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(Unaudited)
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(Unaudited) Parentheticals
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21: R11 Income Taxes (Notes) HTML 24K
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(Exact name of registrant as specified in its charter)
iDelaware
i20-1496201
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i1111 West Jefferson Street Suite 300
iBoise, iIdahoi83702-5389
(Address of principal executive offices) (Zip Code)
(i208) i384-6161
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, $0.01 par value per share
iBCC
iNew York Stock Exchange
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. iYesx No o
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted 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 such files). iYesx 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.
iLarge accelerated filerx Accelerated filer o Non-accelerated filer o Smaller reporting company i☐
Emerging growth company i☐
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 i☐ No x
There were i39,447,709
shares of the registrant's common stock, $0.01 par value per share, outstanding on July 29, 2022.
Condensed Notes to Unaudited Quarterly Consolidated Financial Statements
1. iNature
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 wholesale distributor of building products.
We operate our business using itwo
reportable segments: (1) Wood Products, which primarily manufactures EWP and plywood, and (2) Building Materials Distribution (BMD), which is a wholesale distributor of building materials. For more information, see Note 11, 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 2021 Form 10-K and the other reports we file with the Securities and Exchange Commission.
2. iSummary
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 2021 Form 10-K.
iUse 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 (ROU) 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.
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 11, 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 fulfillment costs. 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 BMD segment, costs related to shipping and handling of $i56.0 million and $i49.7
million, for the three months ended June 30, 2022 and 2021, respectively, and $i112.3 million and $i96.2
million for the six months ended June 30, 2022 and 2021, respectively, are included in "Selling and distribution expenses" in our Consolidated Statements of Operations. In our BMD 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, as well as temporary protection
from price increases. 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, 2022 and December 31, 2021, we had $i165.4 million and $i138.1
million, respectively, of rebates payable to our customers recorded in "Accrued liabilities, Other" on our Consolidated Balance Sheets. We adjust our estimate of revenue at the earlier of when the probability of rebates paid changes or when the amounts become fixed. There have not been significant changes to our estimates of rebates, although it is reasonably possible that a change in the estimate may occur.
/
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, 2022 and December 31, 2021,
we had $i11.8 million and $i13.0 million, respectively, of vendor rebates and allowances recorded in "Receivables, Other" on our Consolidated Balance Sheets. iRebates
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.
i
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 ione 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 BMD 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 iten 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, including credit rating, term, and collateralization.
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. In addition, we do not separate lease and non-lease components for all of our leases.
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 i30 to i90
days. We do not recognize ROU assets or lease liabilities for short-term leases.
Inventories
iInventories included the following (work in process is not material):
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).
i
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, 2022 and December 31, 2021, we held $i963.7 million and $i701.6
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, 2022 and December 31, 2021, the book value of our fixed-rate debt for each period was $ii400.0/
million, and the fair value was estimated to be $i350.0 million and $i420.0 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 variable-rate debt is based on market conditions such as the London Interbank Offered Rate (LIBOR) or a base rate. Because the interest rate on the variable-rate debt is based on current market conditions, we believe that the estimated fair value of the outstanding balance on our variable-rate debt 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 loan and when we have loan amounts outstanding on our Revolving Credit Facility. At June 30, 2022, we had $i50.0 million of variable-rate debt outstanding based on ione-month
LIBOR. Our objective is to limit the variability of interest payments on our debt. To meet this objective, we enter into receive-variable, pay-fixed interest rate swaps to change the variable-rate cash flow exposure to fixed-rate cash flows. iIn 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. We do not speculate using derivative instruments.
At December 31, 2021, we had itwo
interest rate swap agreements. Under the interest rate swaps, we receive ione-month LIBOR-based variable interest rate payments and make fixed interest rate payments, thereby fixing the interest rate on $i50.0 million of variable rate debt exposure.
Payments on one interest rate swap, entered into in 2016, with a notional principal amount of $i50.0 million were due on a monthly basis at an annual fixed rate of i1.007%, and this swap expired in February 2022 (Initial
Swap). During 2020, we entered into another forward interest rate swap agreement which commenced on the expiration date of the Initial Swap. Payments on this interest rate swap with a notional principal amount of $i50.0 million are due on a monthly basis at an annual fixed rate of i0.39%,
and this swap expires in June 2025.
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, 2022, we recorded a long-term asset of $i3.7
million in "Other assets" on our Consolidated Balance Sheets, representing the fair value of the interest rate swap agreement. At December 31, 2021, we recorded a long-term asset of $i1.2 million in "Other assets" on our Consolidated Balance Sheets, and we also recorded a long-term liability of $i0.1
million in "Other long-term liabilities" 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).
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, 2022, receivables from two customers accounted for approximately i20% and i13% of total receivables. At December 31,
2021, receivables from these two customers accounted for approximately i20% and i12% of total receivables. No other customer accounted for 10% or more of total receivables.
i
New
and Recently Adopted Accounting Standards
In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract
liability and payment terms and their effect on subsequent revenue recognized by the acquirer. This ASU requires an acquirer to account for revenue contracts in accordance with Topic 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts. This ASU is applicable to our fiscal year beginning January 1, 2023, and the impact of its adoption on our consolidated financial statements will depend on the contract assets and liabilities acquired
in business combinations after that date.
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.
3. iIncome Taxes
For the three and six months
ended June 30, 2022, we recorded $i73.9 million and $i172.8 million, respectively, of income tax expense and had an effective
rate of i25.3% and i24.9%, respectively. During the three and six months ended June 30, 2022, the primary reason
for the difference between the federal statutory income tax rate of iiii21///%
and the effective tax rate was the effect of state taxes. For the three and six months ended June 30, 2021, we recorded $i101.0 million and $i152.5
million, respectively, of income tax expense and had an effective rate of i25.0% and i25.2%, respectively. During the three and six months ended June 30,
2021, the primary reason for the difference between the federal statutory income tax rate of iiii21///%
and the effective tax rate was the effect of state taxes.
