Condensed Notes to Unaudited Quarterly Consolidated Financial Statements
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1.
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Nature of Operations and Consolidation
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Nature of Operations
Boise Cascade Company is a building products company headquartered in Boise, Idaho. As used in this Form 10-Q, the terms "Boise Cascade," "we," and "our" refer to Boise Cascade Company and its consolidated subsidiaries. We are one of the largest producers of engineered wood products (EWP) and plywood in North America and a leading United States (U.S.) wholesale distributor of building products.
We operate our business using
two
reportable segments: (1) Wood Products, which manufactures EWP, plywood, ponderosa pine lumber, studs, and particleboard; and (2) Building Materials Distribution, which is a wholesale distributor of building materials. For more information, see Note 11, Segment Information.
Consolidation
The accompanying quarterly consolidated financial statements have not been audited by an independent registered public accounting firm but, in the opinion of management, include all adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed within these condensed notes to unaudited quarterly consolidated financial statements, the adjustments made were of a normal, recurring nature. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The quarterly consolidated financial statements include the accounts of Boise Cascade and its subsidiaries after elimination of intercompany balances and transactions. Quarterly results are not necessarily indicative of results that may be expected for the full year. These condensed notes to unaudited quarterly consolidated financial statements should be read in conjunction with our
2016
Form 10-K and the other reports we file with the Securities and Exchange Commission (SEC).
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2.
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Summary of Significant Accounting Policies
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Accounting Policies
The complete summary of significant accounting policies is included in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our
2016
Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, intangible assets, and other long-lived assets; legal contingencies; guarantee obligations; indemnifications; assumptions used in retirement, medical, and workers' compensation benefits; stock-based compensation; fair value measurements; income taxes; and vendor and customer rebates, among others. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
Vendor and Customer Rebates and Allowances
We receive rebates and allowances from our vendors under a number of different programs, including vendor marketing programs. At
March 31, 2017
, and
December 31, 2016
, we had
$4.0 million
and
$7.0 million
, respectively, of vendor rebates and allowances recorded in "Receivables, Other" on our Consolidated Balance Sheets. Rebates and allowances received from our vendors are recognized as a reduction of "Materials, labor, and other operating expenses (excluding depreciation)"
when the product is sold, unless the rebates and allowances are linked to a specific incremental cost to sell a vendor's product. Amounts received from vendors that are linked to specific selling and distribution expenses are recognized as a reduction of "Selling and distribution expenses" in the period the expense is incurred.
We also provide rebates to our customers and our customers' customers based on the volume of their purchases. We provide the rebates to increase the sell-through of our products. The rebates are recorded as a decrease in "Sales." At
March 31, 2017
, and
December 31, 2016
, we had
$30.0 million
and
$31.6 million
, respectively, of rebates payable to our customers recorded in "Accrued liabilities, Other" on our Consolidated Balance Sheets.
Leases
We lease a portion of our distribution centers as well as other property and equipment under operating leases. For purposes of determining straight-line rent expense, the lease term is calculated from the date we first take possession of the facility, including any periods of free rent and any renewal option periods we are reasonably assured of exercising. Rental expense for operating leases was
$4.7 million
and
$4.4 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. Sublease rental income was not material in any of the periods presented.
Inventories
Inventories included the following (work in process is not material):
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March 31,
2017
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December 31,
2016
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(thousands)
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Finished goods and work in process
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$
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394,639
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$
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330,026
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Logs
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47,040
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63,208
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Other raw materials and supplies
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40,687
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40,217
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$
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482,366
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$
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433,451
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Property and Equipment
Property and equipment consisted of the following asset classes:
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March 31,
2017
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December 31,
2016
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(thousands)
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Land
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$
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38,651
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$
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38,700
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Buildings
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136,974
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136,087
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Improvements
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51,815
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50,655
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Mobile equipment, information technology, and office furniture
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127,058
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125,486
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Machinery and equipment
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624,357
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613,060
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Construction in progress
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29,436
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34,877
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1,008,291
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998,865
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Less accumulated depreciation
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(446,943
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)
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(430,163
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$
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561,348
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$
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568,702
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Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy under GAAP gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value (Level 1). If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly (Level 2). If quoted prices for identical or similar assets are not available or are unobservable, we may use internally developed valuation models, whose inputs include bid prices, and third-party valuations utilizing underlying asset assumptions (Level 3).
