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 primarily manufactures EWP and plywood, and (2) Building Materials Distribution, which is a wholesale distributor of building materials. For more information, see Note 12, Segment Information.
Consolidation
The accompanying quarterly consolidated financial statements have not been audited by an independent registered public accounting firm but, in the opinion of management, include all adjustments necessary to present fairly the financial position, results of operations, cash flows, and stockholders' equity for the interim periods presented. Except as disclosed within these condensed notes to unaudited quarterly consolidated financial statements, the adjustments made were of a normal, recurring nature. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The quarterly consolidated financial statements include the accounts of Boise Cascade and its subsidiaries after elimination of intercompany balances and transactions. Quarterly results are not necessarily indicative of results that may be expected for the full year. These condensed notes to unaudited quarterly consolidated financial statements should be read in conjunction with our
2018
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
2018
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; assumptions used in the determination of right-of-use assets and related lease liabilities; stock-based compensation; fair value measurements; income taxes; and vendor and customer rebates, among others. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For revenue disaggregated by major product line for each reportable segment, see Note 12, Segment Information.
Fees for shipping and handling charged to customers for sales transactions are included in "Sales." When control over products has transferred to the customer, we have elected to recognize costs related to shipping and handling as an expense. For our Wood Products segment, costs related to shipping and handling are included in "Materials, labor, and other operating expenses (excluding depreciation)." In our Wood Products segment, we view our shipping and handling costs as a cost of the manufacturing process and the movement of product to our end customers. For our Building Materials Distribution segment, costs related to shipping and handling of
$36.5 million
and
$33.6 million
, respectively, are included in "Selling and distribution expenses" for the
three
months ended
March 31, 2019
, and
2018
. In our Building Materials Distribution segment, our activities relate to the purchase and resale of finished product, and excluding shipping and handling costs from “Materials, labor, and other operating expenses (excluding depreciation)” provides us a clearer view of our operating performance and the effectiveness of our sales and purchasing functions.
Customer Rebates and Allowances
Rebates are provided to our customers and our customers' customers based on the volume of their purchases, among other factors such as customer loyalty, conversion, and commitment. We provide the rebates to increase the sell-through of our products. Rebates are generally estimated based on the expected amount to be paid and recorded as a decrease in "Sales." At
March 31, 2019
, and
December 31, 2018
, we had
$48.2 million
and
$52.1 million
, respectively, of rebates payable to our customers recorded in "Accrued liabilities, Other" on our Consolidated Balance Sheets.
Vendor Rebates and Allowances
We receive rebates and allowances from our vendors under a number of different programs, including vendor marketing programs. At
March 31, 2019
, and
December 31, 2018
, we had
$6.0 million
and
$9.7 million
, respectively, of vendor rebates and allowances recorded in "Receivables, Other" on our Consolidated Balance Sheets. Rebates and allowances received from our vendors are recognized as a reduction of "Materials, labor, and other operating expenses (excluding depreciation)" when the product is sold, unless the rebates and allowances are linked to a specific incremental cost to sell a vendor's product. Amounts received from vendors that are linked to specific selling and distribution expenses are recognized as a reduction of "Selling and distribution expenses" in the period the expense is incurred.
Inventories
Inventories included the following (work in process is not material):
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March 31,
2019
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December 31,
2018
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(thousands)
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Finished goods and work in process
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$
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487,954
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$
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441,774
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Logs
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48,019
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54,301
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Other raw materials and supplies
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37,887
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36,974
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$
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573,860
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$
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533,049
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Property and Equipment
Property and equipment consisted of the following asset classes:
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March 31,
2019
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December 31,
2018
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(thousands)
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Land
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$
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38,888
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$
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38,888
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Buildings (a)
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141,720
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164,878
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Improvements
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50,776
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49,509
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Mobile equipment, information technology, and office furniture
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150,935
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150,712
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Machinery and equipment
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639,994
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629,337
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Construction in progress
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29,797
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31,015
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1,052,110
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1,064,339
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Less accumulated depreciation
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(591,460
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)
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(577,115
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)
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$
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460,650
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$
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487,224
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___________________________________
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(a)
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As of
December 31, 2018
, capital lease assets were included in the "Buildings" asset class. For additional information related to leases, see Note 7, Leases.