During the six months ended June 30, 2022 and 2021, cash paid for taxes, net of refunds received, were $i149.1 million and $i155.5
million, respectively.
4. iNet 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.
iThe 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
2022
2021
2022
2021
(thousands, except per-share data)
Net income
$
i218,111
$
i302,556
$
i520,711
$
i451,712
Weighted
average common shares outstanding during the period (for basic calculation)
i39,544
i39,442
i39,509
i39,399
Dilutive
effect of other potential common shares
i219
i246
i253
i234
Weighted
average common shares and potential common shares (for diluted calculation)
i39,763
i39,688
i39,762
i39,633
Net
income per common share - Basic
$
i5.52
$
i7.67
$
i13.18
$
i11.47
Net
income per common share - Diluted
$
i5.49
$
i7.62
$
i13.10
$
i11.40
The
computation of the dilutive effect of other potential common shares excludes stock awards representing i0.1 million and ino
shares of common stock, respectively, in the three months ended June 30, 2022 and 2021, and i0.1 million and i0.2
million shares of common stock, respectively, in the six months ended June 30, 2022 and 2021. Under the treasury stock method, the inclusion of these stock awards would have been antidilutive.
5. iAcquisition
On
June 10, 2022, we announced that we and our wholly-owned subsidiary, Boise Cascade Wood Products, L.L.C., had entered into a Securities Purchase Agreement, dated June 9, 2022, with Coastal Forest Resources Company (“CFRC”) to purchase 100% of the equity interest of CFRC's wholly-owned subsidiary, Coastal Plywood Company, and its plywood manufacturing operations located in Havana, Florida, and Chapman, Alabama (the "Acquisition"). The Acquisition was completed on July 25, 2022, for a purchase price of $i517
million, inclusive of estimated working capital at closing of $i27 million, which is subject to post-closing adjustments. We funded the Acquisition and related costs with cash on hand. These facilities will provide incremental stress rated veneer needed to optimize and expand our southeastern U.S. EWP production capacity. In addition, the Havana plywood operation will improve our mix of specialty plywood products and is well positioned geographically to support plywood demand in the southeastern U.S.
As
a result of the limited time since the acquisition date and the ongoing status of the valuation, the initial accounting for the business combination is incomplete at the time of this filing. As a result, we are unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired, liabilities assumed, and goodwill. This information will be included in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022.
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 $i350 million senior secured asset-based revolving credit facility (Revolving Credit Facility) and a $i50.0 million
term loan (ABL Term Loan) maturing on March 13, 2025. 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 i1:1 fixed-charge coverage ratio (FCCR), applicable only if Availability falls below i10%
of the aggregate revolving lending commitments (or $i35 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, 2022 was $i346.0
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 i25% of the aggregate Revolver Commitments (as defined in the Amended Agreement) or (iii) (x) pro forma Excess Availability is equal to or exceeds i15%
of the aggregate Revolver Commitment and (y) our fixed-charge coverage ratio is greater than or equal to i1:1 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 i1.25% to
i1.50% for loans based on LIBOR and from i0.25% to i0.50%
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 i0.25% per annum of the average unused portion of the lending commitments.
At both June 30,
2022 and December 31, 2021, we had iino/ borrowings outstanding under the Revolving Credit
Facility and $ii4.0/ 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 i1.75%
to i2.00% for LIBOR rate loans and from i0.75% to i1.00%
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, 2022, the average interest rate on the ABL Term Loan was approximately i2.23%.
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 i1.2% during the six months ended June 30, 2022.
On July 27, 2020, we issued $i400 million of i4.875%
senior notes due July 1, 2030 (2030 Notes) through a private placement that was exempt from the registration requirements of the Securities Act. Interest on our 2030 Notes is payable semiannually in arrears on January 1 and July 1. The 2030 Notes are guaranteed by each of our existing and future direct or indirect domestic subsidiaries that is a guarantor under our Amended Agreement.
The 2030 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 2030 Notes.
The terms of the indenture governing the 2030 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 2030 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 i3.5:1, 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 2030 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, 2022 and 2021, cash payments for interest were $i11.3 million and $i9.6 million,
respectively.
In first quarter 2022 and 2021, we granted iitwo/
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, 2022, we granted i66,180
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 i0% and i200%
of the target amount, depending upon Boise Cascade's 2022 return on invested capital (ROIC), as approved by our Compensation Committee in accordance with the related grant agreement. We define ROIC as net operating profit after taxes (NOPAT) divided by average invested capital (based on a rolling thirteen-month average). We define NOPAT as net income plus after-tax financing expense. Invested capital is defined as total assets plus capitalized lease expense, less current liabilities, excluding short-term debt. For our other employees, the number of shares actually awarded will range from i0%
to i200% of the target amount, depending upon Boise Cascade’s 2022 EBITDA, defined as income before interest (interest expense and interest income), income taxes, and depreciation and amortization, as approved by executive management, determined in accordance with the related grant agreement. Because the PSUs contain a performance condition, we record compensation expense over the requisite service period based on the most probable number of shares expected to vest.
During
the six months ended June 30, 2021, we granted i73,265 PSUs to our officers and other employees, subject to performance and service conditions. During the 2021 performance period, officers and other employees both earned ii200/%
of the target based on Boise Cascade’s 2021 ROIC and EBITDA, as applicable, determined by our Compensation Committee and executive management in accordance with the related grant agreements.
The PSUs granted to officers generally vest in a single installment ithree years from the date of grant, while the PSUs granted to other employees vest in ithree
equal tranches each year after the grant date.
