclosures.
Reclassifications
Certain amounts in prior year's consolidated financial statements have been reclassified to conform with current year's presentation, none of which were considered material.
3. Income Taxes
For the three and six months ended June 30, 2019, we recorded $9.8 million and $13.0 million, respectively of income tax expense and had an effective rate of 26.0% and 24.9%, respectively. During the three and six months ended June 30, 2019, the primary reason for the difference between the federal statutory income tax rate of 21% and the effective tax rate was the effect of state taxes. For the three and six months ended June 30, 2018, we recorded $13.8 million and $23.6 million, respectively, of income tax expense and had an effective rate of 24.9% and 23.0%, respectively. For the three months ended June 30, 2018, the primary reason for the difference between the federal statutory income tax rate of 21% and the effective tax rate was the effect of state taxes. For the six months ended June 30, 2018, the primary reason for the difference between the federal statutory income tax rate of 21% and the effective tax rate was the effect of state taxes, offset partially by excess tax benefits of vested share-based payment awards.
During the six months ended June 30, 2019, refunds received, net of cash taxes paid were $10.6 million. During the six months ended June 30, 2018, cash paid for taxes, net of refunds received, were $6.5 million.
| |
4. | Net Income Per Common Share |
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Weighted average common shares outstanding for the basic net income per common share calculation includes certain vested restricted stock units (RSUs) and performance stock units (PSUs) as there are no conditions under which those shares will not be issued. Diluted net income per common share is computed by dividing net income by the combination of the weighted average number of common shares outstanding during the period and other potentially dilutive weighted average common shares. Other potentially dilutive weighted average common shares include the dilutive effect of stock options, RSUs, and PSUs for each period using the treasury stock method. Under the treasury stock method, the exercise price of a share and the amount of compensation expense, if any, for future service that has not yet been recognized are assumed to be used to repurchase shares in the current period.
The following table sets forth the computation of basic and diluted net income per common share:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| (thousands, except per-share data) |
Net income | $ | 27,718 |
| | $ | 41,825 |
| | $ | 39,107 |
| | $ | 78,875 |
|
Weighted average common shares outstanding during the period (for basic calculation) | 39,087 |
| | 38,981 |
| | 38,986 |
| | 38,880 |
|
Dilutive effect of other potential common shares | 112 |
| | 422 |
| | 199 |
| | 504 |
|
Weighted average common shares and potential common shares (for diluted calculation) | 39,199 |
| | 39,403 |
| | 39,185 |
| | 39,384 |
|
| | | | | | | |
Net income per common share - Basic | $ | 0.71 |
| | $ | 1.07 |
| | $ | 1.00 |
| | $ | 2.03 |
|
Net income per common share - Diluted | $ | 0.71 |
| | $ | 1.06 |
| | $ | 1.00 |
| | $ | 2.00 |
|
The computation of the dilutive effect of other potential common shares excludes stock awards representing 0.2 million and no shares of common stock, respectively, in the three months ended June 30, 2019 and 2018, and 0.2 million and 0.1 million of common stock shares, respectively, in the six months ended June 30, 2019 and 2018. Under the treasury stock method, the inclusion of these stock awards would have been antidilutive.
During second quarter 2019, our wholly owned subsidiary, Boise Cascade Building Materials Distribution, L.L.C., completed the acquisition of a wholesale building material distribution location in Birmingham, Alabama (the "Acquisition"). The purchase price of the Acquisition was $15.7 million, subject to post-closing adjustments based upon working capital targets. We funded the Acquisition with cash on hand. The distribution location adds to our existing distribution business and strengthens our nationwide presence. In addition, we believe we will be able to broaden our product and service offerings within this market following the Acquisition.
Goodwill represents the excess of the purchase price and related costs over the fair value of the net tangible and intangible assets of businesses acquired. The goodwill and customer relationships recognized from the Acquisition are deductible for U.S. income tax purposes. The useful life for customer relationships is 10 years. All of the goodwill and intangible assets were assigned to the Building Materials Distribution segment.
The purchase price allocations of the Acquisition are preliminary and subject to post-closing working capital adjustments. The following table summarizes the allocations of the purchase price to the assets acquired and liabilities assumed, based on our estimates of the fair value at the acquisition date:
|
| | | | |
| | Acquisition Date Fair Value |
| | (thousands) |
Accounts receivable | | $ | 5,600 |
|
Inventories | | 3,398 |
|
Other assets | | 12 |
|
Property and equipment | | 3,487 |
|
Lease right-of-use assets | | 359 |
|
Intangible assets: | | |
Customer relationships | | 2,100 |
|
Goodwill | | 1,183 |
|
Assets acquired | | 16,139 |
|
| | |
Accounts payable | | 105 |
|
Lease liabilities | | 359 |
|
Liabilities assumed | | 464 |
|
| | |
Net assets acquired | | $ | 15,675 |
|
| |
6. | Sale of Manufacturing Facility |
In December 2018, we committed to sell a hardwood plywood facility located in Moncure, North Carolina, and subsequently entered into a definitive sale agreement in January 2019 (the Sale). This facility generated net sales and operating loss of approximately $5.5 million and $1.4 million, respectively, during the six months ended June 30, 2019, and net sales and operating loss of approximately $17.1 million and $2.2 million, respectively, during the six months ended June 30, 2018. These results are included in the operating results of our Wood Products segment.
On March 1, 2019, we closed on the Sale and received proceeds of $2.5 million. The disposal group met the criteria to be classified as held for sale during fourth quarter 2018. Upon classification as held for sale, we discontinued depreciation of the long-lived assets, and performed an assessment of impairment to identify and expense any excess of carrying value over fair value less costs to sell. As a result, we recorded pre-tax impairment and sale-related losses of $24.0 million during fourth quarter 2018.
Long-term debt consisted of the following:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| (thousands) |
Asset-based revolving credit facility | $ | — |
| | $ | — |
|
Asset-based credit facility term loan due 2022 | 50,000 |
| | 50,000 |
|
Term loan due 2026 | 45,000 |
| | 45,000 |
|
5.625% senior notes due 2024 | 350,000 |
| | 350,000 |
|
Deferred financing costs | (5,014 | ) | | (5,572 | ) |
Long-term debt | $ | 439,986 |
| | $ | 439,428 |
|
Asset-Based Credit Facility
On May 15, 2015, Boise Cascade and its principal operating subsidiaries, Boise Cascade Wood Products, L.L.C., and Boise Cascade Building Materials Distribution, L.L.C., as borrowers, and Boise Cascade Wood Products Holdings Corp., as guarantor, entered into an Amended and Restated Credit Agreement, as amended, (Amended Agreement) with Wells Fargo
Capital Finance, LLC, as administrative agent, and the banks named therein as lenders. The Amended Agreement includes a $370 million senior secured asset-based revolving credit facility (Revolving Credit Facility) and a $50.0 million term loan (ABL Term Loan) maturing on May 1, 2022. Interest on borrowings under our Revolving Credit Facility and ABL Term Loan are payable monthly. Borrowings under the Amended Agreement are constrained by a borrowing base formula dependent upon levels of eligible receivables and inventory reduced by outstanding borrowings and letters of credit (Availability).
The Amended Agreement is secured by a first-priority security interest in substantially all of our assets, except for property and equipment. The proceeds of borrowings under the agreement are available for working capital and other general corporate purposes.
The Amended Agreement contains customary nonfinancial covenants, including a negative pledge covenant and restrictions on new indebtedness, investments, distributions to equity holders, asset sales, and affiliate transactions, the scope of which are dependent on the Availability existing from time to time. The Amended Agreement also contains a requirement that we meet a 1:1 fixed-charge coverage ratio (FCCR), applicable only if Availability falls below 10% of the aggregate revolving lending commitments, or $37 million. Availability exceeded the minimum threshold amounts required for testing of the FCCR at all times since entering into the Amended Agreement, and Availability at June 30, 2019, was $365.4 million.
The Amended Agreement permits us to pay dividends only if at the time of payment (i) no default has occurred or is continuing (or would result from such payment) under the Amended Agreement, and (ii) pro forma Excess Availability (as defined in the Amended Agreement) is equal to or exceeds 25% of the aggregate Revolver Commitments (as defined in the Amended Agreement) or (iii) (x) pro forma Excess Availability is equal to or exceeds 15% of the aggregate Revolver Commitment and (y) our fixed-charge coverage ratio is greater than or equal to 1:1 on a pro forma basis.
Revolving Credit Facility
Interest rates under the Revolving Credit Facility are based, at our election, on either LIBOR or a base rate, as defined in the Amended Agreement, plus a spread over the index elected that ranges from 1.25% to 1.75% for loans based on LIBOR and from 0.25% to 0.75% for loans based on the base rate. The spread is determined on the basis of a pricing grid that results in a higher spread as average quarterly Availability declines. Letters of credit are subject to a fronting fee payable to the issuing bank and a fee payable to the lenders equal to the LIBOR margin rate. In addition, we are required to pay an unused commitment fee at a rate of 0.25% per annum of the average unused portion of the lending commitments.