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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, 2019
, and
December 31, 2018
, we held
$116.6 million
and
$160.4 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, 2019
, and
December 31, 2018
, the book value of our fixed-rate debt for each period was
$350.0 million
, and the fair value was estimated to be
$344.8 million
and
$328.1 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. At
March 31, 2019
, we had
$95.0 million
of variable-rate debt outstanding. 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, 2019
, and
December 31, 2018
, the notional principal amount of our interest rate swap agreements was
$95.0 million
after liquidating
$30.0 million
of the interest rate swap with original notional principal amount of
$75.0 million
in November 2018.
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
$95.0 million
of variable rate debt exposure. Payments on the interest rate swaps with notional principal amounts of
$50.0 million
and
$45.0 million
are due on a monthly basis at an annual 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, 2019
, and
December 31, 2018
, we recorded long-term assets of
$2.8 million
and
$3.8 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, 2019
, receivables from two customers accounted for approximately
12%
and
11%
, respectively, of total receivables. At
December 31, 2018
, receivables from two customers accounted for approximately
13%
and
11%
, respectively, of total receivables. No other customer accounted for 10% or more of total receivables.
New and Recently Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
. This ASU provides guidance on implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract. The guidance aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in such a CCA. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We currently do not expect the adoption of the guidance to have a material effect on our financial statements, but will continue to monitor the standard through the effective date.
In August 2018, the FASB issued ASU 2018-14,
Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
. This ASU amends ASC 715 to remove disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant related to defined benefit pension and other postretirement plans. The ASU's changes related to disclosures are part of the FASB's disclosure framework project. The updated guidance is effective retrospectively for annual reporting periods ending after December 15, 2020, with early adoption permitted. We are currently evaluating the effects of this ASU on our disclosures in the notes to our financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
. This ASU amends ASC 820 to remove disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant related to recurring and nonrecurring fair value measurements. The ASU's changes related to disclosures are part of the FASB's disclosure framework project. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We currently do not expect the adoption of the guidance to have a material effect on our financial statements, but will continue to monitor the standard through the effective date.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. This amendment requires a lessee to recognize a right-of-use (ROU) asset and an associated lease liability on the balance sheet for all leases (whether operating or finance leases) with a term longer than 12 months. For leases defined as finance leases under the new standard, the lessee subsequently recognizes interest expense and amortization of the ROU asset, similar to accounting for capital leases under the previous lease
standard. For leases defined as operating leases under the new standard, the lessee subsequently recognizes straight-line lease expense over the life of the lease. We adopted this standard effective January 1, 2019. The new lease standard had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated statements of operations or cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. See Note 7, Leases, for additional information on the impact of this standard on our accounting for leases and additional required qualitative disclosures of our lease policies.
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.
Reclassifications
Certain amounts in prior year's consolidated financial statements have been reclassified to conform with current year's presentation, none of which were considered material.
3. Income Taxes
For the
three
months ended
March 31, 2019
, and
2018
, we recorded
$3.2 million
and
$9.8 million
, respectively of income tax expense and had an effective rate of
21.9%
and
20.9%
, respectively. During the
three
months ended
March 31, 2019
, and
2018
, the primary reason for the difference between the federal statutory income tax rate of
21%
and the effective tax rate was the effect of state taxes, offset by excess tax benefits of vested share-based payment awards.
During the
three
months ended
March 31, 2019
and
2018
, refunds received, net of cash taxes paid were
$11.0 million
and
$12.0 million
, respectively.
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4.