During the six months ended June 30, 2022 and 2021, we granted an aggregate of i86,164 and i99,588
RSUs, respectively, to our officers, other employees, and nonemployee directors with only service conditions. The RSUs granted to officers and other employees vest in ithree equal tranches each year after the grant date. The RSUs granted to nonemployee directors vest over a ione
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, 2022 and 2021, the total fair value of PSUs and RSUs vested was $i12.0 million
and $i9.2 million, respectively.
iThe
following summarizes the activity of our PSUs and RSUs awarded under our incentive plan for the six months ended June 30, 2022:
iWe
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 compensation expense for 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. iTotal
stock-based compensation recognized from PSUs and RSUs, net of forfeitures, was as follows:
Three Months Ended June 30
Six Months Ended June 30
2022
2021
2022
2021
(thousands)
PSUs
$
i1,695
$
i745
$
i3,001
$
i1,834
RSUs
i1,317
i666
i2,402
i1,669
Total
$
i3,012
$
i1,411
$
i5,403
$
i3,503
The
related tax benefit for the six months ended June 30, 2022 and 2021, was $i1.3 million and $i0.9
million respectively. As of June 30, 2022, total unrecognized compensation expense related to nonvested share-based compensation arrangements was $i18.8 million. This expense is expected to be recognized over a weighted-average period of i2.0
years.
9. iStockholders' 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. For more information regarding our dividend declarations and payments made during each of the six months ended June 30, 2022 and 2021, see "Common stock dividends" on our Consolidated Statements of Stockholders' Equity.
On iJuly 28, 2022, our board of directors declared a quarterly dividend of $i0.12
per share on our common stock, payable on iSeptember 15, 2022, to stockholders of record on iSeptember 1, 2022.
For a description of the restrictions in our asset-based credit facility and the indenture governing our senior notes on our ability to pay dividends, see Note 6, Debt.
Future dividend declarations, including amount per share, record date and payment date, will be made at the discretion of our board of directors and will depend upon, among other things, legal capital requirements and surplus, our future operations and earnings, general financial condition, material cash requirements, restrictions imposed by our asset-based credit facility and the indenture governing our senior notes, applicable laws, and other factors that our board of directors may deem relevant.
Stock
Repurchase Program
On July 28, 2022, our board of directors authorized the repurchase of an additional i1.5 million shares of our common stock. This increase is in addition to the remaining authorized shares under our prior common stock repurchase program. The total combined authorization is approximatelyii2.0 million shares. Share repurchases may be made on an opportunistic basis through open market transactions, privately negotiated transactions, or by other means in accordance with applicable federal securities laws. We are not obligated to purchase any shares, and there is no set date that the program will expire. Our board of directors, at its discretion, may increase or decrease the number of authorized shares or terminate the program at any time.
iThe following table details the changes in accumulated other comprehensive loss for the three and six months ended June 30, 2022 and 2021:
Three
Months Ended June 30
Six Months Ended June 30
2022
2021
2022
2021
(thousands)
Beginning balance, net of taxes
$
(i933)
$
(i1,082)
$
(i1,047)
$
(i1,078)
Amortization
of actuarial (gain) loss, before taxes (a)
i21
(i4)
i42
(i9)
Effect
of settlements, before taxes (a)
i—
i—
i130
i—
Income
taxes
(i5)
i1
(i42)
i2
Ending
balance, net of taxes
$
(i917)
$
(i1,085)
$
(i917)
$
(i1,085)
___________________________________
(a) Represents
amounts reclassified from accumulated other comprehensive loss. These amounts are included in the computation of net periodic pension cost.
10. iTransactions With Related Party
Louisiana Timber Procurement Company, L.L.C. (LTP) is an unconsolidated variable-interest entity that is
i50% owned by us and i50% 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 $i3.5 million and
$i3.4 million, respectively, during the three months ended June 30, 2022 and 2021, and $i7.2
million and $i6.7 million, respectively, during the six months ended June 30, 2022 and 2021. These sales are recorded in "Sales" in our Consolidated Statements of Operations.
Costs and Expenses
Related-party wood fiber purchases from LTP were $i23.5
million and $i20.7 million, respectively, during the three months ended June 30, 2022 and 2021, and $i44.3
million and $i41.0 million, respectively, during the six months ended June 30, 2022 and 2021. These costs are recorded in "Materials, labor, and other operating expenses (excluding depreciation)" in our Consolidated Statements of Operations.
We operate our business using itwo
reportable segments: Wood Products and BMD. Unallocated corporate costs are presented as reconciling items to arrive at operating income. There are no differences in our basis of measurement of segment profit or loss from those disclosed in Note 16, Segment Information, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our 2021 Form 10-K.
iWood Products
and BMD segment sales to external customers, including related parties, by product line are as follows:
Three Months Ended June 30
Six Months Ended June 30
2022
2021
2022
2021
(millions)
Wood
Products (a)
LVL (b)
$
(i9.5)
$
i3.7
$
(i7.8)
$
i9.7
I-joists
(b)
(i12.5)
i3.1
(i14.7)
i7.9
Other
engineered wood products (b)
i13.1
i12.6
i24.9
i23.2
Plywood
and veneer
i112.1
i201.2
i273.3
i324.1
Lumber
i20.9
i25.7
i38.6
i44.6
Byproducts
i19.3
i19.0
i38.3
i36.6
Other
i3.5
i5.1
i8.7
i10.9
i146.9
i270.5
i361.3
i457.0
Building
Materials Distribution
Commodity
i956.3
i1,308.8
i2,058.1
i2,215.1
General
line
i700.5
i566.5
i1,315.8
i1,039.1
Engineered
wood products
i474.4
i297.4
i869.1
i553.3
i2,131.2
i2,172.7
i4,243.0
i3,807.5
$
i2,278.1
$
i2,443.2
$
i4,604.4
$
i4,264.5
___________________________________
(a) Amounts
represent sales to external customers. Sales are calculated after intersegment sales eliminations to our BMD segment.