Financial Instruments
Our financial instruments are cash and cash equivalents, accounts receivable, accounts payable, long-term debt, and interest rate swaps. Our cash is recorded at cost, which approximates fair value, and our cash equivalents are money market funds. As of
March 31, 2017
, and
December 31, 2016
, we held
$16.0 million
and
$78.1 million
, respectively, in money market funds that are measured at fair value on a recurring basis using Level 1 inputs. The recorded values of accounts receivable and accounts payable approximate fair values based on their short-term nature. At
March 31, 2017
, and
December 31, 2016
, the book value of our fixed-rate debt for each period was
$350.0 million
, and the fair value was estimated to be
$354.4 million
and
$347.4 million
, respectively. The difference between the book value and the fair value is derived from the difference between the period-end market interest rate and the stated rate of our fixed-rate, long-term debt. We estimated the fair value of our fixed-rate debt using quoted market prices of our debt in inactive markets (Level 2 inputs). The interest rate on our term loans is based on market conditions such as the London Interbank Offered Rate (LIBOR) or a base rate. Because the interest rate on the term loans is based on current market conditions, we believe that the estimated fair value of the outstanding balance on our term loans approximates book value. As discussed below, we also have interest rate swaps to mitigate our variable interest rate exposure, the fair value of which is measured based on Level 2 inputs.
Interest Rate Risk and Interest Rate Swaps
We are exposed to interest rate risk arising from fluctuations in variable-rate LIBOR on our term loans and when we have loan amounts outstanding on our revolving credit facility. Our objective is to limit the variability of interest payments on our debt. To meet this objective, in 2016 we entered into receive-variable, pay-fixed interest rate swaps to change the variable-rate cash flow exposure to fixed-rate cash flows. In accordance with our risk management strategy, we actively monitor our interest rate exposure and use derivative instruments from time to time to manage the related risk.
On February 16, 2016, and March 31, 2016, we entered into interest rate swap agreements with notional principal amounts of
$50.0 million
and
$75.0 million
, respectively, to offset risks associated with the variability in cash flows relating to interest payments that are based on one-month LIBOR. We do not speculate using derivative instruments. At
March 31, 2017
, and
December 31, 2016
, the notional principal amount of our interest rate swap agreements exceeded the
$95.0 million
of variable-rate debt outstanding after paying down
$30.0 million
of variable rate debt on our term loan in December 2016. The excess notional principal amount of our interest rate swaps over our variable-rate debt is within our management strategy as we expect to partially fund seasonal and intra-month working capital requirements in 2017 from borrowings under our revolving credit facility.
Under the interest rate swaps, we receive LIBOR-based variable interest rate payments and make fixed interest rate payments, thereby fixing the interest rate on
$125.0 million
of debt. Payments on the interest rate swaps with notional principal amounts of
$50.0 million
and
$75.0 million
are due on a monthly basis at a fixed rate of
1.007%
and
1.256%
, respectively, and expire in February 2022 and March 2022, respectively. The interest rate swap agreements were not designated as cash flow hedges, and as a result, all changes in the fair value are recognized in "Change in fair value of interest rate swaps" in the Consolidated Statements of Operations rather than through other comprehensive income. At
March 31, 2017
, and
December 31, 2016
, we recorded long-term assets of
$4.5 million
and
$4.2 million
, respectively, in "Other assets" on our Consolidated Balance Sheets, representing the fair value of the interest rate swap agreements. The swaps were valued based on observable inputs for similar assets and liabilities and other observable inputs for interest rates and yield curves (Level 2 inputs).
Concentration of Credit Risk
We are exposed to credit risk related to customer accounts receivable. In order to manage credit risk, we consider customer concentrations and current economic trends and monitor the creditworthiness of significant customers based on
ongoing credit evaluations. At
March 31, 2017
, receivables from two customers accounted for approximately
10%
and
13%
, respectively, of total receivables. At
December 31, 2016
, receivables from two customers accounted for approximately
11%
and
12%
, respectively, of total receivables. No other customer accounted for 10% or more of total receivables.
New and Recently Adopted Accounting Standards
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07
, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost
. This ASU requires entities to present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. The other components of net period benefit cost must be presented elsewhere in the income statement and outside of income from operations if that subtotal is presented. Entities will have to disclose the line(s) used to present the other components of net periodic benefit cost if the components are not presented separately in the income statement. The guidance on the income statement presentation of the components of net periodic benefit cost must be applied retrospectively. This new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within that reporting period. We are currently evaluating the effect of this ASU on our financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU is intended to simplify the accounting for goodwill impairment by removing the requirement to perform a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. This new standard will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted after January 1, 2017. We adopted this standard in first quarter of 2017 and it did not have a material effect on our financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
. This ASU is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This new standard is effective for annual periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. We are evaluating the effect that this guidance will have on our consolidated statements of cash flows.
