BCC 12.31.2013 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2013 |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File Number: 001-35805
Boise Cascade Company
(Exact name of registrant as specified in its charter)
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Delaware | 20-1496201 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1111 West Jefferson Street
Suite 300
Boise, Idaho 83702-5389
(Address of principal executive offices) (Zip Code)
(208) 384-6161
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 28, 2013, the last business day of the registrant's most recently completed second fiscal quarter, based on the last reported trading price of the registrant's common stock on the New York Stock Exchange was approximately $343,782,359.
There were 39,365,350 shares of the registrant's $0.01 par value common stock outstanding on February 26, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2014 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.
Table of Contents
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| | 18. Consolidating Guarantor and Nonguarantor Financial Information | | | | |
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Cautionary Statement Concerning Forward-Looking Statements
Certain statements made in this Form 10-K contain forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Forward-looking statements include information concerning our future financial performance, business strategy, plans, goals, and objectives.
Statements preceded or followed by, or that otherwise include, the words "believes," "expects," "anticipates," "intends," "project," "estimates," "plans," "forecast," "is likely to," and similar expressions or future or conditional verbs such as "will," "may," "would," "should," and "could" are generally forward-looking in nature and not historical facts. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.
The following factors, among others, could cause our actual results, performance, or achievements to differ from those set forth in the forward-looking statements:
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• | The commodity nature of our products and their price movements, which are driven largely by capacity utilization rates and industry cycles that affect supply and demand; |
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• | General economic conditions, including but not limited to housing starts, repair-and-remodeling activity, and light commercial construction, inventory levels of new and existing homes for sale, foreclosure rates, interest rates, unemployment rates, household formation rates, and mortgage availability and pricing, as well as other consumer financing mechanisms, that ultimately affect demand for our products; |
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• | The highly competitive nature of our industry; |
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• | Availability and affordability of raw materials, including wood fiber and glues and resins; |
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• | The impact of actuarial assumptions and regulatory activity on pension costs and pension funding requirements; |
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• | Substantial ongoing capital investment costs and the difficulty in offsetting fixed costs related to our recent capital investments if the housing market does not recover; |
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• | Material disruptions at our manufacturing facilities; |
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• | The financial condition and creditworthiness of our customers; |
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• | Concentration of our sales among a relatively small group of customers; |
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• | Our substantial 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; |
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• | Cost of compliance with government regulations, in particular environmental regulations; |
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• | Labor disruptions, shortages of skilled and technical labor, or increased labor costs; |
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• | Impairment of our long-lived assets, goodwill, and/or intangible assets; |
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• | The need to successfully implement succession plans for certain members of our senior management team; |
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• | Restrictive covenants contained in our debt agreements; |
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• | Our ability to successfully complete potential acquisitions or integrate efficiently acquired operations; |
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• | Our reliance on Boise Inc., which became a wholly owned subsidiary of Packaging Corporation of America (PCA) on October 25, 2013, for many of our administrative services; |
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• | 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; |
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• | Major equipment failure; |
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• | Severe weather phenomena such as drought, hurricanes, tornadoes, and fire; |
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• | Increased costs as a public company; and |
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• | Fluctuations in the market for our equity. |
Certain of these and other factors are discussed in more detail in "Item 1A. Risk Factors" of this Form 10-K. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Form 10-K. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by our forward-looking statements.
PART I
ITEM 1. BUSINESS
Boise Cascade Company is a building products company headquartered in Boise, Idaho. Our operations began on October 29, 2004 (inception), when we acquired the forest products assets of OfficeMax (the Forest Products Acquisition). As used in this Form 10-K, the terms "Boise Cascade," "we," and "our" refer to Boise Cascade Company (formerly known as Boise Cascade, L.L.C.) and its consolidated subsidiaries. On February 11, 2013, we issued 13,529,412 shares of common stock in our initial public offering. Following the initial public offering, the common stock held by Boise Cascade Holdings, L.L.C. (BC Holdings) represented 68.7% of our outstanding common stock. In our July 2013 and November 2013 secondary offerings, we registered a combined 18,050,000 shares of common stock sold by BC Holdings. Concurrent with the close of our July 2013 secondary offering, we also repurchased 3,864,062 shares of common stock from BC Holdings (the Repurchase). Following the secondary offerings and the Repurchase, the common stock held by BC Holdings represents 19.8% of our outstanding common stock. BC Holdings is controlled by Forest Products Holdings, L.L.C. (FPH).
Boise Cascade is a large, vertically-integrated wood products manufacturer and building materials distributor with widespread operations throughout the United States and Canada. We believe we are the second largest manufacturer of plywood and engineered wood products (EWP). We also believe we are one of the largest stocking wholesale distributors of building products in the United States. Our broad line of products is used primarily in new residential construction, residential repair-and-remodeling projects, light commercial construction, and industrial applications. We have a broad base of more than 4,500 customers, which includes a diverse mix of retail lumberyards, home improvement centers, leading wholesalers, and industrial converters. We believe our large, vertically-integrated operations provide us with significant advantages over less integrated competitors and position us to optimally serve our customers.
Our Industry
The building products manufacturing and distribution industry in North America is highly competitive, with a number of producers manufacturing and selling a broad range of products. Demand for our products is principally influenced by new residential construction, residential repair-and-remodeling activity, light commercial construction, and industrial consumption in the United States. Demand drivers include new household formation, the age of the housing stock, availability of credit and other macroeconomic factors, such as GDP growth, population growth and migration, interest rates, employment, and consumer sentiment. Purchasing decisions made by the customers who buy our wood products are generally based on price, quality, and particularly with respect to EWP, customer service and product support.
Segments
We operate our business using three reportable segments: Wood Products, Building Materials Distribution, and Corporate and Other. We present information pertaining to our segments and the geographic areas in which we operate in Note 15, Segment Information, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
Wood Products
Products
We manufacture structural, appearance, and industrial plywood panels. In addition, we manufacture EWP, consisting of laminated veneer lumber (LVL), I-joists, and laminated beams, which are structural products used in applications where extra strength and consistent quality are required, such as headers and beams. LVL is also used in the manufacture of I-joists, which are assembled by combining a vertical web of oriented strand board (OSB) with top and bottom LVL or solid wood flanges. We also produce studs, particleboard, and ponderosa pine lumber, a premium lumber grade sold primarily to manufacturers of specialty wood windows, moldings, and doors.
In 2013, plywood, EWP, and lumber accounted for 43%, 37%, and 9%, respectively, of our Wood Products sales. Most of our wood products are sold to leading wholesalers (including our Building Materials Distribution segment), home improvement centers, retail lumberyards, and industrial converters. In 2013, approximately 41% of our Wood Products sales, including approximately 75% of our EWP sales, were to our Building Materials Distribution segment.
The following table sets forth the annual capacity and production of our principal products for the periods indicated:
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| | Year Ended December 31 |
| | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
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Capacity (a) | | | | | | | | | | |
Plywood (sq. ft.) (3/8" basis) (b) | | 2,380 |
| | 1,630 |
| | 1,500 |
| | 1,475 |
| | 1,430 |
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Laminated veneer lumber (LVL) (cubic feet) (c) | | 27.5 |
| | 27.5 |
| | 27.5 |
| | 27.5 |
| | 27.5 |
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Lumber (board feet) (d) | | 255 |
| | 235 |
| | 200 |
| | 180 |
| | 180 |
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Production | | | | | | | | | | |
Plywood (sq. ft.) (3/8" basis) (b) | | 1,647 |
| | 1,482 |
| | 1,240 |
| | 1,183 |
| | 1,066 |
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Laminated veneer lumber (LVL) (cubic feet) (c) | | 17.2 |
| | 14.2 |
| | 10.7 |
| | 10 |
| | 7.9 |
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I‑joists (equivalent lineal feet) (c) | | 178 |
| | 149 |
| | 112 |
| | 105 |
| | 81 |
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Lumber (board feet) (d) | | 197 |
| | 196 |
| | 152 |
| | 149 |
| | 141 |
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(a) | Annual capacity at the end of each year. |
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(b) | Approximately 17%, 15%, 12%, 11%, and 10%, respectively, of the plywood we produced in 2013, 2012, 2011, 2010, and 2009 was utilized internally to produce LVL. |
In September 2013, we purchased two plywood manufacturing facilities, one in Chester, South Carolina, and one in Moncure, North Carolina, that have a combined estimated annual capacity of 470 million square feet.
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(c) | A portion of LVL production is used to manufacture I-joists at two EWP plants. Capacity is based on LVL production only. |
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(d) | In June 2009, we closed our lumber facility in La Grande, Oregon. This facility was reopened on a limited operating basis in April 2011. In June 2009, we purchased a lumber manufacturing facility in Pilot Rock, Oregon. In February 2012, we purchased a lumber facility in Arden, Washington. |
The following table sets forth segment sales, segment income (loss), depreciation and amortization, and earnings before interest, taxes, depreciation, and amortization (EBITDA) for the periods indicated:
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| | Year Ended December 31 |
| | 2013 | | 2012 | | 2011 (a) | | 2010 (b) | | 2009 (c) |
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Segment sales (d) | | $ | 1,134.1 |
| | $ | 943.3 |
| | $ | 712.5 |
| | $ | 687.4 |
| | $ | 550.8 |
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Segment income (loss) | | $ | 77.7 |
| | $ | 55.8 |
| | $ | (15.1 | ) | | $ | (8.1 | ) | | $ | (77.3 | ) |
Segment depreciation and amortization | | 28.7 |
| | 24.4 |
| | 28.4 |
| | 27.1 |
| | 33.0 |
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Segment EBITDA (e) | | $ | 106.3 |
| | $ | 80.2 |
| | $ | 13.3 |
| | $ | 19.0 |
| | $ | (44.3 | ) |
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(a) | In 2011, segment loss included $2.6 million of expense related to the permanent closure of a laminated beam plant in Emmett, Idaho, and noncash asset write-downs, of which $2.2 million reduced EBITDA and $0.4 million was accelerated depreciation recorded in "Depreciation and amortization." |
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(b) | In 2010, segment loss and EBITDA included $0.5 million of income for cash received from a litigation settlement related to vendor product pricing. |
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(c) | In 2009, segment loss included $8.9 million of expense related to the June 2009 closure of our lumber manufacturing facility in La Grande, Oregon, of which $3.7 million was included in EBITDA and $5.2 million was accelerated depreciation recorded in "Depreciation and amortization." |
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(d) | Segment sales are calculated before elimination of sales to our Building Materials Distribution segment. |
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(e) | Segment EBITDA is calculated as segment income (loss) before depreciation and amortization. EBITDA is the primary measure used by our chief operating decision maker to evaluate segment operating performance and to decide how to allocate resources to segments. See "Item 6. Selected Financial Data" of this Form 10-K for a description of our reasons for using EBITDA, for a discussion of the limitations of such a measure, and for a reconciliation of our consolidated EBITDA to net income (loss). |
Facilities
Our Wood Products segment operates nine plywood and veneer plants (including the Chester and Moncure plywood plants acquired in September 2013), five of which manufacture inputs used in our EWP facilities. In addition, we operate four EWP facilities, which have a high degree of raw material and manufacturing integration with our plywood and veneer facilities. We also operate five sawmills and one particleboard plant.
Raw Materials and Input Costs
Wood fiber. The primary raw material in our Wood Products segment is wood fiber. For the year ended December 31, 2013, wood fiber accounted for approximately 44% of materials, labor, and other operating expenses (excluding depreciation) in our Wood Products segment. Our plywood and veneer facilities use Douglas fir, white woods, pine, and hardwood logs as raw materials. We use ponderosa pine, spruce, and white fir logs to manufacture various grades of lumber. Our EWP facilities in Louisiana and Oregon use parallel-laminated veneer panels and veneer sheets produced by our facilities and purchased from third parties, together with OSB purchased from third parties, to manufacture LVL and I-joists. Our manufacturing facilities are located in close proximity to active wood markets.
Timber comprises over 75% of our wood fiber costs, and we satisfy our timber requirements through a combination of purchases under supply agreements, open-market purchases, and purchases pursuant to contracts awarded under public timber auctions. In February 2005, one of our affiliates sold its timberland operations to Forest Capital, an unaffiliated third party. In connection with this sale, we entered into a series of fiber supply agreements with Forest Capital. These fiber supply agreements required Forest Capital to sell a specified amount of timber to us at prices generally related to market prices. In 2013, approximately 28% of our timber was supplied pursuant to these agreements. In July 2011, Forest Capital sold approximately 50,000 acres of the timberlands in Louisiana to Rayonier Louisiana Timberlands, LLC, a timberland real estate investment trust (Rayonier). In July 2012, Forest Capital sold the remaining legacy timberlands in Louisiana, Washington, Oregon, Minnesota, and Idaho to a group of purchasers whose investments in the timberlands are managed by Hancock Natural Resource Group, Inc. (Hancock). In July 2012, Hancock resold approximately 110,000 acres of the Louisiana timberlands to a group of purchasers whose investments in the timberlands are managed by The Molpus Woodlands Group LLC (Molpus). The
purchasers of the timberlands (other than Molpus and Rayonier) assumed Forest Capital's obligations under the 2005 wood supply agreements. The Molpus entities and Rayonier each entered into a new master harvest rights agreement on substantially the same terms. As a result of Forest Capital's sale of the timberlands to various purchasers, our sources of timber are more diversified.
All of the supply agreements require us to purchase (and the suppliers to sell) a minimum specified volume of timber per year at prices that are reset quarterly based on agreed-upon market data. Prior to the beginning of each contract year, we provide each supplier with a harvest plan. To the extent the volumes specified in the harvest plan exceed the specified minimum volume, the parties have agreed to negotiate in good faith with respect to the purchase of the additional timber. If agreement is not reached, then the parties have agreed to a public auction process designed to provide us with equal opportunity to purchase such additional quantities. The agreements generally also provide us with rights to reduce the specified minimum volumes in the event we close a mill or permanently cease operation of any portion of a mill. All of the supply agreements terminate on December 31, 2014, subject to additional one-year extensions unless notice is provided to the other party at least six months prior to expiration of the applicable agreement. The agreements generally restrict the ability of the owner of the timberlands to transfer any interest in the timberlands during the terms of the applicable supply agreement without our consent.
We also bid in auctions conducted by federal, state, and local authorities for the purchase of timber, generally at fixed prices, under contracts with a term of generally one to three years. In 2013, approximately 21% of our timber was supplied under government contracts. The remainder of our log supply in 2013 was supplied through private purchases directly from timber owners or through dealers.
Under most of our timber and fiber supply agreements, we have the right to cancel or reduce our commitments in the event of a mill curtailment or shutdown. Future purchase prices under most of these agreements will be set quarterly or semiannually based on regional market prices. Our timber and fiber obligations are subject to change based on, among other things, the effect of governmental laws and regulations, our manufacturing operations not operating in the normal course of business, timber and fiber availability, and the status of environmental appeals. For a discussion of contractual commitments relating to fiber supply agreements, see "Contractual Obligations" in "Item 8. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
The cost of timber is strongly correlated with product prices for building materials, with the increase in product prices driving increases in timber costs. Because wood fiber is a commodity, prices have been historically cyclical in response to changes in domestic and foreign demand and supply. Demand for dimension lumber has a strong influence on pricing, as the dimension lumber industry is the largest consumer of timber. In the future, we expect the level of foreign demand for timber exports from the western U.S. to fluctuate based on economic activity in China and other Pacific Rim countries, currency exchange rates, and the availability of timber supplies from other countries such as Canada, Russia, and New Zealand. Sustained periods of high timber costs may impair the cost competitiveness of our manufacturing facilities.
Our aggregate cost of obtaining timber is also affected by fuel costs and the distance of the fiber source from our facilities, as we are often required to transport the timber we purchase from the source to our facilities.