At both June 30, 2019, and December 31, 2018, we had no borrowings outstanding under the Revolving Credit Facility and $4.6 million of letters of credit outstanding. These letters of credit and borrowings, if any, reduce Availability under the Revolving Credit Facility by an equivalent amount.
ABL Term Loan
The ABL Term Loan was provided by institutions within the Farm Credit system. Borrowings under the ABL Term Loan may be repaid from time to time at the discretion of the borrowers without premium or penalty. However, any principal amount of ABL Term Loan repaid may not be subsequently re-borrowed.
Interest rates under the ABL Term Loan are based, at our election, on either LIBOR or a base rate, as defined in the Amended Agreement, plus a spread over the index elected that ranges from 1.75% to 2.25% for LIBOR rate loans and from 0.75% to 1.25% for base rate loans, both dependent on the amount of Average Excess Availability (as defined in the Amended Agreement). During the six months ended June 30, 2019, the average interest rate on the ABL Term Loan was approximately 4.22%.
We have received and expect to continue receiving patronage credits under the ABL Term Loan. Patronage credits are distributions of profits from banks in the Farm Credit system, which are cooperatives that are required to distribute profits to their members. Patronage distributions, which are generally made in cash, are received in the year after they are earned. Patronage credits are recorded as a reduction to interest expense in the year earned. After giving effect to expected patronage distributions, the effective average net interest rate on the ABL Term Loan was approximately 3.2% during the six months ended June 30, 2019.
Term Loan
On March 30, 2016 (Closing Date), Boise Cascade and its principal operating subsidiaries, Boise Cascade Wood Products, L.L.C., and Boise Cascade Building Materials Distribution, L.L.C., as borrowers, and the guarantors party thereto,
entered into a term loan agreement, as amended, (Term Loan Agreement) with American AgCredit, PCA, as administrative agent and sole lead arranger, and other banks in the Farm Credit system named therein as lenders. The Term Loan Agreement was for a $75.0 million secured term loan (Term Loan). The outstanding principal balance of the Term Loan amortizes and is payable in equal installments of $10 million per year on each of the sixth, seventh, eighth, and ninth anniversaries of the Closing Date, with the remaining principal balance due and payable on March 30, 2026. Interest on our Term Loan is payable monthly.
In December 2016, we prepaid $30 million of the Term Loan, which became available to reborrow. In November 2018, we terminated the ability to reborrow this prepaid Term Loan. Amounts prepaid and eligible for reborrowing were subject to an unused line fee of 0.325% per annum times the average daily amount of the unused commitments. This prepayment of $30 million satisfied our principal obligations due on the sixth, seventh, and eighth anniversaries of the Closing Date.
Pursuant to the Term Loan Agreement, the borrowers are required to maintain, as of the end of any fiscal quarter, a Capitalization Ratio lower than 60%, a Consolidated Net Worth greater than $350 million, and Available Liquidity greater than $100 million (each as defined in the Term Loan Agreement). In addition, under the Term Loan Agreement, and subject to certain exceptions, the borrowers may not, among other things, (i) incur indebtedness, (ii) incur liens, (iii) make junior payments, (iv) make certain investments, and (v) under certain circumstances, make capital expenditures in excess of $50 million during four consecutive quarters. The Term Loan Agreement also includes customary representations of the borrowers and provides for certain events of default customary for similar facilities.
The Term Loan Agreement permits us to pay dividends only if at the time of payment (i) no default has occurred or is continuing (or would result from such payment) under the Term Loan Agreement, and (ii) our interest coverage ratio is greater than or equal to 3:1 at such time or (iii) our fixed-charge coverage ratio is greater than or equal to 1:1.
Interest rates under the Term Loan Agreement are based, at our election, on either the LIBOR or a base rate, as defined in the Term Loan Agreement, plus a spread over the index. The applicable spread for the Term Loan ranges from 1.875% to 2.125% for LIBOR rate loans, and 0.875% to 1.125% for base rate loans, both dependent on our Interest Coverage Ratio (as defined in the Term Loan Agreement). During the six months ended June 30, 2019, the average interest rate on the Term Loan was approximately 4.36%. We have received and expect to continue receiving patronage credits under the Term Loan. After giving effect to expected patronage distributions, the effective average net interest rate on the Term Loan was approximately 3.4%.
The Term Loan is secured by a first priority mortgage on our Thorsby, Alabama, and Roxboro, North Carolina, EWP facilities and a first priority security interest on the equipment and certain tangible personal property located therein.
2024 Notes
On August 29, 2016, Boise Cascade issued $350 million of 5.625% senior notes due September 1, 2024 (2024 Notes), through a private placement that was exempt from the registration requirements of the Securities Act. Interest on our 2024 Notes is payable semiannually in arrears on March 1 and September 1. The 2024 Notes are guaranteed by each of our existing and future direct or indirect domestic subsidiaries that is a guarantor under our Amended Agreement.
The 2024 Notes are senior unsecured obligations and rank equally with all of the existing and future senior indebtedness of Boise Cascade Company and of the guarantors, senior to all of their existing and future subordinated indebtedness, effectively subordinated to all of their present and future senior secured indebtedness (including all borrowings with respect to our Amended Agreement to the extent of the value of the assets securing such indebtedness), and structurally subordinated to the indebtedness of any subsidiaries that do not guarantee the 2024 Notes.
The terms of the indenture governing the 2024 Notes, among other things, limit the ability of Boise Cascade and our restricted subsidiaries to: incur additional debt; declare or pay dividends; redeem stock or make other distributions to stockholders; make investments; create liens on assets; consolidate, merge or transfer substantially all of their assets; enter into transactions with affiliates; and sell or transfer certain assets. The indenture governing the 2024 Notes, permits us to pay dividends only if at the time of payment (i) no default has occurred or is continuing (or would result from such payment) under the indenture, and (ii) our consolidated leverage ratio is no greater than 3.5:1, or (iii) the dividend, together with other dividends since the issue date, would not exceed our "builder" basket under the indenture. In addition, the indenture includes certain specific baskets for the payment of dividends.
The indenture governing the 2024 Notes provides for customary events of default and remedies.
Interest Rate Swaps
For information on interest rate swaps, see Interest Rate Risk and Interest Rate Swaps of Note 2, Summary of Significant Accounting Policies.
Cash Paid for Interest
For the six months ended June 30, 2019 and 2018, cash payments for interest were $11.5 million and $11.6 million, respectively.
8. Leases
Adoption of ASC Topic 842, "Leases"
On January 1, 2019, we adopted Topic 842 using the modified retrospective transition method and used the effective date as our date of initial application. Consequently, leases for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840.
The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs. We did not elect the use-of-hindsight practical expedient.
We recorded additional lease liabilities for operating leases of $72.4 million, with an offsetting increase to ROU assets of approximately $69.2 million as of January 1, 2019, substantially all of which are real estate leases. The difference between these amounts is related to the reclassification of accrued straight-line rent upon adoption. Capital leases were also reclassified from "Property and equipment, net" to "Finance lease right-of-use assets" and from "Other long-term liabilities" to "Finance lease liabilities" on our Consolidated Balance Sheet. The standard did not have a material impact on our consolidated net earnings and cash flows. There was no cumulative effect adjustment recorded to opening retained earnings as of January 1, 2019, upon adoption of Topic 842.
The effect of the changes made to our consolidated balance sheet as of January 1, 2019, for the adoption of the new lease standard was as follows: |
| | | | | | | | | | | |
| Balance at December 31, 2018 | | Adjustments Due to ASC 842 | | Balance at January 1, 2019 |
| (thousands) |
ASSETS | | | | | |
Property and equipment, net | $ | 487,224 |
| | $ | (21,732 | ) | | $ | 465,492 |
|
Operating lease right-of-use assets | — |
| | 69,155 |
| | 69,155 |
|
Finance lease right-of-use assets | — |
| | 20,872 |
| | 20,872 |
|
Prepaid expenses and other | 31,818 |
| | (246 | ) | | 31,572 |
|
| | | | | |
LIABILITIES | | | | | |
Accrued liabilities, other | 63,509 |
| | 8,863 |
| | 72,372 |
|
Operating lease liabilities, net of current portion | — |
| | 63,498 |
| | 63,498 |
|
Finance lease liabilities, net of current portion | — |
| | 21,921 |
| | 21,921 |
|
Other long-term liabilities | 38,904 |
| | (26,233 | ) | | 12,671 |
|
In accordance with the new lease standard requirements, the disclosure of the impact of adoption on our consolidated balance sheet was as follows:
|
| | | | | | | | | | | |
| June 30, 2019 |
| As Reported | | Balances Without Adoption of ASC 842 | | Effect of Change Higher/(Lower) |
| (thousands) |
ASSETS | | | | | |
Property and equipment, net | $ | 464,095 |
| | $ | 485,232 |
| | $ | (21,137 | ) |
Operating lease right-of-use assets | 65,989 |
| | — |
| | 65,989 |
|
Finance lease right-of-use assets | 20,301 |
| | — |
| | 20,301 |
|
Prepaid expenses and other | 17,745 |
| | 17,991 |
| | (246 | ) |
| | | | | |
LIABILITIES | | | | | |
Accrued liabilities, other | 77,256 |
| | 68,304 |
| | 8,952 |
|
Operating lease liabilities, net of current portion | 60,289 |
| | — |
| | 60,289 |
|
Finance lease liabilities, net of current portion | 21,701 |
| | — |
| | 21,701 |
|
Other long-term liabilities | 13,721 |
| | 39,756 |
| | (26,035 | ) |
Leases
We primarily lease land, building, and equipment under operating and finance leases. We determine if an arrangement is a lease at inception and assess lease classification as either operating or finance at lease inception or upon modification. Substantially all of our leases with initial terms greater than one year are for real estate, including distribution centers, corporate headquarters, land, and other office space. Substantially all of these lease agreements have fixed payment terms based on the passage of time and are recorded in our Building Materials Distribution segment. Many of our leases include fixed escalation clauses, renewal options and/or termination options that are factored into our determination of lease term and lease payments when appropriate. Renewal options generally range from one to ten years with fixed payment terms similar to those in the original lease agreements. Some lease agreements provide us with the option to purchase the leased property at market value. Our lease agreements do not contain any residual value guarantees.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of fixed lease payments over the lease term. The current portion of our operating and finance lease liabilities are recorded in "Accrued liabilities, Other" on our Consolidated Balance Sheets.
