Boise Cascade Company — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited results. Boise Cascade manufactures engineered wood products and plywood and distributes building materials through Wood Products, Building Materials Distribution, and Corporate and Other segments.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $878.0 million | $764.6 million | $2,475.2 million | $2,084.5 million |
| Operating income | $30.5 million | $28.1 million | $77.3 million | $54.5 million |
| Operating margin | 3.5% | 3.7% | 3.1% | 2.6% |
| Net income | $15.9 million | $23.5 million | $107.1 million | $40.2 million |
| Diluted EPS | $0.39 | $0.79 | $2.65 | $1.35 |
| EBITDA | $39.5 million | $36.8 million | $103.2 million | $79.6 million |
Cash flow: Nine-month operating cash flow was $22.1 million, down from $64.9 million. Investing used $130.4 million, including the $102.0 million acquisition and $29.9 million of capital expenditures. Financing provided $210.8 million, primarily reflecting IPO proceeds and additional notes, offset in part by the $100.0 million share repurchase and debt repayments. Cash ended the period at $157.0 million.
Liquidity and debt: Long-term debt was $326.7 million, including $300.0 million principal of 6.375% senior notes due 2020 and $25.0 million drawn on the revolving facility. The $350 million asset-based revolver had $274.7 million availability; reported total liquidity was $431.7 million. Management said available cash, operating cash flow, and borrowing capacity should cover anticipated needs for at least 12 months.
Margins and segment results: Q3 Wood Products segment income fell to $17.9 million from $22.5 million; higher wood-fiber costs and lower plywood prices outweighed stronger EWP and lumber pricing. Building Materials Distribution income rose to $17.9 million from $10.3 million as higher volumes increased gross-margin dollars; segment gross-margin percentage eased to 11.6% from 12.0%. Nine-month segment income increased in both Wood Products ($61.8 million versus $48.8 million) and Distribution ($29.1 million versus $18.2 million).
Material changes and notable items
- Sales rose 15% in Q3 and 19% for the nine-month period, driven by higher volumes and prices across many products. Q3 operating income improved, but operating margin narrowed.
- Q3 net income declined despite higher operating income, mainly because the company recorded $9.6 million of income tax expense versus $0.1 million in Q3 2012. Boise Cascade became a taxable corporation effective January 1, 2013; the prior LLC structure generally had an effective tax rate below 1%.
- Nine-month net income includes a one-time $68.7 million deferred-tax benefit recorded on conversion to a corporation. Excluding that discrete item, nine-month tax expense was $24.0 million and the effective tax rate was 38.4%.
- The September 30 acquisition of Chester Wood Products and Moncure Plywood for $102.0 million was completed on the last day of the quarter; acquired businesses’ results were to be reported in Wood Products beginning Q4. Purchase-price allocations were preliminary.
- The company issued 13.5 million shares in its February IPO, receiving $262.5 million net, and repurchased 3.9 million shares from its controlling shareholder for $100.0 million in July. It also issued $50 million of additional 6.375% senior notes.
Outlook, commentary, and risks
Management expected 2013 U.S. housing starts to exceed 2012 levels but remain below historical averages, and noted that a lower share of single-family construction could limit product demand. It remained optimistic that recent demand improvement would continue, while warning that lumber and panel prices are volatile and may respond to operating rates, inventories, and seasonal demand. The company planned to match production to sales, potentially operating facilities below capacity. Excluding acquisitions, 2013 capital expenditures were estimated at $40 million to $45 million.
Key risks include housing and construction cyclicality, commodity-price swings, wood-fiber and other input costs, customer concentration and creditworthiness, substantial indebtedness, acquisition integration, and reliance on Boise Inc. for administrative services. Two Louisiana collective-bargaining agreements covering 655 employees had expired and were extended indefinitely; a disruption or higher labor costs could affect operations. Boise Inc. was acquired by PCA in October 2013; the outsourcing agreement remained in place and was scheduled to expire in February 2015. The company reported no legal proceedings or environmental claims believed likely to have a material adverse effect.
Investor verification points
- Separate recurring operating performance from the $68.7 million deferred-tax benefit when assessing nine-month earnings and EPS.
- Track whether higher sales translate into stronger margins, particularly in Distribution, and whether wood-fiber costs and plywood pricing pressure Wood Products results.
- Assess operating cash conversion: nine-month operating cash flow fell materially, with working-capital investment and cash taxes among the drivers.
- Review the acquired plants’ subsequent contribution, integration costs, and final purchase-price allocation; Q3 results exclude their operating contribution.
- Monitor liquidity, borrowing-base availability, debt service, labor negotiations, and continuity of outsourced services after PCA’s acquisition of Boise Inc.