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Net Income Per Common Share
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Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Weighted average common shares outstanding for the basic net income per common share calculation includes certain vested restricted stock units (RSUs) and performance stock units (PSUs) as there are no conditions under which those shares will not be issued. Diluted net income per common share is computed by dividing net income by the combination of the weighted average number of common shares outstanding during the period and other potentially dilutive weighted average common shares. Other potentially dilutive weighted average common shares include the dilutive effect of stock options, RSUs, and PSUs for each period using the treasury stock method. Under the treasury stock method, the exercise price of a share and the amount of compensation expense, if any, for future service that has not yet been recognized are assumed to be used to repurchase shares in the current period.
The following table sets forth the computation of basic and diluted net income per common share:
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Three Months Ended
March 31
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2019
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2018
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(thousands, except per-share data)
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Net income
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$
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11,389
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$
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37,050
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Weighted average common shares outstanding during the period (for basic calculation)
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38,884
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38,778
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Dilutive effect of other potential common shares
|
319
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|
618
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Weighted average common shares and potential common shares (for diluted calculation)
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39,203
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|
39,396
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Net income per common share - Basic
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$
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0.29
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$
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0.96
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Net income per common share - Diluted
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$
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0.29
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$
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0.94
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The computation of the dilutive effect of other potential common shares excludes stock awards representing
0.2
million and
no
shares of common stock, respectively, in the
three
months ended
March 31, 2019
and
2018
. Under the treasury stock method, the inclusion of these stock awards would have been antidilutive.
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5.
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Sale of Manufacturing Facility
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In December 2018, we committed to sell a hardwood plywood facility located in Moncure, North Carolina, and subsequently entered into a definitive sale agreement in January 2019 (the Sale). This facility generated net sales and operating loss of approximately
$5.5 million
and
$1.4 million
, respectively, during the
three
months ended
March 31, 2019
, and net sales and operating loss of approximately
$7.8 million
and
$1.2 million
, respectively, during the
three
months ended
March 31, 2018
. These results are included in the operating results of our Wood Products segment.
On March 1, 2019, we closed on the Sale and received proceeds of
$2.5 million
. The disposal group met the criteria to be classified as held for sale during fourth quarter 2018. Upon classification as held for sale, we discontinued depreciation of the long-lived assets, and performed an assessment of impairment to identify and expense any excess of carrying value over fair value less costs to sell. As a result, we recorded pre-tax impairment and sale-related losses of
$24.0 million
during fourth quarter 2018.
Long-term debt consisted of the following:
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March 31,
2019
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December 31,
2018
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(thousands)
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Asset-based revolving credit facility
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$
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—
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$
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—
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Asset-based credit facility term loan due 2022
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50,000
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50,000
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Term loan due 2026
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45,000
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|
45,000
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5.625% senior notes due 2024
|
350,000
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350,000
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Deferred financing costs
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(5,293
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)
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(5,572
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)
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Long-term debt
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$
|
439,707
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$
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439,428
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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., as guarantor, entered into an Amended and Restated Credit Agreement, as amended, (Amended Agreement) with Wells Fargo Capital Finance, LLC, as administrative agent, and the banks named therein as lenders. The Amended Agreement includes a
$370 million
senior secured asset-based revolving credit facility (Revolving Credit Facility) 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, 2019
, was
$365.4 million
.
The Amended Agreement permits us to pay dividends only if at the time of payment (i) no default has occurred or is continuing (or would result from such payment) under the Amended Agreement, and (ii) pro forma Excess Availability (as defined in the Amended Agreement) is equal to or exceeds
25%
of the aggregate Revolver Commitments (as defined in the Amended Agreement) or (iii) (x) pro forma Excess Availability is equal to or exceeds
15%
of the aggregate Revolver Commitment and (y) our fixed-charge coverage ratio is greater than or equal to
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 of
0.25%
per annum of the average unused portion of the lending commitments.
At both
March 31, 2019
, and
December 31, 2018
, we had
no
borrowings outstanding under the Revolving Credit Facility and
$4.6 million
of letters of credit outstanding. These letters of credit and borrowings, if any, reduce Availability under the Revolving Credit Facility by an equivalent amount.