We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. In determining our incremental borrowing rates, we give consideration to publicly available interest rates for instruments with similar characteristics.
For purposes of determining straight-line rent expense, the lease term is calculated from the date we first take possession of the facility, including any periods of free rent and any renewal option periods we are reasonably certain of exercising. Variable lease expense generally includes reimbursement of actual costs for common area maintenance, property taxes, and insurance on leased real estate and are recorded as incurred. Most of our operating lease expense was recorded in "Selling and distribution expenses" in our Consolidated Statements of Operations.
The new standard provides practical expedients for an entity’s ongoing accounting. We elected the practical expedient to not separate lease and non-lease components for all of our leases. We also elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases in transition. Our short-term leases primarily include equipment rentals with lease terms on a month-to-month basis, which provide for our seasonal needs and flexibility in the use of equipment. Our short-term leases also include certain real estate for which either party has the right to cancel upon providing notice of 30 to 90 days.
Lease Costs
The components of lease expense were as follows:
|
| | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| (thousands) |
Operating lease cost | $ | 3,367 |
| | $ | 6,708 |
|
Finance lease cost | | | |
Amortization of right-of-use assets | 385 |
| | 760 |
|
Interest on lease liabilities | 465 |
| | 926 |
|
Variable lease cost | 722 |
| | 1,341 |
|
Short-term lease cost | 1,075 |
| | 2,069 |
|
Sublease income | (172 | ) | | (304 | ) |
Total lease cost | $ | 5,842 |
| | $ | 11,500 |
|
Other Information
Supplemental cash flow information related to leases was as follows:
|
| | | |
| Six Months Ended June 30, 2019 |
| (thousands) |
Cash paid for amounts included in the measurement of lease liabilities | |
Operating cash flows from operating leases | $ | 6,637 |
|
Operating cash flows from finance leases | 926 |
|
Financing cash flows from finance leases | 369 |
|
Right-of-use assets obtained in exchange for lease obligations | |
Operating leases | 1,368 |
|
Finance leases | 310 |
|
Other information related to leases was as follows:
|
| | |
| June 30, 2019 |
| |
Weighted-average remaining lease term (years) | |
Operating leases | 9 |
|
Finance leases | 15 |
|
Weighted-average discount rate | |
Operating leases (a) | 6.5 | % |
Finance leases | 8.8 | % |
___________________________________ (a)
As of June 30, 2019, our minimum lease payment requirements for noncancelable operating and finance leases are as follows (in thousands): |
| | | | | | | | |
| | Operating Leases | | Finance Leases |
| | (thousands) |
Remainder of 2019 | | $ | 6,608 |
| | $ | 1,344 |
|
2020 | | 12,878 |
| | 2,713 |
|
2021 | | 11,741 |
| | 2,753 |
|
2022 | | 10,374 |
| | 2,747 |
|
2023 | | 10,045 |
| | 2,769 |
|
Thereafter | | 41,338 |
| | 30,177 |
|
Total future minimum lease payments | | 92,984 |
| | 42,503 |
|
Less: interest | | (23,743 | ) | | (19,951 | ) |
Total lease obligations | | 69,241 |
| | 22,552 |
|
Less: current obligations | | (8,952 | ) | | (851 | ) |
Long-term lease obligations | | $ | 60,289 |
| | $ | 21,701 |
|
Disclosures Related to Periods Prior to Adoption of ASC Topic 842, "Leases"
Rental expense for operating leases was $4.6 million and $9.2 million for the three and six months ended June 30, 2018, respectively. Sublease rental income was not material in any of the periods presented. During the six months ended June 30, 2018, we recorded a capital lease for a distribution center with an initial lease term of 20 years in the amount of $14.3 million, which represents a non-cash investing and financing activity. At December 31, 2018, capital lease obligations are recorded in "Other long-term liabilities" on our Consolidated Balance Sheets.
As of December 31, 2018, our minimum lease payment requirements for noncancelable operating and capital leases with terms of more than one year are as follows:
|
| | | | | | | | |
| | Operating Leases | | Capital Leases |
| | (thousands) |
2019 | | $ | 13,222 |
| | $ | 2,578 |
|
2020 | | 12,734 |
| | 2,617 |
|
2021 | | 11,595 |
| | 2,656 |
|
2022 | | 10,208 |
| | 2,694 |
|
2023 | | 9,800 |
| | 2,740 |
|
Thereafter | | 40,381 |
| | 30,177 |
|
Total | | $ | 97,940 |
| | 43,462 |
|
Less: interest on capital lease obligations | | | | (20,838 | ) |
Total principal payable on capital lease obligations | | | | 22,624 |
|
Less: current obligations | | | | (703 | ) |
Long-term capital lease obligations | | | | $ | 21,921 |
|
These future minimum lease payment requirements have not been reduced by sublease income due in the future under noncancelable subleases. Minimum sublease income expected to be received in the future is not material.
9. Retirement and Benefit Plans
The following table presents the pension benefit costs:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| (thousands) |
Service cost | $ | 161 |
| | $ | 198 |
| | $ | 322 |
| | $ | 403 |
|
Interest cost | 1,809 |
| | 3,312 |
| | 3,625 |
| | 7,323 |
|
Expected return on plan assets | (1,475 | ) | | (3,292 | ) | | (2,949 | ) | | (7,880 | ) |
Amortization of actuarial (gain) loss | (44 | ) | | 356 |
| | (87 | ) | | 1,177 |
|
Plan settlement loss | — |
| | 12,003 |
| | — |
| | 12,003 |
|
Net periodic benefit expense | $ | 451 |
| | $ | 12,577 |
| | $ | 911 |
| | $ | 13,026 |
|
Service cost is recorded in the same income statement line items as other employee compensation costs arising from services rendered, and the other components of net periodic benefit expense are recorded in "Pension expense (excluding service costs)" in our Consolidated Statements of Operations.
During the six months ended June 30, 2019, we contributed $0.9 million in cash to the pension plans. For the remainder of 2019, we expect to make approximately $0.9 million in cash contributions to the pension plans.
On April 25, 2018, Boise Cascade transferred $151.8 million of its pension plan assets to The Prudential Insurance Company of America (Prudential) for the purchase of a group annuity contract. Under the arrangement, Prudential assumed ongoing responsibility for administration and benefit payments for approximately one-third of Boise Cascade’s U.S. qualified pension plan projected benefit obligations outstanding at the time of the transaction. As a result of the transaction, the Company recognized a non-cash pension settlement charge of $12.0 million during the three months ended June 30, 2018.
| |
10. | Stock-Based Compensation |
In February 2019 and 2018, we granted two types of stock-based awards under our incentive plan: performance stock units (PSUs) and restricted stock units (RSUs).
PSU and RSU Awards
During the six months ended June 30, 2019, we granted 110,923 PSUs to our officers and other employees, subject to performance and service conditions. For the officers, the number of shares actually awarded will range from 0% and 200% of the target amount, depending upon Boise Cascade's 2019 return on invested capital (ROIC), as approved by our Compensation Committee in accordance with the related grant agreement. For the other employees, the number of shares actually awarded will range from 0% to 200% of the target amount, depending upon Boise Cascade’s 2019 EBITDA, defined as income before interest (interest expense and interest income), income taxes, and depreciation and amortization, determined in accordance with the related grant agreement. Because the ROIC and EBITDA components contain a performance condition, we record compensation expense over the requisite service period based on the most probable number of shares expected to vest. The PSUs granted to officers in 2019, if earned, generally vest in a single installment three years from the date of grant, while the PSUs granted to other employees vest in three equal tranches each year after the grant date.
During the six months ended June 30, 2018, we granted 78,976 PSUs to our officers and other employees, subject to performance and service conditions. During the 2018 performance period, officers and other employees earned 100% and 110%, respectively, of the target based on Boise Cascade’s 2018 ROIC and EBITDA, determined by our Compensation Committee in accordance with the related grant agreement.