Other raw materials and energy costs. We use a significant quantity of various resins and glues in our manufacturing processes. Resin and glue product costs are influenced by changes in the prices of raw material input costs, primarily fossil fuel products. We purchase resins and glues, other raw materials, and energy used to manufacture our products in both the open market and through supply contracts. The contracts are generally with regional suppliers who agree to supply all of our needs for a certain raw material or energy at one of our facilities. These contracts have terms of various lengths and typically contain price adjustment mechanisms that take into account changes in market prices. Therefore, although our long-term contracts provide us with supplies of raw materials and energy that are more stable than open-market purchases, in many cases, they may not alleviate fluctuations in market prices.
Sales, Marketing, and Distribution
Sales of plywood, lumber, and particleboard are managed by product. Our EWP sales force is managed centrally through a main office that oversees regional sales teams. Our sales force spends a significant amount of time working with end customers who purchase our EWP. Our sales force provides a variety of technical support services, including integrated design, engineering, product specification software, distributor inventory management software, and job-pack preparation systems. The majority of our wood products are sold to wholesale distributors, including our Building Materials Distribution segment, home improvement centers, and industrial converters in North America. Our Building Materials Distribution segment is our Wood Products segment's largest customer, representing approximately 41% of our Wood Products segment's overall sales, including approximately 75% of its EWP sales, in 2013.
The following table lists sales volumes for our principal wood products for the periods indicated:
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| | Year Ended December 31 |
| | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| | (millions) |
Plywood (sq. ft.) (3/8" basis) | | 1,473 |
| | 1,356 |
| | 1,106 |
| | 1,088 |
| | 992 |
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Laminated veneer lumber (LVL) (cubic feet) (a) | | 11.1 |
| | 9.1 |
| | 7.1 |
| | 6.6 |
| | 5.6 |
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I-joists (equivalent lineal feet) | | 179 |
| | 145 |
| | 110 |
| | 106 |
| | 87 |
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Lumber (board feet) | | 199 |
| | 188 |
| | 153 |
| | 149 |
| | 146 |
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(a) Excludes LVL produced and used as flange stock in the manufacture of I-joists.
Segment Strategy
Grow Our Operations With a Focus on Expanding Our Market Position in EWP
We will continue to expand our market position in EWP by focusing on our large-scale manufacturing position, comprehensive customer service, design support capabilities, and efficient distribution network. We have positioned ourselves to take advantage of expected increases in the demand for EWP by expanding our capacity through capital investments in low-cost, internal veneer manufacturing. We have also developed strategic relationships with third-party veneer suppliers to support additional EWP production as needed. Additionally, we have grown and intend to continue to grow our Wood Products business through strategic acquisitions, including the September 2013 purchase of the Chester and Moncure plywood plants.
Continue to Improve Our Competitiveness Through Operational Excellence
We use a disciplined cost management approach to maximize our competitiveness without sacrificing our ability to react to future growth opportunities. Additionally, we have made capital investments and process improvements in certain facilities, which have enabled us to close or divest certain manufacturing facilities during the housing downturn without any adverse impact on our production capacity. These capital investments and process improvements have decreased our production costs and allowed us to produce lower-cost, higher-quality veneers. Beginning in 2009, we adopted a data-driven process improvement program to further strengthen our manufacturing operations. Because of the significant gains we continue to see from this program, we believe there are opportunities to apply similar techniques and methods to different functional areas (including sales and marketing) to realize efficiencies in those areas.
Building Materials Distribution
Products
We sell a broad line of building materials, including EWP, OSB, plywood, lumber, and general line items such as siding, metal products, insulation, roofing, and composite decking. Except for EWP, we purchase most of these building materials from a vendor base of more than 1,000 third-party suppliers ranging from large manufacturers, such as James Hardie Building Products, Trex Company, Huber Engineered Woods, Louisiana-Pacific, and Georgia-Pacific, to small regional producers. Substantially all of our EWP is sourced from our Wood Products segment. 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, and the construction of light industrial and commercial buildings.
The following table sets forth segment sales, segment income, depreciation and amortization, and EBITDA for the periods indicated:
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| | Year Ended December 31 |
| | 2013 | | 2012 | | 2011 (a) | | 2010 (b) | | 2009 |
| | (millions) |
Segment sales (c) | | $ | 2,599.6 |
| | $ | 2,190.2 |
| | $ | 1,779.4 |
| | $ | 1,778.0 |
| | $ | 1,609.8 |
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Segment income | | $ | 39.9 |
| | $ | 24.0 |
| | $ | 2.0 |
| | $ | 11.6 |
| | $ | 8.0 |
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Segment depreciation and amortization | | 9.2 |
| | 8.8 |
| | 8.4 |
| | 7.5 |
| | 7.6 |
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Segment EBITDA (d) | | $ | 49.2 |
| | $ | 32.9 |
| | $ | 10.4 |
| | $ | 19.1 |
| | $ | 15.5 |
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(a) | In 2011, segment income and EBITDA included $1.2 million of noncash asset write-downs. |
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(b) | In 2010, segment income and EBITDA included $4.1 million of income for cash received from a litigation settlement related to vendor product pricing. |
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(c) | Segment sales are calculated before intersegment eliminations. |
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(d) | Segment EBITDA is calculated as segment income before depreciation and amortization. EBITDA is the primary measure used by our chief operating decision maker to evaluate segment operating performance and to decide how to allocate resources to segments. See "Item 6. Selected Financial Data" of this Form 10-K for a description of our reasons for using EBITDA, for a discussion of the limitations of such a measure, and for a reconciliation of our consolidated EBITDA to net income (loss). |
Facilities
Our Building Materials Distribution segment operates a nationwide network of 31 building materials distribution facilities throughout the United States. We also operate a single truss manufacturing plant. Our broad geographic presence reduces our exposure to market factors in any single region. In early 2012, we completed facility expansions in Dallas, Texas, and Greenland, New Hampshire. In 2013, we also expanded our Minneapolis, Minnesota, Boise, Idaho, and Chicago, Illinois, facilities.
Sales, Marketing, and Distribution
We market our building materials primarily to retail lumberyards and home improvement centers that then sell the products to end customers, who are typically professional builders, independent contractors, and homeowners engaged in residential construction and repair-and-remodeling projects. We also market our products to industrial converters, which use our products to assemble windows, doors, agricultural bins, and other products used in industrial applications. We believe that our national presence and long-standing relationships with many of our key suppliers allow us to obtain favorable price and term arrangements and offer excellent customer service on top brands in the building materials industry. We also believe our broad product line provides our customers with an efficient, one-stop resource for their building materials needs. We also have expertise in special-order sourcing and merchandising support, which is a key service for our home improvement center customers that choose not to stock certain items in inventory.
Each of our distribution centers implements its own distribution and logistics model using centralized information systems. We use internal and external trucking resources to deliver materials on a regularly scheduled basis. Our highly efficient logistics system allows us to deliver superior customer service and assist our customers in optimizing their working capital, which we believe led to increased market share during the housing downturn.
We have a large, decentralized sales force to support our suppliers and customers. Our sales force and product managers have local product knowledge and decision-making authority, which we believe enables them to optimize stocking, pricing, and product assortment decisions. Our sales force has access to centralized information technology systems, an extensive vendor base, and corporate-level working capital support, which we believe complements our localized sales model. Our sales force is compensated, in part, based on branch-level performance.
We regularly evaluate opportunities to introduce new products. Broadening our product offering helps us serve as a one-stop resource for building materials, which we believe improves our customers' purchasing and operating efficiencies. The
introduction of new products is primarily driven by customer demand or product extensions originating from our vendors. We believe our long-standing customer relationships allow us to respond to customer feedback and introduce new products more rapidly. Broadening our product offering also helps us drive additional products through our distribution system, thereby increasing our scale and efficiency.
Segment Strategy
Grow Market Share
We intend to grow our Building Materials Distribution business in existing markets by adding products and services to better serve our customers. We also plan to opportunistically expand our Building Materials Distribution business into nearby geographies that we currently serve using off-site storage arrangements or longer truck routes. Sales in our Building Materials Distribution segment are strongly correlated with new residential construction and residential improvements in the United States. We will continue to grow our Building Materials Distribution business by opportunistically acquiring facilities, adding new products, opening new locations, relocating and expanding capacity at existing facilities, and capturing local market share through our superior supply chain capabilities and customer service.
Further Differentiate Our Products and Services
We seek to continue to differentiate ourselves from our competitors by providing a broad line of high-quality products and superior customer service. Throughout the housing downturn, we believe we have grown market share by strengthening relationships with our customers by stocking sufficient inventory and retaining our primary sales team. Our highly efficient logistics system allows us to deliver superior customer service and assist our customers in optimizing their working capital. Our national distribution platform, coupled with the manufacturing capabilities of our Wood Products segment, differentiates us from most of our competitors and is critical to servicing retail lumberyards, home improvement centers, and industrial converters locally, regionally, and nationally. Additionally, this system allows us to procure product more efficiently and to develop and maintain stronger relationships with our vendors. Because of these relationships and our national presence, many of our vendors have offered us favorable pricing and provide us with enhanced product introductions and ongoing marketing support.
Corporate and Other
Our Corporate and Other segment includes corporate support staff services, related assets and liabilities, and foreign currency exchange gains and losses. These support services include, but are not limited to, finance, accounting, legal, information technology, and human resource functions. We purchase many of these services from Boise Inc., which became a wholly owned subsidiary of Packaging Corporation of America (PCA) on October 25, 2013, under an Outsourcing Services Agreement, under which Boise Inc. provides a number of corporate staff services to us. The Outsourcing Services Agreement remains in place after PCA's acquisition of Boise Inc. and is currently set to expire on February 22, 2016. The agreement automatically renews for successive one-year terms unless either party provides notice of termination to the other party at least 12 months in advance of the expiration date. See "Item 1A. Risk Factors" and Note 12, Outsourcing Services Agreement, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K for more information.
Customers
We maintain relationships with a broad customer base across multiple market segments and various end markets. For the year ended December 31, 2013, our top ten customers represented approximately 30% of our sales, with one customer, Home Depot, accounting for approximately 11% of our sales. At December 31, 2013, receivables from Home Depot accounted for approximately 13% of total receivables. Sales to Home Depot were recorded in our Building Materials Distribution and Wood Products segments. No other customer accounted for 10% or more of total sales for the year ended December 31, 2013. For additional information related to customers of our Wood Products and Building Materials Distribution segments, see the "Sales, Marketing, and Distribution" sections above.
Competition
The competitive environment in the U.S. continues to be challenging as new residential and light commercial construction activity and repair-and-remodeling spending remain substantially below average historical levels. Industry capacity in a number of product markets, including some of those in which we compete, exceeds the current level of demand. Our products and services compete with similar products manufactured and distributed by others. Many factors influence our
competitive position in the markets in which we operate. Those factors include price, service, quality, product selection, and convenience of location.
Some of our competitors are larger than we are and have greater financial resources. These resources may afford those competitors greater purchasing power, increased financial flexibility, and more capital resources for expansion and improvement.
Wood Products. The wood products manufacturing markets in which we operate are large and highly competitive. In plywood, we compete with Georgia-Pacific, the largest manufacturer in North America, other large producers such as Roseburg Forest Products, and several smaller producers. We also compete against several major North American EWP producers, such as Weyerhaeuser Company and Louisiana-Pacific Corporation, as well as several other smaller, regional firms. Our EWP products also face competition from numerous dimension lumber producers, because EWP may be substituted by dimension lumber in many building applications. We have leading market positions in the manufacture of plywood, EWP, and ponderosa pine lumber. We hold much smaller market positions in our other manufactured products. In the wood products manufacturing markets, we compete primarily on the basis of price, quality, and particularly with respect to EWP, levels of customer service. Most of our competitors are located in the United States and Canada, although we also compete with manufacturers in other countries. Our competition includes not only manufacturers and distributors of similar building products but also manufacturers and distributors of products made from alternative materials, such as steel and plastic. Some of our competitors enjoy strong reputations for product quality and customer service, and these competitors may have strong relationships with certain distributors, making it more difficult for our products to gain additional market share. Some of our competitors in this segment are also vertically integrated and/or have access to internal sources of wood fiber, which may allow them to subsidize their base manufacturing business in periods of rising fiber prices.
Building Materials Distribution. The building materials distribution markets in which we operate are highly fragmented, and we compete in each of our geographic and product markets with national, regional, and local distributors. Our national wholesale distribution competitors include BlueLinx Holdings Inc. and Weyerhaeuser Company. Regional wholesale distribution competitors include Cedar Creek, OrePac, Roberts & Dybdahl, and U.S. Lumber Group. We also compete with wholesale brokers and certain buying cooperatives. We compete on the basis of pricing and availability of product, service and delivery capabilities, ability to assist customers with problem solving, extension of credit terms, customer relationships, geographic coverage, and breadth of product offerings. We also distribute products for some manufacturers that engage in direct sales. In recent years, there has been consolidation among retail lumberyards and home improvement centers. As the customer base consolidates, this dynamic could affect our ability to maintain margins. Proximity to customers is an important factor in minimizing shipping costs and facilitating quick order turnaround and on-time delivery. We believe our ability to obtain quality materials, from both internal and external sources, the scale and efficiency of our national footprint, and our focus on customer service are our primary competitive advantages in this segment. Also, financial stability is important to suppliers and customers in choosing distributors and allows for more favorable terms on which we are able to obtain our products from our suppliers and sell our products to our customers.
Environmental
Our discussion of general and industry-specific environmental laws and regulations is presented under the caption "Environmental" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 3. Legal Proceedings" of this Form 10-K.
Capital Investment
Information concerning our capital expenditures is presented in "Investment Activities" under "Liquidity and Capital Resources" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
Seasonal and Inflationary Influences
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. For further information, see "Seasonal and Inflationary Influences" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
Employees
As of February 16, 2014, we had approximately 5,290 employees. Approximately 27% of these employees work pursuant to collective bargaining agreements. As of February 16, 2014, we had nine collective bargaining agreements. Fewer than 1% of our total employees are working pursuant to a collective bargaining agreement that will expire within the next 12 months.
Trademarks
We maintain many trademarks for our manufactured wood products, particularly EWP. Our key registered trademarks include BOISE CASCADE® and the TREE-IN-A-CIRCLE® logo, which we believe to be of significant importance to our business.
Available Information
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act) and therefore file periodic reports and other information with the Securities and Exchange Commission (SEC). These reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website at www.sec.gov that contains reports, proxy information statements, and other information regarding issuers that file electronically.
Our filings under the Exchange Act, including annual reports on Form 10-K, quarterly reports on Form 10-Q, Registration Statements, current reports on Form 8-K, and all amendments to these reports, are also available free of charge on the investor relations portion of our website at www.bc.com. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.
Executive Officers of the Registrant
Below is a list of names, ages, and a brief account of the business experience of our executive officers and key members of management, each as of February 26, 2014.
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Name | Age | Position |
Executive Officers: | | |
Thomas E. Carlile | 62 | Chief Executive Officer and Director |
Wayne M. Rancourt | 51 | Senior Vice President, Chief Financial Officer, and Treasurer |
Thomas A. Lovlien | 58 | President, Wood Products Manufacturing |
Stanley R. Bell | 67 | President, Building Materials Distribution |
Nick Stokes | 56 | Executive Vice President, Building Materials Distribution |
John T. Sahlberg | 60 | Senior Vice President, Human Resources and General Counsel |
Kelly E. Hibbs | 47 | Vice President and Controller |
Key Management: | | |
Thomas K. Corrick | 58 | Senior Vice President, Wood Products Manufacturing |
Dennis R. Huston | 61 | Vice President of Sales and Marketing, Engineered Wood Products |
Daniel G. Hutchinson | 62 | Vice President of Operations, Wood Products Manufacturing |
Frank Elfering | 47 | Vice President of Purchasing, Building Materials Distribution |
Rich Viola | 56 | Vice President of Sales and Marketing, Building Materials Distribution |
Thomas E. Carlile, Chief Executive Officer and Director
Mr. Carlile became our chief executive officer and a director of BC Holdings in August 2009. He became one of our directors in February 2013 in connection with our initial public offering. Mr. Carlile previously served as our executive vice president and chief financial officer from February 2008 to August 2009, following the divestiture of our paper and packaging businesses. From October 2004 to January 2008, he served as senior vice president and chief financial officer. Mr. Carlile received a bachelor's degree in accounting from Boise State University and completed the Stanford Executive Program. Mr. Carlile is a member of the board of directors of FPH. Mr. Carlile's position as our chief executive officer allows him to advise the board of directors on management's perspective over a full range of issues affecting the company.