ABL Term Loan
The ABL Term Loan was provided by institutions within the Farm Credit system. Borrowings under the ABL Term Loan may be repaid from time to time at the discretion of the borrowers without premium or penalty. However, any principal amount of ABL Term Loan repaid may not be subsequently re-borrowed.
Interest rates under the ABL Term Loan are based, at our election, on either LIBOR or a base rate, as defined in the Amended Agreement, plus a spread over the index elected that ranges from
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, 2019
, the average interest rate on the ABL Term Loan was approximately
4.24%
.
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
3.2%
during the
three
months ended
March 31, 2019
.
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 other 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. Interest on our Term Loan is payable monthly.
In December 2016, we prepaid
$30 million
of the Term Loan, which became available to reborrow. In November 2018, we terminated the ability to reborrow this prepaid Term Loan. Amounts prepaid and eligible for reborrowing were subject to an unused line fee of
0.325%
per annum times the average daily amount of the unused commitments. This prepayment of
$30 million
satisfied our principal obligations due on the sixth, seventh, and eighth anniversaries of the Closing Date.
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.
The Term Loan Agreement permits us to pay dividends only if at the time of payment (i) no default has occurred or is continuing (or would result from such payment) under the Term Loan Agreement, and (ii) our interest coverage ratio is greater than or equal to
3
:1 at such time or (iii) our fixed-charge coverage ratio is greater than or equal to
1
:1.
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
three
months ended
March 31, 2019
, the average interest rate on the Term Loan was approximately
4.38%
. 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
3.4%
.
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, permits us to pay dividends only if at the time of payment (i) no default has occurred or is continuing (or would result from such payment) under the indenture, and (ii) our consolidated leverage ratio is no greater than
3.5
:1, or (iii) the dividend, together with other dividends since the issue date, would not exceed our "builder" basket under the indenture. In addition, the indenture includes certain specific baskets for the payment of dividends.
The indenture governing the 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, 2019
and
2018
, cash payments for interest were
$10.8 million
and
$10.7 million
, respectively.
7. Leases
Adoption of ASC Topic 842, "Leases"
On January 1, 2019, we adopted Topic 842 using the modified retrospective transition method and used the effective date as our date of initial application. Consequently, leases for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840.
The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs. We did not elect the use-of-hindsight practical expedient.
We recorded additional lease liabilities for operating leases of
$72.4
million, with an offsetting increase to ROU assets of approximately
$69.2
million as of January 1, 2019, substantially all of which are real estate leases. The difference between these amounts is related to the reclassification of accrued straight-line rent upon adoption. Capital leases were also reclassified from "Property and equipment, net" to "Finance lease right-of-use assets" and from "Other long-term liabilities" to "Finance lease liabilities" on our consolidated balance sheet. The standard did not have a material impact on our consolidated net earnings and cash flows. There was
no
cumulative effect adjustment recorded to opening retained earnings as of January 1, 2019, upon adoption of Topic 842.
