Boise Cascade(BCC) - 2020 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2020, and 2019, including statements of operations, comprehensive income, balance sheets, cash flows, and stockholders' equity, along with detailed notes covering significant accounting policies, segment information, debt, and other key financial areas Consolidated Statements of Operations Highlights (unaudited) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Sales | $1,589.3 M | $1,269.5 M | $4,002.6 M | $3,541.7 M | | Income from operations | $158.6 M | $44.9 M | $235.9 M | $111.7 M | | Net income | $103.2 M | $27.2 M | $149.0 M | $66.3 M | | Diluted EPS | $2.61 | $0.69 | $3.78 | $1.69 | Consolidated Balance Sheet Highlights (unaudited) | Metric | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $503.9 M | $285.2 M | | Total current assets | $1,413.5 M | $1,022.8 M | | Total assets | $2,059.8 M | $1,693.4 M | | Total current liabilities | $676.4 M | $385.0 M | | Long-term debt | $443.6 M | $440.5 M | | Total stockholders' equity | $778.1 M | $701.3 M | Consolidated Statements of Cash Flows Highlights (unaudited, Nine Months Ended) | Metric | September 30, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operations | $293.8 M | $194.8 M | | Net cash used for investment | ($46.4 M) | ($64.8 M) | | Net cash used for financing | ($28.6 M) | ($15.2 M) | | Net increase in cash | $218.7 M | $114.8 M | Nature of Operations and Consolidation Boise Cascade is a major North American producer of engineered wood products (EWP) and plywood, and a leading U.S. wholesale distributor of building products, operating through two reportable segments: Wood Products and Building Materials Distribution (BMD) - The company is one of the largest producers of EWP and plywood in North America[20] - Business is operated through two segments: Wood Products (manufacturing) and Building Materials Distribution (wholesale distribution)[21] Debt In Q3 2020, the company undertook significant debt refinancing, issuing $400 million of 4.875% senior notes due 2030 to repurchase its $350 million 5.625% notes due 2024 and pay off a $45 million term loan, resulting in a pre-tax loss on debt extinguishment of $14.0 million, with total long-term debt at $443.6 million as of September 30, 2020 - On July 27, 2020, the company issued $400 million of 4.875% senior notes due 2030[70] - Proceeds were used to retire the $350 million 5.625% senior notes due 2024 and pay off a $45.0 million term loan[68][71] - The refinancing transactions resulted in a pre-tax loss on the extinguishment of debt of $14.0 million in Q3 2020, which included $10.8 million in premium payments and $3.2 million in write-offs of deferred financing costs[68] Retirement and Benefit Plans The company intends to terminate its qualified defined benefit pension plan, having frozen benefit accruals effective August 31, 2020, and purchased a buy-in group annuity contract from Prudential, funded with plan assets, to cover future obligations and fully eliminate the pension plan's liabilities - The company intends to terminate its Pension Plan and froze all benefit accruals effective August 31, 2020[82] - A buy-in group annuity contract was purchased from Prudential, funded with plan assets, to manage lump-sum payments and future obligations for remaining participants[82][83][84] Stockholders' Equity The company maintains a quarterly dividend policy, declaring a significant supplemental dividend of $1.60 per share on September 28, 2020, in addition to the regular quarterly dividend of $0.10 per share, with the supplemental dividend totaling $62.7 million accrued at quarter-end - On September 28, 2020, the board of directors declared a supplemental dividend of $1.60 per share[96] - A regular quarterly dividend of $0.10 per share was also declared on October 29, 2020[96] - Future dividends are at the discretion of the board and depend on financial condition, contractual obligations, and other factors[97] Segment Information The company's operations are divided into two segments: Wood Products and Building Materials Distribution (BMD), both of which saw significant year-over-year increases in operating income for Q3 2020, with Wood Products reporting $66.0 million on sales of $363.7 million, and BMD reporting $107.9 million on sales of $1,437.7 million Segment Operating Income (Three Months Ended Sep 30) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | Wood Products | $66.0 M | $15.6 M | | Building Materials Distribution | $107.9 M | $38.7 M | | Total Segment Operating Income | $173.9 M | $54.3 M | Segment Net Sales (Three Months Ended Sep 30) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | Wood Products | $363.7 M | $325.1 M | | Building Materials Distribution | $1,437.7 M | $1,145.6 M | - Approximately 80% of the Wood Products segment's EWP sales volumes for the nine months ended September 30, 2020, were to the company's own Building Materials Distribution segment[105] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant increase in Q3 2020 operating income to $158.6 million from $44.9 million in Q3 2019, driven by higher plywood prices and strong commodity margins, detailing the impact of COVID-19, which led to initial production cuts followed by robust demand and historically high prices, while maintaining strong liquidity of $849.3 million and refinancing debt to extend maturities - Q3 2020 income from operations surged to $158.6 million, compared to $44.9 million in Q3 2019[114] - The performance increase was primarily due to higher plywood sales prices in the Wood Products segment and improved gross margins on commodity products in the Building Materials Distribution segment[114] - The company ended Q3 2020 with total available liquidity of $849.3 million, consisting of $503.9 million in cash and $345.4 million in undrawn credit