During the six months ended June 30, 2019 and 2018, we granted an aggregate of 166,180 and 99,087 RSUs, respectively, to our officers, other employees, and nonemployee directors with only service conditions. The RSUs granted to officers and other employees vest in three equal tranches each year after the grant date. The RSUs granted to nonemployee directors vest over a 1 year period.
We based the fair value of PSU and RSU awards on the closing market price of our common stock on the grant date. During the six months ended June 30, 2019 and 2018, the total fair value of PSUs and RSUs vested was $11.4 million and $15.2 million, respectively.
The following summarizes the activity of our PSUs and RSUs awarded under our incentive plan for the six months ended June 30, 2019:
|
| | | | | | | | | | | | | |
| PSUs | | RSUs |
| Number of shares | | Weighted Average Grant-Date Fair Value | | Number of shares | | Weighted Average Grant-Date Fair Value |
Outstanding, December 31, 2018 | 429,788 |
| | $ | 25.90 |
| | 289,173 |
| | $ | 29.52 |
|
Granted | 110,923 |
| | 29.48 |
| | 166,180 |
| | 29.06 |
|
Performance condition adjustment, net (a) | 1,443 |
| | 43.05 |
| | — |
| | — |
|
Vested | (223,706 | ) | | 19.97 |
| | (183,311 | ) | | 26.43 |
|
Forfeited | (19,545 | ) | | 35.97 |
| | (13,136 | ) | | 35.34 |
|
Outstanding, June 30, 2019 | 298,903 |
| | $ | 31.09 |
| | 258,906 |
| | $ | 31.11 |
|
_______________________________
| |
(a) | EBITDA in excess of target. |
Compensation Expense
We record compensation expense over the awards' vesting period and account for share-based award forfeitures as they occur, rather than making estimates of future forfeitures. Any shares not vested are forfeited. We recognize stock awards with only service conditions on a straight-line basis over the requisite service period. Most of our share-based compensation expense was recorded in "General and administrative expenses" in our Consolidated Statements of Operations. Total stock-based compensation recognized from PSUs and RSUs, net of forfeitures, was as follows: |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| (thousands) |
PSUs | $ | 736 |
| | $ | 1,231 |
| | $ | 1,715 |
| | $ | 2,318 |
|
RSUs | 1,133 |
| | 1,214 |
| | 2,354 |
| | 2,413 |
|
Total | $ | 1,869 |
| | $ | 2,445 |
| | $ | 4,069 |
| | $ | 4,731 |
|
The related tax benefit for the six months ended June 30, 2019 and 2018, was $1.0 million and $1.2 million, respectively. As of June 30, 2019, total unrecognized compensation expense related to nonvested share-based compensation arrangements was $10.9 million. This expense is expected to be recognized over a weighted-average period of 1.9 years.
11. Stockholders' Equity
Dividends
On November 14, 2017, we announced that our board of directors approved a dividend policy to pay quarterly cash dividends to holders of our common stock. During each of the first and second quarters of 2019, we declared and paid a dividend of $0.09 per share of our common stock. During each of the first and second quarters of 2018, we declared and paid a dividend of $0.07 per share of our common stock. As such, we paid $7.6 million and $5.5 million of dividends to shareholders during the six months ended June 30, 2019 and 2018, respectively. On August 1, 2019, our board of directors declared a dividend of $0.09 per share of common stock, payable on September 16, 2019, to stockholders of record on September 3, 2019. For a description of the restrictions in our asset-based credit facility, Term Loan, and the indenture governing our senior notes on our ability to pay dividends, see Note 7, Debt.
Accumulated Other Comprehensive Loss
The following table details the changes in accumulated other comprehensive loss for the three and six months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| (thousands) |
Beginning balance, net of taxes | $ | (47,684 | ) | | $ | (76,089 | ) | | $ | (47,652 | ) | | $ | (76,702 | ) |
Net actuarial gain, before taxes | — |
| | 13,340 |
| | — |
| | 13,340 |
|
Amortization of actuarial (gain) loss, before taxes (a) | (44 | ) | | 356 |
| | (87 | ) | | 1,177 |
|
Effect of settlements, before taxes (a) | — |
| | 12,003 |
| | — |
| | 12,003 |
|
Income taxes | 11 |
| | (6,517 | ) | | 22 |
| | (6,725 | ) |
Ending balance, net of taxes | $ | (47,717 | ) | | $ | (56,907 | ) | | $ | (47,717 | ) | | $ | (56,907 | ) |
___________________________________
| |
12. | Transactions With Related Party |
Louisiana Timber Procurement Company, L.L.C. (LTP) is an unconsolidated variable-interest entity that is 50% owned by us and 50% owned by Packaging Corporation of America (PCA). LTP procures sawtimber, pulpwood, residual chips, and other residual wood fiber to meet the wood and fiber requirements of us and PCA in Louisiana. We are not the primary beneficiary of LTP as we do not have power to direct the activities that most significantly affect the economic performance of LTP. Accordingly, we do not consolidate LTP's results in our financial statements.
Sales
Related-party sales to LTP from our Wood Products segment in our Consolidated Statements of Operations were $4.3 million and $4.6 million, respectively, during the three months ended June 30, 2019 and 2018, and $8.8 million and $8.9 million, respectively, during the six months ended June 30, 2019 and 2018. These sales are recorded in "Sales" in our Consolidated Statements of Operations.
Costs and Expenses
Related-party wood fiber purchases from LTP were $21.4 million and $22.6 million, respectively, during the three months ended June 30, 2019 and 2018, and $41.4 million and $43.0 million, respectively, during the six months ended June 30, 2019 and 2018. These costs are recorded in "Materials, labor, and other operating expenses (excluding depreciation)" in our Consolidated Statements of Operations.
We operate our business using two reportable segments: Wood Products and Building Materials Distribution. Corporate and Other results are presented as reconciling items to arrive at total net sales and operating income. There are no differences in our basis of measurement of segment profit or loss from those disclosed in Note 17, Segment Information, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our 2018 Form 10-K.
Wood Products and Building Materials Distribution segment sales to external customers, including related parties, by product line are as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30 | | Six Months Ended June 30 |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (millions) |
Wood Products (a) | | | | | | | | |
LVL | | $ | 12.0 |
| | $ | 9.8 |
| | $ | 23.9 |
| | $ | 23.2 |
|
I-joists | | 8.0 |
| | 7.9 |
| | 13.3 |
| | 17.8 |
|
Other engineered wood products | | 8.6 |
| | 5.8 |
| | 14.3 |
| | 12.3 |
|
Plywood and veneer | | 63.5 |
| | 96.7 |
| | 130.9 |
| | 183.7 |
|
Lumber | | 14.0 |
| | 25.0 |
| | 27.2 |
| | 49.9 |
|
Byproducts | | 18.0 |
| | 22.8 |
| | 38.0 |
| | 44.9 |
|
Particleboard | | — |
| | 11.8 |
| | — |
| | 22.6 |
|
Other | | 8.6 |
| | 14.7 |
| | 19.4 |
| | 30.2 |
|
| | 132.7 |
| | 194.3 |
| | 267.1 |
| | 384.8 |
|
| | | | | | | | |
Building Materials Distribution | | | | | | | | |
Commodity | | 450.7 |
| | 602.7 |
| | 849.0 |
| | 1,093.2 |
|
General line | | 429.6 |
| | 392.9 |
| | 753.1 |
| | 708.1 |
|
Engineered wood products | | 217.2 |
| | 218.2 |
| | 403.0 |
| | 404.8 |
|
| | 1,097.4 |
| | 1,213.8 |
| | 2,005.1 |
| | 2,206.1 |
|
| | $ | 1,230.1 |
| | $ | 1,408.1 |
| | $ | 2,272.2 |
| | $ | 2,591.0 |
|
___________________________________
An analysis of our operations by segment is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| (thousands) |
Net sales by segment | | | | |
|
| | |
Wood Products | $ | 334,256 |
| | $ | 425,483 |
| | $ | 653,779 |
| | $ | 823,474 |
|
Building Materials Distribution | 1,097,421 |
| | 1,213,783 |
| | 2,005,129 |
| | 2,206,164 |
|
Intersegment eliminations and other (a) | (201,596 | ) | | (231,134 | ) | | (386,741 | ) | | (438,665 | ) |
Total net sales | $ | 1,230,081 |
| | $ | 1,408,132 |
| | $ | 2,272,167 |
| | $ | 2,590,973 |
|
| | | | | | | |
Segment operating income | | | | | | | |
Wood Products | $ | 18,908 |
| | $ | 36,482 |
| | $ | 30,538 |
| | $ | 62,603 |
|
Building Materials Distribution | 33,800 |
| | 47,713 |
| | 51,317 |
| | 80,101 |
|
Total segment operating income | 52,708 |
| | 84,195 |
| | 81,855 |
| | 142,704 |
|
Unallocated corporate and other | (7,576 | ) | | (10,139 | ) | | (15,069 | ) | | (16,844 | ) |
Income from operations | $ | 45,132 |
| | $ | 74,056 |
| | $ | 66,786 |
| | $ | 125,860 |
|
___________________________________
14. Commitments, Legal Proceedings and Contingencies, and Guarantees
Commitments
We are a party to a number of long-term log supply agreements that are discussed in Note 18, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our 2018 Form 10-K. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business. As of June 30, 2019, there have been no material changes to the above commitments disclosed in the 2018 Form 10-K.