The effect of the changes made to our consolidated balance sheet as of January 1, 2019, for the adoption of the new lease standard was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
Adjustments Due to ASC 842
|
|
Balance at
January 1, 2019
|
|
|
(thousands)
|
|
ASSETS
|
|
|
|
|
|
|
Property and equipment, net
|
$
|
487,224
|
|
|
$
|
(21,732
|
)
|
|
$
|
465,492
|
|
|
Operating lease right-of-use assets
|
—
|
|
|
69,155
|
|
|
69,155
|
|
|
Finance lease right-of-use assets
|
—
|
|
|
20,872
|
|
|
20,872
|
|
|
Prepaid expenses and other
|
31,818
|
|
|
(246
|
)
|
|
31,572
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Accrued liabilities, other
|
63,509
|
|
|
8,863
|
|
|
72,372
|
|
|
Operating lease liabilities, net of current portion
|
—
|
|
|
63,498
|
|
|
63,498
|
|
|
Finance lease liabilities, net of current portion
|
—
|
|
|
21,921
|
|
|
21,921
|
|
|
Other long-term liabilities
|
38,904
|
|
|
(26,233
|
)
|
|
12,671
|
|
In accordance with the new lease standard requirements, the disclosure of the impact of adoption on our consolidated balance sheet was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
As Reported
|
|
Balances Without Adoption of
ASC 842
|
|
Effect of Change Higher/(Lower)
|
|
|
(thousands)
|
|
ASSETS
|
|
|
|
|
|
|
Property and equipment, net
|
$
|
460,650
|
|
|
$
|
481,873
|
|
|
$
|
(21,223
|
)
|
|
Operating lease right-of-use assets
|
67,493
|
|
|
—
|
|
|
67,493
|
|
|
Finance lease right-of-use assets
|
20,376
|
|
|
—
|
|
|
20,376
|
|
|
Prepaid expenses and other
|
19,109
|
|
|
19,355
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Accrued liabilities, other
|
70,298
|
|
|
61,460
|
|
|
8,838
|
|
|
Operating lease liabilities, net of current portion
|
61,902
|
|
|
—
|
|
|
61,902
|
|
|
Finance lease liabilities, net of current portion
|
21,687
|
|
|
—
|
|
|
21,687
|
|
|
Other long-term liabilities
|
14,091
|
|
|
40,118
|
|
|
(26,027
|
)
|
Leases
We primarily lease land, building, and equipment under operating and finance leases. We determine if an arrangement is a lease at inception and assess lease classification as either operating or finance at lease inception or upon modification. Substantially all of our leases with initial terms greater than
one
year are for real estate, including distribution centers, corporate headquarters, land, and other office space. Substantially all of these lease agreements have fixed payment terms based on the passage of time and are recorded in our Building Materials Distribution segment. Many of our leases include fixed escalation clauses, renewal options and/or termination options that are factored into our determination of lease term and lease payments when appropriate. Renewal options generally range from
one
to
ten
years with fixed payment terms similar to those in the
original lease agreements. Some lease agreements provide us with the option to purchase the leased property at market value. Our lease agreements do not contain any residual value guarantees.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of fixed lease payments over the lease term. The current portion of our operating and finance lease liabilities are recorded in "Accrued liabilities, Other" on our Consolidated Balance Sheets.
We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. In determining our incremental borrowing rates, we give consideration to publicly available interest rates for instruments with similar characteristics.
For purposes of determining straight-line rent expense, the lease term is calculated from the date we first take possession of the facility, including any periods of free rent and any renewal option periods we are reasonably certain of exercising. Variable lease expense generally includes reimbursement of actual costs for common area maintenance, property taxes, and insurance on leased real estate and are recorded as incurred.
The new standard provides practical expedients for an entity’s ongoing accounting. We elected the practical expedient to not separate lease and non-lease components for all of our leases. We also elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases in transition. Our short-term leases primarily include equipment rentals with lease terms on a month-to-month basis, which provide for our seasonal needs and flexibility in the use of equipment. Our short-term leases also include certain real estate for which either party has the right to cancel upon providing notice of
30
to
90
days.
Lease Costs
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
|
(thousands)
|
|
|
|
|
Operating lease cost
|
$
|
3,341
|
|
|
Finance lease cost
|
|
|
Amortization of right-of-use assets
|
375
|
|
|
Interest on lease liabilities
|
461
|
|
|
Variable lease cost
|
619
|
|
|
Short-term lease cost
|
994
|
|
|
Sublease income
|
(132
|
)
|
|
Total lease cost
|
$
|
5,658
|
|
Other Information
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
|
(thousands)
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from operating leases
|
$
|
3,301
|
|
|
Operating cash flows from finance leases
|
461
|
|
|
Financing cash flows from finance leases
|
181
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
Operating leases
|
585
|
|
|
Finance leases
|
—
|
|
Other information related to leases was as follows:
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
|
Operating leases
|
9
|
|
|
Finance leases
|
16
|
|
|
Weighted-average discount rate
|
|
|
Operating leases (a)
|
6.5
|
%
|
|
Finance leases
|
8.8
|
%
|
___________________________________
(a) Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.