In March 2016, the FASB issued ASU 2016-09,
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted this standard in the first quarter of 2017, under the modified retrospective method, with the cumulative effect of adoption recorded as an adjustment to 2017 beginning retained earnings. The new standard results in excess tax benefits and deficiencies on share-based transactions being recorded as income tax expense or benefit rather than in additional-paid-in-capital. In addition, excess tax benefits on share-based payments are now classified in the operating section of our consolidated statement of cash flows. Furthermore, we recorded an adjustment to beginning retained earnings of approximately
$0.1 million
as we have made an election to account for share-based award forfeitures as they occur, rather than making estimates of future forfeitures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. This amendment requires a lessee to recognize substantially all leases (whether operating or finance leases) on the balance sheet as a right-of-use asset and an associated lease liability. Short-term leases of 12 months or less are excluded from this amendment. For leases defined as finance leases under the new standard, the lessee subsequently recognizes interest expense and amortization of the right-of-use asset, similar to accounting for capital leases under current GAAP. For leases defined as operating leases under the new standard, the lessee subsequently recognizes straight-line lease expense over the life of the lease. This new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The guidance is to be applied using a modified retrospective transition method with the option to elect a package of practical expedients. The adoption of this ASU will result in a significant increase to our balance sheet for lease liabilities and right-of-use assets, which has not yet been quantified. We are currently evaluating this and the other effects of this ASU on our financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. This ASU requires entities to measure most inventory "at the lower of cost or net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard is effective for annual
and interim reporting periods beginning after December 15, 2016. The adoption of this standard in first quarter of 2017 did not have a material effect on our financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance also requires additional disclosure to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. Furthermore, numerous updates were issued in 2016 that provide clarification on a number of specific issues. The new standard is effective for annual and interim reporting periods beginning after December 15, 2017 and we currently anticipate adopting it effective January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. We are still evaluating the transition method we will elect upon implementation. As a result of our preliminary assessment, we do not anticipate a material impact on the revenue recognition practices of our Building Materials Distribution segment. We have not yet completed our preliminary assessment of the revenue recognition practices of our Wood Products segment. We continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact our current conclusions.
There were no other accounting standards recently issued that had or are expected to have a material impact on our consolidated financial statements and associated disclosures.
For the
three
months ended
March 31, 2017
and
2016
, we recorded
$5.1 million
and
$2.9 million
, respectively, of income tax expense and had an effective rate of
33.6%
and
37.2%
, respectively. During the
three
months ended
March 31, 2017
, the primary reason for the difference between the federal statutory income tax rate of
35%
and the effective tax rate was the effect of excess tax benefits of vested share-based payment awards, offset partially by state taxes. During the
three
months ended
March 31, 2016
, the primary reason for the difference between the federal statutory income tax rate of
35%
and the effective tax rate was the effect of state taxes, offset partially by other tax credits.
During the
three
months ended
March 31, 2017
, cash paid for taxes, net of refunds received, was
$0.1 million
. During the
three
months ended
March 31, 2016
, refunds received, net of cash paid for taxes, were
$9.4 million
.
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4.
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Net Income Per Common Share
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Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Weighted average common shares outstanding for the basic net income per common share calculation includes certain vested restricted stock units (RSUs) as there are no conditions under which those shares will not be issued. Diluted net income per common share is computed by dividing net income by the combination of other potentially dilutive weighted average common shares and the weighted average number of common shares outstanding during the period. Other potentially dilutive weighted average common shares include the dilutive effect of stock options, RSUs, and performance stock units (PSUs) for each period using the treasury stock method. Under the treasury stock method, the exercise price of a share and the amount of compensation expense, if any, for future service that has not yet been recognized are assumed to be used to repurchase shares in the current period.
The following table sets forth the computation of basic and diluted net income per common share:
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Three Months Ended
March 31
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2017
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2016
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(thousands, except per-share data)
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Net income
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$
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10,020
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$
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4,950
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Weighted average common shares outstanding during the period (for basic calculation)
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38,500
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38,853
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Dilutive effect of other potential common shares
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401
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27
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Weighted average common shares and potential common shares (for diluted calculation)
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38,901
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38,880
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Net income per common share - Basic
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$
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0.26
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$
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0.13
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Net income per common share - Diluted
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$
|
0.26
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$
|
0.13
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The computation of the dilutive effect of other potential common shares excludes stock awards representing
0.2 million
shares and
0.4 million
shares of common stock, respectively, in the
three
months ended
March 31, 2017
and
2016
. Under the treasury stock method, the inclusion of these stock awards would have been antidilutive.