(b) Sales of EWP to external customers are net of the cost of all EWP rebates and sales allowances provided at various stages of the supply chain (including distributors, dealers, and homebuilders). For both the six months ended June 30, 2022 and 2021, approximately ii78/%
of Wood Products' EWP sales volumes were to our BMD segment.
iAn analysis of our operations by segment is as follows:
Three
Months Ended June 30
Six Months Ended June 30
2022
2021
2022
2021
(thousands)
Net sales by segment
Wood
Products
$
i536,030
$
i594,569
$
i1,094,974
$
i1,026,904
Building
Materials Distribution
i2,131,200
i2,172,744
i4,243,033
i3,807,521
Intersegment
eliminations (a)
(i389,158)
(i324,152)
(i733,653)
(i569,948)
Total
net sales
$
i2,278,072
$
i2,443,161
$
i4,604,354
$
i4,264,477
Segment
operating income
Wood Products
$
i154,101
$
i213,761
$
i344,217
$
i310,813
Building
Materials Distribution
i154,308
i206,338
i380,200
i326,557
Total
segment operating income
i308,409
i420,099
i724,417
i637,370
Unallocated
corporate costs
(i11,334)
(i10,324)
(i21,714)
(i22,334)
Income
from operations
$
i297,075
$
i409,775
$
i702,703
$
i615,036
___________________________________
(a) Primarily
represents intersegment sales from our Wood Products segment to our BMD segment.
12. iCommitments, 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 17, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our 2021 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, 2022, there have been no material changes to the above commitments disclosed in the 2021 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 17, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our 2021 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,
2022, there have been no material changes to the guarantees disclosed in the 2021 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 2021 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 2021 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. Our products are used in the construction of new residential housing, including single-family, multi-family, and manufactured homes, the repair-and-remodeling of existing housing, the construction of light industrial and commercial buildings, and industrial applications. For more information, see Note 11, Segment Information, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1. Financial Statements" of this Form 10-Q.
We recorded income from operations of $297.1 million during the three months ended June 30, 2022, compared with income from operations of $409.8 million during the three months ended June 30, 2021. In our Wood Products segment, income decreased $59.7 million to $154.1 million for the three months ended June 30, 2022, from $213.8 million for the three months ended June 30, 2021, due primarily to lower sales prices of plywood and lower plywood and EWP sales volumes, offset partially by higher EWP sales prices. In our BMD segment, income decreased $52.0 million to $154.3 million for the three months ended June 30,
2022, from $206.3 million for the three months ended June 30, 2021, driven by a gross margin decrease of $44.5 million, resulting from a decline in commodity prices during the second quarter 2022. The negative impacts from commodity price declines were offset partially by improved gross margin percentages for EWP and general line products. These changes are discussed further in "Our Operating Results" below.
We ended second quarter 2022 with $1,033.0 million of cash and cash equivalents and $346.0 million of undrawn committed bank line availability, for total available liquidity of $1,379.0 million. We had $445.0 million of outstanding debt at June 30, 2022. We generated $284.1 million of cash during the six months ended June 30, 2022, as cash
provided by operations was offset partially by capital spending, 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 in "Liquidity and Capital Resources" below.
On July 25, 2022, we and our wholly-owned subsidiary, Boise Cascade Wood Products, L.L.C., completed the acquisition of 100% of the equity interest of Coastal Forest Resources Company's (“CFRC”) wholly-owned subsidiary, Coastal Plywood Company, and its plywood manufacturing operations located in Havana, Florida, and Chapman, Alabama, (the "Acquisition") for a purchase price of $517 million, inclusive of estimated working capital at closing of $27 million, which is subject to post-closing adjustments. We funded the Acquisition and related
costs with cash on hand. These facilities will provide incremental stress rated veneer needed to optimize and expand our southeastern U.S. EWP production capacity. In addition, the Havana plywood operation will improve our mix of specialty plywood products and is well positioned geographically to support plywood demand in the southeastern U.S.
Demand for the products we manufacture, as well as the products we purchase and distribute, is correlated with new residential construction, residential repair-and-remodeling activity and light commercial construction. Consensus forecasts for 2022 single- and multi-family housing starts in the U.S are around 1.6 million units, or essentially flat compared to 2021. We believe that current U.S. demographics and limited new and existing home inventory support this level of housing starts. In addition, the age of U.S. housing stock and elevated levels of homeowner equity
provide a favorable backdrop for repair-and-remodel spending. However, recent monetary policy shifts to increase interest rates to combat high levels of inflation have significantly increased mortgage rates and created a great deal of uncertainty broadly across the U.S. economy. As such, we expect the pace of new residential construction in second half of 2022 to slow due to home affordability constraints and a weakening economy. While potentially tempered by an economic slowdown, we anticipate the primary drivers of repair-and-remodeling activity to continue to be supportive of homeowners' further investment in their residences.
As a manufacturer of certain commodity products, we have sales and profitability exposure to declines in commodity product prices and rising input costs. Our distribution business purchases and resells a broad mix of commodity products with periods of increasing prices providing
the opportunity for higher sales and increased margins, while declining price environments expose us to declines in sales and profitability. We expect future commodity product pricing and commodity input costs to be volatile in response to economic uncertainties, industry operating rates, transportation constraints or disruptions, net import and export activity, inventory levels in various distribution channels, and seasonal demand patterns. EWP and general line products have historically experienced limited price volatility, but are also subject to price erosion as economic activity slows.
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 a portion 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;
•declines in demand for our products due to competing technologies or materials, as well as changes in building code provisions;
•the duration and magnitude of impacts of the ongoing COVID-19 pandemic and related variants, including the impact of any government mandates relating to vaccines and testing;
•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;
•material disruptions and/or major equipment failure at our manufacturing facilities;
•labor disruptions, shortages of skilled and technical labor, or increased labor costs;
•the need to successfully formulate and implement succession plans for key members of our management team;
•product shortages, loss of key suppliers, and our dependence on third-party suppliers and manufacturers;
•the
cost and availability of third-party transportation services used to deliver the goods we manufacture and distribute, as well as our raw materials;
•cost and availability of raw materials, including wood fiber and glues and resins;
•our ability to successfully and efficiently complete and integrate acquisitions;
•concentration of our sales among a relatively small group of customers, as well as the financial condition and creditworthiness of our customers;
•impairment of our long-lived assets, goodwill, and/or intangible assets;
•substantial
ongoing capital investment costs, including those associated with acquisitions, and the difficulty in offsetting fixed costs related to those investments;
•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;
•restrictive covenants contained in our debt agreements;
•compliance with data privacy and security laws and regulations;
•the impacts of climate change, and related legislative and regulatory responses
intended to reduce climate change;
•cost of compliance with government regulations, in particular environmental regulations;
•the enactment of tax reform legislation;
•exposure to product liability, product warranty, casualty, construction defect, and other claims;
•fluctuations in the market for our equity; and
•the other factors described in "Item 1A. Risk Factors" in our 2021 Form 10-K.