Wayne M. Rancourt, Senior Vice President, Chief Financial Officer, and Treasurer
Mr. Rancourt became our senior vice president and chief financial officer in August 2009. Mr. Rancourt previously served as our vice president, treasurer and investor relations from February 2008 to August 2009, following the divestiture of our paper and packaging businesses. From October 2004 to January 2008, he served as vice president and treasurer. Mr. Rancourt received a B.S. degree in accounting from Central Washington University.
Thomas A. Lovlien, President, Wood Products Manufacturing
Mr. Lovlien became our president, Wood Products Manufacturing, in February 2008, following the divestiture of our paper and packaging businesses. From October 2004 to January 2008, he served as senior vice president, Wood Products. Mr. Lovlien received a bachelor's degree in accounting and a master's degree in wood technology from Oregon State University.
Stanley R. Bell, President, Building Materials Distribution
Mr. Bell became our president, Building Materials Distribution, in February 2008, following the divestiture of our paper and packaging businesses. From October 2004 to January 2008, he served as senior vice president, Building Materials Distribution. Mr. Bell received a B.A. in economics from the University of Utah and an M.B.A. from the University of Utah. Mr. Bell has elected to retire from the company, effective March 7, 2014.
Nick Stokes, Executive Vice President, Building Materials Distribution
Mr. Stokes will become our executive vice president, Building Materials Distribution, on March 1, 2014. Prior to that he served as the division's senior vice president from February 2011 to March 2014. From October 2004 to February 2011, Mr. Stokes served as vice president, Building Materials Distribution. Mr. Stokes received a B.S. in management and a B.S. in marketing from the University of Utah.
John T. Sahlberg, Senior Vice President, Human Resources and General Counsel
Mr. Sahlberg became our senior vice president, Human Resources and General Counsel, effective August 2012. Prior to his election as senior vice president, Human Resources and General Counsel, Mr. Sahlberg served as vice president, Human Resources and General Counsel, since January 2011. Prior to that, he served as vice president, Human Resources, from February 2008 to January 2011. Prior to that, he served as director of Human Resources from February 2006 to February 2008. From October 2004 through January 2006, he was director of labor relations. Mr. Sahlberg received a bachelor's degree in economics from Harvard College and a J.D. from Georgetown University. He is a member of the Idaho State Bar.
Kelly E. Hibbs, Vice President and Controller
Mr. Hibbs became our vice president and controller in February 2011. Mr. Hibbs previously served as our director of strategic planning and internal audit from February 2008 to February 2011. From October 2004 to February 2008, he served as manager of financial forecasts and projects. Mr. Hibbs received a B.A. in accounting from Boise State University. He is a certified public accountant.
Thomas K. Corrick, Senior Vice President, Wood Products Manufacturing
Mr. Corrick became our senior vice president, Wood Products Manufacturing, effective August 2012. Prior to his election as senior vice president, Wood Products Manufacturing, Mr. Corrick served as senior vice president, Engineered Wood Products, since February 2011. Prior to that, Mr. Corrick served as vice president, Engineered Wood Products, from January
2005 to February 2011. From October 2004 to January 2005, he served as the general manager of Engineered Wood Products. Mr. Corrick received both his bachelor's and master's degrees in business administration from Texas Christian University.
Dennis R. Huston, Vice President of Sales and Marketing, Engineered Wood Products
Mr. Huston became our vice president of sales and marketing, Engineered Wood Products, in August 2012. Mr. Huston previously served as sales manager of Engineered Wood Products from October 2004 until August 2012. Mr. Huston received a bachelor's degree in political science from the University of Dubuque in Iowa.
Daniel G. Hutchinson, Vice President of Operations, Wood Products Manufacturing
Mr. Hutchinson became our vice president of operations for Wood Products Manufacturing in August 2012. He previously served as general manager of operations for our Engineered Wood Products business from 2008 to August 2012. From 2007 to 2008, he served as our Engineered Wood Products national accounts manager. Mr. Hutchinson received bachelor's degrees in accounting and finance from the University of Idaho and an M.B.A. from Washington State University.
Frank Elfering, Vice President of Purchasing, Building Materials Distribution
Mr. Elfering became our vice president of purchasing for Building Materials Distribution in October 2013. Prior to that he served as the division’s purchasing manager since July 2013. From 2008 to 2013, he served as the division marketing manager and west region sales manager for BMD. Mr. Elfering received a B.S. in marketing from Oregon State University.
Rich Viola, Vice President of Sales and Marketing, Building Materials Distribution
Mr. Viola became our vice president of sales and marketing for Building Materials Distribution in October 2013, after being named division sales and marketing manager in early 2013. From 1999 to 2013, Mr. Viola served as national accounts sales manager and east region sales manager. Prior to the acquisition by Boise Cascade in 1999, he held the position of senior vice president, sales and marketing, for Furman Lumber, Inc. Mr. Viola received a B.S. in marketing from Northeastern University in Boston.
ITEM 1A. RISK FACTORS
Risks Relating to Our Business
Many of the products we manufacture or purchase and resell are commodities whose price is determined by the market's supply and demand for such products, and the markets in which we operate are cyclical and competitive. The depressed state of the housing, construction, and home improvement markets could continue to adversely affect demand and pricing for our products.
Many of the building products we produce or distribute, including OSB, plywood, lumber, and particleboard, are commodities that are widely available from other manufacturers or distributors with prices and volumes determined frequently in an auction market based on participants' perceptions of short-term supply and demand factors. At times, the price for any one or more of the products we produce or distribute may fall below our cash production or purchase costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our manufacturing facilities. Therefore, our profitability with respect to these commodity products depends, in significant part, on managing our cost structure, particularly raw materials and labor, which represent the largest components of our operating costs. Commodity wood product prices could be volatile in response to operating rates and inventory levels in various distribution channels. Commodity price volatility affects our distribution business, with falling price environments generally causing reduced revenues and margins, resulting in substantial declines in profitability and possible net losses.
Historically, demand for the products we manufacture, as well as the products we purchase and distribute, has been closely correlated with new residential construction in the United States and, to a lesser extent, light commercial construction and residential repair-and-remodeling activity. New residential construction activity remained substantially below average historical levels during 2013 and so did demand for many of the products we manufacture and distribute. There is significant uncertainty regarding the timing and extent of a recovery to average historical levels in such construction activity and resulting product demand levels. Demand for new residential construction is influenced by seasonal weather factors, mortgage availability and rates, unemployment levels, household formation rates, domestic population growth, immigration rates,
residential vacancy and foreclosure rates, demand for second homes, existing home prices, consumer confidence, and other general economic factors.
Wood products industry supply is influenced primarily by price-induced changes in the operating rates of existing facilities but is also influenced over time by the introduction of new product technologies, capacity additions and closures, restart of idled capacity, and log availability. The balance of wood products supply and demand in the United States is also heavily influenced by imported products, principally from Canada.
We have very limited control of the foregoing, and as a result, our profitability and cash flow may fluctuate materially in response to changes in the supply and demand balance for our primary products.
Our industry is highly competitive. If we are unable to compete effectively, our sales, operating results, and growth strategies could be negatively affected.
The markets for the products we manufacture in our Wood Products segment are highly competitive. Our competitors range from very large, fully integrated forest and building products firms to smaller firms that may manufacture only one or a few types of products. We also compete less directly with firms that manufacture substitutes for wood building products. Certain mills operated by our competitors may be lower-cost manufacturers than the mills operated by us.
The building products distribution industry that our Building Materials Distribution segment competes in is highly fragmented and competitive, and the barriers to entry for local competitors are relatively low. Competitive factors in our industry include pricing and availability of product, service and delivery capabilities, ability to assist customers with problem solving, extension of credit terms, customer relationships, geographic coverage, and breadth of product offerings. Also, financial stability is important to suppliers and customers in choosing distributors and allows for more favorable terms on which to obtain products from suppliers and sell products to customers. If our financial condition deteriorates in the future, our support from suppliers may be negatively affected.
Some of the businesses with which we compete are part of larger companies and therefore have access to greater financial and other resources than we do. These resources may afford those competitors greater purchasing power, increased financial flexibility, and more capital resources for expansion and improvement, which may enable those competitors to compete more effectively than we can. In addition, certain suppliers to our distribution business also sell and distribute their products directly to customers. Additional manufacturers of products distributed by us may elect to sell and distribute directly to end users in the future or enter into exclusive supply arrangements with other distributors. Finally, we may not be able to maintain our costs at a level sufficiently low for us to compete effectively. If we are unable to compete effectively, our net sales and net income will be reduced.
Our manufacturing operations may have difficulty obtaining wood fiber at favorable prices or at all.
Wood fiber is our principal raw material, which accounted for approximately 44% of the aggregate amount of materials, labor, and other operating expenses (excluding depreciation) for our Wood Products segment in 2013. Wood fiber is a commodity, and prices have been historically cyclical in response to changes in domestic and foreign demand and supply. In the future, we expect the level of foreign demand for timber exports from the western U.S. to fluctuate based on the economic activity in China and other Pacific Rim countries, currency exchange rates, and the availability of timber supplies from other countries such as Canada, Russia, and New Zealand. Sustained periods of high timber costs may impair the cost competitiveness of our manufacturing facilities.
In 2005, following the sale of our timberlands, supply agreements (or successor arrangements) were put in place under which we purchase timber at market-based prices. For 2013, approximately 28% of our timber was supplied pursuant to agreements assumed by (or replacement master supply agreements with) Hancock, Molpus, and Rayonier. The supply agreements with these parties terminate on December 31, 2014, subject to additional one-year extensions unless notice is provided to the other party at least six months prior to expiration of the applicable agreement. If a counterparty to these agreements elects not to continue these agreements or we are unable to renegotiate future purchases on terms that are acceptable to us, we would need to locate a replacement supplier for our timber requirements, which could include private purchases with other suppliers, open-market purchases, and purchases from governmental sources. If we are unable to locate a replacement supplier in a particular region to satisfy our timber needs at satisfactory prices, it could have an adverse effect on our results of operations.
In 2013, we purchased approximately 21% of our timber from federal, state, and local governments. In certain regions in which we operate, a substantial portion of our timber is purchased from governmental authorities. As a result, existing and
future governmental regulation can affect our access to, and the cost of, such timber. Future domestic or foreign legislation and litigation concerning the use of timberlands, timber harvest methodologies, forest road construction and maintenance, the protection of endangered species, forest-based carbon sequestration, the promotion of forest health, and the response to and prevention of catastrophic wildfires can affect timber and fiber supply from both government and private lands. Availability of harvested timber and fiber may be further limited by fire, insect infestation, disease, ice storms, windstorms, hurricanes, flooding, and other natural and man-made causes, thereby reducing supply and increasing prices.
Historically, availability of residual wood fiber for our particleboard operation has been negatively affected by significant mill closures and curtailments that have occurred among solid-wood product manufacturers, and future periods of low demand for solid-wood products could negatively affect availability. In addition, future development of wood cellulose biofuel or other new sources of wood fiber demand could interfere with our ability to source wood fiber or lead to significantly higher costs.
Significant changes in discount rates, actual investment return on pension assets, and other factors could affect our earnings, equity, and pension contributions in future periods.
Our earnings may be negatively affected by the amount of income or expense we record for our pension plans. Generally accepted accounting principles (GAAP) require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions relating to financial market and other economic conditions. Changes in key economic indicators can change the assumptions. The most significant year-end assumptions used to estimate pension expense are the discount rate and the expected long-term rate of return on plan assets. In addition, we are required to make an annual measurement of plan assets and liabilities, which may result in a significant change to equity through a reduction or increase to "Accumulated other comprehensive loss." A decline in the market value of the pension assets will increase our funding requirements. Our pension plan liabilities are sensitive to changes in interest rates. As interest rates decrease, the present value of our liabilities increase, potentially increasing pension expense and funding requirements. Changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions, may also increase the funding requirements of the obligations related to the pension plans. At December 31, 2013, the net underfunded status of our defined benefit pension plans was $86.0 million. If the status of our defined benefit plans continues to be underfunded, we anticipate significant future funding obligations, reducing the cash available for our business. For more discussion regarding how our financial statements can be affected by pension plan estimates, see "Pensions" included in "Critical Accounting Estimates" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
Our operations require substantial capital, and recent significant capital investments have increased fixed costs, which could negatively affect our profitability.
In the past three years, we have completed a number of capital investments, including significantly increasing our outdoor storage acreage and leasing additional warehouse space. In the future, we expect to make further capital investments, primarily related to internal veneer production. These significant capital investments have resulted in increased fixed costs, which could negatively affect our profitability if the housing market does not continue to recover and revenues do not improve to offset our incremental fixed costs. Capital expenditures for expansion or replacement of existing facilities or equipment or to comply with future changes in environmental laws and regulations may be substantial. Although we maintain our production equipment with regular periodic and scheduled maintenance, we cannot assure you that key pieces of equipment in our various manufacturing facilities will not need to be repaired or replaced or that we will not incur significant additional costs associated with environmental compliance. The costs of repairing or replacing such equipment and the associated downtime of the affected production line could have a material adverse effect on our financial condition, results of operations and cash flow. If for any reason we are unable to provide for our operating needs, capital expenditures, and other cash requirements on economic terms, we could experience a material adverse effect on our business, financial condition, results of operations, and cash flows.
A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, including the demand from our Building Materials Distribution business, reduce our sales, and/or negatively affect our financial results.
Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including but not limited to:
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• | equipment failure, particularly a press at one of our major EWP production facilities; |
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• | fires, floods, earthquakes, hurricanes, or other catastrophes; |
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• | unscheduled maintenance outages; |
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• | utility and transportation infrastructure disruptions; |
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• | other operational problems; or |
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• | ecoterrorism or threats of ecoterrorism. |
Any downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned capital expenditures. If our machines or facilities were to incur significant downtime, our ability to satisfy customer requirements would be impaired, resulting in lower sales and net income.
Because approximately 41% of our Wood Products sales in 2013, including approximately 75% of our EWP sales, were to our Building Materials Distribution business, a material disruption at our Wood Products facilities would also negatively affect our Building Materials Distribution business. We are therefore exposed to a larger extent to the risk of disruption to our Wood Products manufacturing facilities due to our vertical integration and the resulting impact on our Building Materials Distribution business.
In addition, a number of our suppliers are subject to the manufacturing facility disruption risks noted above. Our suppliers' inability to produce the necessary raw materials for our manufacturing processes or supply the finished goods that we distribute through our Building Materials Distribution segment may adversely affect our results of operations, cash flows, and financial position.
Adverse housing market conditions may increase the credit risk from our customers.
Our Building Materials Distribution and Wood Products segments extend credit to numerous customers who are generally susceptible to the same economic business risks as we are. Unfavorable housing market conditions could result in financial failures of one or more of our significant customers. Furthermore, we may not necessarily be aware of any deterioration in our customers' financial position. If our customers' financial position becomes impaired, it could impair our ability to fully collect receivables from such customers and negatively affect our operating results, cash flow, and liquidity.
A significant portion of our sales are concentrated with a relatively small number of customers.
For the year ended December 31, 2013, our top ten customers represented approximately 30% of our sales, with one customer accounting for approximately 11% of sales. At December 31, 2013, receivables from such customer accounted for approximately 13% of total receivables. Although we believe that our relationships with our customers are strong, the loss of one or more of these customers could have a material adverse effect on our operating results, cash flow, and liquidity.
Our ability to service our indebtedness or to fund our other liquidity needs is subject to various risks.
Our ability to make scheduled payments on our indebtedness and fund other liquidity needs depends on and is subject to our financial and operating performance, which in turn is affected by general and regional economic, financial, competitive, business, and other factors, including the availability of financing in the banking and capital markets as well as the other risks described herein. In particular, demand for our products correlates to a significant degree to the level of residential construction activity in North America, which historically has been characterized by significant cyclicality. Over the last several years, housing starts remained below historical levels. There can be no assurance as to when or if the housing market will rebound to historical levels. We have experienced significant losses from operations and used significant cash for operating activities in recent periods.
We cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. If we are unable to service our debt obligations or to fund our other liquidity needs, we could be forced to curtail our operations, reorganize our capital structure, or liquidate some or all of our assets.
We are subject to environmental regulation and environmental compliance expenditures, as well as other potential environmental liabilities.
Our businesses are subject to a wide range of general and industry-specific environmental laws and regulations, particularly with respect to air emissions, wastewater discharges, solid and hazardous waste management, and site remediation.
Enactment of new environmental laws or regulations, including those aimed at addressing greenhouse gas emissions, or changes in existing laws or regulations might require us to make significant expenditures or restrict operations.
From time to time, legislative bodies and environmental regulatory agencies may promulgate new regulatory programs imposing significant incremental operating costs or capital costs on us. In December 2012, the Environmental Protection Agency (EPA) finalized a revised series of four regulations commonly referred to collectively as Boiler MACT, which are intended to regulate the emission of hazardous air pollutants from industrial boilers. Facilities in our Wood Products segment will be subject to one or more of these regulations and must be in compliance with the applicable rules by early 2016. We are currently undertaking a complete review of the revised rules to assess how they will affect our operations. Even with the revised rules finalized, considerable uncertainty still exists, as there will likely be legal challenges to the final rules from industry and/or environmental organizations. Notwithstanding that uncertainty, we are proceeding with efforts to analyze the applicability and requirements of the regulations, including the capital and operating costs required to comply. Based upon our current understanding of the regulations, we expect to spend approximately $5 million to $10 million in capital over the next two years to comply with the applicable rules.
As an owner and operator of real estate, we may be liable under environmental laws for the cleanup of past and present spills and releases of hazardous or toxic substances on or from our properties and operations. We could be found liable under these laws whether or not we knew of, or were responsible for, the presence of such substances. In some cases, this liability may exceed the value of the property itself.
We may be unable to generate funds or other sources of liquidity and capital to fund unforeseen environmental liabilities or expenditures to the extent we are not indemnified by third parties. For example, in connection with the completion of our acquisition of the forest products assets of OfficeMax in 2004 (the Forest Products Acquisition), OfficeMax, which became a wholly owned subsidiary of Office Depot on November 5, 2013, is generally obligated to indemnify us for hazardous substance releases and other environmental violations that occurred prior to the Forest Products Acquisition. However, OfficeMax may not have sufficient funds to fully satisfy its indemnification obligations when required, and in some cases, we may not be contractually entitled to indemnification by OfficeMax. In addition, in connection with the sale of our Paper and Packaging & Newsprint assets in 2008, Boise Inc., which became a wholly owned subsidiary of Packaging Corporation of America (PCA) on October 25, 2013, and its affiliates assumed any and all environmental liabilities arising from our ownership or operation of the assets and businesses sold to them, and we believe we are entitled to indemnification by them from third-party claims in the event they fail to fully discharge any such liabilities on the basis of common law rules of indemnification. However, Boise Inc. may not have sufficient funds to discharge its obligations when required or to indemnify us from third-party claims arising out of any such failure. For additional information on how environmental regulation and compliance affects our business, see "Environmental" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
Labor disruptions or increased labor costs could adversely affect our business.
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. Either of these situations could prevent us from meeting customer demands or result in increased costs, thereby reducing our sales and profitability. As of February 16, 2014, we had approximately 5,290 employees. Approximately 27% of these employees work pursuant to collective bargaining agreements. As of February 16, 2014, we had nine collective bargaining agreements. Fewer than 1% of our total employees are working pursuant to a collective bargaining agreement that will expire within the next 12 months.
If our long-lived assets, goodwill, and/or intangible assets become impaired, we may be required to record noncash impairment charges that could have a material impact on our results of operations.
We review the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We also test goodwill in each of our reporting units and intangible assets with indefinite lives for impairment annually in the fourth quarter or sooner if events or changes in circumstances indicate that the carrying value of the asset may exceed fair value. Should the markets for our products deteriorate or should we decide to invest capital differently than as expected, or should other cash flow assumptions change, it is possible that we will be required to record noncash impairment charges in the future with respect to the investments we have completed and expect to complete, which could have a material impact on our results of operations.
The terms of our revolving credit facility and the indenture governing our senior notes restrict, and covenants contained in agreements governing indebtedness in the future may restrict, our ability to operate our business and to pursue our business strategies.
Our revolving credit facility and the indenture governing our senior notes contain, and any future indebtedness of ours may contain, a number of restrictive covenants that impose customary operating and financial restrictions on us. Our revolving credit facility and the indenture governing our senior notes limit our ability and the ability of our restricted subsidiaries, among other things, to:
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• | declare or pay dividends, redeem stock, or make other distributions to stockholders; |
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• | create liens or use assets as security in other transactions; |
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• | merge or consolidate, or sell, transfer, lease, or dispose of substantially all of our assets; |
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• | enter into transactions with affiliates; |
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• | sell or transfer certain assets; and |
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• | make prepayments on our senior notes and subordinated indebtedness. |
In addition, our revolving credit facility provides that if an event of default occurs or excess availability under our revolving credit facility drops below a threshold amount equal to the greater of 10% of the aggregate commitments under our revolving credit facility or $35 million (and until such time as excess availability for two consecutive fiscal months exceeds that threshold amount and no event of default has occurred and is continuing), we will be required to maintain a monthly minimum fixed coverage charge ratio of 1.0:1.0, determined on a trailing twelve-month basis.
Our failure to comply with any of these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness.
We may be unable to attract and retain key management and other key employees.
Our key managers are important to our success and may be difficult to replace because they have a significant amount of experience in forest products manufacturing and building materials distribution. While our senior management team has considerable experience, certain members of our management team are nearing or have reached normal retirement age. The failure to successfully implement succession plans could result in inadequate depth of institutional knowledge or inadequate skill sets, which could adversely affect our business.
Our growth strategy includes pursuing strategic acquisitions. We may be unable to efficiently integrate acquired operations or successfully complete potential acquisitions.
We may not be able to integrate the operations of acquired businesses in an efficient and cost-effective manner or without significant disruption to our existing operations or realize expected synergies. Acquisitions involve significant risks and uncertainties, including uncertainties as to the future financial performance of the acquired business, 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. In the future, we may be unable to successfully complete potential acquisitions due to multiple factors, such as issues related to regulatory review of the proposed transactions. We may also be required to incur additional debt in order to consummate acquisitions, which debt may be substantial and may limit our flexibility in using our cash flow from operations. Our failure to integrate future acquired businesses effectively or to manage other consequences of our acquisitions could adversely affect our financial condition, operating results, and cash flows.
We rely on Boise Inc. for many of our administrative services.
In conjunction with the sale of our Paper and Packaging & Newsprint assets in 2008, we entered into an Outsourcing Services Agreement, under which Boise Inc. provides a number of corporate staff services to us. These services include information technology, accounting, and human resource transactional services. Most of the Boise Inc. staff that provides these services are providing the same services they provided when they were our employees. On October 25, 2013, PCA acquired all
of the outstanding common shares of Boise Inc. The Outsourcing Services Agreement remains in place after PCA's acquisition of Boise Inc. and is currently set to expire on February 22, 2016. The agreement automatically renews for successive one-year terms unless either party provides notice of termination to the other party at least 12 months in advance of the expiration date. We cannot be assured that the staff providing such services will remain with PCA after the acquisition or that there will not be a disruption in the continuity or level of service provided. If PCA is unwilling or unable to provide services at the same quality levels as those services have been provided in the past or we are unable to develop and implement effective alternatives, if necessary, our business and compliance activities and results of operations could be substantially and negatively affected.
Cyber security risks related to security breaches of company, customer, employee, and vendor information, as well as the technology that manages our operations and other business processes, could adversely affect our business.
We rely on various information technology systems to capture, process, store, and report data and interact with customers, vendors, and employees. Despite careful security and controls design, implementation, updating, and internal and independent third-party assessments, our information technology systems, and those of our third party providers, could become subject to cyber attacks. Network, system, and data breaches could result in misappropriation of sensitive data or operational disruptions, including interruption to systems availability and denial of access to and misuse of applications required by our customers to conduct business with us. In addition, sophisticated hardware and operating system software and applications that we procure from third parties (including Boise Inc.) may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of the systems. Misuse of internal applications; theft of intellectual property, trade secrets, or other corporate assets; and inappropriate disclosure of confidential information could stem from such incidents. Delayed sales, slowed production, or other repercussions resulting from these disruptions could result in lost sales, business delays, and negative publicity and could have a material adverse effect on our operations, financial condition, or cash flows.
Risks Relating to Ownership of Our Common Stock
The price of our common stock may fluctuate significantly.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for them. The market price for our common stock could fluctuate significantly for various reasons, including:
•our operating and financial performance and prospects;
•our quarterly or annual earnings or those of other companies in our industry;
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• | the public's reaction to our press releases, our other public announcements, and our filings with the Securities and Exchange Commission (SEC); |
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• | changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industry; |
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• | the failure of research analysts to cover our common stock; |
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• | general economic, industry, and market conditions; |
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• | strategic actions by us, our customers, or our competitors, such as acquisitions or restructurings; |
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• | new laws or regulations or new interpretations of existing laws or regulations applicable to our business; |
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• | changes in accounting standards, policies, guidance, interpretations, or principles; |
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• | material litigation or government investigations; |
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• | changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war, incidents of terrorism, or responses to such events; |
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• | changes in key personnel; |
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• | sales of common stock by us, our principal stockholder, or members of our management team; |
•the granting or exercise of employee stock options;
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• | volume of trading in our common stock (which may be impacted by future sales of our common stock); and |
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• | the impact of the facts described elsewhere in "Item 1A. Risk Factors" of this Form 10-K. |
In addition, in recent years, the stock market has regularly experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price.
The requirements of being a public company have increased certain of our costs and require significant management focus.
We completed our initial public offering in February 2013, and Boise Cascade common stock is listed on the New York Stock Exchange (NYSE). As a public company, our legal, accounting, and other expenses associated with compliance-related and other activities have increased. For example, we created new board committees and appointed an additional independent director to comply with the corporate governance requirements of the NYSE. Costs to obtain director and officer liability insurance contribute to our increased costs. As a result of the associated liability, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements, which could further increase our compliance costs.
Until certain applicable phase-in periods expire, we are exempt from certain corporate governance requirements since we were a "controlled company" within the meaning of the NYSE rules and, as a result, you will not have the protections afforded by these corporate governance requirements.
Until July 30, 2013, when BC Holdings ceased to hold a majority of our common stock, we were considered a "controlled company" for the purposes of the NYSE listing requirements. Under these rules, a company of which more than 50% of the voting power is held by a group is a "controlled company" and may elect not to comply with certain NYSE corporate governance requirements, including the requirements that our board of directors, our Compensation Committee, and our Corporate Governance and Nominating Committee meet the standard of independence established by those corporate governance requirements. We have one year from the date we ceased to be a controlled company to fully comply with all of the NYSE's corporate governance requirements. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE's corporate governance requirements until the applicable phase-in periods expire.
Our significant stockholder, BC Holdings, has the ability to influence corporate activities, and its interests may not coincide with yours.
BC Holdings beneficially owns approximately 19.8% of our outstanding common stock. As a result of its ownership, BC Holdings (and Madison Dearborn as its indirect controlling equityholder) has the ability to influence the outcome of matters submitted to a vote of stockholders and, through our board of directors, the ability to influence decision making with respect to our business direction and policies.
Matters over which BC Holdings, directly or indirectly, has the ability to influence decision making include:
•election of directors;
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• | mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares; |
•other acquisitions or dispositions of businesses or assets;
•incurrence of indebtedness and the issuance of equity securities;
•repurchase of stock and payment of dividends; and
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• | the issuance of shares to management under the Boise Cascade Company 2013 Incentive Plan (the 2013 Incentive Plan). |
In addition, BC Holdings has a contractual right to designate a number of directors proportionate to its stock ownership.
Conflicts of interest may arise because some of our directors are principals of BC Holdings.
Messrs. Mencoff, Norton, and Souleles, who are officers or employees of Madison Dearborn, serve on our board of directors. Madison Dearborn is the ultimate principal equityholder of BC Holdings, a significant stockholder of Boise Cascade Company. Madison Dearborn and entities controlled by it may hold equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may begin competing with us. As a result of these relationships, when conflicts between the interests of Madison Dearborn, on the one hand, and of other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director's or officer's relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director's or officer's relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction, or (3) the transaction is otherwise fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager, and/or employee of Madison Dearborn or any entity that controls, is controlled by, or under common control with Madison Dearborn (other than Forest Products Holdings, L.L.C. (FPH), an entity controlled by an investment fund managed by Madison Dearborn, BC Holdings, us, or any company that is controlled by us), or any investment funds managed by Madison Dearborn will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors.
We do not currently intend to pay dividends on our common stock.
We historically have not paid dividends on our common stock. In the future, the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend upon our financial condition, earnings, contractual obligations, applicable laws, and other factors that our board of directors may deem relevant. In addition, our existing indebtedness restricts, and we anticipate our future indebtedness may restrict, our ability to pay dividends. Therefore, you may not receive a return on your investment in our common stock by receiving a payment of dividends.
Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial.
Certain provisions of our certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our certificate of incorporation and bylaws include, among other things, the following:
•a classified board of directors with three-year staggered terms;
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• | the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; |
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• | stockholder action can only be taken at a special or regular meeting and not by written consent; |
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• | advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings; |
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• | removal of directors only for cause; |
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• | allowing only our board of directors to fill vacancies on our board of directors; and |
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• | super-majority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation. |
In addition, we are a party to a Director Nomination Agreement with BC Holdings that provides BC Holdings the right to designate nominees for election to our board of directors for so long as BC Holdings beneficially owns 10% or more of the
total number of shares of our common stock then outstanding. The Director Nomination Agreement also provides that Madison Dearborn Capital Partners IV, L.P., one of Madison Dearborn's investment funds (MDCP IV), may cause BC Holdings to assign such right to MDCP IV or to an MDCP IV affiliate so long as MDCP IV and its affiliates are the beneficial owners of 50% or more of BC Holdings' voting equity interests.
We have elected in our certificate of incorporation not to be subject to Section 203 of the General Corporation Law of the State of Delaware (DGCL), an antitakeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation's voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we are not subject to any antitakeover effects of Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that Madison Dearborn, its affiliates (including any investment funds managed by Madison Dearborn), and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the "interested stockholder" definition in our certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203.
While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of the stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.
Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
Upon becoming a public company, we became subject to the SEC's rules implementing Section 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. However, even though we have been required to disclose changes made in our internal controls and procedures on a quarterly basis, this year (fiscal year 2013 Form 10-K) is our first annual assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. To comply with the requirements of being a public company, we have undertaken various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. Testing and maintaining internal control could divert our management's attention from other matters that are important to the operation of our business.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting until our fiscal year 2014 Form 10-K. At such time, our independent registered public accounting firm may issue a report that is adverse, in the event it is not satisfied with the level at which our controls are documented, designed, or operating. If we are unable to conclude that we have effective internal control over financial reporting, our independent registered public accounting firm is unable to provide us with an unqualified report as required by Section 404 of the Sarbanes-Oxley Act, or we are required to restate our financial statements, we may fail to meet our public reporting obligations and investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have no unresolved comments from the Commission staff.
ITEM 2. PROPERTIES
Our properties are well-maintained and are suitable for the operations for which they are used. Information concerning production capacity and the utilization of our manufacturing facilities is presented in "Item 1. Business" of this Form 10-K.
The following is a list of our facilities by segment as of February 26, 2014. We lease office space for our corporate headquarters in Boise, Idaho.
