10-K 1 a09-1710_110k.htm 10-K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the year ended December 31, 2008

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                    

 

Commission File Number:  333-122770

 

Boise Cascade Holdings, L.L.C.
(Exact name of registrant as specified in its charter)

 

Delaware

 

20-1478587

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1111 West Jefferson Street
Suite 300
Boise, Idaho  83702-5389

(Address of principal executive offices)  (Zip Code)

 

(208) 384-6161

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o     No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes x   No o

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes o     No x

 

We are a voluntary filer of reports required of companies with public securities under Sections 13 or 15(d) of the Securities Exchange Act of 1934, and we have filed all reports which would have been required of us during the past 12 months had we been subject to such provisions.

 

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined by Rule 12b-2 of the Exchange Act).

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x 

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes o     No x

 

The registrant, a limited liability company, has no voting or nonvoting equity held by nonaffiliates and no common stock outstanding. Equity units issued and outstanding on February 28, 2009, were as follows:

 

Series

 

Units Outstanding as of February 28, 2009

Series A Common Units

 

 

66,000,000

 

Series B Common Units

 

 

535,329,693

 

Series C Common Units

 

 

31,165,150

 

 

These units are neither registered nor publicly traded.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 



Table of Contents

 

Table of Contents

 

 

PART I

 

 

 

 

Item 1.

Business

1

 

Corporate Structure

1

 

Building Materials Distribution

2

 

Wood Products

4

 

Corporate and Other

7

 

Competition

7

 

Environmental Issues

8

 

Capital Investment

8

 

Seasonality

8

 

Working Capital

8

 

Acquisitions and Divestitures

9

 

Employees

9

 

Identification of Executive Officers

9

 

 

 

Item 1A.

Risk Factors

9

 

 

 

Item 1B.

Unresolved Staff Comments

14

 

 

 

Item 2.

Properties

14

 

Building Materials Distribution

15

 

Wood Products

15

 

 

 

Item 3.

Legal Proceedings

15

 

 

 

Item 4.

Submission of Matters to a Vote of Securityholders

15

 

 

 

 

PART II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

16

Item 6.

Selected Financial Data

17

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

Executive Overview

19

 

Sale of Our Paper and Packaging & Newsprint Assets

20

 

Effects of the Sale

21

 

Our Segments

22

 

Recent Trends and Operational Outlook

22

 

Factors That Affect Our Operating Results

23

 

Our Operating Results

27

 

Industry Mergers and Acquisitions

34

 

Liquidity and Capital Resources

34

 

Contractual Obligations

40

 

Off-Balance-Sheet Activities

42

 

Guarantees

42

 

Inflationary and Seasonal Influences

42

 

Disclosures of Financial Market Risks

42

 

Financial Instruments

43

 

Environmental

43

 

Critical Accounting Estimates

44

 

New and Recently Adopted Accounting Standards

49

 

Non-GAAP Financial Measures

50

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

52

 

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Table of Contents

 

Item 8.

Financial Statements and Supplementary Data

53

 

 

 

 

1.           Nature of Operations and Basis of Presentation

58

 

2.           Summary of Significant Accounting Policies

59

 

3.           Sale of Our Paper and Packaging & Newsprint Assets

65

 

4.           Investment in Equity Affiliate

66

 

5.           Transactions With Related Parties

68

 

6.           Other (Income) Expense, Net

69

 

7.           Leases

69

 

8.           Income Taxes

70

 

9.           Goodwill and Intangible Assets

72

 

10.     Asset Retirement Obligations

73

 

11.     Debt

74

 

12.     Financial Instruments

75

 

13.     Retirement and Benefit Plans

76

 

14.     Redeemable Equity Units

81

 

15.     Capital

86

 

16.     Segment Information

88

 

17.     Commitments and Guarantees

93

 

18.     Consolidating Guarantor and Nonguarantor Financial Information

94

 

19.     Legal Proceedings and Contingencies

105

 

20.     Quarterly Results of Operations (unaudited)

105

 

 

 

 

Report of Independent Registered Public Accounting Firm

106

 

 

 

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

107

 

 

 

Item 9A(T).

Controls and Procedures

107

 

 

 

Item 9B.

Other Information

108

 

 

 

 

PART III

 

 

 

 

Item 10.

Directors, Executive Officers, and Corporate Governance

109

 

 

 

Item 11.

Executive Compensation

114

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

139

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

141

 

 

 

Item 14.