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, 2022 and 2021:
Three
Months Ended June 30
Six Months Ended June 30
2022
2021
2022
2021
(millions)
Sales
$
2,278.1
$
2,443.2
$
4,604.4
$
4,264.5
Costs
and expenses
Materials, labor, and other operating expenses (excluding depreciation)
1,797.9
1,864.5
3,527.8
3,315.0
Depreciation and amortization
20.7
20.4
41.2
40.0
Selling
and distribution expenses
134.3
130.7
280.9
251.7
General and administrative expenses
27.7
18.0
53.8
43.3
Other
(income) expense, net
0.4
(0.3)
(2.1)
(0.4)
1,981.0
2,033.4
3,901.7
3,649.4
Income
from operations
$
297.1
$
409.8
$
702.7
$
615.0
(percentage
of sales)
Sales
100.0
%
100.0
%
100.0
%
100.0
%
Costs and expenses
Materials,
labor, and other operating expenses (excluding depreciation)
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 BMD segment for the three and six months ended June 30, 2022 and 2021.
Three
Months Ended June 30
Six Months Ended June 30
2022
2021
2022
2021
(thousands)
U.S. Housing Starts (a)
Single-family
298.9
309.3
565.7
564.8
Multi-family
151.2
126.2
274.1
228.4
450.1
435.5
839.8
793.2
(thousands)
Segment
Sales
Wood Products
$
536,030
$
594,569
$
1,094,974
$
1,026,904
Building Materials Distribution
2,131,200
2,172,744
4,243,033
3,807,521
Intersegment
eliminations
(389,158)
(324,152)
(733,653)
(569,948)
Total sales
$
2,278,072
$
2,443,161
$
4,604,354
$
4,264,477
Wood
Products
(millions)
Sales Volumes
Laminated veneer lumber (LVL) (cubic feet)
4.6
4.7
9.2
9.1
I-joists (equivalent lineal feet)
69
76
135
147
Plywood
(sq. ft.) (3/8" basis)
281
338
598
641
Wood
Products
(dollars per unit)
Average Net Selling Prices
Laminated veneer lumber (LVL) (cubic foot)
$
28.47
$
19.63
$
27.43
$
19.33
I-joists
(1,000 equivalent lineal feet)
2,066
1,363
1,974
1,342
Plywood (1,000 sq. ft.) (3/8" basis)
569
878
633
726
(percentage
of Building Materials Distribution sales)
Building Materials Distribution
Product Line Sales
Commodity
44.9
%
60.2
%
48.5
%
58.2
%
General
line
32.9
%
26.1
%
31.0
%
27.3
%
Engineered wood
22.2
%
13.7
%
20.5
%
14.5
%
Gross
margin percentage (b)
13.9
%
15.6
%
15.9
%
15.4
%
_______________________________________
(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 BMD segment are for inventory purchased for resale. Gross margin percentage is gross margin as a percentage of segment sales.
For the three months ended June 30, 2022, total sales decreased $165.1 million, or 7%, to $2,278.1 million from $2,443.2 million during the three months ended June 30, 2021. For the six months ended June 30,
2022, total sales increased $339.9 million, or 8%, to $4,604.4 million from $4,264.5 million for the same period in the prior year. As described below, the change in sales was driven by the changes 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 2022, total U.S. housing starts increased 3% driven by an increase in multi-family housing starts compared to the same period in 2021. However, single-family housing starts decreased 3% compared to the prior year quarter. On a year-to-date basis through June 2022, total housing starts increased 6%, while single-family housing starts remained flat when compared with the same period in 2021. Average composite panel and average composite lumber prices for the three months ended June 30, 2022 were 43% and 35% lower, respectively, than in the
same period in the prior year, as reflected by Random Lengths composite panel and lumber pricing. For the six months ended June 30, 2022, average composite panel and average composite lumber prices were 17% and 8% lower, respectively, compared with the same period in the prior year.
Wood Products. Sales, including sales to our BMD segment, decreased $58.6 million, or 10%, to $536.0 million for the three months ended June 30, 2022, from $594.6 million for the three months ended June 30, 2021. The decrease in sales was driven by lower sales prices and sales volumes for plywood of 35% and 17%, respectively, resulting in decreased sales of $86.9 million and $50.1 million, respectively. Plywood sales volumes decreased primarily as a result
of downtime to replace an existing dryer at our Chester, South Carolina, plywood facility, as well as staffing shortages at our Western Oregon plywood facility. In addition, lower sales volumes for I-joists and LVL (collectively referred to as EWP) of 8% and 3%, respectively, resulted in decreased sales of $8.5 million and $2.4 million, respectively. EWP sales volumes decreased primarily related to veneer availability, labor shortages, and transportation constraints. These decreases were offset partially by higher sales prices for I-joists and LVL of 52% and 45%, respectively, resulting in increased sales of $48.8 million and $40.6 million, respectively. The increase in EWP pricing was due to realizations of previously announced price increases and the expiration of certain temporary price protection arrangements.