Legal Proceedings and Contingencies
We are a party to legal proceedings that arise in the ordinary course of our business, including commercial liability claims, premises claims, environmental claims, and employment-related claims, among others. As of the date of this filing, we believe it is not reasonably possible that any of the legal actions against us will, individually or in the aggregate, have a material adverse effect on our financial position, results of operations, or cash flows.
Guarantees
We provide guarantees, indemnifications, and assurances to others. Note 18, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our 2018 Form 10-K describes the nature of our guarantees, including the approximate terms of the guarantees, how the guarantees arose, the events or circumstances that would require us to perform under the guarantees, and the maximum potential undiscounted amounts of future payments we could be required to make. As of June 30, 2019, there have been no material changes to the guarantees disclosed in the 2018 Form 10-K.
| |
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 2018 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 2018 Form 10-K, as well as those factors 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 and its consolidated subsidiaries. Boise Cascade is a large, vertically-integrated wood products manufacturer and building materials distributor. We have two reportable segments: (i) Wood Products, which primarily manufactures engineered wood products (EWP) and plywood; and (ii) Building Materials Distribution (BMD), which is a wholesale distributor of building materials. 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 $45.1 million during the three months ended June 30, 2019, compared with income from operations of $74.1 million during the three months ended June 30, 2018. In our Wood Products segment, income decreased $17.6 million to $18.9 million for the three months ended June 30, 2019, from $36.5 million for the three months ended June 30, 2018. The decrease in segment income was due primarily to lower sales prices of plywood and lower sales volumes of EWP and plywood, as well as higher per-unit conversion costs. These decreases were offset partially by higher net EWP sales prices and lower costs of OSB (used in the manufacture of I-joists) and logs. In our Building Materials Distribution segment, income decreased $13.9 million to $33.8 million for the three months ended June 30, 2019, from $47.7 million for the three months ended June 30, 2018, driven primarily by a gross margin decrease of $10.6 million resulting from lower average commodity prices compared with second quarter 2018, as well as increased selling and distribution expenses of $3.6 million. These changes are discussed further in "Our Operating Results" below.
We ended second quarter 2019 with $202.4 million of cash and cash equivalents and $440.0 million of debt. At June 30, 2019, we had $365.4 million of unused committed bank line availability. We generated $10.7 million of cash during the six months ended June 30, 2019, as cash provided by operations was offset partially by capital spending, funding the acquisition of a wholesale building material distribution location in Birmingham, Alabama (the "Acquisition"), dividends paid on our common stock, and tax withholding payments on stock-based awards. A further description of our cash sources and uses for the six month comparative periods are discussed further in "Liquidity and Capital Resources" below.
Demand for the products we manufacture, as well as the products we purchase and distribute, is closely correlated with new residential construction in the U.S., which has historically been cyclical. To a lesser extent, demand for our products correlates with residential repair-and-remodeling activity and light commercial construction. As of July 2019, the Blue Chip Economic Indicators consensus forecast for 2019 and 2020 single- and multi-family housing starts in the U.S. were 1.24 million and 1.27 million units, respectively, compared with actual housing starts of 1.25 million in 2018, as reported by the U.S. Census Bureau. Single-family housing starts have represented approximately two-thirds of total housing starts in recent years and are the primary driver of our sales.
Although we believe U.S. demographics are supportive of higher levels of housing starts, we expect near-term residential construction growth to be flat to slightly down due to constraints faced by builders, such as availability of labor and building lots, as well as affordability constraints faced by prospective buyers. The pace of household formation rates and residential repair-and-remodeling activity will be affected by employment growth, wage growth, prospective home buyers' access to and cost of financing, housing affordability, and consumer confidence, as well as other factors. Household formation rates in turn will be a key factor behind the demand for new construction. In addition, the size of new single-family residences as well as the mix of single and multi-family starts will influence product consumption.
Weak commodity products pricing experienced in first quarter 2019 continued throughout second quarter 2019 as weaker year-to-date residential construction activity and additional industry capacity brought on in 2018 have led to supply and demand imbalances. Commodity product pricing during the remainder of 2019 will be a key driver of our financial results and will be dependent on industry operating rates, net import and export activity, transportation constraints or disruptions, inventory levels in various distribution channels, and seasonal demand patterns. In our BMD segment, we anticipate that commodity products pricing in the third quarter of 2019 will remain at low absolute levels compared to historical levels. However, we do not expect the substantial downward price volatility and gross margin erosion like we experienced in the third quarter of 2018. With a more stable price environment, we expect BMD to report improved year-over-year financial results in third quarter 2019. For our Wood Products segment, our average plywood sales prices during July 2019 are more than 25% below average levels experienced in the third quarter of 2018. When considering the lower plywood pricing environment, and also adjusting third quarter 2018 to exclude an $11.0 million impairment charge related to asset sales, we expect Wood Products year-over-year financial comparisons to be negative in the third quarter of 2019.
In addition, we expect to record less than $0.5 million of pension expense in third quarter 2019, compared with $11.8 million recorded in third quarter 2018, which included a non-cash pension settlement charge of $11.3 million.
Factors That Affect Our Operating Results and Trends
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 industry capacity and operating rates, industry cycles that affect supply and demand, and net import and export activity; |
| |
• | general economic conditions, including but not limited to housing starts, repair-and-remodeling activity, light commercial construction, inventory levels of new and existing homes for sale, foreclosure rates, interest rates, unemployment rates, household formation rates, prospective home buyers' access to and cost of financing, and housing affordability, that ultimately affect demand for our products; |
| |
• | the highly competitive nature of our industry; |
| |
• | material disruptions and/or major equipment failure at our manufacturing facilities; |
| |
• | labor disruptions, shortages of skilled and technical labor, or increased labor costs; |
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• | the need to successfully formulate and implement succession plans for key members of our management team; |
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• | disruptions to information systems used to process and store customer, employee, and vendor information, as well as the technology that manages our operations and other business processes; |
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• | our ability to successfully and efficiently complete and integrate acquisitions; |
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• | cost and availability of raw materials, including wood fiber and glues and resins; |
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• | concentration of our sales among a relatively small group of customers, as well as the financial condition and creditworthiness of our customers; |
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• | product shortages, loss of key suppliers, and our dependence on third-party suppliers and manufacturers; |
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• | impairment of our long-lived assets, goodwill, and/or intangible assets; |
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• | substantial ongoing capital investment costs, including those associated with recent acquisitions, and the difficulty in offsetting fixed costs related to those investments; |
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• | the cost and availability of third-party transportation services used to deliver the goods we manufacture and distribute, as well as our raw materials; |
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• | cost of compliance with government regulations, in particular environmental regulations; |
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• | exposure to product liability, product warranty, casualty, construction defect, and other claims; |
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• | declines in demand for our products due to competing technologies or materials, as well as changes in building code provisions; |
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• | the impact of actuarial assumptions, investment return on pension assets, and regulatory activity on pension costs and pension funding requirements; |
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• | our 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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• | change in interest rate of our debt; |
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• | restrictive covenants contained in our debt agreements; |
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• | fluctuations in the market for our equity; and |
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• | the other factors described in "Item 1A. Risk Factors" in our 2018 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, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| (millions) |