Principal Accounting Fees and Services

143

 

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

145

 

 

 

 

Signatures

146

 

 

 

 

Index to Exhibits

147

 

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Table of Contents

 

PART 1

 

We have publicly traded, registered debt securities, which require us to file reports with the Securities and Exchange Commission (SEC). All of our SEC filings, which include this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Registration Statements, Current Reports on Form 8-K, and all related amendments are available free of charge via Electronic Data Gathering Analysis and Retrieval (EDGAR) through the SEC website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.bc.com as soon as reasonably practicable after we file or furnish such reports to the SEC. Attached as exhibits to this Form 10-K are certifications of our chief executive officer and chief financial officer required under Section 302 of the Sarbanes-Oxley Act of 2002.

 

ITEM 1.

BUSINESS

 

Boise Cascade Holdings, L.L.C., or “BC Holdings,” “the Company,” “we,” “us,” or “our” is a building products company headquartered in Boise, Idaho. We manufacture engineered wood products, plywood, lumber, and particleboard and distribute a broad line of building materials, including wood products we manufacture. Our operations began on October 29, 2004 (inception), when we acquired the forest products and paper assets of OfficeMax (the Forest Products Acquisition). Before the Forest Products Acquisition, OfficeMax was known as Boise Cascade Corporation. We acquired the name “Boise Cascade” as part of the Forest Products Acquisition.

 

On February 22, 2008, Boise Cascade, L.L.C., our wholly owned direct subsidiary, sold its Paper and Packaging & Newsprint assets and most of its Corporate and Other assets (the Sale) to Boise Inc. (formerly Aldabra 2 Acquisition Corp.) for cash and securities equal to $1.6 billion, plus working capital adjustments. Immediately following the Sale, Boise Cascade, L.L.C., distributed the securities received in the transaction to us. As a result, we became a 49% owner of Boise Inc. and continue to have a significant indirect financial interest in the results of the sold businesses. The equity interest we own in Boise Inc. represents a significant continuing involvement as defined in Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As a result, the financial data in this report includes the results of the Paper and Packaging & Newsprint segments through February 21, 2008, and we did not define the sold assets as discontinued operations. See Note 4, Investment in Equity Affiliate, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for more information related to our investment in Boise Inc.

 

Corporate Structure

 

The following sets forth our corporate structure and equity ownership at December 31, 2008 (based on voting power):

 

 

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Table of Contents

 

Prior to the Sale, we operated our business using five reportable segments:  Building Materials Distribution, Wood Products, Paper, Packaging & Newsprint, and Corporate and Other. After the Sale, we operate our business using three reportable segments:  Building Materials Distribution, Wood Products, and Corporate and Other. We present information pertaining to our segments and the geographic areas in which they operate in Note 16, Segment Information, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. The “Business” discussion below focuses on our retained operating businesses.

 

As used in this 2008 Annual Report on Form 10-K, the terms “BC Holdings” and “we” refer to Boise Cascade Holdings, L.L.C., and its consolidated subsidiaries and, where the context relates to periods prior to the Forest Products Acquisition, to their predecessors in interest. The terms “Boise Forest Products Operations” and “Predecessor” refer to the results of the forest products and paper assets of OfficeMax that we acquired in the Forest Products Acquisition. The terms “we,” “us,” and “our” mean BC Holdings with respect to periods after the Forest Products Acquisition and Boise Forest Products Operations with respect to periods prior to the Forest Products Acquisition.

 

The consolidated financial information included in this Annual Report on Form 10-K presents the financial results of BC Holdings for the years ended December 31, 2008, 2007, 2006, and 2005, and the period of October 29 (inception) through December 31, 2004, and the results of OfficeMax’s forest products operations for the period of January 1 through October 28, 2004. When we refer to the 2004 results in this Form 10-K, we are referring to the entire year, both the period owned by the Predecessor company and the period owned by BC Holdings.

 

Building Materials Distribution
 

Products

 

We are a leading national stocking wholesale distributor of building materials. We distribute a broad line of building materials, including engineered wood products (EWP), oriented strand board (OSB), plywood, lumber, and general line items such as framing accessories, composite decking, roofing, siding, and insulation. We purchase most of these building materials from third-party suppliers and market them primarily to customers that resell building materials to professional builders in the residential, light commercial construction, and repair-and-remodeling markets. We believe our broad product line provides our customers with a one-stop resource for their needs and lowers per-unit freight costs. We also have expertise in special-order sourcing and merchandising support, and our nationwide supplier relationships allow us to offer excellent customer service on top brands in the building materials industry.