As of
March 31, 2019
, our minimum lease payment requirements for noncancelable operating and finance leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
|
|
(thousands)
|
|
Remainder of 2019
|
|
$
|
9,859
|
|
|
$
|
1,937
|
|
|
2020
|
|
12,737
|
|
|
2,617
|
|
|
2021
|
|
11,598
|
|
|
2,656
|
|
|
2022
|
|
10,211
|
|
|
2,694
|
|
|
2023
|
|
9,881
|
|
|
2,740
|
|
|
Thereafter
|
|
41,189
|
|
|
30,177
|
|
|
Total future minimum lease payments
|
|
95,475
|
|
|
42,821
|
|
|
Less imputed interest
|
|
(24,735
|
)
|
|
(20,390
|
)
|
|
Total lease obligations
|
|
70,740
|
|
|
22,431
|
|
|
Less current obligations
|
|
(8,838
|
)
|
|
(744
|
)
|
|
Long-term lease obligations
|
|
$
|
61,902
|
|
|
$
|
21,687
|
|
Disclosures Related to Periods Prior to Adoption of ASC Topic 842, "Leases"
Rental expense for operating leases was
$4.6 million
for the three months ended March 31, 2018. Sublease rental income was not material. During the three months ended March 31, 2018, we recorded a capital lease for a distribution center with an initial lease term of
20
years in the amount of
$14.3 million
, which represents a non-cash investing and financing
activity. At December 31, 2018, capital lease obligations are recorded in "Other long-term liabilities" on our Consolidated Balance Sheets.
As of December 31, 2018, our minimum lease payment requirements for noncancelable operating and capital leases with terms of more than one year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Capital Leases
|
|
|
|
(thousands)
|
|
2019
|
|
$
|
13,222
|
|
|
$
|
2,578
|
|
|
2020
|
|
12,734
|
|
|
2,617
|
|
|
2021
|
|
11,595
|
|
|
2,656
|
|
|
2022
|
|
10,208
|
|
|
2,694
|
|
|
2023
|
|
9,800
|
|
|
2,740
|
|
|
Thereafter
|
|
40,381
|
|
|
30,177
|
|
|
Total
|
|
$
|
97,940
|
|
|
43,462
|
|
|
Less - interest on capital lease obligations
|
|
|
|
(20,838
|
)
|
|
Total principal payable on capital lease obligations
|
|
|
|
22,624
|
|
|
Less - current obligations
|
|
|
|
(703
|
)
|
|
Long-term capital lease obligations
|
|
|
|
$
|
21,921
|
|
These future minimum lease payment requirements have not been reduced by sublease income due in the future under noncancelable subleases. Minimum sublease income expected to be received in the future is not material.
8. Retirement and Benefit Plans
The following table presents the pension benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
|
2019
|
|
2018
|
|
|
(thousands)
|
|
Service cost
|
$
|
161
|
|
|
$
|
205
|
|
|
Interest cost
|
1,816
|
|
|
4,011
|
|
|
Expected return on plan assets
|
(1,474
|
)
|
|
(4,588
|
)
|
|
Amortization of actuarial (gain) loss
|
(43
|
)
|
|
821
|
|
|
Net periodic benefit expense
|
$
|
460
|
|
|
$
|
449
|
|
Service cost is recorded in the same income statement line items as other employee compensation costs arising from services rendered, and the other components of net periodic benefit expense are recorded in "Pension expense (excluding service costs)" in our Consolidated Statements of Operations.
During the
three
months ended
March 31, 2019
, we contributed
$0.5 million
in cash to the pension plans. For the remainder of
2019
, we expect to make approximately
$1.4 million
in cash contributions to the pension plans.
|
|
|
|
9.
|
Stock-Based Compensation
|
In February 2019 and 2018, we granted
two
types of stock-based awards under our incentive plan: performance stock units (PSUs) and restricted stock units (RSUs).
