Boise Cascade Company — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited. Boise Cascade manufactures engineered wood products and plywood and distributes building materials through Wood Products, Building Materials Distribution, and Corporate and Other segments.
Key financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Sales | $852.3 million | $732.9 million | $1,597.2 million | $1,319.9 million |
| Operating income | $22.2 million | $20.1 million | $46.9 million | $26.4 million |
| Net income | $10.4 million | $15.0 million | $91.2 million | $16.7 million |
| Diluted EPS | $0.24 | $0.51 | $2.26 | $0.56 |
| EBITDA | $30.7 million | $28.2 million | $63.7 million | $42.7 million |
Q2 sales increased 16% year over year; operating margin was 2.6%, versus 2.7%. First-half sales rose 21%, and operating margin improved to 2.9% from 2.0%. Q2 net income declined despite higher sales and operating income, in part because corporate tax expense now applies following the company’s conversion to a corporation. First-half net income includes a one-time $68.7 million deferred tax benefit from that conversion; excluding the discrete benefit, first-half income tax expense was $14.4 million.
- Segments, Q2 year over year: Wood Products income rose to $23.0 million from $15.5 million, driven mainly by higher plywood, engineered wood, and lumber prices. Building Materials Distribution income fell to $3.3 million from $8.7 million as falling commodity prices compressed gross margins and prompted lower-of-cost-or-market inventory write-downs.
- Cash flow: Operations used $45.8 million in the first half, compared with $4.8 million provided a year earlier. Increased working capital, including higher receivables and seasonal inventory, income taxes paid, and pension contributions were key uses. Investing used $13.5 million, including $14.0 million of capital expenditures.
- Balance sheet and liquidity: At June 30, cash was $232.7 million, long-term debt was $250.0 million, and stockholders’ equity was $462.0 million. The $300 million revolving facility had no borrowings and $290.7 million of availability; reported aggregate liquidity was $523.4 million. Cash and debt imply net debt of approximately $17.3 million.
Changes, outlook, and notable items
- Higher housing activity, sales volumes, and product prices lifted revenue. Q2 U.S. housing starts rose 17% year over year. The company said wood-product commodity prices, after rising in Q1, declined sharply during Q2; future prices may remain volatile.
- Management expected 2013 U.S. housing starts of 0.99 million units, based on the July consensus forecast, but noted demand remained below historical levels and recent starts included a lower share of higher-material-use single-family homes. It expected to match production to sales demand, potentially operating facilities below capacity. No specific company earnings or revenue guidance was provided.
- Management believed cash, operating cash flows, and borrowing capacity would cover operating needs and obligations for at least the next 12 months. Capital expenditures excluding acquisitions were expected to be approximately $40–$45 million in 2013.
- After quarter-end, the company agreed to acquire Wood Resources LLC’s Southeast plywood operations for $102 million, expected to close before September 30, 2013; planned financing was approximately $77 million cash and $25 million revolver borrowings. On July 30, it also repurchased 3,864,062 shares from its controlling shareholder, BC Holdings, for $100 million using cash on hand. These transactions reduce cash and may increase revolver usage.
- Risks include cyclical housing demand, volatile commodity and raw-material prices, customer credit and concentration, substantial debt, pension funding, environmental compliance, and execution/integration risks from acquisitions. Two Louisiana collective bargaining agreements covering 641 employees had been extended indefinitely after their scheduled July 15 expiration; a disruption or higher labor costs could affect operations.
- The filing reports routine legal proceedings but no pending legal or environmental matter believed likely to have a material adverse effect. Disclosure controls were concluded effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How the $68.7 million noncash tax benefit affects comparisons, and the company’s ongoing tax rate and deferred-tax-asset realizability.
- Whether falling commodity prices and inventory write-downs continue to pressure distribution margins and cash conversion.
- Actual purchase price, closing, financing, and integration results for the Southeast plywood acquisition.
- Post-repurchase cash, revolver borrowings, liquidity, and working-capital needs, particularly during seasonal inventory build.
- Housing-start trends, product pricing and wood-fiber costs, customer concentration (one customer represented 16% of receivables), and outcomes of the extended labor negotiations.