On March 31, 2016, our wholly owned subsidiary, Boise Cascade Wood Products, L.L.C., completed the acquisition of Georgia-Pacific LLC's and certain of its affiliates' (collectively, "GP") EWP facilities located in Thorsby, Alabama, and Roxboro, North Carolina, for an aggregate purchase price of
$215.9 million
, including a post-closing adjustment of
$0.3 million
based upon a working capital target (the Acquisition). Acquisition-related costs of
$3.5 million
are recorded in "General and administrative expenses" in our Consolidated Statements of Operations for the three months ended March 31, 2016.
The following pro forma financial information gives effect to the Acquisition as if it had occurred on January 1, 2015. The pro forma financial information also gives effect to the issuance of a
$75.0 million
term loan due March 30, 2026 and a
$55.0 million
draw under our revolving credit facility incurred to partially finance the Acquisition, as if such transactions had occurred on January 1, 2015. The pro forma results are intended for informational purposes only and do not purport to represent what our results of operations would actually have been had the Acquisition and related financing transactions occurred on January 1, 2015. They also do not reflect any revenue enhancements or cost savings, operating synergies, customer attrition, or incremental depreciation upon the restart of laminated veneer lumber assets at Roxboro.
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Pro Forma
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Three Months Ended
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March 31, 2016
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(unaudited, thousands, except per-share data)
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Sales
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$
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907,989
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Net income (a)
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$
|
8,020
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Net income per common share - Basic and Diluted
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$
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0.21
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___________________________________
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(a)
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The pro forma financial information for the
three
months ended
March 31, 2016
, was adjusted to exclude
$3.5 million
of pre-tax acquisition-related costs for legal, accounting, and other advisory-related services.
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Long-term debt consisted of the following:
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March 31,
2017
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December 31,
2016
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(thousands)
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Asset-based revolving credit facility
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$
|
—
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$
|
—
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|
Asset-based credit facility term loan
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50,000
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|
50,000
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Term loan
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45,000
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|
45,000
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5.625% senior notes due 2024
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350,000
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|
350,000
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Deferred financing costs
|
(7,099
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)
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|
(7,371
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)
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Long-term debt
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$
|
437,901
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|
|
$
|
437,629
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Asset-Based Credit Facility
On May 15, 2015, Boise Cascade and its principal operating subsidiaries, Boise Cascade Wood Products, L.L.C., and Boise Cascade Building Materials Distribution, L.L.C., as borrowers, and Boise Cascade Wood Products Holdings Corp., Chester Wood Products LLC, and Moncure Plywood LLC, as guarantors, entered into an Amended and Restated Credit Agreement, as amended, (Amended Agreement) with Wells Fargo Capital Finance, LLC, as administrative agent, and the banks named therein as lenders. The Amended Agreement includes a
$370 million
senior secured asset-based revolving credit facility (Revolving Credit Facility) maturing on April 30, 2020 and a
$50.0 million
term loan (ABL Term Loan) maturing on May 1, 2022. Interest on borrowings under our Revolving Credit Facility and ABL Term Loan are payable monthly. Borrowings under the Amended Agreement are constrained by a borrowing base formula dependent upon levels of eligible receivables and inventory reduced by outstanding borrowings and letters of credit (Availability).
The Amended Agreement is secured by a first-priority security interest in substantially all of our assets, except for property and equipment. The proceeds of borrowings under the agreement are available for working capital and other general corporate purposes.
The Amended Agreement contains customary nonfinancial covenants, including a negative pledge covenant and restrictions on new indebtedness, investments, distributions to equity holders, asset sales, and affiliate transactions, the scope of which are dependent on the Availability existing from time to time. The Amended Agreement also contains a requirement that we meet a
1
:1 fixed-charge coverage ratio (FCCR), applicable only if Availability falls below
10%
of the aggregate revolving lending commitments (or
$37 million
). Availability exceeded the minimum threshold amounts required for testing of the FCCR at all times since entering into the Amended Agreement, and Availability at
March 31, 2017
, was
$364.0 million
.
The Amended Agreement generally permits dividends only if certain conditions are met, including complying with either (i) pro forma Excess Availability (as defined in the Amended Agreement) equal to or exceeding
25%
of the aggregate Revolver Commitments (as defined in the Amended Agreement) 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.
