Boise Cascade(BCC) - 2022 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements Boise Cascade reported significant Q3 2022 profitability growth, with net income reaching $219.6 million on $2.15 billion sales, strengthening its balance sheet and cash flow Consolidated Statements of Operations Highlights (Three Months Ended Sep 30) | Financial Metric | 2022 (in thousands) | 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Sales | $2,154,647 | $1,879,451 | +14.6% | | Income from operations | $299,370 | $129,386 | +131.4% | | Net income | $219,587 | $91,699 | +139.5% | | Diluted EPS | $5.52 | $2.31 | +138.9% | Consolidated Balance Sheet Highlights | Account | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total current assets | $2,181,437 | $1,885,878 | +15.7% | | Total assets | $3,348,534 | $2,572,640 | +30.2% | | Total current liabilities | $739,463 | $640,746 | +15.4% | | Total stockholders' equity | $1,983,072 | $1,352,619 | +46.6% | Consolidated Statements of Cash Flows Highlights (Nine Months Ended Sep 30) | Cash Flow Activity | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operations | $814,125 | $527,091 | | Net cash used for investment | ($575,622) | ($50,824) | | Net cash used for financing | ($120,346) | ($94,763) | | Net increase in cash | $118,157 | $381,504 | Note 1. Nature of Operations and Consolidation Boise Cascade operates in Wood Products (EWP, plywood) and Building Materials Distribution (BMD) segments, with consolidated financial statements reflecting interim period adjustments - The company is a major North American producer of EWP and plywood and a leading U.S. wholesale distributor of building products[29] - The business is structured into two reportable segments: Wood Products and Building Materials Distribution (BMD)[29] Note 2. Summary of Significant Accounting Policies This note details accounting policies for revenue recognition, rebates, leases, and financial instruments, highlighting interest rate swap usage and significant customer credit risk concentration - Customer rebates payable were $136.1 million as of September 30, 2022, recorded as a decrease in Sales[36] - The company manages interest rate risk on its $50.0 million variable-rate debt using receive-variable, pay-fixed interest rate swaps, with fair value changes recognized in earnings[49][50][51] - As of September 30, 2022, two customers represented a significant concentration of credit risk, accounting for approximately 18% and 12% of total receivables[52] Note 3. Income Taxes The effective tax rate was 25.7% for Q3 2022 and 25.2% for the nine months, slightly above the federal rate due to state taxes Income Tax Expense and Effective Rates | Period | Income Tax Expense (in millions) | Effective Tax Rate | | :--- | :--- | :--- | | Q3 2022 | $76.0 | 25.7% | | Q3 2021 | $31.2 | 25.4% | | Nine Months 2022 | $248.8 | 25.2% | | Nine Months 2021 | $183.6 | 25.3% | Note 4. Net Income Per Common Share Basic and diluted net income per common share significantly increased year-over-year, with Q3 2022 diluted EPS at $5.52 and nine-month diluted EPS at $18.62 Net Income Per Common Share | Period | Basic EPS | Diluted EPS | | :--- | :--- | :--- | | Q3 2022 | $5.55 | $5.52 | | Q3 2021 | $2.32 | $2.31 | | Nine Months 2022 | $18.73 | $18.62 | | Nine Months 2021 | $13.79 | $13.71 | Note 5. Acquisition Boise Cascade acquired Coastal Plywood for $516.9 million in July 2022 to expand EWP capacity, with a preliminary $74.0 million goodwill allocation and Q3 contributions of $43.0 million sales - Completed the acquisition of Coastal Plywood Company on July 25, 2022, for a purchase price of $516.9 million, funded with cash on hand[60] - The strategic rationale for the acquisition is to secure incremental stress-rated veneer to optimize and expand southeastern U.S. EWP production capacity[61] Preliminary Purchase Price Allocation (in thousands) | Asset/Liability | Fair Value | | :--- | :--- | | Property and equipment | $251,329 | | Customer relationships | $156,700 | | Goodwill | $73,974 | | Inventories | $22,300 | | Net assets acquired | $516,881 | Note 6. Goodwill and Intangible Assets Goodwill increased to $134.4 million and net intangible assets to $169.5 million as of September 30, 2022, primarily due to the Coastal Plywood acquisition - Goodwill increased by $74.0 million to a total of $134.4 million, entirely due to the Coastal Plywood acquisition[68] - Net intangible assets grew to $169.5 million, with the majority of the increase from