Sales | $ | 1,230.1 |
| | $ | 1,408.1 |
| | $ | 2,272.2 |
| | $ | 2,591.0 |
|
| | | | | | | |
Costs and expenses | |
| | |
| | |
| | |
|
Materials, labor, and other operating expenses (excluding depreciation) | 1,049.7 |
| | 1,193.9 |
| | 1,947.5 |
| | 2,203.7 |
|
Depreciation and amortization | 19.5 |
| | 24.3 |
| | 38.7 |
| | 46.4 |
|
Selling and distribution expenses | 98.9 |
| | 96.8 |
| | 185.9 |
| | 180.2 |
|
General and administrative expenses | 16.8 |
| | 20.0 |
| | 33.5 |
| | 35.9 |
|
Other (income) expense, net | 0.2 |
| | (1.0 | ) | | (0.1 | ) | | (1.1 | ) |
| 1,184.9 |
| | 1,334.1 |
| | 2,205.4 |
| | 2,465.1 |
|
| | | | | | | |
Income from operations | $ | 45.1 |
| | $ | 74.1 |
| | $ | 66.8 |
| | $ | 125.9 |
|
| | | | | | | |
| (percentage of sales) |
Sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | |
Costs and expenses | | | | | | | |
Materials, labor, and other operating expenses (excluding depreciation) | 85.3 | % | | 84.8 | % | | 85.7 | % | | 85.1 | % |
Depreciation and amortization | 1.6 |
| | 1.7 |
| | 1.7 |
| | 1.8 |
|
Selling and distribution expenses | 8.0 |
| | 6.9 |
| | 8.2 |
| | 7.0 |
|
General and administrative expenses | 1.4 |
| | 1.4 |
| | 1.5 |
| | 1.4 |
|
Other (income) expense, net | — |
| | (0.1 | ) | | — |
| | — |
|
| 96.3 | % | | 94.7 | % | | 97.1 | % | | 95.1 | % |
| | | | | | | |
Income from operations | 3.7 | % | | 5.3 | % | | 2.9 | % | | 4.9 | % |
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, 2019 and 2018.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| (thousands) |
U.S. Housing Starts (a) | | | | | | | |
Single-family | 241.3 |
| | 257.3 |
| | 429.9 |
| | 452.1 |
|
Multi-family | 111.2 |
| | 95.9 |
| | 187.8 |
| | 189.6 |
|
| 352.5 |
| | 353.2 |
| | 617.7 |
| | 641.7 |
|
| | | | | | | |
| (thousands) |
Segment Sales | | | | | |
| | |
|
Wood Products | $ | 334,256 |
| | $ | 425,483 |
| | $ | 653,779 |
| | $ | 823,474 |
|
Building Materials Distribution | 1,097,421 |
| | 1,213,783 |
| | 2,005,129 |
| | 2,206,164 |
|
Intersegment eliminations | (201,596 | ) | | (231,134 | ) | | (386,741 | ) | | (438,665 | ) |
Total sales | $ | 1,230,081 |
| | $ | 1,408,132 |
| | $ | 2,272,167 |
| | $ | 2,590,973 |
|
| | | | | | | |
| (millions) |
Wood Products | | | | | | | |
Sales Volumes | | | | | | | |
Laminated veneer lumber (LVL) (cubic feet) | 4.6 |
| | 4.8 |
| | 9.0 |
| | 9.6 |
|
I-joists (equivalent lineal feet) | 60 |
| | 68 |
| | 113 |
| | 131 |
|
Plywood (sq. ft.) (3/8" basis) | 343 |
| | 369 |
| | 679 |
| | 729 |
|
Lumber (board feet) | 22 |
| | 46 |
| | 42 |
| | 93 |
|
| | | | | | | |
| (dollars per unit) |
Wood Products | | | | | | | |
Average Net Selling Prices | | | | | | | |
Laminated veneer lumber (LVL) (cubic foot) | $ | 18.70 |
| | $ | 18.25 |
| | $ | 18.78 |
| | $ | 17.77 |
|
I-joists (1,000 equivalent lineal feet) | 1,279 |
| | 1,220 |
| | 1,273 |
| | 1,200 |
|
Plywood (1,000 sq. ft.) (3/8" basis) | 272 |
| | 379 |
| | 279 |
| | 368 |
|
Lumber (1,000 board feet) | 637 |
| | 570 |
| | 645 |
| | 563 |
|
| | | | | | | |
| (percentage of Building Materials Distribution sales) |
Building Materials Distribution | | | | | | | |
Product Line Sales | | | | | | | |
Commodity | 41.0 | % | | 49.6 | % | | 42.3 | % | | 49.6 | % |
General line | 39.2 | % | | 32.4 | % | | 37.6 | % | | 32.1 | % |
Engineered wood | 19.8 | % | | 18.0 | % | | 20.1 | % | | 18.3 | % |
| | | | | | | |
Gross margin percentage (b) | 12.4 | % | | 12.0 | % | | 12.1 | % | | 12.0 | % |
_______________________________________
| |
(a) | Actual U.S. housing starts data reported by the U.S. Census Bureau. |
| |
(b) | We define gross margin as "Sales" less "Materials, labor, and other operating expenses (excluding depreciation)." Substantially all costs included in "Materials, labor, and other operating expenses (excluding depreciation)" for our Building Materials Distribution segment are for inventory purchased for resale. Gross margin percentage is gross margin as a percentage of segment sales. |
Sales
For the three months ended June 30, 2019, total sales decreased $178.1 million, or 13%, to $1,230.1 million from $1,408.1 million during the three months ended June 30, 2018. For the six months ended June 30, 2019, total sales decreased by $318.8 million, or 12%, to $2,272.2 million from $2,591.0 million for the same period in the prior year. As described below, the decline in sales was driven by the decreases in sales prices and volumes for the products we manufacture and distribute with single-family residential construction activity being the key demand driver of our sales. In second quarter 2019, total U.S. housing starts were flat, with single-family starts down 6% from the same period in 2018. On a year-to-date basis through June 2019, total and single-family housing starts decreased 4% and 5%, respectively, from the same period in 2018. Average composite lumber and average composite panel prices for the three and six months ended June 30, 2019, were over 30% lower than in the same periods in the prior year, as reflected by Random Lengths composite lumber and panel pricing. These declines in composite commodity pricing resulted in lower sales in both of our segments, as noted below.
Wood Products. Sales, including sales to our BMD segment, decreased $91.2 million, or 21%, to $334.3 million for the three months ended June 30, 2019, from $425.5 million for the three months ended June 30, 2018. The decrease in sales was driven primarily by lower sales prices and sales volumes for plywood of 28% and 7%, respectively, resulting in decreased sales of $36.6 million and $9.8 million, respectively. The lower sales volume for plywood was mostly due to weaker market conditions and downtime for facility capital improvements, as well as the sale of the Moncure plywood facility on March 1, 2019. In addition, sales volumes for I-joists and LVL decreased 11% and 5%, respectively, resulting in decreased sales of $9.3 million and $4.0 million, respectively. The decrease in sales was also attributable to lower sales volumes of lumber and particleboard of $13.6 million and $11.0 million, respectively, due to the sale or closure of three lumber mills and our particleboard plant during 2018. These decreases were offset partially by increases in net sales prices for I-joists and LVL of 5% and 2%, respectively, resulting in increased sales of $3.6 million and $2.1 million, respectively.
For the six months ended June 30, 2019, sales, including sales to our BMD segment, decreased $169.7 million, or 21%, to $653.8 million from $823.5 million for the same period in the prior year. The decrease in sales was driven primarily by lower sales prices and sales volumes for plywood of 24% and 7%, respectively, resulting in decreased sales of $59.9 million and $18.3 million, respectively. The lower sales volume for plywood was mostly due to weaker market conditions and downtime for facility capital improvements, as well as the sale of the Moncure plywood facility on March 1, 2019. In addition, sales volumes for I-joists and LVL decreased 14% and 7%, respectively, resulting in decreased sales of $21.6 million and $12.5 million, respectively. The decrease in sales was also attributable to lower sales volumes of lumber and particleboard of $28.6 million and $21.6 million, respectively, due to the sale or closure of three lumber mills and our particleboard plant during 2018. These decreases were offset partially by increases in net sales prices for LVL and I-joists of 6% each, resulting in increased sales of $9.0 million and $8.2 million, respectively.
Building Materials Distribution. Sales decreased $116.4 million, or 10%, to $1,097.4 million for the three months ended June 30, 2019, from $1,213.8 million for the three months ended June 30, 2018. Compared with the same quarter in the prior year, the overall decrease in sales was driven by a sales price decrease of 12%, offset partially by a sales volume increase of 2%. Excluding the impact of the acquisition of wholesale building material distribution locations in Nashville, Tennessee, Medford, Oregon, and Cincinnati, Ohio during 2018, and the Birmingham, Alabama acquisition in 2019 (the "BMD Acquisitions"), BMD sales would have decreased 12%. By product line, commodity sales decreased 25%, or $152.0 million; general line product sales increased 9%, or $36.7 million; and sales of EWP (substantially all of which are sourced through our Wood Products segment) decreased less than 1%, or $1.1 million.
During the six months ended June 30, 2019, sales decreased $201.0 million, or 9%, to $2,005.1 million from $2,206.2 million for the same period in the prior year. Compared with the same period in the prior year, the overall decrease in sales was driven by a sales price decrease of 9%. Excluding the impact of the BMD Acquisitions, BMD sales would have decreased 12%. Sales volumes were flat compared with the same period in the prior year. By product line, commodity sales decreased 22%, or $244.2 million; general line product sales increased 6%, or $45.0 million; and sales of EWP decreased less than 1%, or $1.8 million.
Costs and Expenses
Materials, labor, and other operating expenses (excluding depreciation) decreased $144.3 million, or 12%, to $1,049.7 million for the three months ended June 30, 2019, compared with $1,193.9 million during the same period in the prior year. In our Wood Products segment, the decrease in materials, labor, and other operating expenses was primarily driven by lower sales volumes, as well as lower per-unit costs of OSB (used in the manufacture of I-joists) and logs of 37% and 10%, respectively, compared with second quarter 2018. However, materials, labor, and other operating expenses as a percentage of sales (MLO rate) in our Wood Products segment increased by 290 basis points, which was primarily due to lower plywood sales prices,
resulting in decreased leveraging of labor and other manufacturing costs, offset partially by lower wood fiber costs. In BMD, the decrease in materials, labor, and other operating expenses was driven by lower purchased materials costs as a result of lower commodity prices. However, the BMD segment MLO rate improved 40 basis points compared with the second quarter 2018 driven by a greater mix of general line and EWP sales, which have higher margins than commodity products. In addition, margin percentages for our general line product sales improved, offset partially by lower margin percentages on our commodity product sales.