availability[115] - Market conditions were volatile due to COVID-19, with initial production cuts followed by a surge in demand and significant increases in commodity product prices in Q3[115] Our Operating Results Total sales for Q3 2020 increased 25% year-over-year to $1.59 billion, driven by a 17% rise in single-family housing starts and soaring commodity prices, with Wood Products sales growing 12% due to a 69% increase in plywood prices and BMD sales jumping 25% led by a 54% increase in commodity sales, resulting in income from operations rising sharply to $158.6 million from $44.9 million in the prior-year quarter Sales Performance (Three Months Ended Sep 30, 2020 vs 2019) | Segment/Product | Change Driver | Impact | | :--- | :--- | :--- | | Total Sales | Increased 25% to $1,589.3M | Driven by higher prices and volumes | | Wood Products | Plywood prices up 69% | Sales increased by $38.6M (12%) | | BMD | Commodity sales up 54% | Sales increased by $292.1M (25%) | Income from Operations (Three Months Ended Sep 30) | Segment | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Wood Products | $66.0 M | $15.6 M | +$50.4 M | | Building Materials Distribution | $107.9 M | $38.7 M | +$69.2 M | | Total Income from Operations | $158.6 M | $44.9 M | +$113.7 M | - Selling, distribution, and administrative expenses increased primarily due to higher employee incentive compensation tied to strong financial performance[136][137] Liquidity and Capital Resources The company maintained strong liquidity, ending Q3 2020 with $849.3 million available, with operations generating $293.8 million in cash for the first nine months of 2020, a $99.0 million increase from 2019, primarily due to higher operating income, while major financing activities included issuing $400 million in new notes to retire existing debt, extending maturities to 2025 and beyond, and revising capital spending for 2020 down to $60-$75 million due to COVID-19 uncertainty, with plans to increase to $80-$90 million in 2021 - Net cash provided by operations for the nine months ended Sep 30, 2020 was $293.8 million, a significant increase from $194.8 million in the prior year period, driven by improved income from operations[155] - In July 2020, the company issued $400 million of 2030 Notes and used proceeds to retire $350 million of 2024 Notes and a $45 million term loan[160] - Planned capital spending for 2020 was reduced to a range of $60-to-$75 million from an initial $85-to-$95 million in response to COVID-19 uncertainty[158] Employees As of October 2020, Boise Cascade had approximately 5,900 employees, with 23% covered by collective bargaining agreements, and issued a WARN Act notice for its Elgin, Oregon plywood plant, indicating potential production reductions from January 2021 due to new environmental permit constraints from the Oregon Department of Environmental Quality (ODEQ) - The company has approximately 5,900 employees, with 23% unionized[175] - A WARN Act notice was issued for the Elgin, Oregon plant due to the possibility of production reduction starting January 2021, caused by new environmental permit constraints from ODEQ, which has created uncertainty about future operations and log supply[175] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes in its exposure to market risks, such as commodity prices, interest rates, and foreign currency, since its 2019 Form 10-K, except for the interest rate swap transactions detailed within the MD&A section of this report - There have been no material changes in the company's exposure to market risk from those disclosed in the 2019 Form 10-K, other than changes related to interest rate swaps[188] Controls and Procedures Based on an evaluation as of September 30, 2020, the CEO and CFO concluded that the company's disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the third quarter of 2020 - The CEO and CFO concluded that as of September 30, 2020, the company's disclosure controls and procedures were effective[189] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[189] PART II—OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings that arise in the ordinary course of business, none of which management believes are reasonably likely to have a material adverse effect on the company's financial position, results, or cash flows - The company is party to legal proceedings arising in the ordinary course of business, but does not expect them to have a material adverse effect on its financials[191] Risk Factors This section highlights significant risks to the business, emphasizing that the full impact of the COVID-19 pandemic remains unknown and could adversely affect operations, demand, and customer creditworthiness, alongside other key risks including material disruptions at manufacturing facilities, potential impairment of long-lived assets and goodwill, product shortages from suppliers, and difficulty in obtaining wood fiber at favorable prices - The full effect of the COVID-19 pandemic on the business is unknown and may adversely affect operating results, potentially through new restrictions, reduced demand, or disruptions to facilities[193] - A material disruption at a manufacturing facility, such as from equipment failure or labor difficulties, could prevent the company from meeting customer demand and negatively impact both the Wood Products and BMD segments[194][196] - The company faces risk of non-cash impairment charges on its long-lived assets and goodwill if future economic benefits do not meet expectations, potentially triggered by sustained negative impacts from COVID-19 or weak commodity prices[199][200] - The availability and price of wood fiber, the principal raw material, are subject to cyclicality and risks from natural causes (fires, hurricanes) and pandemics, which could impair the cost competitiveness of manufacturing facilities[206]