acquired customer relationships with a weighted-average useful life of approximately 10 years[69][70] Note 7. Debt Total long-term debt was $444.2 million as of September 30, 2022, following an amendment to increase the revolving credit facility to $400 million and extend its maturity to 2027 Long-Term Debt Composition (in thousands) | Debt Instrument | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Asset-based credit facility term loan due 2027 | $50,000 | $50,000 | | 4.875% senior notes due 2030 | $400,000 | $400,000 | | Deferred financing costs | ($5,825) | ($5,372) | | Total Long-term debt | $444,175 | $444,628 | - On September 9, 2022, the company amended its credit agreement, increasing the revolving credit facility to $400 million and extending the maturity to 2027[73] Note 8. Leases Total lease cost for Q3 2022 was $7.1 million, with total lease obligations of $63.4 million for operating leases and $32.3 million for finance leases as of September 30, 2022 Lease Costs (in thousands) | Lease Component | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | $3,588 | $3,474 | $10,734 | $10,199 | | Finance lease cost | $1,204 | $1,190 | $3,625 | $3,578 | | Total lease cost | $7,147 | $6,869 | $21,264 | $19,898 | - As of September 30, 2022, total future minimum lease payments are $79.2 million for operating leases and $53.2 million for finance leases[93] Note 9. Stock-Based Compensation Stock-based compensation expense was $3.3 million for Q3 2022, with $16.9 million of unrecognized expense remaining as of quarter-end, to be recognized over 1.9 years Stock-Based Compensation Expense (in thousands) | Period | PSUs | RSUs | Total | | :--- | :--- | :--- | :--- | | Q3 2022 | $1,933 | $1,354 | $3,287 | | Q3 2021 | $1,190 | $991 | $2,181 | | Nine Months 2022 | $4,934 | $3,756 | $8,690 | | Nine Months 2021 | $3,024 | $2,660 | $5,684 | - Total unrecognized compensation expense related to nonvested share-based awards was $16.9 million as of September 30, 2022[101] Note 10. Stockholders' Equity The board declared a quarterly dividend of $0.15 per share and a special dividend of $1.00 per share, while increasing the stock repurchase authorization to approximately 2.0 million shares - On October 27, 2022, the board declared a quarterly dividend of $0.15 per share and a special dividend of $1.00 per share[103] - The stock repurchase program was increased by 1.5 million shares in July 2022, for a total authorization of approximately 2.0 million shares; no shares were purchased in the first nine months of 2022[105] Note 11. Transactions With Related Party The company transacts with Louisiana Timber Procurement Company (LTP), a 50%-owned joint venture, reporting $10.6 million in sales to LTP and $67.4 million in purchases from LTP for the nine months ended September 30, 2022 - Transactions are with Louisiana Timber Procurement Company, L.L.C. (LTP), a 50/50 joint venture with Packaging Corporation of America (PCA) for wood fiber procurement[108] Related Party Transactions with LTP (Nine Months Ended Sep 30, in millions) | Transaction Type | 2022 | 2021 | | :--- | :--- | :--- | | Sales to LTP | $10.6 | $10.2 | | Purchases from LTP | $67.4 | $63.3 | Note 12. Segment Information Both Wood Products and BMD segments reported significant Q3 2022 operating income increases, driven by higher EWP prices and improved gross margins on commodity products, respectively Segment Operating Income (Three Months Ended Sep 30, in thousands) | Segment | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Wood Products | $155,972 | $122,056 | +27.8% | | Building Materials Distribution | $154,436 | $16,565 | +832.3% | | Total segment operating income | $310,408 | $138,621 | +123.9% | Note 13. Commitments, Legal Proceedings and Contingencies, and Guarantees No material changes to commitments, legal proceedings, contingencies, or guarantees have occurred since the 2021 Form 10-K, with no expected material adverse effects from current legal actions - There have been no material changes to commitments, legal proceedings, or guarantees since the 2021 Form 10-K[114][116] - The company is not party to any legal action expected to have a material adverse effect on its financial results[115] Management's Discussion and Analysis of Financial Condition and Results of Operations Strong Q3 2022 operating income of $299.4 million was driven by EWP price increases and BMD margin improvements, despite concerns over rising interest rates impacting future demand Executive Overview