Revolving Credit Facility
Interest rates under the Revolving Credit Facility are based, at our election, on either LIBOR or a base rate, as defined in the Amended Agreement, plus a spread over the index elected that ranges from
1.25%
to
1.75%
for loans based on LIBOR and from
0.25%
to
0.75%
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.
At both
March 31, 2017
, and
December 31, 2016
, we had
no
borrowings outstanding under the Revolving Credit Facility and
$6.0 million
and
$5.9 million
, respectively, of letters of credit outstanding. These letters of credit and borrowings, if any, reduce Availability under the Revolving Credit Facility by an equivalent amount. During the
three
months ended
March 31, 2017
, the minimum and maximum borrowings under the Revolving Credit Facility were
zero
and
$74.7 million
, respectively, and the average interest rate on borrowings was approximately
2.10%
.
ABL Term Loan
The ABL Term Loan was provided by institutions within the Farm Credit system. Borrowings under the ABL Term Loan may be repaid from time to time at the discretion of the borrowers without premium or penalty. However, any principal amount of ABL Term Loan repaid may not be subsequently re-borrowed.
Interest rates under the ABL Term Loan are based, at our election, on either LIBOR or a base rate, as defined in the Amended Agreement, plus a spread over the index elected that ranges from
1.75%
to
2.25%
for LIBOR rate loans and from
0.75%
to
1.25%
for base rate loans, both dependent on the amount of Average Excess Availability (as defined in the Amended Agreement). During the
three
months ended
March 31, 2017
, the average interest rate on the ABL Term Loan was approximately
2.54%
.
We have received and expect to continue receiving patronage credits under the ABL Term Loan. Patronage credits are distributions of profits from banks in the Farm Credit system, which are cooperatives that are required to distribute profits to their members. Patronage distributions, which are generally made in cash, are received in the year after they are earned. Patronage credits are recorded as a reduction to interest expense in the year earned. After giving effect to expected patronage distributions, the effective average net interest rate on the ABL Term Loan was approximately
1.8%
.
Term Loan
On March 30, 2016 (Closing Date), Boise Cascade and its principal operating subsidiaries, Boise Cascade Wood Products, L.L.C., and Boise Cascade Building Materials Distribution, L.L.C., as borrowers, and the guarantors party thereto, entered into a term loan agreement, as amended, (Term Loan Agreement) with American AgCredit, PCA, as administrative agent and sole lead arranger, and the banks in the Farm Credit system named therein as lenders. The Term Loan Agreement was for a
$75.0 million
secured term loan (Term Loan). The outstanding principal balance of the Term Loan amortizes and is payable in equal installments of
$10 million
per year on each of the sixth, seventh, eighth, and ninth anniversaries of the Closing Date, with the remaining principal balance due and payable on March 30, 2026. In December 2016, we prepaid
$30 million
of the Term Loan, which became available to reborrow as discussed below. This prepayment satisfied our principal obligations due on the sixth, seventh, and eighth anniversaries of the Closing Date. Interest on our Term Loan is payable monthly.
The Term Loan Agreement allows us to prepay the Term Loan and subsequently reborrow amounts prepaid on or before December 31, 2018. The option to reborrow applicable prepaid principal amounts expires on December 31, 2019. Reborrowings may be made in up to
three
instances in minimum amounts of
$10 million
each. In addition, amounts prepaid and eligible for reborrowing are subject to an unused line fee of
0.325%
per annum times the average daily amount of the unused commitments.
Pursuant to the Term Loan Agreement, the borrowers are required to maintain, as of the end of any fiscal quarter, a Capitalization Ratio lower than
60%
, a Consolidated Net Worth greater than
$350 million
, and Available Liquidity greater than
$100 million
(each as defined in the Term Loan Agreement). In addition, under the Term Loan Agreement, and subject to certain exceptions, the borrowers may not, among other things, (i) incur indebtedness, (ii) incur liens, (iii) make junior payments, (iv) make certain investments, and (v) under certain circumstances, make capital expenditures in excess of
$50 million
during four consecutive quarters. The Term Loan Agreement also includes customary representations of the borrowers and provides for certain events of default customary for similar facilities.
Interest rates under the Term Loan Agreement are based, at our election, on either the LIBOR or a base rate, as defined in the Term Loan Agreement, plus a spread over the index. The applicable spread for the Term Loan ranges from
1.875%
to
2.125%
for LIBOR rate loans, and
0.875%
to
1.125%
for base rate loans, both dependent on our Interest Coverage Ratio (as defined in the Term Loan Agreement). During the period for which the Term Loan was outstanding, the average interest rate on the Term Loan was approximately
2.65%
. We have received and expect to continue receiving patronage credits under the Term Loan. After giving effect to expected patronage distributions, the effective average net interest rate on the Term Loan was approximately
1.9%
.