For the six months ended June 30, 2019, materials, labor, and other operating expenses (excluding depreciation), decreased $256.2 million, or 12%, to $1,947.5 million, compared with $2,203.7 million in the same period in the prior year. In our Wood Products segment, the decrease in materials, labor, and other operating expenses was primarily driven by lower sales volumes, as well as lower per-unit costs of OSB and logs of 35% and 8%, respectively, compared with the first half of 2018. However, the MLO rate in our Wood Products segment increased by 270 basis points, which was primarily due to lower plywood sales prices, resulting in decreased leveraging of labor and other manufacturing costs, offset partially by lower wood fiber costs. In BMD, the decrease in materials, labor, and other operating expenses was driven by lower purchased materials costs as a result of lower commodity prices, compared with the first half of 2018. However, the BMD segment MLO rate improved 10 basis points compared with the first half of 2018 driven by a greater mix of general line and EWP sales, which have higher margins than commodity products. In addition, margin percentages for our general line product sales improved, offset partially by lower margin percentages on our commodity product sales.
Depreciation and amortization expenses decreased $4.8 million, or 20%, to $19.5 million for the three months ended June 30, 2019, compared with $24.3 million during the same period in the prior year. For the six months ended June 30, 2019, these expenses decreased $7.7 million, or 17%, to $38.7 million, compared with $46.4 million in the same period in the prior year. The decreases for both periods were due primarily to discontinued depreciation on certain manufacturing facilities curtailed and sold in the last 12 months, offset partially by incremental depreciation on capital expenditures.
Selling and distribution expenses increased $2.0 million, or 2%, to $98.9 million for the three months ended June 30, 2019, compared with $96.8 million during the same period in the prior year, due primarily to higher shipping and handling costs of $1.3 million, which includes the impact of the BMD Acquisitions. During the six months ended June 30, 2019, selling and distribution expenses increased $5.7 million, or 3%, to $185.9 million, compared with $180.2 million during the same period in 2018, due primarily to higher shipping and handling costs and employee-related expenses of $3.0 million and $0.9 million, respectively, which includes the impact of the BMD Acquisitions.
General and administrative expenses decreased $3.2 million, or 16%, to $16.8 million for the three months ended June 30, 2019, compared with $20.0 million for the same period in the prior year. For the six months ended June 30, 2019, general and administrative expenses decreased $2.4 million, or 7%, to $33.5 million, compared with $35.9 million during the same period in 2018. The decreases for both periods were primarily a result of lower incentive compensation expenses, offset partially by base compensation increases.
Income From Operations
Income from operations decreased $28.9 million to $45.1 million for the three months ended June 30, 2019, compared with $74.1 million for the three months ended June 30, 2018. Income from operations decreased $59.1 million to $66.8 million for the six months ended June 30, 2019, compared with $125.9 million for the six months ended June 30, 2018.
Wood Products. Segment income decreased $17.6 million to $18.9 million for the three months ended June 30, 2019, compared with $36.5 million for the three months ended June 30, 2018. The decrease in segment income was due primarily to lower sales prices of plywood and lower sales volumes of EWP and plywood, as well as higher per-unit conversion costs. These decreases were offset partially by higher net EWP sales prices and lower costs of OSB (used in the manufacture of I-joists) and logs, as well as lower employee-related expenses. In addition, depreciation and amortization expense decreased $5.4 million due primarily to discontinued depreciation on manufacturing facilities curtailed and sold in the last 12 months.
For the six months ended June 30, 2019, segment income decreased $32.1 million to $30.5 million from $62.6 million for the six months ended June 30, 2018. The decrease in segment income was due primarily to lower sales prices of plywood and lower sales volumes of EWP and plywood, as well as higher per-unit conversion costs. These decreases were offset partially by higher net EWP sales prices and lower costs of OSB and logs, as well as lower employee-related expenses. In addition, depreciation and amortization expense decreased $9.2 million due primarily to discontinued depreciation on manufacturing facilities curtailed and sold in the last 12 months.
Building Materials Distribution. Segment income decreased $13.9 million to $33.8 million for the three months ended June 30, 2019, from $47.7 million for the three months ended June 30, 2018. The decline in segment income was driven primarily by a gross margin decrease of $10.6 million resulting from lower average commodity prices compared with second quarter 2018. In addition, selling and distribution expenses increased by $3.6 million.
For the six months ended June 30, 2019, segment income decreased $28.8 million to $51.3 million from $80.1 million for the six months ended June 30, 2018. The decline in segment income was driven primarily by a gross margin decrease of $20.6 million resulting from lower average commodity prices compared with the first half of 2018, as well as increased selling and distribution expenses of $7.6 million.
Corporate and Other. Unallocated corporate expenses decreased $2.6 million to $7.6 million for the three months ended June 30, 2019, from $10.1 million for the three months ended June 30, 2018. The decrease was primarily due to lower incentive compensation costs resulting from weaker operating results. In addition, our second quarter 2018 results included a $1.2 million business interruption loss incurred at one of our manufacturing facilities (business interruption loss). For the six months ended June 30, 2019, unallocated corporate expenses decreased $1.8 million to $15.1 million from $16.8 million for the six months ended June 30, 2018, primarily due to the second quarter 2018 business interruption loss, as well as lower incentive compensation costs.
Other
Pension expense (excluding service costs). On April 25, 2018, Boise Cascade transferred $151.8 million of its pension plan assets to The Prudential Insurance Company of America (Prudential) for the purchase of a group annuity contract. Under the arrangement, Prudential assumed ongoing responsibility for administration and benefit payments for approximately one-third of Boise Cascade’s U.S. qualified pension plan projected benefit obligations outstanding at the time of the transaction. As a result of the transaction, the Company recognized a non-cash pension settlement charge of $12.0 million during the three months ended June 30, 2018.
Change in fair value of interest rate swaps. For information related to our interest rate swaps, see the discussion under "Interest Rate Risk and Interest Rate Swaps" of Note 2, Summary of Significant Accounting Policies, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1. Financial Statements" of this Form 10-Q.
Income Tax Provision
For the three and six months ended June 30, 2019, we recorded $9.8 million and $13.0 million, respectively of income tax expense and had an effective rate of 26.0% and 24.9%, respectively. During the three and six months ended June 30, 2019, the primary reason for the difference between the federal statutory income tax rate of 21% and the effective tax rate was the effect of state taxes. For the three and six months ended June 30, 2018, we recorded $13.8 million and $23.6 million, respectively, of income tax expense and had an effective rate of 24.9% and 23.0%, respectively. For the three months ended June 30, 2018, the primary reason for the difference between the federal statutory income tax rate of 21% and the effective tax rate was the effect of state taxes. For the six months ended June 30, 2018, the primary reason for the difference between the federal statutory income tax rate of 21% and the effective tax rate was the effect of state taxes, offset partially by excess tax benefits of vested share-based payment awards.
Liquidity and Capital Resources
We ended second quarter 2019 with $202.4 million of cash and cash equivalents and $440.0 million of debt. At June 30, 2019, we had $567.8 million of available liquidity (cash and cash equivalents and undrawn committed bank line availability). We generated $10.7 million of cash during the six months ended June 30, 2019, as cash provided by operations was offset partially by capital spending, acquisition funding, dividends paid on our common stock, and tax withholding payments on stock-based awards. Further descriptions of our cash sources and uses for the six month comparative periods are noted 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, funding of acquisitions, lease obligations, working capital, pension contributions, and to pay cash dividends to holders of our common stock over the next 12 months. We expect to fund our seasonal and intra-month working capital requirements in the remainder of 2019 from cash on hand and, if necessary, borrowings under our revolving credit facility.
Sources and Uses of Cash
We generate cash primarily from sales of our products, as well as short-term and long-term borrowings. Our primary uses of cash are for expenses related to the manufacture and distribution of building products, including inventory purchased for resale, wood fiber, labor, energy, and glues and resins. In addition to paying for ongoing operating costs, we use cash to invest in our business, service our debt and pension obligations, pay dividends, repurchase our common stock, and meet our contractual obligations and commercial commitments. Below is a discussion of our sources and uses of cash for operating activities, investing activities, and financing activities.
|
| | | | | | | |
| Six Months Ended June 30 |
| 2019 | | 2018 |
| (thousands) |
Net cash provided by operations | $ | 66,852 |
| | $ | 88,336 |
|
Net cash used for investment | (44,611 | ) | | (45,583 | ) |
Net cash used for financing | (11,505 | ) | | (9,882 | ) |
Operating Activities
For the six months ended June 30, 2019, our operating activities generated $66.9 million of cash, compared with $88.3 million of cash generated in the same period in 2018. The $21.5 million decrease in cash generated for operations was due primarily to a $59.1 million decline in income from operations, partially offset by a lesser year-over-year increase in working capital and a decrease in cash paid for taxes, net of refunds received, of $17.1 million. Working capital increased $40.1 million during the six months ended June 30, 2019, compared with a $70.0 million increase for the same period in the prior year. See "Our Operating Results" in this Management's Discussion and Analysis of Financial Condition and Results of Operations for more information related to factors affecting our operating results.