Q3 2022 income from operations more than doubled to $299.4 million, driven by strong segment performance and the $516.9 million Coastal Plywood acquisition, ending with $1.26 billion in liquidity - Q3 2022 income from operations was $299.4 million, a significant increase from $129.4 million in Q3 2021[122] - Completed the acquisition of Coastal Plywood for $516.9 million using cash on hand to expand EWP production capacity[123] - Ended Q3 2022 with total available liquidity of $1,263.2 million, comprising $867.1 million in cash and $396.2 million in undrawn bank line availability[124] Factors That Affect Our Operating Results and Trends Operating results are influenced by commodity prices, housing starts, interest rates, and raw material costs, with demand expected to decline into 2023 due to rising interest rates - Key influencing factors include commodity price volatility, housing starts, interest rates, raw material costs (wood fiber, glues), and transportation costs[127][128] - Due to rising mortgage rates and home affordability constraints, the company expects demand to decline for the remainder of 2022 and into 2023[125] - Consensus forecasts for 2023 U.S. housing starts are estimated to be 15% to 20% below 2022 levels[125] Our Operating Results Total Q3 2022 sales increased 15% to $2.15 billion, driven by 20% growth in Wood Products sales and a significant increase in BMD segment gross margin to 15.4% Wood Products - Average Net Selling Prices (Q3 2022 vs Q3 2021) | Product | Q3 2022 Price | Q3 2021 Price | % Change | | :--- | :--- | :--- | :--- | | Laminated veneer lumber (LVL) (per cubic foot) | $33.82 | $22.30 | +51.7% | | I-joists (per 1,000 lineal feet) | $2,429 | $1,575 | +54.2% | | Plywood (per 1,000 sq. ft.) | $477 | $561 | -15.0% | - BMD segment gross margin percentage increased significantly to 15.4% in Q3 2022 from 7.9% in Q3 2021, primarily due to margin improvements on commodity products[133][149] - Selling and distribution expenses increased 24% in Q3 2022, primarily due to higher employee-related incentive compensation and increased shipping costs[145] Liquidity and Capital Resources The company maintained strong liquidity with $867.1 million in cash and $1.26 billion total available liquidity, generating $814.1 million from operations for the nine months ended September 30, 2022 Sources and Uses of Cash (Nine Months Ended Sep 30, in thousands) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operations | $814,125 | $527,091 | | Net cash used for investment | ($575,622) | ($50,824) | | Net cash used for financing | ($120,346) | ($94,763) | - The primary use of cash for investment activities in 2022 was the $516.9 million acquisition of Coastal Plywood[161] - Projected capital expenditures are expected to be $100 million to $120 million in 2022 and increase to approximately $120 million to $140 million in 2023, excluding acquisitions[162][163] Quantitative and Qualitative Disclosures About Market Risk No material changes in exposure to market risks, including commodity prices, interest rates, and foreign currency, have occurred since the 2021 Form 10-K - There have been no material changes in the company's exposure to market risk since the 2021 Form 10-K[178] Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2022[179] - No changes occurred during Q3 2022 that materially affected internal control over financial reporting[180] PART II—OTHER INFORMATION Legal Proceedings The company is involved in ordinary legal proceedings but anticipates no material adverse effect on its financial position or results - The company does not believe it is party to any legal action that could reasonably be expected to have a material adverse effect on its financial position or results[182] Risk Factors A key risk involves potential difficulties in efficiently integrating acquired operations, such as Coastal Plywood, which could disrupt business and hinder expected benefit realization - A key risk is the inability to efficiently integrate acquired operations, such as the recent Coastal Plywood acquisition, which could disrupt business and prevent the realization of expected benefits[184][185] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported - None[186] Exhibits This section lists exhibits filed with the Form 10-Q, including the Eighth Amendment to the Credit Agreement and required certifications - Key exhibits include the Eighth Amendment to the Amended and Restated Credit Agreement and CEO/CFO certifications[188]