The Term Loan is secured by a first priority mortgage on our Thorsby, Alabama, and Roxboro, North Carolina, EWP facilities and a first priority security interest on the equipment and certain tangible personal property located therein.
2024 Notes
On August 29, 2016, Boise Cascade issued
$350 million
of
5.625%
senior notes due September 1, 2024 (2024 Notes) through a private placement that was exempt from the registration requirements of the Securities Act. Interest on our 2024 Notes is payable semiannually in arrears on March 1 and September 1. The 2024 Notes are guaranteed by each of our existing and future direct or indirect domestic subsidiaries that is a guarantor under our Amended Agreement.
The 2024 Notes are senior unsecured obligations and rank equally with all of the existing and future senior indebtedness of Boise Cascade Company and of the guarantors, senior to all of their existing and future subordinated indebtedness, effectively subordinated to all of their present and future senior secured indebtedness (including all borrowings with respect to our Amended Agreement to the extent of the value of the assets securing such indebtedness), and structurally subordinated to the indebtedness of any subsidiaries that do not guarantee the 2024 Notes.
The terms of the indenture governing the 2024 Notes, among other things, limit the ability of Boise Cascade and our restricted subsidiaries to: incur additional debt; declare or pay dividends; redeem stock or make other distributions to stockholders; make investments; create liens on assets; consolidate, merge or transfer substantially all of their assets; enter into transactions with affiliates; and sell or transfer certain assets.
The indenture governing the 2024 Notes provides for customary events of default and remedies.
Interest Rate Swaps
For information on interest rate swaps, see Interest Rate Risk and Interest Rate Swaps of Note 2, Summary of Significant Accounting Policies.
Cash Paid for Interest
For the
three
months ended
March 31, 2017
and
2016
, cash payments for interest were
$10.8 million
and
$0.6 million
, respectively.
7. Retirement and Benefit Plans
The following table presents the pension benefit costs:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2017
|
|
2016
|
|
(thousands)
|
Service cost
|
$
|
301
|
|
|
$
|
285
|
|
Interest cost
|
4,376
|
|
|
4,782
|
|
Expected return on plan assets
|
(4,740
|
)
|
|
(5,103
|
)
|
Amortization of actuarial loss
|
395
|
|
|
478
|
|
Plan settlement loss
|
—
|
|
|
297
|
|
Net periodic benefit expense
|
$
|
332
|
|
|
$
|
739
|
|
During the
three
months ended
March 31, 2017
, we contributed
$0.6 million
in cash to the pension plans. For the remainder of
2017
, we expect to make approximately
$1.6 million
in additional cash contributions to the pension plans.
|
|
8.
|
Stock-Based Compensation
|
In February 2017 and 2016, we granted
two
types of stock-based awards under our incentive plans: performance stock units (PSUs) and restricted stock units (RSUs).
PSU and RSU Awards
During the
three
months ended
March 31, 2017
, we granted
178,021
PSUs to our officers and other employees, subject to performance and service conditions. For the officers, the number of shares actually awarded will range from
0%
and
200%
of the target amount, depending upon Boise Cascade's 2017 return on invested capital (ROIC), determined in accordance with the related grant agreement. For the other employees, the number of shares actually awarded will range from
0%
to
200%
of the target amount, depending upon Boise Cascade’s 2017 EBITDA, defined as income before interest (interest expense and interest income), income taxes, and depreciation and amortization, determined in accordance with the related grant agreement. Because the ROIC and EBITDA components contain a performance condition, we record compensation expense over the requisite service period based on the most probable number of shares expected to vest.
During the
three
months ended
March 31, 2016
, we granted
418,344
PSUs to our officers and other employees, subject to performance and service conditions. During the 2016 performance period, officers and other employees earned
97%
and
104%
, respectively, of the target based on Boise Cascade’s 2016 ROIC and EBITDA, determined by our Compensation Committee in accordance with the related grant agreement.
During the
three
months ended
March 31, 2017
and
2016
, we granted an aggregate of
208,888
and
327,993
RSUs, respectively, to our officers, other employees, and nonemployee directors with only service conditions.