The change in working capital in both periods was primarily attributable to higher receivables, offset by an increase in accounts payable and accrued liabilities. The increases in receivables in both periods primarily reflect increased sales of approximately 38% and 43%, comparing sales for the months of June 2019 and 2018 with sales for the months of December 2018 and 2017, respectively. An increase in inventories during the six months ended June 30, 2018 also contributed to the increase in working capital, primarily due to seasonal increases in inventory in preparation for the spring building season, as well as rapidly rising commodity prices in the first six months of 2018 resulting in inventory growth. During the six months ended June 30, 2019, inventories decreased, as inventory in our Building Materials Distribution segment did not increase at the same rate as the comparative prior year period as a result of weak commodity pricing in the first six months of 2019, and as inventory levels at the end of 2018 were seasonally higher than normal with slower sales in the second half of 2018 due to slower housing activity and declining commodity prices. The increase in accounts payable and accrued liabilities provided $45.4 million of cash during the six months ended June 30, 2019, compared with $134.5 million in the same period a year ago. For our Building Materials Distribution segment, extended terms offered by major vendors led to the increase in accounts payable during both periods. The increase in accounts payable was offset partially by decreases in accrued liabilities, most notably annual employee incentive compensation payouts made during both periods and lower incentive compensation accruals for 2019.
Investment Activities
During the six months ended June 30, 2019 and 2018, we used $32.8 million and $28.3 million, respectively, of cash for purchases of property and equipment, including business improvement and quality/efficiency projects, replacement and expansion projects, and ongoing environmental compliance. In addition, during the six months ended June 30, 2019 and 2018 we used $15.7 million and $17.6 million for acquisitions. For the six months ended June 30, 2019, we received asset sale proceeds of $2.5 million from the sale of a hardwood plywood facility located in Moncure, North Carolina. For additional information related to the acquisition of the distribution facility and the sale of our manufacturing facility, see the discussion in Note 5, Acquisitions, and Note 6, Sale of Manufacturing Facility, respectively, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1. Financial Statements" of this Form 10-Q.
Excluding acquisitions, we expect capital expenditures in 2019 to total approximately $85 million to $95 million. This includes spending to improve the efficiency of our veneer production at our Chester, South Carolina, and Florien, Louisiana, facilities. As of June 30, 2019, the veneer production project at the Chester, South Carolina, facility is substantially complete.
This level of capital expenditures could increase or decrease as a result of a number of factors, including our financial results, future economic conditions, and timing of equipment purchases.
Financing Activities
During the six months ended June 30, 2019, our financing activities used $11.5 million of cash, including $7.6 million for common stock dividend payments and $3.6 million of tax withholding payments on stock-based awards. During the six months ended June 30, 2019, we also borrowed $5.5 million under our revolving credit facility to fund intra-month working capital needs, which were subsequently repaid during the same period with cash on hand. At June 30, 2019, we had no borrowings outstanding under the revolving credit facility.
During the six months ended June 30, 2018, our financing activities used $9.9 million of cash, including $5.5 million for common stock dividend payments and $5.1 million of tax withholding payments on stock-based awards. During the six months ended June 30, 2018, we also borrowed $7.5 million under our revolving credit facility to fund intra-month working capital needs, which were subsequently repaid during the same period with cash on hand.
For more information related to our debt structure and dividend policy, see the discussion in Note 7, Debt, and Note 11, Stockholders' Equity, respectively, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1. Financial Statements" of this Form 10-Q.
Contractual Obligations
For information about contractual obligations, see Contractual Obligations in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2018 Form 10-K. There have been no material changes in contractual obligations outside the ordinary course of business since December 31, 2018.
Off-Balance-Sheet Activities
At June 30, 2019, and December 31, 2018, we had no material off-balance-sheet arrangements with unconsolidated entities.
Guarantees
Note 10, Debt, and Note 18, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our 2018 Form 10-K describe the nature of our guarantees, including the approximate terms of the guarantees, how the guarantees arose, the events or circumstances that would require us to perform under the guarantees, and the maximum potential undiscounted amounts of future payments we could be required to make. As of June 30, 2019, there have been no material changes to the guarantees disclosed in our 2018 Form 10-K.
Seasonal Influences
We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors. These seasonal factors are common in the building products industry. Seasonal changes in levels of building activity affect our building products businesses, which are dependent on housing starts, repair-and-remodeling activities, and light commercial construction activities. We typically report lower sales in the first and fourth quarters due to the impact of poor weather on the construction market, and we generally have higher sales in the second and third quarters, reflecting an increase in construction due to more favorable weather conditions. We typically have higher working capital in the first and second quarters in preparation and response to the building season. Seasonally cold weather increases costs, especially energy consumption costs, at most of our manufacturing facilities.
Employees
As of July 28, 2019, we had approximately 6,050 employees. Approximately 23% of these employees work pursuant to collective bargaining agreements. As of July 28, 2019, we had eight collective bargaining agreements. Three agreements, covering approximately 500 employees at our Elgin plywood plant, Kettle Falls plywood plant, and Woodinville BMD facility, are set to expire on May 31, 2020. If any of these agreements are not renewed or extended upon their termination, we could experience a material labor disruption, strike, or significantly increased labor costs at one or more of our facilities, either in the
course of negotiations of a labor agreement or otherwise. In addition, the ongoing recovery in the U.S. economy and our industry, when coupled with low unemployment rates, has made it difficult to acquire and retain the skilled labor necessary to successfully operate our facilities. Labor disruptions or shortages could prevent us from meeting customer demands or result in increased costs, thereby reducing our sales and profitability.
Disclosures of Financial Market Risks
In the normal course of business, we are exposed to financial risks such as changes in commodity prices, interest rates, and foreign currency exchange rates. As of June 30, 2019, there have been no material changes to financial market risks disclosed in our 2018 Form 10-K.
Environmental
For additional information about environmental issues, see Environmental in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2018 Form 10-K.
Critical Accounting Estimates
Critical accounting estimates are those that are most important to the portrayal of our financial condition and results. These estimates require management's most difficult, subjective, or complex judgments, often as a result of the need to estimate matters that are inherently uncertain. We review the development, selection, and disclosure of our critical accounting estimates with the Audit Committee of our board of directors. For information about critical accounting estimates, see Critical Accounting Estimates in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2018 Form 10-K. At June 30, 2019, there have been no material changes to our critical accounting estimates from those disclosed in our 2018 Form 10-K.
New and Recently Adopted Accounting Standards
For information related to new and recently adopted accounting standards, see "New and Recently Adopted Accounting Standards" in Note 2, Summary of Significant Accounting Policies, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1. Financial Statements" in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information relating to quantitative and qualitative disclosures about market risk, see the discussion under "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" and under the headings "Disclosures of Financial Market Risks" and "Financial Instruments" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2018 Form 10-K. As of June 30, 2019, there have been no material changes in our exposure to market risk from those disclosed in our 2018 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as defined in Rule 13a-15(e) under the Exchange Act. We have designed these controls and procedures to reasonably assure that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. We have also designed our disclosure controls to provide reasonable assurance that such information is accumulated and communicated to our senior management, including our chief executive officer (CEO) and our chief financial officer (CFO), as appropriate, to allow them to make timely decisions regarding our required disclosures. Based on an evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that as of June 30, 2019, our disclosure controls and procedures were effective in meeting the objectives for which they were designed.
Limitations on the Effectiveness of Controls and Procedures
In designing and evaluating our disclosure and/or internal controls and procedures, we recognized that no matter how well conceived and well operated, a control system can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of its inherent limitations, a control system, no matter how well designed, may not prevent or detect misstatements due to error or fraud. Additionally, in designing a control system, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have also designed our disclosure and internal controls and procedures based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control Over Financial Reporting
Effective January 1, 2019, we adopted Accounting Standards Codification 842, Leases (Topic 842). As a result, we have made changes to certain internal controls over financial reporting to address risks associated with the required lease accounting and disclosure requirements. This includes the enhancement of our lease evaluation processes and the implementation of controls to address risks associated with the calculation of right-of-use assets and corresponding lease liabilities. We also implemented a new lease accounting system to track our leasing portfolio, process accounting transactions, and report on activity and balances. There were no other changes in our internal control over financial reporting that occurred during the three months ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to legal proceedings that arise in the ordinary course of our business, including commercial liability claims, premises claims, environmental claims, and employment-related claims, among others. As of the date of this filing, we believe it is not reasonably possible that any of the legal actions against us will, individually or in the aggregate, have a material adverse effect on our financial position, results of operations, or cash flows.
ITEM 1A. RISK FACTORS
This report on Form 10-Q contains forward-looking statements. Statements that are not historical or current facts, including statements about our expectations, anticipated financial results, projected capital expenditures, and future business prospects, are forward-looking statements. You can identify these statements by our use of words such as "may," "will," "expect," "believe," "should," "plan," "anticipate," and other similar expressions. You can find examples of these statements throughout this report, including "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." We cannot guarantee that our actual results will be consistent with the forward-looking statements we make in this report. You should review carefully the risk factors listed in "Item 1A. Risk Factors" in our 2018 Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission and the risk factor below related to the impairment of long-lived assets. We do not assume an obligation to update any forward-looking statement.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Filed With the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2019
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | BOISE CASCADE COMPANY |
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| | /s/ Kelly E. Hibbs |
| | Kelly E. Hibbs Vice President and Controller |
| | (As Duly Authorized Officer and Chief Accounting Officer) |
Date: August 2, 2019