Wood Products
We own all of our Wood Products manufacturing facilities. The following table summarizes our Wood Products facilities as of February 26, 2014:
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| | | | |
Facility Type | | Number of Facilities | | Locations |
Plywood and veneer plants | | 9 | | Louisiana (2), North Carolina, Oregon (4), South Carolina, and Washington |
LVL/I-joist/laminated beam plants | | 4 | | Louisiana, Oregon, Idaho, and Canada |
Sawmills | | 5 | | Oregon (3) and Washington (2) |
Particleboard plant | | 1 | | Oregon |
Building Materials Distribution
We lease and own properties in our Building Materials Distribution business. All of our leases are noncancelable and accounted for as operating leases. These leases are not subject to early termination except for standard nonperformance clauses. The following table summarizes our 32 Building Materials Distribution facilities as of February 26, 2014:
|
| | | | | |
Location | | Owned or Leased | | Approximate Warehouse Square Footage |
Phoenix, Arizona | | Owned | | 33,000 |
|
Lathrop, California | | Leased | | 164,000 |
|
Riverside, California | | Leased | | 162,000 |
|
Denver, Colorado | | Owned/Leased | | 230,000 |
|
Grand Junction, Colorado | | Owned/Leased | | 97,000 |
|
Milton, Florida | | Leased | | 87,000 |
|
Orlando, Florida | | Owned | | 144,000 |
|
Pompano Beach, Florida | | Leased | | 68,000 |
|
Atlanta, Georgia | | Leased | | 155,000 |
|
Boise, Idaho | | Owned/Leased | | 159,000 |
|
Idaho Falls, Idaho | | Owned/Leased | | 69,000 |
|
Chicago, Illinois | | Leased | | 170,000 |
|
Biddeford/Saco, Maine (a) | | Leased | | 48,000 |
|
Baltimore, Maryland | | Leased | | 205,000 |
|
Westfield, Massachusetts | | Leased | | 134,000 |
|
Detroit, Michigan | | Leased | | 108,000 |
|
Minneapolis, Minnesota | | Leased | | 184,000 |
|
Billings, Montana | | Owned | | 81,000 |
|
Greenland, New Hampshire | | Owned/Leased | | 166,000 |
|
Delanco, New Jersey | | Owned/Leased | | 345,000 |
|
Albuquerque, New Mexico | | Leased | | 68,000 |
|
Greensboro, North Carolina | | Owned/Leased | | 88,000 |
|
Marion, Ohio | | Leased | | 95,000 |
|
Tulsa, Oklahoma | | Owned | | 129,000 |
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Memphis, Tennessee | | Owned | | 78,000 |
|
Dallas, Texas | | Owned/Leased | | 233,000 |
|
Houston, Texas | | Leased | | 150,000 |
|
Salt Lake City, Utah | | Leased | | 126,000 |
|
Spokane, Washington | | Owned/Leased | | 58,000 |
|
Vancouver, Washington | | Leased | | 86,000 |
|
Woodinville, Washington | | Owned/Leased | | 110,000 |
|
Yakima, Washington | | Owned/Leased | | 44,000 |
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_______________________________________
(a) Truss manufacturing plant.
ITEM 3. LEGAL PROCEEDINGS
We are a party to routine legal proceedings that arise in the ordinary course of our business. We are not currently a party to any legal proceedings or environmental claims that we believe would, individually or in the aggregate, have a material adverse effect on our financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Price of Our Common Stock
Our common stock began trading on the New York Stock Exchange (NYSE) under the symbol BCC on February 6, 2013. Prior to that, there was no public market for our common stock. The following table sets forth the high and low sales prices of our common stock as reported by the NYSE since February 6, 2013:
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| | | | | | | |
| High Sale Price | | Low Sale Price |
2013 | | | |
Fourth Quarter | $ | 30.24 |
| | $ | 23.05 |
|
Third Quarter | $ | 29.50 |
| | $ | 22.55 |
|
Second Quarter | $ | 33.99 |
| | $ | 24.90 |
|
First Quarter (beginning February 6, 2013) | $ | 34.54 |
| | $ | 25.25 |
|
On February 26, 2014, there were 39,365,350 shares of our common stock outstanding, held by two stockholders of record, one of which was Cede & Co., which is the nominee of shares held through The Depository Trust Company, and the other of which is BC Holdings. On February 26, 2014, the closing price of our common stock was $30.15.
Dividends
Boise Cascade made $228.3 million in aggregate cash distributions to BC Holdings during the year ended December 31, 2012. Boise Cascade did not make any cash distributions to BC Holdings or declare any cash dividends on its common stock during the year ended December 31, 2013. We do not currently plan to pay a regular dividend on our common stock. In the future, the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend upon our financial condition, earnings, contractual obligations, restrictions imposed by our revolving credit facility and the indenture governing our senior notes, or applicable laws and other factors that our board of directors may deem relevant. See "Asset-Based Revolving Credit Facility'' and ''Senior Notes'' under "Debt Structure" under "Liquidity and Capital Resources" in ''Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for a description of the restrictions in our revolving credit facility and the indenture governing our senior notes, respectively, on our ability to pay dividends.
Performance Graph
The following graph compares the return on a $100 investment in our common stock on February 6, 2013 (the day we first began trading on the NYSE as Boise Cascade Company) with a $100 investment also made on February 6, 2013, in the S&P SmallCap 600 Index and our peer group. The companies included in our peer group are Louisiana-Pacific Corporation, BlueLinx Holdings Inc., Universal Forest Products, Inc., Builders FirstSource, Inc., and Norbord Inc. The information in the graph and table above is not "soliciting material," is not deemed "filed" with the SEC, and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, except to the extent that we specifically incorporate such information by reference. The stock performance shown below is not necessarily indicative of future performance.
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(a) | $100 invested in stock or index on February 6, 2013, including reinvestment of dividends in additional shares of the same class of equity securities. |
Unregistered Sales of Equity Securities
On February 4, 2013, Boise Cascade, L.L.C., our predecessor and a Delaware limited liability company, converted into Boise Cascade Company in anticipation of our initial public offering. In connection with the conversion, the 1,000 common units of Boise Cascade, L.L.C., held by BC Holdings were automatically exchanged into 29,700,000 shares of our common stock. BC Holdings did not pay any consideration for such shares of common stock.
Except as set forth above in the immediately preceding paragraph, we did not sell any unregistered securities from January 1, 2011, through December 31, 2013.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On July 30, 2013, we repurchased 3,864,062 shares of our common stock from BC Holdings for $100.0 million. We did not repurchase any shares of common stock during the three months ended December 31, 2013.
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ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth our selected financial data for the periods indicated and should be read in conjunction with the disclosures in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
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| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
| | 2013 (a) | | 2012 | | 2011 (b) | | 2010 (c) | | 2009 (d) |
| | (millions, except per-share data) |
Consolidated statement of operations data | | | | | | | | | | |
Sales | | $ | 3,273 |
| | $ | 2,779 |
| | $ | 2,248 |
| | $ | 2,241 |
| | $ | 1,973 |
|
Net income (loss) | | $ | 117 |
| | $ | 41 |
| | $ | (46 | ) | | $ | (33 | ) | | $ | (98 | ) |
Net income (loss) per common share – basic | | $ | 2.91 |
| | $ | 1.40 |
| | $ | (1.56 | ) | | $ | (1.12 | ) | | $ | (3.32 | ) |
Net income (loss) per common share – diluted | | $ | 2.91 |
| | $ | 1.40 |
| | $ | (1.56 | ) | | $ | (1.12 | ) | | $ | (3.32 | ) |
Earnings before interest, taxes, depreciation, and amortization (EBITDA) (e) | | $ | 136 |
| | $ | 97 |
| | $ | 9 |
| | $ | 22 |
| | $ | (35 | ) |
Cash dividends declared per common share | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
Balance sheet data (at end of year) | | | | | | | | | | |
Cash and cash equivalents | | $ | 118 |
| | $ | 46 |
| | $ | 176 |
| | $ | 259 |
| | $ | 283 |
|
Working capital, excluding cash and cash equivalents | | $ | 330 |
| | $ | 245 |
| | $ | 241 |
| | $ | 200 |
| | $ | 201 |
|
Total assets | | $ | 1,104 |
| | $ | 828 |
| | $ | 897 |
| | $ | 947 |
| | $ | 933 |
|
Total long-term debt | | $ | 302 |
| | $ | 275 |
| | $ | 220 |
| | $ | 220 |
| | $ | 303 |
|
_______________________________________
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(a) | In 2013, net income includes a $68.7 million income tax benefit associated with the recording of net deferred tax assets upon our conversion to a corporation. For more information, see Note 3, Income Taxes, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K. |
At December 31, 2013, total assets includes the acquisition of Wood Resources LLC Southeast Operations for an aggregate purchase price of $103.0 million.
(b) The following were included in 2011 net loss:
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• | $1.7 million of expense related to the permanent closure of a laminated beam plant in Emmett, Idaho; and |
| |
• | $2.0 million of noncash asset write-downs. |
| |
(c) | In 2010, net loss includes $4.6 million of income associated with receiving proceeds from a litigation settlement related to vendor product pricing. |
| |
(d) | The following were included in 2009 net loss: |
| |
• | $6.0 million gain on the repurchase of $11.9 million of senior subordinated notes; and |
| |
• | $8.9 million of expense related to the closure of our lumber manufacturing facility in La Grande, Oregon. |
(e) The following table reconciles net income (loss) to EBITDA for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
| | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| | (millions) |
Net income (loss) | | $ | 117 |
| | $ | 41 |
| | $ | (46 | ) | | $ | (33 | ) | | $ | (98 | ) |
Interest expense | | 20 |
| | 22 |
| | 19 |
| | 21 |
| | 23 |
|
Interest income | | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Income tax provision (benefit) | | (39 | ) | | — |
| | — |
| | — |
| | 1 |
|
Depreciation and amortization | | 38 |
| | 33 |
| | 37 |
| | 35 |
| | 41 |
|
EBITDA | | $ | 136 |
| | $ | 97 |
| | $ | 9 |
| | $ | 22 |
| | $ | (35 | ) |
EBITDA is defined as income (loss) before interest (interest expense, interest income, and change in fair value of interest rate swaps), income taxes, and depreciation and amortization. EBITDA is the primary measure used by our chief operating decision maker to evaluate segment operating performance and to decide how to allocate resources to segments. We believe EBITDA is useful to investors because it provides a means to evaluate the operating performance of our segments and our company on an ongoing basis using criteria that are used by our internal decision makers and because it is frequently used by investors and other interested parties when comparing companies in our industry that have different financing and capital structures and/or tax rates.
We believe EBITDA is a meaningful measure because it presents a transparent view of our recurring operating performance and allows management to readily view operating trends, perform analytical comparisons, and identify strategies to improve operating performance. EBITDA, however, is not a measure of our liquidity or financial performance under generally accepted accounting principles (GAAP) and should not be considered as an alternative to net income (loss), income (loss) from operations, or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity. The use of EBITDA instead of net income (loss) or segment income (loss) has limitations as an analytical tool, including the inability to determine profitability; the exclusion of interest expense, interest income, change in fair value of interest rate swaps, and associated significant cash requirements; and the exclusion of depreciation and amortization, which represent unavoidable operating costs. Management compensates for the limitations of EBITDA by relying on our GAAP results. Our measure of EBITDA is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation.
| |
ITEM 7. | 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 and other financial information appearing elsewhere in this Form 10-K. The following discussion includes statements that are forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section entitled "Cautionary Statement Concerning Forward-Looking Statements" and in Item 1A. "Risk Factors." References to "fiscal year" or "fiscal" refer to our fiscal year ending on December 31 in each calendar year.
Overview
Company Background
Boise Cascade Company is a building products company headquartered in Boise, Idaho. As used in this Form 10-K, the terms "Boise Cascade," "we," and "our" refer to Boise Cascade Company (formerly known as Boise Cascade, L.L.C.) and its consolidated subsidiaries. On February 11, 2013, we issued 13,529,412 shares of common stock in our initial public offering. Following the initial public offering, the common stock held by Boise Cascade Holdings, L.L.C. (BC Holdings) represented 68.7% of our outstanding common stock. In our July 2013 and November 2013 secondary offerings, we registered a combined 18,050,000 shares of common stock sold by BC Holdings. Concurrent with the close of our July 2013 secondary offering, we also repurchased 3,864,062 shares of common stock from BC Holdings (the Repurchase). Following the secondary offerings and the Repurchase, the common stock held by BC Holdings represents 19.8% of our outstanding common stock. BC Holdings is controlled by Forest Products Holdings, L.L.C. (FPH).
Boise Cascade is a large, vertically-integrated wood products manufacturer and building materials distributor with 51 facilities (consisting of 20 manufacturing facilities and 31 distribution facilities) located throughout the United States and Canada. We have three reportable segments: (i) Wood Products, which manufactures plywood, engineered wood products (EWP), studs, particleboard, and ponderosa pine lumber; (ii) Building Materials Distribution, which is a wholesale distributor of building materials; and (iii) Corporate and Other, which includes corporate support staff services, related assets and liabilities, and foreign currency exchange gains and losses. For more information, see Note 15, Segment Information, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" and "Item 1. Business" of this Form 10-K. Our broad line of products is used primarily in new residential construction, residential repair-and-remodeling projects, light commercial construction, and industrial applications. We have a broad base of more than 4,500 customers, which includes a diverse mix of retail lumberyards, home improvement centers, leading wholesalers, and industrial converters. Our Wood Products and Building Materials Distribution segments are vertically-integrated from wood procurement through distribution. During 2013, approximately 41% of our Wood Products segment sales, including approximately 75% of our EWP sales, were to our Building Materials Distribution segment.
Executive Summary
We recorded income from operations of $98.8 million during the year ended December 31, 2013, compared with income from operations of $63.1 million during the same period in the prior year. In our Wood Products segment, income increased by $21.9 million to $77.7 million for the year ended December 31, 2013, from $55.8 million in 2012. In our Building
Materials Distribution segment, income improved $15.9 million to $39.9 million for the year ended December 31, 2013, from $24.0 million for the year ended December 31, 2012. The key components that drove our improved financial performance are discussed in "Our Operating Results" below.
On September 30, 2013, we completed the acquisition of 100% of the outstanding limited liability company interests of both Chester Wood Products LLC and Moncure Plywood LLC (Wood Resources LLC Southeast Operations) for an aggregate purchase price of $103.0 million, including a post-closing adjustment of $1.0 million based upon a working capital target (the Acquisition). These facilities will complement our existing Wood Products business and enable us to better serve our customers in the eastern and southeastern United States.
On February 11, 2013, we issued 13,529,412 shares of common stock in our initial public offering. In connection with our initial public offering, we received proceeds of $262.5 million, net of underwriting discounts and offering expenses. At December 31, 2013, we had $118.2 million of cash and cash equivalents and $258.3 million of unused committed bank line availability. Cash increased $72.4 million during the year ended December 31, 2013, as cash provided by net proceeds from our initial public offering, the issuance of an additional $50 million in aggregate principal amount of our 6.375% senior notes due November 1, 2020 (Senior Notes), and cash provided by operations was partially offset by a $100.0 million repurchase of common stock from BC Holdings (the Repurchase), the Acquisition, capital spending, and repayment of borrowings under our revolving credit facility. These changes are discussed further in "Liquidity and Capital Resources" below.
Factors That Affect Our Operating Results
Our results of operations and financial performance are influenced by a variety of factors, including: (i) the commodity nature of the products we manufacture and distribute; (ii) general economic and industry conditions affecting demand; and (iii) availability and affordability of raw materials, including wood fiber and glues and resins. These factors have historically produced cyclicality in our results of operations, and we expect this cyclicality to continue in future periods.
Commodity Nature of Our Products
Many of the building products we manufacture or distribute, including oriented strand board (OSB), plywood, lumber, and particleboard, are commodities that are widely available from other manufacturers or distributors with prices and volumes determined frequently based on buyers' and sellers' perceptions of short-term supply and demand factors. At times, the price for any one or more of the products we produce or distribute may fall below our cash production or purchase costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our manufacturing facilities. As a result, our profitability with respect to these commodity products depends, in significant part, on managing our cost structure, particularly raw materials and labor, which represent the largest components of our operating costs, as well as the purchase cost for commodities we distribute. Commodity wood product prices could be volatile in response to industry capacity restarts and operating rates, inventory levels in various distribution channels, and seasonal demand patterns.