The PSUs granted to officers in
2017
, if earned, generally vest over a
three
year period from the date of grant, while the PSUs granted to other employees vest in
three
equal tranches each year after the grant date. All PSU grants are subject to final determination of meeting the performance condition by the Compensation Committee of our board of directors. The RSUs granted to officers and other employees vest in
three
equal tranches each year after the grant date. The RSUs granted to nonemployee directors vest over a
one
-year period.
We based the fair value of PSU and RSU awards on the closing market price of our common stock on the grant date. During the
three
months ended
March 31, 2017
and
2016
, the total fair value of PSUs and RSUs vested was
$7.9 million
and
$1.8 million
, respectively.
The following summarizes the activity of our PSUs and RSUs awarded under our incentive plan for the
three
months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSUs
|
|
RSUs
|
|
Number of shares
|
|
Weighted Average Grant-Date Fair Value
|
|
Number of shares
|
|
Weighted Average Grant-Date Fair Value
|
Outstanding, December 31, 2016
|
448,500
|
|
|
$
|
18.16
|
|
|
387,287
|
|
|
$
|
19.73
|
|
Granted
|
178,021
|
|
|
27.05
|
|
|
208,888
|
|
|
27.05
|
|
Performance condition adjustment (a)
|
5,175
|
|
|
16.56
|
|
|
—
|
|
|
—
|
|
Vested
|
(109,755
|
)
|
|
19.83
|
|
|
(172,746
|
)
|
|
20.07
|
|
Forfeited (b)
|
(8,457
|
)
|
|
16.56
|
|
|
—
|
|
|
—
|
|
Outstanding, March 31, 2017
|
513,484
|
|
|
$
|
20.89
|
|
|
423,429
|
|
|
$
|
23.20
|
|
__________________
|
|
(a)
|
Amount represents additional PSU's earned during the
three
months ended
March 31, 2017
based on the performance condition adjustment, as other employees earned
104%
of the target based Boise Cascade's 2016 EBITDA.
|
|
|
(b)
|
Total PSUs forfeited during the
three
months ended
March 31, 2017
reflects
8,457
shares related to the performance condition adjustment, as officers earned
97%
of the target based on Boise Cascade’s 2016 ROIC.
|
Compensation Expense
We record compensation expense over the awards' vesting period and account for share-based award forfeitures as they occur, rather than making estimates of future forfeitures. Any shares not vested are forfeited. We recognize stock awards with only service conditions on a straight-line basis over the requisite service period. Most of our share-based compensation expense was recorded in "General and administrative expenses" in our Consolidated Statements of Operations. Total stock-based compensation recognized from PSUs, RSUs, and stock options net of forfeitures, was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2017
|
|
2016
|
|
(thousands)
|
PSUs
|
$
|
921
|
|
|
$
|
706
|
|
RSUs
|
1,081
|
|
|
906
|
|
Stock options
|
—
|
|
|
81
|
|
Total
|
$
|
2,002
|
|
|
$
|
1,693
|
|
The related tax benefit for the
three
months ended
March 31, 2017
and
2016
, was
$0.8 million
and
$0.6 million
, respectively. As of
March 31, 2017
, total unrecognized compensation expense related to nonvested share-based compensation arrangements was
$17.5 million
. This expense is expected to be recognized over a weighted-average period of
2.2
years.
9. Stockholders' Equity
Stock Repurchase
On February 25, 2015, our Board of Directors (Board) authorized a
two million
share repurchase program (Program) pursuant to which we may, from time to time, purchase shares of our common stock through various means including, without limitation, open market transactions, privately negotiated transactions, or accelerated share repurchase transactions. We are not obligated to purchase any shares and there is no set date that the Program will expire. The Board may increase or decrease the number of shares under the Program or terminate the Program in its discretion at any time. We did not repurchase any shares under the Program during the
three
months ended
March 31, 2017
. We repurchased
180,100
shares under the Program at a cost of
$2.6 million
, or an average of
$14.62
per share, during the
three
months ended
March 31, 2016
. The shares were purchased with cash on hand and are recorded as "Treasury stock" on our Consolidated Balance Sheet. As of
March 31, 2017
, there were
696,989
shares of common stock that may yet be purchased under the Program.