For the six months ended June 30,
2022, sales, including sales to our BMD segment, increased $68.1 million, or 7%, to $1,095.0 million from $1,026.9 million for the same period in the prior year. The increase in sales was driven by higher sales prices for I-joists and LVL of 47% and 42%, respectively, resulting in increased sales of $85.3 million and $74.7 million, respectively. The increase in EWP pricing was due to realizations of previously announced price increases and the expiration of certain temporary price protection arrangements. Higher sales volumes for LVL of 2% resulted in increased sales of $3.1 million. In addition, price increases for laminated beam and OSB rimboard combined increased sales by $20.0 million. These increases were offset partially by lower sales prices and sales volumes for plywood of 13% and 7%, respectively, resulting in decreased sales of $55.7 million and $31.5 million, respectively. In addition, lower sales volumes for I-joists and lumber of 8% and 16%, respectively,
resulted in decreased sales of $16.7 million and $6.9 million.
Building Materials Distribution. Sales decreased$41.5 million, or 2%, to $2,131.2 million for the three months ended June 30, 2022, from $2,172.7 million for the three months ended June 30, 2021. Compared with the same quarter in the prior year, the overall decrease in sales was driven by a sales volume decrease of 4%, offset partially by a sales price increase of 2%. By product line, commodity sales decreased 27%, or $352.4 million; general line product sales increased 24%, or $134.0 million; and sales of EWP (substantially all of which are sourced through our Wood Products segment) increased 59%, or $176.9 million.
During
the six months ended June 30, 2022, sales increased $435.5 million, or 11%, to $4,243.0 million from $3,807.5 million for the same period in the prior year. Compared with the same period in the prior year, the overall increase in sales was driven by a sales price increase of 13%, offset partially by a sales volume decrease of 2%. By product line, commodity sales decreased 7%, or $157.0 million; general line product sales increased 27%, or $276.6 million; and sales of EWP increased 57%, or $315.9 million.
Costs and Expenses
Materials, labor, and other operating expenses (excluding depreciation) decreased $66.6 million, or 4%, to $1,797.9 million for the three months ended June 30, 2022, compared with $1,864.5 million during the
same period in the prior year. In our Wood Products segment, materials, labor, and other operating expenses decreased due to lower sales volumes, offset partially by higher per-unit costs of logs of approximately 5%, compared with second quarter 2021. However, materials, labor, and other operating expenses as a percentage of sales (MLO rate) in our Wood Products segment increased by 610 basis points. The increase in MLO rate was primarily the result of lower plywood sales prices, as well as lower sales volumes, which resulted in higher per-unit labor, wood fiber, and other manufacturing costs. In BMD, the increase in materials, labor, and other
operating expenses was
driven by higher purchased materials costs as a result of higher product prices, compared with second quarter 2021. The BMD segment MLO rate increased 180 basis points compared with second quarter 2021. The increase in MLO rate was driven by a declining commodity price environment during the second quarter 2022, offset partially by improved margins on our EWP and general line product sales. In our BMD Segment, periods of increasing prices provide the opportunity for higher sales and increased margins, while declining price environments generally result in declines in sales and profitability, as we experienced in commodity products during second quarter 2022.
For the six months ended June 30, 2022, materials, labor, and other operating expenses (excluding depreciation) increased $212.9 million or 6%, to $3,527.8 million, compared with $3,315.0 million in
the same period in the prior year. In our Wood Products segment, materials, labor, and other operating expenses increased due to higher per-unit costs of logs of approximately 7% compared with the first half of 2021, as well as increased labor and other manufacturing costs. However, the MLO rate in our Wood Products segment decreased by 100 basis points, which was primarily due to higher EWP sales prices, resulting in improved leveraging of wood fiber costs and labor costs. In BMD, the increase in materials, labor, and other operating expenses was driven by higher purchased materials costs as a result of higher product prices, compared with the first half of 2021. However, the BMD segment MLO rate improved 50 basis points as a decrease in commodity product margins compared with the first half of 2021 was more than offset by improved sales of EWP and general line products, which typically have higher margins than commodity products.
Depreciation
and amortization expenses increased $0.3 million, or 1%, to $20.7 million for the three months ended June 30, 2022, compared with $20.4 million during the same period in the prior year. For the six months ended June 30, 2022, these expenses increased $1.3 million, or 3%, to $41.2 million, compared with $40.0 million in the same period in the prior year. The increases in both periods were due primarily to purchases of property and equipment.
Selling and distribution expenses increased $3.5 million, or 3%, to $134.3 million for the three months ended June 30, 2022, compared with $130.7 million during the same period in the prior year, due primarily to higher shipping and handling costs of $5.7 million, as well as increased discretionary expenses related
to travel and entertainment and professional fees of $2.2 million. These increases were offset partially by lower employee-related expenses related to sales and incentive compensation of $4.7 million. For the six months ended June 30, 2022, selling and distribution expenses increased $29.3 million, or 12%, to $280.9 million, compared with $251.7 million during the same period in 2021, due primarily to higher employee-related expenses, including base pay increases, special bonuses, and sales and incentive compensation of $12.7 million, as well as higher shipping and handling costs of $11.0 million. In addition, travel and entertainment expenses and occupancy expenses increased $2.6 million and $2.4 million, respectively.
General and administrative expenses increased $9.7 million, or 54%, to $27.7 million for the three months ended June 30,
2022, compared with $18.0 million for the same period in the prior year, due to higher employee-related expenses of $6.7 million, most of which relates to incentive compensation. In addition, employee-related expenses were reduced in the three months ended June 30, 2021 due to the departure of two officers and related forfeiture of accrued incentive compensation. Discretionary expenses related to professional fees and travel and entertainment also increased $2.8 million during the three months ended June 30, 2022 compared with the same period in the prior year. For the six months ended June 30, 2022, general and administrative expenses increased $10.5 million, or 24%, to $53.8 million, compared with $43.3 million during the same period in 2021. The increase was primarily the result of higher employee-related expenses,
including base pay increases, special bonuses, and incentive compensation of $7.2 million. In addition, discretionary expenses related to professional fees and travel and entertainment increased $3.5 million.