PSU and RSU Awards
During the
three
months ended
March 31, 2019
, we granted
110,923
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 2019 return on invested capital (ROIC), as approved by our Compensation Committee 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 2019 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. The PSUs granted to officers in
2019
, if earned, generally vest in a single installment
three
years from the date of grant, while the PSUs granted to other employees vest in
three
equal tranches each year after the grant date.
During the
three
months ended
March 31, 2018
, we granted
78,976
PSUs to our officers and other employees, subject to performance and service conditions. During the
2018
performance period, officers and other employees earned
100%
and
110%
, respectively, of the target based on Boise Cascade’s
2018
ROIC and EBITDA, determined by our Compensation Committee in accordance with the related grant agreement.
During the
three
months ended
March 31, 2019
and
2018
, we granted an aggregate of
165,350
and
98,375
RSUs, respectively, to our officers, other employees, and nonemployee directors with only service conditions. 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, 2019
and
2018
, the total fair value of PSUs and RSUs vested was
$11.1 million
and
$15.2 million
, respectively.
The following summarizes the activity of our PSUs and RSUs awarded under our incentive plan for the
three
months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSUs
|
|
RSUs
|
|
|
Number of shares
|
|
Weighted Average Grant-Date Fair Value
|
|
Number of shares
|
|
Weighted Average Grant-Date Fair Value
|
|
Outstanding, December 31, 2018
|
429,788
|
|
|
$
|
25.90
|
|
|
289,173
|
|
|
$
|
29.52
|
|
|
Granted
|
110,923
|
|
|
29.48
|
|
|
165,350
|
|
|
29.08
|
|
|
Performance condition adjustment, net (a)
|
1,443
|
|
|
43.05
|
|
|
—
|
|
|
—
|
|
|
Vested
|
(212,891
|
)
|
|
19.45
|
|
|
(182,857
|
)
|
|
26.42
|
|
|
Forfeited
|
(10,512
|
)
|
|
37.99
|
|
|
(5,561
|
)
|
|
35.96
|
|
|
Outstanding, March 31, 2019
|
318,751
|
|
|
$
|
31.13
|
|
|
266,105
|
|
|
$
|
31.24
|
|
_______________________________
|
|
|
|
(a)
|
Represents additional PSUs granted to non-officers based on achievement of
2018
EBITDA in excess of target.
|
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 and RSUs, net of forfeitures, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
|
2019
|
|
2018
|
|
|
(thousands)
|
|
PSUs
|
$
|
979
|
|
|
$
|
1,087
|
|
|
RSUs
|
1,221
|
|
|
1,199
|
|
|
Total
|
$
|
2,200
|
|
|
$
|
2,286
|
|
The related tax benefit for both the
three
months ended
March 31, 2019
and
2018
, was
$0.6 million
. As of
March 31, 2019
, total unrecognized compensation expense related to nonvested share-based compensation arrangements was
$13.7 million
. This expense is expected to be recognized over a weighted-average period of
2.1
years.
10. Stockholders' Equity
Dividends
On November 14, 2017, we announced that our board of directors approved a dividend policy to pay quarterly cash dividends to holders of our common stock. During the first quarters of
2019
and
2018
, we declared and paid a dividend of
$0.09
per share and
$0.07
per share, respectively, of our common stock. As such, we paid
$4.1 million
and
$2.8 million
of dividends to shareholders during the
three
months ended
March 31, 2019
and
2018
, respectively. On
May 2, 2019
, our board of directors declared a dividend of
$0.09
per share of common stock, payable on
June 17, 2019
, to stockholders of record on
June 3, 2019
. For a description of the restrictions in our asset-based credit facility, Term Loan, and the indenture governing our senior notes on our ability to pay dividends, see Note 6, Debt.