The following table provides changes in the average composite panel (a composite calculation based on index prices for OSB and plywood) and average composite lumber prices as reflected by Random Lengths, an industry publication, for the periods noted below: |
| | | | | |
| Year Ended December 31 |
| 2013 versus 2012 | | 2012 versus 2011 | | 2011 versus 2010 |
Increase (decrease) in panel prices | 11% | | 32% | | (10)% |
Increase (decrease) in lumber prices | 19% | | 19% | | (4)% |
Periods of increasing prices provide the opportunity for higher sales and increased margins, while declining price environments may result in declines in sales and profitability. For further discussion of the impact of commodity prices on historical periods, see "Our Operating Results" in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
In our Wood Products segment, our plan is to continue to respond to market conditions by actively managing our production facilities to balance supply with demand. In addition, we plan to further expand our market position in EWP. We believe that EWP will continue to gain market share from dimensional lumber products and that margins for EWP over time will be higher and more stable than those for most dimensional lumber products. We are focused on leveraging our manufacturing position, comprehensive customer service offering, design support capabilities, and efficient distribution network to continue to gain market share among home builders, building products retailers, and other distributors.
General Economic and Industry Conditions Affecting Demand
The level of housing starts is especially important to our results of operations. From 2005 to 2011, total housing starts in the United States declined by more than 70% and remained substantially below average historical levels during 2012 and 2013. The significant drop in new residential construction created challenging conditions for building products manufacturers and distributors, with substantial reductions in manufacturing and distribution capacity occurring since late 2008, as companies adjusted to lower industry demand. We expect manufacturing and distribution capacity to increase as housing demand improves.
As of February 2014, the Blue Chip Economic Indicators consensus forecast for 2014 single- and multi-family housing starts in the U.S. was approximately 1.11 million units, compared with actual housing starts of 0.93 million in 2013 and 0.78 million in 2012, as reported by the U.S. Census Bureau. While still below long-term historical average levels, annual housing starts increased 19% and 28%, respectively, during 2013 and 2012. Many economists expect housing starts to continue to increase. We believe that, over the long term, there is considerable growth potential in the U.S. housing sector.
Unemployment rates in the U.S. improved to 6.7% as of December 31, 2013, from 7.9% as of December 31, 2012. We believe continued employment growth, prospective home buyers' access to financing, and improved consumer confidence will be necessary to increase household formation rates. Improved household formation rates in turn will help stimulate new construction.
Demand for new residential construction is also influenced by several other economic conditions, including domestic population growth, immigration rates, residential vacancy and foreclosure rates, demand for second homes, existing home prices, and consumer confidence.
We believe that our product line diversification provides us some protection from declines in new residential construction. Our products are used not only in new residential construction, but also in residential repair-and-remodeling projects. We believe the overall age of the U.S. housing stock, resales of existing homes, increased focus on making homes more energy efficient, rising home prices, and availability of consumer loans at low interest rates will continue to support long-term growth in repair-and-remodeling expenditures and increased demand through home improvement centers and our other customers that service professional contractors.
Availability and Affordability of Raw Materials
Our principal raw material is wood fiber, which accounted for approximately 44% of the aggregate amount of materials, labor, and other operating expenses (excluding depreciation), for our Wood Products segment in 2013. Timber comprises over 75% of our wood fiber costs, and we satisfy our timber requirements through a combination of purchases under supply agreements, open-market purchases, and purchases pursuant to contracts awarded under public timber auctions. The fiber supply agreements require the timberland owners to sell a specified amount of timber to us at prices generally related to market prices. In 2013, approximately 28% of our timber was supplied pursuant to these agreements. See "Raw Materials and Input Costs" under "Wood Products" in "Item 1. Business" of this Form 10-K for further description of these agreements.
We also bid in auctions conducted by federal, state, and local authorities for the purchase of timber, generally at fixed prices, under contracts with a term of generally one to three years. In 2013, approximately 21% of our timber was supplied under government contracts. The remainder of our log supply in 2013 was supplied through private purchases directly from timber owners or through dealers.
The following table provides changes in our average per-unit log costs for the periods noted below: |
| | | | | |
| Year Ended December 31 |
| 2013 versus 2012 | | 2012 versus 2011 | | 2011 versus 2010 |
Increase in per-unit log costs | 10% | | 5% | | 6% |
The cost of timber is strongly correlated with prevailing product prices for building materials and manufacturers' expectations for future product prices, with an increase in product prices driving increases in timber costs. Because wood fiber is a commodity, prices have been historically cyclical in response to changes in domestic and foreign demand and supply. Demand for dimension lumber has a strong influence on pricing, as the dimension lumber industry is the largest consumer of timber. We anticipate that wood fiber costs will fluctuate in the future as building material product prices fluctuate. Generally,
increases in the cost of timber lag product price increases, as improved manufacturer profitability often leads to increased demand for timber.
In the future, we expect the level of foreign demand for timber exports from the western U.S. to fluctuate based on economic activity in China and other Pacific Rim countries, currency exchange rates, and the availability of timber supplies from other countries such as Canada, Russia, and New Zealand. Sustained periods of high timber costs may impair the cost competitiveness of our manufacturing facilities.
Our aggregate cost of obtaining timber is also affected by fuel costs and the distance between our fiber source and our facilities, as we are often required to transport the timber we purchase from the source to our facilities.
We also use various resins and glues in our manufacturing processes, which accounted for approximately 6% of the aggregate amount of materials, labor, and other operating expenses (excluding depreciation) for our Wood Products segment in 2013. The costs of resins and glues are influenced by changes in the prices of raw material input costs, primarily fossil fuel products. We purchase many of our raw materials through long-term contracts that contain price adjustment mechanisms that take into account changes in market prices. Therefore, although our long-term contracts provide us with supplies of raw materials and energy that are more stable than open-market purchases, in many cases, they may not alleviate fluctuations in market prices.
We also purchase OSB, which is used as the vertical web to assemble I-joists, from third parties. OSB accounted for approximately 6% of the aggregate amount of materials, labor, and other operating expenses (excluding depreciation) for our Wood Products segment in 2013.
The following table provides average weekly OSB composite prices as reflected by Random Lengths for the years ended December 31, 2013, December 31, 2012, and December 31, 2011:
|
| | | | | |
| Year Ended December 31 |
| 2013 | | 2012 | | 2011 |
OSB composite prices | $357 | | $302 | | $209 |
Our Operating Results
The following tables set forth our operating results in dollars and as a percentage of sales for the years ended December 31, 2013, 2012, and 2011:
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2013 | | 2012 | | 2011 |
| (millions) |
Sales | $ | 3,273.5 |
| | $ | 2,779.1 |
| | $ | 2,248.1 |
|
| | | | | |
Costs and expenses | |
| | |
| | |
|
Materials, labor, and other operating expenses (excluding depreciation) | 2,846.6 |
| | 2,403.4 |
| | 1,992.7 |
|
Depreciation and amortization | 38.0 |
| | 33.4 |
| | 37.0 |
|
Selling and distribution expenses | 245.3 |
| | 235.1 |
| | 205.0 |
|
General and administrative expenses | 45.5 |
| | 43.1 |
| | 37.2 |
|
Other (income) expense, net | (0.7 | ) | | 0.9 |
| | 3.2 |
|
| 3,174.7 |
| | 2,715.9 |
| | 2,275.1 |
|
| | | | | |
Income (loss) from operations | $ | 98.8 |
| | $ | 63.1 |
| | $ | (27.0 | ) |
| | | | | |
| (percentage of sales) |
Sales | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | |
Costs and expenses | | | | | |
Materials, labor, and other operating expenses (excluding depreciation) | 87.0 | % | | 86.5 | % | | 88.6 | % |
Depreciation and amortization | 1.2 |
| | 1.2 |
| | 1.6 |
|
Selling and distribution expenses | 7.5 |
| | 8.5 |
| | 9.1 |
|
General and administrative expenses | 1.4 |
| | 1.6 |
| | 1.7 |
|
Other (income) expense, net | — |
| | — |
| | 0.1 |
|
| 97.0 | % | | 97.7 | % | | 101.2 | % |
| | | | | |
Income (loss) from operations | 3.0 | % | | 2.3 | % | | (1.2 | )% |
Sales Volumes and Prices
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 Building Materials Distribution segment for the years ended December 31, 2013, 2012, and 2011.
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2013 | | 2012 | | 2011 |
| (millions) |
U.S. Housing Starts (a) | | | | | |
Single-family | 0.62 |
| | 0.54 |
| | 0.43 |
|
Multi-family | 0.31 |
| | 0.24 |
| | 0.18 |
|
| 0.93 |
| | 0.78 |
| | 0.61 |
|
| | | | | |
Segment Sales | |
| | |
| | |
Wood Products | $ | 1,134.1 |
| | $ | 943.3 |
| | $ | 712.5 |
|
Building Materials Distribution | 2,599.6 |
| | 2,190.2 |
| | 1,779.4 |
|
Intersegment eliminations | (460.2 | ) | | (354.4 | ) | | (243.7 | ) |
| $ | 3,273.5 |
| | $ | 2,779.1 |
| | $ | 2,248.1 |
|
| | | | | |
Wood Products | | | | | |
Sales Volumes | | | | | |
Plywood (sq. ft.) (3/8" basis) | 1,473 |
| | 1,356 |
| | 1,106 |
|
Laminated veneer lumber (LVL) (cubic feet) | 11.1 |
| | 9.1 |
| | 7.1 |
|
I-joists (equivalent lineal feet) | 179 |
| | 145 |
| | 110 |
|
Lumber (board feet) | 199 |
| | 188 |
| | 153 |
|
| | | | | |
| (dollars per unit) |
Wood Products | | | | | |
Average Net Selling Prices | | | | | |
Plywood (1,000 sq. ft.) (3/8" basis) | $ | 316 |
| | $ | 295 |
| | $ | 232 |
|
Laminated veneer lumber (LVL) (cubic foot) | 15.68 |
| | 14.80 |
| | 15.51 |
|
I-joists (1,000 equivalent lineal feet) | 1,000 |
| | 921 |
| | 957 |
|
Lumber (1,000 board feet) | 509 |
| | 430 |
| | 421 |
|
| | | | | |
| (percentage of Building Materials Distribution sales) |
Building Materials Distribution | | | | | |
Product Line Sales | | | | | |
Commodity | 51.3 | % | | 49.9 | % | | 47.0 | % |
General line | 33.0 | % | | 36.3 | % | | 40.6 | % |
Engineered wood products | 15.7 | % | | 13.8 | % | | 12.4 | % |
| | | | | |
Gross margin percentage (b) | 10.9 | % | | 11.7 | % | | 11.7 | % |
_______________________________________
| |
(a) | Actual U.S. housing starts as 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 Building Materials Distribution segment are for inventory purchased for resale. Gross margin percentage is gross margin as a percentage of segment sales. |
2013 Compared With 2012
Sales
For the year ended December 31, 2013, total sales increased $494.4 million, or 18%, to $3,273.5 million from $2,779.1 million during the year ended December 31, 2012, driven primarily by increases in sales volumes and prices for many of the products we manufacture and distribute. During 2013, U.S. housing starts increased 19%, with single-family starts up 16%, compared with 2012. Single-family housing starts are the primary driver of our sales and typically result in higher building product utilization per start than multi-family units. Average composite lumber and average composite panel prices for the year ended December 31, 2013, were 19% and 11% higher, respectively, than in the same period in the prior year, as reflected by Random Lengths.
Wood Products. During the year ended December 31, 2013, sales, including sales to our Building Materials Distribution segment, increased $190.8 million, or 20%, to $1,134.1 million from $943.3 million in 2012. The increase in sales was due primarily to increased EWP volumes and prices, resulting in increases of $63.0 million and $29.5 million, respectively, as well as higher plywood volumes and prices of $34.3 million and $30.8 million, respectively. Lumber sales prices and volumes also contributed $15.7 million and $4.6 million, respectively, to the increase in sales. I-joist and laminated veneer lumber (LVL) sales volumes increased 24% and 22%, respectively, due to higher levels of residential construction activity. In addition, lumber and plywood sales prices increased 18% and 7%, respectively, while I-joist and LVL sales prices improved 9% and 6%, respectively. Plywood sales volumes increased 9%, primarily as a result of the acquisition of two plywood manufacturing facilities on September 30, 2013. In addition, lumber sales volumes increased 6%.
Building Materials Distribution. During the year ended December 31, 2013, sales increased $409.4 million, or 19%, to $2,599.6 million from $2,190.2 million for the prior year. The increase in sales was driven primarily by improvements in sales volumes and prices of 10% and 8%, respectively. By product line, commodity sales increased 22%, or $240.7 million; sales of EWP (substantially all of which is sourced through our Wood Products segment) increased 35%, or $105.9 million; and general line products sales increased 8%, or $62.8 million.
Costs and Expenses
Materials, labor, and other operating expenses (excluding depreciation) increased $443.2 million, or 18%, to $2,846.6 million for the year ended December 31, 2013, compared with $2,403.4 million during the prior year. The increase primarily reflects higher purchased materials costs as a result of higher sales volumes and product price inflation in our Building Materials Distribution segment, as well as an 80-basis-point increase in materials, labor, and other operating expenses as a percentage of sales (MLO rate), compared with the prior year, in our Building Materials Distribution segment due to commodity products being a larger portion of the Building Materials Distribution segment sales mix and the negative impact of a sharp downward trajectory in commodity prices during second quarter 2013. In addition, higher manufacturing costs, including wood costs, labor, glues and resins, and energy, were driven by higher sales volumes of EWP, plywood, and lumber in our Wood Products segment, as well as higher per-unit log costs, which increased approximately 10%, compared with the same period in 2012. The MLO rate in our Wood Products segment decreased by 20 basis points. The decrease in the MLO rate was primarily the result of improved leveraging of labor costs of 180 basis points due to higher sales, offset partially by increases in wood fiber costs and other manufacturing costs of 100 and 60 basis points, respectively, compared with the prior year.
Depreciation and amortization expenses increased $4.6 million, or 14%, to $38.0 million for the year ended December 31, 2013, compared with $33.4 million during the prior year. The increase was due primarily to the acquisition of two plywood manufacturing facilities on September 30, 2013, and purchases of property and equipment.
Selling and distribution expenses increased $10.2 million, or 4%, to $245.3 million for the year ended December 31, 2013, compared with $235.1 million for the prior year. The increase was due primarily to higher payroll and transportation costs in our Building Materials Distribution segment of $5.9 million and $3.7 million, respectively, due to increased sales volumes and an increase in other variable expenses, offset partially by lower incentive compensation expenses of $1.8 million. The change in transportation costs excludes payroll costs related to shipping and handling, which are included in the change in payroll costs discussed above. While total selling and distribution expenses increased 4%, these costs decreased as a percentage of total sales by 100 basis points, as selling and distribution expenses did not increase at the same rate as sales.
General and administrative expenses increased $2.4 million, or 5%, to $45.5 million for the year ended December 31, 2013, compared with $43.1 million for the prior year. The increase was due primarily to higher professional service, payroll, and travel expenses of $3.0 million, $0.9 million, and $0.6 million, respectively, offset partially by lower incentive
compensation expense of $2.5 million. The increase in professional service expenses was due primarily to secondary offering expenses and acquisition-related costs.
Outsourcing Services Agreement. Included in the 2013 and 2012 costs and expenses set forth above are $15.5 million and $15.0 million, respectively, of expenses related to the Outsourcing Services Agreement we have with Boise Inc., which became a wholly owned subsidiary of Packaging Corporation of America (PCA) on October 25, 2013, under which Boise Inc. provides a number of corporate staff services to us. For more information related to the Outsourcing Services Agreement, see Note 12, Outsourcing Services Agreement, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
For the years ended December 31, 2013 and 2012, other (income) expense, net, was insignificant.