Accumulated Other Comprehensive Loss
The following table details the changes in accumulated other comprehensive loss for the
three
months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2017
|
|
2016
|
|
(thousands)
|
Beginning Balance, net of taxes
|
$
|
(83,012
|
)
|
|
$
|
(93,015
|
)
|
Amortization of actuarial loss, before taxes (a)
|
395
|
|
|
478
|
|
Effect of settlements, before taxes (a)
|
—
|
|
|
297
|
|
Income taxes
|
(152
|
)
|
|
(298
|
)
|
Ending Balance, net of taxes
|
$
|
(82,769
|
)
|
|
$
|
(92,538
|
)
|
___________________________________
|
|
(a)
|
Represents amounts reclassified from accumulated other comprehensive loss. These amounts are included in the computation of net periodic pension cost. For additional information, see Note 7, Retirement and Benefit Plans.
|
|
|
10.
|
Transactions With Related Party
|
Louisiana Timber Procurement Company, L.L.C. (LTP) is an unconsolidated variable-interest entity that is
50%
owned by us and
50%
owned by Packaging Corporation of America (PCA). LTP procures sawtimber, pulpwood, residual chips, and other residual wood fiber to meet the wood and fiber requirements of us and PCA in Louisiana. We are not the primary beneficiary of LTP as we do not have power to direct the activities that most significantly affect the economic performance of LTP. Accordingly, we do not consolidate LTP's results in our financial statements.
Sales
Related-party sales to LTP from our Wood Products segment in our Consolidated Statements of Operations were
$5.0 million
and
$4.7 million
, respectively, during the
three
months ended
March 31, 2017
and
2016
. These sales are recorded in "Sales" in our Consolidated Statements of Operations.
Costs and Expenses
Related-party wood fiber purchases from LTP were
$21.9 million
and
$21.5 million
, respectively, during the
three
months ended
March 31, 2017
and
2016
. These costs are recorded in "Materials, labor, and other operating expenses (excluding depreciation)" in our Consolidated Statements of Operations.
As of January 1, 2017, we operate our business using
two
reportable segments: Wood Products and Building Materials Distribution. Prior to January 1, 2017, we operated our business using
three
reportable segments: Wood Products, Building Materials Distribution, and Corporate and Other. This change is based on Corporate and Other no longer earning revenue as of January 1, 2017 and thus no longer meeting the definition of a reportable segment. Corporate and Other results are now presented as reconciling items to arrive at total net sales and operating income. Corresponding information for the
three
months ended
March 31, 2016
has been revised to conform with current presentation. There are no other differences in our basis of measurement of segment profit or loss from those disclosed in Note 14, Segment Information, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our
2016
Form 10-K.
An analysis of our operations by segment is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2017
|
|
2016
|
|
(thousands)
|
Net sales by segment
|
|
|
|
Wood Products
|
$
|
325,657
|
|
|
$
|
303,457
|
|
Building Materials Distribution
|
815,683
|
|
|
717,254
|
|
Intersegment eliminations and other (a)
|
(166,897
|
)
|
|
(140,016
|
)
|
Total net sales
|
$
|
974,443
|
|
|
$
|
880,695
|
|
|
|
|
|
Segment operating income
|
|
|
|
Wood Products
|
$
|
7,388
|
|
|
$
|
5,885
|
|
Building Materials Distribution
|
19,965
|
|
|
13,373
|
|
Total segment operating income
|
27,353
|
|
|
19,258
|
|
Unallocated corporate and other
|
(6,259
|
)
|
|
(5,853
|
)
|
Income from operations
|
$
|
21,094
|
|
|
$
|
13,405
|
|
___________________________________
|
|
(a)
|
Primarily represents intersegment sales from our Wood Products segment to our Building Materials Distribution segment.
|
12. Commitments, Legal Proceedings and Contingencies, and Guarantees
Commitments
We are a party to a number of long-term log supply agreements that are discussed in Note 15, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our
2016
Form 10-K. In addition, we have purchase obligations for goods and services, capital expenditures, and raw materials entered into in the normal course of business. As of
March 31, 2017
, there have been no material changes to the above commitments disclosed in the
2016
Form 10-K.
Legal Proceedings and Contingencies
We are a party to routine legal proceedings that arise in the ordinary course of our business, including commercial liability claims, premises claims, environmental claims, and employment-related claims, among others. As of the date of this filing, we believe it is not reasonably possible that any of the legal actions against us will, individually or in the aggregate, have a material adverse effect on our financial position, results of operations, or cash flows.
Guarantees
We provide guarantees, indemnifications, and assurances to others. Note 15, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our
2016
Form 10-K describes the nature of our guarantees, including the approximate terms of the guarantees, how the guarantees arose, the events or circumstances that would require us to perform under the guarantees, and the maximum potential undiscounted amounts of future payments we could be required to make. As of
March 31, 2017
, there have been no material changes to the guarantees disclosed in the
2016
Form 10-K.