Accumulated Other Comprehensive Loss
The following table details the changes in accumulated other comprehensive loss for the
three
months ended
March 31, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
|
2019
|
|
2018
|
|
|
(thousands)
|
|
Beginning balance, net of taxes
|
$
|
(47,652
|
)
|
|
$
|
(76,702
|
)
|
|
Amortization of actuarial (gain) loss, before taxes (a)
|
(43
|
)
|
|
821
|
|
|
Income taxes
|
11
|
|
|
(208
|
)
|
|
Ending balance, net of taxes
|
$
|
(47,684
|
)
|
|
$
|
(76,089
|
)
|
___________________________________
|
|
|
|
(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 8, Retirement and Benefit Plans.
|
|
|
|
|
11.
|
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
$4.5 million
and
$4.3 million
, respectively, during the
three
months ended
March 31, 2019
and
2018
. These sales are recorded in "Sales" in our Consolidated Statements of Operations.
Costs and Expenses
Related-party wood fiber purchases from LTP were
$20.0 million
and
$20.4 million
, respectively, during the
three
months ended
March 31, 2019
and
2018
. These costs are recorded in "Materials, labor, and other operating expenses (excluding depreciation)" in our Consolidated Statements of Operations.
We operate our business using
two
reportable segments: Wood Products and Building Materials Distribution. Corporate and Other results are presented as reconciling items to arrive at total net sales and operating income. There are no differences in our basis of measurement of segment profit or loss from those disclosed in Note 17, Segment Information, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our
2018
Form 10-K.
Wood Products and Building Materials Distribution segment sales to external customers, including related parties, by product line are as follows:
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Three Months Ended
March 31
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2019
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2018
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(millions)
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Wood Products (a)
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LVL
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$
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11.9
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$
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13.5
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I-joists
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5.3
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9.9
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Other engineered wood products
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5.7
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6.6
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Plywood and veneer
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67.4
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87.1
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Lumber
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13.2
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24.9
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Byproducts
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20.1
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22.1
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Particleboard
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—
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10.8
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Other
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10.8
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15.5
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134.4
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190.5
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Building Materials Distribution
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Commodity
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398.4
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490.6
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General line
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323.4
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315.2
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Engineered wood products
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185.9
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186.6
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907.7
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992.4
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$
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1,042.1
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$
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1,182.8
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___________________________________
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(a)
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Amounts represent sales to external customers. Sales are calculated after intersegment sales eliminations to our Building Materials Distribution segment, as well as the cost of EWP rebates and sales allowances provided at various stages of the supply chain
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(including distributors, retail lumberyards, and professional builders). For the
three
months ended
March 31, 2019
, approximately
75%
of Wood Products' EWP sales volumes were to our Building Materials Distribution segment.
An analysis of our operations by segment is as follows:
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Three Months Ended
March 31
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2019
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2018
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(thousands)
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Net sales by segment
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Wood Products
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$
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319,523
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$
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397,991
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Building Materials Distribution
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907,708
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992,381
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Intersegment eliminations and other (a)
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(185,145
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)
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(207,531
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)
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Total net sales
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$
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1,042,086
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$
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1,182,841
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Segment operating income
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Wood Products
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$
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11,630
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$
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26,121
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Building Materials Distribution
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17,517
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32,388
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Total segment operating income
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29,147
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58,509
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Unallocated corporate and other
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(7,493
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)
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(6,705
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)
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Income from operations
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$
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21,654
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$
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51,804
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___________________________________
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(a)
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Primarily represents intersegment sales from our Wood Products segment to our Building Materials Distribution segment.
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13. 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 18, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our
2018
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, 2019
, there have been no material changes to the above commitments disclosed in the
2018
Form 10-K.
Legal Proceedings and Contingencies
We are a party to legal proceedings that arise in the ordinary course of our business, including commercial liability claims, premises claims, environmental claims, and employment-related claims, among others. As of the date of this filing, we believe it is not reasonably possible that any of the legal actions against us will, individually or in the aggregate, have a material adverse effect on our financial position, results of operations, or cash flows.
Guarantees
We provide guarantees, indemnifications, and assurances to others. Note 18, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in our
2018
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, 2019
, there have been no material changes to the guarantees disclosed in the
2018
Form 10-K.