Other (income) expense, net for the three months ended June 30, 2022 and 2021, and for the six months ended June 30, 2021, was insignificant. For the six months ended June 30, 2022, other (income) expense, net, was $2.1 million of income, which included $2.5 million of earn-out income from a previous asset sale in our Wood Products segment.
Income From Operations
Income from
operations decreased $112.7 million to $297.1 million for the three months ended June 30, 2022, compared with $409.8 million for the three months ended June 30, 2021. Income from operations increased $87.7 million to $702.7 million for the six months ended June 30, 2022, compared with $615.0 million for the six months ended June 30, 2021.
Wood Products. Segment income decreased $59.7 million to $154.1 million for the three months ended June 30, 2022, compared with $213.8 million for the three months ended June 30, 2021. The decrease in segment income was due primarily to lower plywood
sales prices, as well as higher per-unit labor, wood fiber, and other manufacturing costs due in part to lower plywood and EWP sales volumes. These decreases in segment income were offset partially by higher EWP sales prices.
For the six months ended June 30, 2022, segment income increased $33.4 million to $344.2 million from $310.8 million for the six months ended June 30, 2021. The increase in segment income was due primarily to higher EWP sales prices. This increase in segment income was offset partially by lower plywood sales prices,
lower plywood and EWP sales volumes, and higher wood fiber costs and other manufacturing costs.
Building Materials Distribution. Segment income decreased $52.0 million to $154.3 million for the three months ended June 30, 2022, from $206.3 million for the three months ended June 30, 2021. The decrease in segment income was driven by lower sales volumes and a gross margin decrease of $44.5 million, resulting from a decline in commodity prices during the second quarter 2022. However, the negative impacts from commodity price declines were offset partially by margin improvements for both EWP and general line products. In addition, general and administrative and selling and distribution expenses increased $3.3 million and $2.0 million, respectively.
For
the six months ended June 30, 2022, segment income increased $53.6 million to $380.2 million from $326.6 million for the six months ended June 30, 2021. The increase in segment income was driven by a gross margin increase of $89.1 million, resulting from improved gross margins on EWP and general line products, offset partially by decreased gross margins on commodity products. The margin improvement was also offset partially by increased selling and distribution expenses and general and administrative expenses of $27.5 million and $5.0 million, respectively.
Corporate. Unallocated corporate expenses increased $1.0 million to $11.3 million for the three months ended June 30, 2022, from $10.3 million for the same
period in the prior year. The increase was primarily due to higher employee-related expenses and professional fees. During the three months ended June 30, 2021, employee-related expenses were lower due to the departure of an officer and related forfeiture of accrued incentive compensation. In addition, as part of our self-insured risk retention program, corporate absorbed approximately $3.4 million of estimated insurance losses resulting from a fire at our BMD Phoenix location during second quarter 2021.
For the six months ended June 30, 2022, unallocated corporate expenses decreased $0.6 million to $21.7 million from $22.3 million for the six months ended June 30, 2021. The decrease was primarily due to 2021 results including estimated insurance losses
absorbed at corporate, as described above, offset partially by higher employee-related expenses during the first half of 2022.
Other
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, 2022, we recorded $73.9 million
and $172.8 million, respectively, of income tax expense and had an effective rate of 25.3% and 24.9%, respectively. During the three and six months ended June 30, 2022, 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, 2021, we recorded $101.0 million and $152.5 million, respectively, of income tax expense and had an effective rate of 25.0% and 25.2%, respectively. During the three and six months ended June 30, 2021, 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.
Industry
Mergers and Acquisitions
On June 21, 2022, Pacific Woodtech, a manufacturer of engineered wood products, announced an agreement to acquire Louisiana-Pacific Corporation's EWP division. The acquisition is expected to close in third quarter of 2022. Pacific Woodtech is a competitor to our Wood Products segment. Until this transaction closes, we cannot assess the impact, if any, this transaction may have on our future results of operations.
On July 11, 2022, US LBM, a distributor of specialty building materials, announced an agreement to acquire Foxworth-Galbraith Lumber, a building products supplier and manufacturer in the Southwest U.S. The acquisition is expected to close in third quarter of 2022. US LBM and Foxworth-Galbraith are both customers
of ours. We believe we have good relationships with these customers. However, until this transaction closes, we cannot assess the impact, if any, this customer combination may have on our future results of operations.
We ended second quarter 2022 with $1,033.0 million of cash and cash equivalents and $445.0 million of debt. At June 30, 2022, we had $1,379.0 million of
available liquidity (cash and cash equivalents and undrawn committed bank line availability). We generated $284.1 million of cash during the six months ended June 30, 2022, as cash provided by operations was offset partially by capital spending, 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, lease obligations, working capital, income tax payments, 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 2022 from cash on hand and, if necessary, borrowings under our revolving credit facility.
On July 25, 2022, the Company completed the acquisition of Coastal Plywood Company for a purchase price of $517 million, inclusive of estimated working capital at closing of $27 million, which is subject to post-closing adjustments. We funded the acquisition and related costs with cash on hand. For further discussion, see Note 5, Acquisition, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1. Financial Statements" of this Form 10-Q.
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 lease obligations, and return cash to our shareholders through dividends or common stock repurchases. Below is a discussion of our sources and uses of cash for operating activities, investing activities, and financing activities.
Six
Months Ended June 30
2022
2021
(thousands)
Net cash provided by operations
$
436,056
$
291,179
Net cash used for investment
(37,944)
(31,002)
Net
cash used for financing
(114,032)
(11,792)
Operating Activities
For the six months ended June 30, 2022, our operating activities generated $436.1 million of cash, compared with $291.2 million of cash generated in the same period in 2021. The $144.9 million increase in cash provided by operations was due primarily to an improvement in income from operations. 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. In addition, the increase in cash
provided by operations was due to an increase in working capital of $152.6 million during the six months ended June 30, 2022, compared with a $203.4 million increase for the same period in the prior year. In addition, cash paid for taxes, net of refunds received, decreased $6.4 million compared to the prior year.