Income (Loss) From Operations
Income from operations increased $35.7 million to $98.8 million for the year ended December 31, 2013, compared with $63.1 million of income for the year ended December 31, 2012. Our improved financial results were driven primarily by higher sales volumes and prices for many of the products we manufacture and distribute, as well as leveraging of manufacturing and distribution expenses, as discussed above.
Wood Products. For the year ended December 31, 2013, segment income improved $21.9 million to $77.7 million of income from $55.8 million for the year ended December 31, 2012. The increase in segment income was driven primarily by higher plywood, EWP, and lumber sales prices, as well as higher sales volumes of plywood and EWP. These improvements were offset partially by higher wood fiber costs and an increase in depreciation and amortization expenses, as well as lower margins on inventory purchased for resale in support of customer programs.
Building Materials Distribution. For the year ended December 31, 2013, segment income increased $15.9 million to $39.9 million from $24.0 million for the year ended December 31, 2012. The improvement in segment income was driven primarily by higher gross margin dollars generated of $25.9 million due to an increase in sales. However, the gross margin percentage declined 80 basis points, compared with the same period in the prior year, due to commodity products being a larger portion of the Building Materials Distribution segment sales mix and the negative impact of a sharp downward trajectory in commodity prices during second quarter 2013. While total selling and distribution expenses increased $10.5 million, these costs decreased as a percentage of segment sales by 110 basis points, as selling and distribution expenses did not increase at the same rate as sales.
Other
Foreign Currency Exchange Gain (Loss). For the year ended December 31, 2013, foreign currency exchange loss was $0.4 million, compared with approximately break-even for the prior year. The 2013 loss was driven primarily by the strengthening of the U.S. dollar, compared with the Canadian dollar.
Interest Expense. Interest expense decreased $1.4 million, or 6%, to $20.4 million for the year ended December 31, 2013, compared with $21.8 million for the prior year. The decrease in interest expense was primarily due to less amortization of deferred financing costs than in the prior year because of the write-off of deferred financing costs associated with our senior subordinated notes that were redeemed in fourth quarter 2012. Although average borrowings increased in 2013, average interest rates on 2013 debt were lower, resulting in an insignificant change in cash interest expense from 2012.
2012 Compared With 2011
Sales
For the year ended December 31, 2012, total sales increased $531.0 million, or 24%, to $2,779.1 million from $2,248.1 million during the year ended December 31, 2011, driven primarily by increases in sales volumes and prices for many of the products we manufacture and distribute. Average composite panel and average composite lumber prices for the year ended December 31, 2012, were 32% and 19% higher, respectively, than in the same period in the prior year, as reflected by Random Lengths. Single-family housing starts, which are a primary driver of our sales and typically result in higher building product utilization per start than multi-family units, experienced an increase of 24% for the year, compared with 2011.
Wood Products. During the year ended December 31, 2012, sales, including sales to our Building Materials Distribution segment, increased $230.8 million, or 32%, to $943.3 million from $712.5 million in 2011. The increase in sales
was due primarily to higher plywood prices and volumes of $84.6 million and $58.0 million, respectively, as well as increased EWP volumes of $63.9 million, with the remaining increases due to increased lumber volumes, offset partially by declines in EWP prices. The increase in sales volumes also drove an increase in shipping and handling revenue of $15.3 million. Plywood sales volumes increased 23%, primarily as a result of increased operating rates and market share gains. LVL and I-joist sales volumes increased 28% and 31%, respectively, due to higher levels of residential construction activity, resulting in additional sales to existing customers and sales to new EWP customers. In addition, lumber sales volumes increased 23%. Plywood prices increased 27%, while LVL and I-joist sales prices declined 5% and 4%, respectively.
Building Materials Distribution. During the year ended December 31, 2012, sales increased $410.8 million, or 23%, to $2,190.2 million from $1,779.4 million for the prior year. The increase in sales was driven primarily by improvements in sales volumes and prices of 13% and 9%, respectively. By product line, commodity sales increased 31%, or $256.6 million; sales of EWP (substantially all of which is sourced through our Wood Products segment) increased 37%, or $81.6 million; and general line products sales increased 10%, or $72.6 million.
Costs and Expenses
Materials, labor, and other operating expenses (excluding depreciation) increased $410.7 million, or 21%, to $2,403.4 million for the year ended December 31, 2012, compared with $1,992.7 million during the prior year. The increase primarily reflects higher purchased materials costs as a result of higher sales volumes and product price inflation in our Building Materials Distribution segment. The MLO rate was flat, compared with the prior year, in our Building Materials Distribution segment. In addition, higher manufacturing costs, including wood costs, labor, glues and resins, and energy, were driven by higher sales volumes of plywood and EWP in our Wood Products segment, as well as higher per-unit log costs, which increased 5%, compared with the same period in 2011. However, the MLO rate in our Wood Products segment decreased by 600 basis points due to higher sales. The decrease in the MLO rate was primarily the result of improved leveraging of labor costs and other manufacturing costs of 340 and 260 basis points, respectively. Wood fiber costs as a percentage of sales were flat, compared with the prior year.
Depreciation and amortization expenses decreased $3.6 million, or 10%, to $33.4 million for the year ended December 31, 2012, compared with $37.0 million during the prior year. The decrease was due primarily to certain property and equipment becoming fully depreciated during 2011.
Selling and distribution expenses increased $30.1 million, or 15%, to $235.1 million for the year ended December 31, 2012, compared with $205.0 million for the prior year. The increase was due primarily to increased compensation and benefit costs of $20.5 million, including performance-based incentive costs, due to our improved operating results, as well as higher transportation costs of $4.1 million in our Building Materials Distribution segment due to increased sales volumes. The change in transportation costs excludes payroll costs related to shipping and handling, which are included in the change in compensation and benefit costs discussed above. While total selling and distribution expenses increased 15%, these costs decreased as a percentage of total sales by 60 basis points, as selling and distribution expenses did not increase at the same rate as sales.
General and administrative expenses increased $5.9 million, or 16%, to $43.1 million for the year ended December 31, 2012, compared with $37.2 million for the prior year. The increase was due primarily to higher performance-based incentive costs as a result of improved operating results.
Outsourcing Services Agreement. Included in the 2012 and 2011 costs and expenses set forth above are $15.0 million and $14.7 million, respectively, of expenses related to the Outsourcing Services Agreement we have with Boise Inc., which became a wholly owned subsidiary of PCA on October 25, 2013, under which Boise Inc. provides a number of corporate staff services to us. For more information related to the Outsourcing Services Agreement, see Note 12, Outsourcing Services Agreement, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
Other (income) expense, net, for the year ended December 31, 2012, was $0.9 million of expense. Other (income) expense, net, for the year ended December 31, 2011, was $3.2 million of expense, including $1.3 million related to the closure of a laminated beam manufacturing plant in Emmett, Idaho, and $2.0 million in noncash asset write-downs.
Income (Loss) From Operations
Income from operations increased $90.2 million to $63.1 million for the year ended December 31, 2012, compared with a $27.0 million loss for the year ended December 31, 2011. Our improved financial results were driven primarily by higher sales volumes and prices for many of the products we manufacture and distribute, as well as leveraging of manufacturing and distribution expenses, as discussed above. In addition, during the year ended December 31, 2011, we recorded $3.8 million of charges related to the closure of a manufacturing plant in our Wood Products segment and noncash asset write-downs. These charges are discussed in more detail below.
Wood Products. For the year ended December 31, 2012, segment income improved $70.9 million to $55.8 million of income from a $15.1 million loss for the year ended December 31, 2011. The increase in segment income was driven primarily by higher plywood sales prices as well as lower per-unit manufacturing costs resulting from higher sales volumes of EWP and plywood and productivity improvements. These improvements were offset partially by higher wood fiber costs, an increase in selling and distribution costs, and declines in EWP prices. In addition, during 2011, we recorded charges of $2.6 million related to the closure of a manufacturing plant in our Wood Products segment and noncash asset write-downs.
Building Materials Distribution. For the year ended December 31, 2012, segment income increased $22.0 million to $24.0 million from $2.0 million for the year ended December 31, 2011. The improvement in segment income was driven primarily by a 13% improvement in sales volumes, compared with the prior year. Gross margins were flat year over year. Total selling and distribution expenses increased 13%, but these costs decreased as a percentage of segment sales by 90 basis points, as selling and distribution expenses did not increase at the same rate as sales. In addition, during 2011, we recorded a noncash asset write-down of $1.2 million.
Other
Foreign Currency Exchange Gain (Loss). For the year ended December 31, 2012, foreign currency exchange gain (loss) was approximately break-even, compared with a loss of $0.5 million for the prior year. During 2012, the U.S. dollar was flat, compared with the Canadian dollar.
Interest Expense. Interest expense increased $2.8 million, or 15%, to $21.8 million for the year ended December 31, 2012, compared with $19.0 million for the prior year. Amortization of deferred financing costs increased approximately $1.7 million from the prior year due primarily to the write-off of deferred financing costs associated with our senior subordinated notes that were redeemed in the fourth quarter of 2012. In addition, in conjunction with the issuance of our senior notes on October 22, 2012, we also issued a redemption notice on the remaining senior subordinated notes outstanding, which required us to pay $1.0 million of interest through the redemption date of November 21, 2012.
Income Tax Benefit (Provision)
On February 4, 2013, we converted from a limited liability company to a corporation. In addition, we elected to be treated as a corporation for federal and state income tax purposes effective as of January 1, 2013. Therefore, we became subject to federal and state income tax expense beginning January 1, 2013. As a result of our conversion to a corporation, we recorded deferred tax assets, net of deferred tax liabilities, of $68.7 million on our Consolidated Balance Sheet, the effect of which was recorded as an income tax benefit in the Consolidated Statement of Operations during the year ended December 31, 2013. As a corporation, we are subject to typical corporate U.S. federal and state income tax rates. For the year ended December 31, 2013, excluding the discrete establishment of net deferred tax assets, we recorded $29.9 million of income tax expense and had an effective tax rate of 38.2%. During the year ended December 31, 2013, the primary reason for the difference from the federal statutory income tax rate of 35% and the effective tax rate, excluding the deferred discrete item, was the effect of state taxes.
Prior to January 1, 2013, as a limited liability company, we were not subject to entity-level federal or state income taxation. Our income tax provision generally consisted of income taxes payable to state jurisdictions that do not allow for the income tax liability to be passed through to our former sole member as well as income taxes payable by our separate subsidiaries that are taxed as corporations. As a limited liability company, we had an effective tax rate of less than 1%.
Acquisitions
On September 30, 2013, we completed the acquisition of Wood Resources LLC Southeast Operations for an aggregate purchase price of $103.0 million, including a post-closing adjustment of $1.0 million based upon a working capital target (the Acquisition). These operations consist of two plywood manufacturing facilities located in North Carolina and South Carolina. These facilities complement our existing Wood Products business and enable us to better serve our customers in the eastern and southeastern United States.
In February 2012, we completed the purchase of a sawmill in Arden, Washington, which improved fiber integration and enhanced the product mix capabilities of our Inland Region lumber operations.
Liquidity and Capital Resources
On February 11, 2013, we issued 13,529,412 shares of common stock in our initial public offering. Following this initial public offering, we received proceeds of approximately $262.5 million, net of underwriting discounts and offering expenses. We used $25.0 million of the net proceeds to repay borrowings under our revolving credit facility, $78.0 million for the acquisition of two plywood plants in the Carolinas (the aggregate purchase price for such acquisition was $103.0 million and was financed with $78.0 million of cash from the initial public offering and a $25.0 million draw under our revolving credit facility), $100.0 million to repurchase 3,864,062 shares of our common stock from BC Holdings (the Repurchase), and the remainder used for capital spending and working capital.
We ended 2013 with $118.2 million of cash and cash equivalents and $301.6 million of long-term debt. At December 31, 2013, we had $376.6 million of available liquidity (unrestricted cash and cash equivalents and unused borrowing capacity under our senior secured asset-based revolving credit facility). We generated $72.4 million of cash during the year ended December 31, 2013, as cash provided by net proceeds from our initial public offering, the issuance of $50.0 million in additional Senior Notes, and cash provided by operations was offset partially by pay-downs of borrowings on our asset-based revolving credit facility, the Acquisition, the Repurchase described above, and capital spending, as further discussed below.
At December 31, 2013, our cash was invested in high-quality, short-term investments, which we record in "Cash and cash equivalents." The credit quality of our portfolio of short-term investments remains strong, with the majority of our cash and cash equivalents invested in money market funds that are broadly diversified and invested in high-quality, short-duration securities, including commercial paper, certificates of deposit, U.S. government agency securities, and similar instruments. We have significant amounts of cash and cash equivalents that are in excess of federally insured limits. Though we have not experienced any losses on our cash and cash equivalents to date and we do not anticipate incurring any losses, we cannot be assured that we will not experience losses on our short-term investments.
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, and pension contributions in 2014. Compared to the past, we expect that we will fund a larger portion of our intra-month working capital requirements in 2014 from borrowings under our revolving credit facility.
In recent years, our reported pension benefit obligations have fluctuated significantly, primarily due to the interest rate environment in the U.S. and its impact on the discount rate assumptions used to measure the present value of our pension benefit obligations. At December 31, 2013, we used a discount rate assumption of 4.65% to measure the present value of our pension benefit obligations, which resulted in a reported pension benefit obligation of approximately $443.3 million. The fair value of our pension plan assets at December 31, 2013, was approximately $357.3 million, and thus we reported an underfunded status of our defined benefit pension plans of approximately $86.0 million. Given the underfunded status, we expect to have significant pension funding obligations. We expect to make cash contributions of approximately $13 million to our pension plans in 2014.
We intend to fund our future pension obligations with cash on hand, cash generated from operations, and external financing. See "Contractual Obligations" in this Management's Discussion and Analysis of Financial Condition and Results of Operations for an estimate of future minimum pension funding obligations. Also see "Critical Accounting Estimates" in this Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 9, Retirement and Benefit Plans, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K for a further discussion of the assumptions used to measure the present value of our pension benefit obligations.
Sources and Uses of Cash
We generate cash primarily from sales of our products, short-term and long-term borrowings, and equity offerings. 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, repay debt, and meet our contractual obligations and commercial commitments. Below is a discussion of our sources and uses of cash for operating activities, investing activities, and financing activities.
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2013 | | 2012 | | 2011 |
| (thousands) |
Net cash provided by (used for) operations | $ | 33,427 |
| | $ | 77,608 |
| | $ | (43,601 | ) |
Net cash used for investment | (146,680 | ) | | (29,434 | ) | | (36,617 | ) |
Net cash provided by (used for) financing | 185,609 |
| | (178,650 | ) | | (2,548 | ) |
Operating Activities
2013 Compared With 2012
In 2013, our operating activities generated $33.4 million of cash, compared with $77.6 million in 2012. Compared with 2012, the $44.2 million decrease in cash provided by operations in 2013 relates primarily to the following:
| |
• | A $61.3 million increase in working capital during 2013, compared with a $9.2 million increase in working capital during 2012. Working capital is subject to cyclical operating needs, seasonal buying patterns for inventory purchased for resale and logs, the timing of the collection of receivables, and the timing of payment of payables and expenses. The increases in working capital in both periods were attributable primarily to higher receivables and inventories, offset partially by an increase in accounts payable and accrued liabilities. The increases in receivables in both periods primarily reflect increased sales of approximately 18% and 16%, comparing sales for the months of December 2013 and 2012 with sales for the months of December 2012 and 2011, respectively. Inventories increased in 2013 primarily due to an increase in finished goods inventory in our segments and log inventory in our Wood Products segment due to an improvement in demand for our products from higher residential construction activity, as well as cost inflation on key raw materials we consume in the manufacture of wood products. Accounts payable and accrued liabilities increased slightly in 2013, after adjusting for liabilities assumed in the Acquisition. Accounts payable did not increase at the same rate as inventory with a lower proportion of our inventory financed through accounts payable at year-end 2013, compared with 2012. Also, the majority of the employee incentive compensation that was accrued in 2012 was paid out in first quarter 2013. |
| |
• | A $22.5 million increase in cash paid for income taxes. As discussed under "Income Tax Benefit (Provision)" above, we converted from a limited liability company to a corporation and elected to be treated as a corporation for federal and state income tax purposes effective as of January 1, 2013, and became subject to federal and state income tax expense. |
| |
• | An increase in cash contributions to our pension plans. During 2013, we used $10.7 million of cash to make pension contributions, compared with $8.5 million during 2012. |
| |
• | A $21.9 million increase in income in our Wood Products segment and a $15.9 million increase in income in our Building Materials Distribution segment. As discussed under "Operating Results" above, the improvement in results for 2013 was the result of higher sales volumes and prices for many of the products we manufacture and distribute, as well as leveraging of manufacturing and distribution expenses. |
2012 Compared With 2011
In 2012, our operating activities generated $77.6 million of cash, compared with $43.6 million of cash used for operating activities in 2011. Compared with 2011, the $121.2 million increase in cash provided by operations in 2012 relates primarily to the following:
| |
• | A $70.9 million increase in income in our Wood Products segment and a $22.0 million increase in income in our Building Materials Distribution segment. As discussed under "Operating Results" above, the improvement in results for 2012 was the result of higher sales volumes and prices for many of the products we manufacture and distribute, as well as leveraging of labor and manufacturing costs. |
| |
• | A $9.2 million increase in working capital during 2012, compared with a $35.4 million increase in working capital during 2011. Working capital is subject to cyclical operating needs, seasonal buying patterns for inventory purchased for resale and logs, the timing of the collection of receivables, and the timing of payment of payables and expenses. The increases in working capital in both periods were attributable primarily to higher receivables and inventories, offset partially by an increase in accounts payable and accrued liabilities. The increases in receivables in both periods primarily reflect increased sales of approximately 16% and 11%, comparing sales for the months of December 2012 and 2011 with sales for the months of December 2011 and 2010, respectively. While inventory turns improved in 2012, compared with 2011, inventories increased in 2012 due primarily to an increase in finished goods inventory in each of our segments due to product line expansions and an improvement in demand for our products from higher residential construction activity and market share gains. Accounts payable and accrued liabilities increased in 2012, driven primarily by higher compensation and benefit-related accrued liabilities, as well as higher accounts payable, driven by higher inventories. We accrued more incentive compensation during the year ended December 31, 2012, compared with 2011, resulting from improved results of operations in 2012. We paid out the majority of accrued incentive compensation in the first quarter of 2013. |
| |
• | A decrease in cash contributions to our pension plans. During 2012, we used $8.5 million of cash to make pension contributions, compared with $13.6 million during 2011. |
Investment Activities
Net cash used for investing activities was $146.7 million, $29.4 million, and $36.6 million during 2013, 2012, and 2011, respectively.
2013
During the year ended December 31, 2013, we used $103.0 million for the acquisition of Wood Resources LLC Southeast Operations. In addition, we used approximately $45.8 million of cash for purchases of property and equipment, which included business improvement and quality/efficiency projects, replacement and expansion projects, and ongoing environmental compliance.
Details of 2013 capital investment, including acquisitions, by segment are included in the table below:
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2013 |
| Acquisition/ Expansion | | Quality/ Efficiency (a) | | Replacement, Environmental, and Other (b) | | Total |
| (millions) |
Wood Products | $ | 104.7 |
| | $ | 2.3 |
| | $ | 26.6 |
| | $ | 133.6 |
|
Building Materials Distribution | 4.6 |
| | 1.5 |
| | 8.6 |
| | 14.7 |
|
Corporate and Other | — |
| | 0.1 |
| | 0.4 |
| | 0.5 |
|
| $ | 109.3 |
| | $ | 3.9 |
| | $ | 35.6 |
| | $ | 148.8 |
|
_______________________________________
| |
(a) | Quality and efficiency projects include quality improvements, modernization, energy, and cost-saving projects. |
| |
(b) | During 2013, we spent approximately $4.8 million on environmental compliance. We expect to spend approximately $7 million in 2014 for this purpose. |
Excluding acquisitions, we expect capital expenditures in 2014 to total approximately $50 million to $60 million. This level of capital expenditures could increase or decrease as a result of a number of factors, including our financial results, future economic conditions, and timing of equipment purchases. Our capital spending in 2014 will be for business improvement and quality/efficiency projects, replacement projects, and ongoing environmental compliance. For the year ended December 31, 2013, we received proceeds of $2.2 million from the sale of assets.
2012
During the year ended December 31, 2012, we used approximately $27.4 million of cash for purchases of property and equipment, which included expenditures for the rebuild of veneer dryers, as well as costs related to other replacement projects and ongoing environmental compliance. In addition, we spent $2.4 million for the acquisition of a sawmill in Arden, Washington, which improved fiber integration and enhanced the product mix capabilities in our Inland Region lumber operations.
Details of 2012 capital investment, including acquisitions, by segment are included in the table below:
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2012 |
| Acquisition/ Expansion | | Quality/ Efficiency (a) | | Replacement, Environmental, and Other (b) | | Total |
| (millions) |
Wood Products | $ | 2.4 |
| | $ | 4.4 |
| | $ | 15.9 |
| | $ | 22.7 |
|
Building Materials Distribution | 1.7 |
| | 0.7 |
| | 4.7 |
| | 7.1 |
|
Corporate and Other | — |
| | — |
| | — |
| | — |
|
| $ | 4.1 |
| | $ | 5.1 |
| | $ | 20.6 |
| | $ | 29.7 |
|
_______________________________________
| |
(a) | Quality and efficiency projects include quality improvements, modernization, energy, and cost-saving projects. |
| |
(b) | During 2012, we spent approximately $1.3 million on environmental compliance. |
2011
During the year ended December 31, 2011, we used approximately $33.5 million of cash for purchases of property and equipment, which included expansions of certain facilities (particularly Dallas, Texas) in our Building Materials Distribution segment. In addition, we spent $5.8 million for the acquisition of a laminated beam and decking manufacturing plant in Homedale, Idaho, and received proceeds of $3.1 million from the sale of assets, including the sale of certain land and timber holdings.
Details of 2011 capital investment, including acquisitions, by segment are included in the table below:
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2011 |
| Acquisition/ Expansion | | Quality/ Efficiency (a) | | Replacement, Environmental, and Other (b) | | Total |
| (millions) |
Wood Products | $ | 5.9 |
| | $ | 6.2 |
| | $ | 17.2 |
| | $ | 29.3 |
|
Building Materials Distribution | 3.9 |
| | 0.1 |
| | 6.0 |
| | 10.0 |
|
Corporate and Other | — |
| | — |
| | — |
| | — |
|
| $ | 9.8 |
| | $ | 6.3 |
| | $ | 23.2 |
| | $ | 39.3 |
|
_______________________________________
| |
(a) | Quality and efficiency projects include quality improvements, modernization, energy, and cost-saving projects. |
| |
(b) | During 2011, we spent approximately $2.4 million on environmental compliance. |
Financing Activities
On February 11, 2013, we issued 13,529,412 shares of common stock in our initial public offering. In connection with this initial public offering, we received proceeds of approximately $262.5 million, after deducting underwriting discounts and commissions of approximately $19.2 million and offering expenses of approximately $2.5 million. On July 30, 2013, we repurchased 3,864,062 shares of our common stock from BC Holdings for $100.0 million in the Repurchase.
During 2013, we repaid $105.0 million of borrowings under our revolving credit facility, $25.0 million of which was outstanding at December 31, 2012, $55.0 million of which was borrowed for working capital needs and repaid during the first quarter of 2013, and $25.0 million of which was borrowed for the acquisition of two plywood plants and repaid during the fourth quarter. During third quarter 2013, we issued an additional $50 million in aggregate principal amount of Senior Notes. We also used $2.1 million of cash for financing costs related to the additional $50 million of Senior Notes, the registration of our Senior Notes, and amendments to the asset-based revolving credit facility, as discussed below.
During 2012, we repaid our senior subordinated notes with cash on hand, borrowings under our revolving credit facility, and the issuance of senior notes. On October 12, 2012, we borrowed $50.0 million under our revolving credit facility to partially fund the redemption of $75.0 million of our senior subordinated notes. In addition, on October 22, 2012, we issued $250.0 million aggregate amount of our Senior Notes to fund the redemption of our remaining senior subordinated notes and for general corporate purposes. We repaid $25.0 million of borrowings under our revolving credit facility on December 20, 2012. We also used $5.8 million of cash for financing costs related primarily to our Senior Notes. In addition, during 2012, we made $228.3 million of distributions to BC Holdings, our equityholder.
During 2011, we used $2.5 million of cash for financing costs related to our revolving credit facility.
Debt Structure
At December 31, 2013 and 2012, our long-term debt was as follows:
|
| | | | | | | |
| December 31 |
| 2013 | | 2012 |
| (thousands) |
Asset-based revolving credit facility | $ | — |
| | $ | 25,000 |
|
6.375% senior notes | 299,990 |
| | 250,000 |
|
Unamortized premium on 6.375% senior notes | 1,623 |
| | — |
|
Total long-term debt | $ | 301,613 |
| | $ | 275,000 |
|
Asset-Based Revolving Credit Facility
Boise Cascade and its principal operating subsidiaries, Boise Cascade Wood Products, L.L.C., and Boise Cascade Building Materials Distribution, L.L.C., are borrowers, and Boise Cascade Wood Products Holdings Corp. is guarantor under a $350 million senior secured asset-based revolving credit facility (Revolving Credit Facility) with Wells Fargo Capital Finance, L.L.C., as agent, and the banks named therein as lenders. Borrowings under the Revolving Credit Facility are constrained by a borrowing base formula dependent upon levels of eligible receivables and inventory reduced by outstanding borrowings and letters of credit (Availability). On May 15, 2013, we entered into a third amendment to the credit agreement governing the Revolving Credit Facility, which reduced unused commitment fee rates as described below. We entered into a fourth amendment to our Revolving Credit Facility on July 19, 2013, to permit the repurchase of $100.0 million of our common stock from BC Holdings in the Repurchase. On August 15, 2013, we entered into a fifth amendment to our Revolving Credit Facility that increased the aggregate revolving commitments from $300 million to $350 million, extended the maturity date to July 31, 2018, reduced the spread for calculating the interest rates payable on outstanding borrowings, and provided additional flexibility under certain covenants by reducing the threshold Availability of the revolving commitments required in order to, among other things, make certain restricted payments and investments.
The Revolving Credit Facility 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.
Interest rates under the Revolving Credit Facility are based, at the company's election, on either the London Interbank Offered Rate (LIBOR) or a base rate, as defined in the credit agreement, plus a spread over the index elected that ranges from 1.50% to 2.00% for loans based on LIBOR and from 0.50% to 1.00% 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 ranging from 0.25% to 0.375% per annum (based on facility utilization) of the average unused portion of the lending commitments.
The Revolving Credit Facility contains customary nonfinancial covenants, including a negative pledge covenant and restrictions on new indebtedness, investments, distributions to equityholders, asset sales, and affiliate transactions, the scope of which are dependent on the Availability existing from time to time. The Revolving Credit Facility also contains a requirement that we meet a 1:1 fixed-charge coverage ratio (FCCR) if Availability falls below 10% of the aggregate lending commitments (or $35 million). Availability exceeded the minimum threshold amounts required for testing of the FCCR at all times since entering into the Revolving Credit Facility, and Availability at December 31, 2013, was $258.3 million. At December 31, 2013, our aggregate liquidity from cash and cash equivalents and unused borrowing capacity (net of the Availability threshold amount for testing of the FCCR, as applicable) under the Revolving Credit Facility totaled $376.6 million.
The Revolving Credit Facility generally permits dividends only if certain conditions are met, including complying with either (i) pro forma Excess Availability (as defined in the Revolving Credit Facility) equal to or exceeding 25% of the aggregate Revolver Commitments (as defined in the Revolving Credit Facility) or (ii) (x) pro forma Excess Availability equal to or exceeding 15% of the aggregate Revolver Commitment and (y) a fixed-charge coverage ratio of 1:1 on a pro forma basis.
At December 31, 2013 and 2012, we had no borrowings and $25.0 million, respectively, outstanding under the Revolving Credit Facility and $8.4 million and $10.0 million, respectively, of letters of credit outstanding. These letters of credit and borrowings reduced our borrowing capacity under the Revolving Credit Facility by an equivalent amount. The minimum and maximum borrowings under the Revolving Credit Facility were zero and $75.0 million, respectively, during the year ended December 31, 2013.
Senior Notes
On October 22, 2012, Boise Cascade and its wholly owned subsidiary, Boise Cascade Finance Corporation (Boise Finance and together with Boise Cascade, the Co-issuers), issued $250 million of Senior Notes through a private placement that was exempt from the registration requirements of the Securities Act of 1933, as amended (Securities Act). Interest on our Senior Notes is payable semiannually in arrears on May 1 and November 1, commencing on May 1, 2013. On March 28, 2013, Boise Finance was merged with and into Boise Cascade, with Boise Cascade as the surviving entity and sole issuer of the Senior Notes. The Senior Notes are guaranteed by each of our existing and future direct or indirect domestic subsidiaries that is a guarantor or co-borrower under our Revolving Credit Facility.
On August 15, 2013, we issued an additional $50 million in aggregate principal amount of Senior Notes in a private offering that was exempt from registration under the Securities Act. The additional $50 million of Senior Notes were priced at 103.5% of their principal amount plus accrued interest from May 1, 2013, and were issued as additional Senior Notes under the indenture dated as of October 22, 2012.
On May 8, 2013 and November 26, 2013, we completed an offer to exchange any and all of our $250 million and $50 million, respectively, outstanding Senior Notes for a like principal amount of new 6.375% Senior Notes due 2020 having substantially identical terms to those of the Senior Notes. $250 million and $49,990,000 in aggregate principal amount (or 100% and 99.98%, respectively) of the outstanding Senior Notes were tendered and accepted for exchange upon closing of the related exchange offers and have been registered under the Securities Act.
The Senior 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 Revolving Credit Facility 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 Senior Notes.
The terms of the indenture governing the Senior Notes, among other things, limit the ability of Boise Cascade Company and certain Boise Cascade Company 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 Senior Notes provides for customary events of default, which include (subject in certain cases to customary grace and cure periods and notification requirements) among others: nonpayment of principal or interest; breach of other agreements in the indenture governing the Senior Notes; defaults in failure to pay certain other indebtedness; the rendering of judgments to pay certain amounts of money against Boise Cascade Company, the guarantors, or certain Boise Cascade Company subsidiaries; the failure of certain guarantees to be enforceable; and certain events of bankruptcy or insolvency.
Cash Paid for Interest
For the years ended December 31, 2013, 2012, and 2011, cash payments for interest were $18.4 million, $18.1 million, and $16.7 million, respectively.
Contractual Obligations
In the table below, we set forth our enforceable and legally binding obligations as of December 31, 2013. Some of the amounts included in the table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table. Purchase orders made in the ordinary course of business are excluded from the table below. Any amounts for which we are liable under purchase orders are reflected on the Consolidated Balance Sheets as accounts payable and accrued liabilities.
|
| | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| 2014 | | 2015-2016 | | 2017-2018 | | Thereafter | | Total |
| (millions) |
Long-term debt (a) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 300.0 |
| | $ | 300.0 |
|
Interest (b) | 19.1 |
| | 38.2 |
| | 38.2 |
| | 35.4 |
| | 130.9 |
|
Operating leases (c) | 12.9 |
| | 21.7 |
| | 17.1 |
| | 28.6 |
| | 80.3 |
|
Purchase obligations | | | | | | | | | |
Raw materials and finished goods inventory (d) | 115.1 |
| | 35.9 |
| | 6.3 |
| | — |
| | 157.3 |
|
Utilities (e) | 10.5 |
| | — |
| | — |
| | — |
| | 10.5 |
|
Other | 1.1 |
| | — |
| | — |
| | — |
| | 1.1 |
|
Other long-term liabilities reflected on our Balance Sheet | | | | |