The increase in working capital during both periods was primarily attributable to higher receivables and inventories, offset by an increase in accounts payable and accrued liabilities. The increases in receivables in both periods primarily reflect increased sales of approximately 25% and 69%, comparing sales for the months of June 2022 and 2021 with sales for the months of December 2021 and 2020, respectively. Inventories increased during the six months ended June 30, 2022 primarily due to increased
cost of inventory purchased for resale on EWP and general line products and higher production costs for our manufactured products, offset partially by decreased costs for commodity products. During the six months ended June 30, 2021 inventories increased primarily due to the growth of inventory for the building season, as well as elevated commodity prices. The increase in accounts payable and accrued liabilities as of June 30, 2022 was related to the increase in inventories and higher accrued rebates. During the six months ended June 30, 2021, seasonally higher purchase activity and extended terms offered by major vendors to our BMD segment led to an increase in accounts payable and an increase in accrued rebates contributed to the increase in accrued liabilities.
During the six months ended June 30, 2022 and 2021, we used $40.8 million and $31.5 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. During the six months ended June 30, 2022, we received $2.5 million of earn-out income related to a previous asset sale in our Wood Products segment.
Excluding acquisitions, we expect capital expenditures in 2022 to total approximately $100 million to $120 million. We expect our capital spending in 2022 will be for business
improvement and quality/efficiency projects, replacement and expansion projects, and ongoing environmental compliance. Our 2022 capital expenditures range includes funding to complete our BMD organic expansions in Ohio, Kentucky, and Minnesota, replacement of a dryer at our Chester, South Carolina, veneer and plywood plant, and initial veneer equipment related spending at the Chapman, Alabama facility. This level of capital expenditures could increase or decrease as a result of several factors, including acquisitions, efforts to further accelerate organic growth, exercise of lease purchase options, our financial results, future economic conditions, availability of engineering and construction resources, and timing and availability of equipment purchases.
Financing Activities
During the six months ended June 30,
2022, our financing activities used $114.0 million of cash, including $109.3 million for common stock dividend payments and $3.9 million of tax withholding payments on stock-based awards. During the six months ended June 30, 2022, we did not borrow under our revolving credit facility, and therefore have no borrowing outstanding on the facility as of June 30, 2022.
During the six months ended June 30, 2021, our financing activities used $11.8 million of cash, including $8.4 million for common stock dividend payments and $2.7 million of tax withholding payments on stock-based awards. During the six months ended June 30, 2021, we also borrowed $28.0 million under our revolving credit facility, which was subsequently
repaid during the same period with cash on hand.
Future dividend declarations, including amount per share, record date and payment date, will be made at the discretion of our board of directors and will depend upon, among other things, legal capital requirements and surplus, our future operations and earnings, general financial condition, material cash requirements, restrictions imposed by our asset-based credit facility and the indenture governing our senior notes, applicable laws, and other factors that our board of directors may deem relevant.
For more information related to our debt transactions and structure, our dividend policy, and our stock repurchase program, see the discussion in Note 6, Debt, and Note 9, Stockholders' Equity, respectively,
of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1. Financial Statements" of this Form 10-Q.
Other Material Cash Requirements
For information about other material cash requirements, see Liquidity and Capital Resources in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K. As of June 30, 2022, there have been no material changes in other material cash requirements outside the ordinary course of business since December 31, 2021.
Guarantees
Note
9, Debt, and Note 17, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our 2021 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, 2022, there have been no material changes to the guarantees disclosed in our 2021 Form 10-K.
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 volumes in the first and fourth quarters due to the impact of poor weather on the construction market, and we generally have higher sales volumes 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 24, 2022, we had approximately 6,210 employees. Approximately 23% of these employees work pursuant to collective bargaining agreements. As of July 24, 2022, we had ten collective bargaining agreements. One agreement covering approximately 110 employees at our Canadian EWP facility is set to expire on December 31, 2022. We may not be able to renew these agreements or may renew them on terms that are less favorable to us than the current agreements. 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. 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, 2022, there have been no material changes to financial market risks
disclosed in our 2021 Form 10-K.
Environmental
As of June 30, 2022, there have been no material changes to environmental issues disclosed in our 2021 Form 10-K. For additional information, see Environmental in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 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 2021 Form 10-K. At June 30, 2022, there have been no material changes to our critical accounting estimates from those disclosed in our 2021 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 2021 Form 10-K. As of June 30, 2022, there have been no material changes in our exposure to market risk from those disclosed in our 2021 Form 10-K.
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 their evaluation, our CEO and CFO have concluded that as of June 30,
2022, our disclosure controls and procedures were effective in meeting the objectives for which they were designed and were operating at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
SEC regulations require us to disclose certain information
about proceedings arising under federal, state or local environmental provisions if we reasonably believe that such proceedings may result in monetary sanctions above a stated threshold. Pursuant to the SEC regulations, we use a threshold of $1 million or more for purposes of determining whether disclosure of any such proceedings is required.
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 2021 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. We do not assume an obligation to update any forward-looking statement.
Our strategy includes pursuing acquisitions. We may be unable to efficiently integrate acquired operations or realize expected benefits from such acquisitions.
We
may not be able to integrate the operations of acquired businesses, including those of Coastal Plywood Company which we acquired in July 2022 and include mill operations in Havana, Florida, and Chapman, Alabama, in an efficient and cost-effective manner or without disruption to our existing operations or may not be able to realize expected benefits. Acquisitions involve significant risks and uncertainties, including some that may not be identifiable or resolvable in due diligence. Subsequent to making the investment, performance of the acquired assets is subject to economic uncertainties, as well as difficulties integrating acquired personnel into our business, the potential loss of key employees, customers, or suppliers, difficulties in integrating different computer and accounting systems, exposure to unknown or unforeseen liabilities of acquired companies, and the diversion of management attention and resources from existing operations. Our failure to integrate future
acquired businesses effectively, realize expected benefits, or to manage other consequences of our acquisitions could adversely affect our financial condition, operating results, and cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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.