 

The following table sets forth segment sales; segment income before interest and taxes; depreciation, amortization, and depletion; and earnings before interest, taxes, depreciation, and amortization (EBITDA) for the periods indicated:

 

 

 

BC Holdings

 

Predecessor

 

 

 

Year Ended December 31

 

October 29
(inception)
through
December 31,

 

January 1
through
October 28,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

2004

 

 

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

2,109.4

 

$

2,564.0

 

$

2,950.3

 

$

3,052.3

 

$

401.7

 

$

2,442.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment income before interest and taxes

 

$

19.5

 

$

51.8

 

$

75.3

 

$

99.9

 

$

10.1

 

$

78.8

 

Depreciation, amortization, and depletion

 

7.7

 

7.4

 

9.2

 

9.1

 

1.5

 

6.1

 

EBITDA (a)

 

$

27.2

 

$

59.2

 

$

84.6

 

$

109.0

 

$

11.6

 

$

84.9

 

 


(a)                                  Segment EBITDA is calculated as segment income (loss) before interest (interest expense, interest income, and change in fair value of interest rate swaps), income taxes, and depreciation, amortization, and depletion. EBITDA is the primary measure used by our chief operating decision makers to evaluate segment operating performance and to decide how to allocate resources to segments. See “Item 6. Selected Financial Information” of this Form 10-K for a description of our reasons for using EBITDA, for a discussion of the limitations of such a measure, and for a reconciliation of our EBITDA to net income (loss).

 

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Table of Contents

 

Facilities

 

We operate 30 wholesale building materials distribution facilities located strategically throughout the United States. Since 2003, we have relocated or expanded several facilities.

 

Raw Materials and Input Costs

 

In our Building Materials Distribution segment, the primary cost is for products procured for resale, which represents over 90% of our segment’s total costs. We purchase the majority of the building materials we distribute from third-party suppliers. Approximately 27% of the lumber, commodity panels, and engineered wood products purchased by Building Materials Distribution during 2008 were purchased from our Wood Products segment. Our vendor base includes over 1,200 suppliers. We generally do not have long-term supply contracts with our vendors. This flexibility and our national presence allow us to obtain favorable price and term arrangements.

 

Sales, Marketing, and Distribution

 

Utilizing centralized information systems, each of our distribution centers implements its own distribution and logistics model tailored to the customers it serves. We operate a fleet of trucks to deliver materials on a regularly scheduled basis. We have a large decentralized sales force able to use timely and accurate market information and local product knowledge to support customers and new products.

 

Customers

 

Our customer base in this segment includes a wide range of customers across multiple market segments and various end markets. In 2008, a majority of our sales in this segment were to pro dealers and retail distributors that sell building materials to professional builders in the residential, light commercial construction, and repair-and-remodeling markets. We also service retail lumberyards, home improvement centers, and other industrial accounts.

 

Business Plan

 

We intend to continue to expand our building materials distribution network into new geographic markets and to grow in our existing markets by increasing market share and broadening our product line. Sales in this segment are strongly correlated with new residential construction in the United States. The business has grown successfully over the last decade by acquiring facilities, adding new products, opening new locations, relocating and expanding existing facilities, and capturing local market share through superior customer service. The pace at which we execute our business plan will be dependent on future market conditions and the competitive environment.

 

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Table of Contents

 

Wood Products

 

Products

 

Over the past ten years, we have shifted our product focus from commodity products, such as plywood and lumber, to EWP, which traditionally has had more stable prices and higher margins. We are a leading producer of EWP, consisting of laminated veneer lumber (LVL), a high-strength engineered lumber often used in beams; I-joists, a structural support typically used in floors and roofs; and laminated beams. We believe we are the second-largest EWP manufacturer in North America, with an estimated market share of approximately 20% in 2008. EWP accounted for 33% of our sales in this segment in 2008. A 33% decline in housing starts during 2008 led to a 39% decline in our EWP sales, compared with 2007. Prior to the decline in 2008, our EWP sales grew at a compound annual rate of 12% from 1998 through 2007. We also produce plywood, particleboard, dimension lumber, and high-quality ponderosa pine lumber, a premium lumber grade sold primarily to manufacturers of specialty wood windows, moldings, and doors. Our wood products are used primarily in the residential, light commercial construction, and repair-and-remodeling markets. Most of these products are sold to wholesalers, major retailers, and industrial converters or through our own wholesale building materials distribution outlets.

 

The following table sets forth the capacity and production by product for the periods indicated:

 

 

 

BC Holdings

 

Predecessor

 

 

 

Year Ended December 31

 

October 29
(inception)
through
December 31,

 

January 1
through
October 28,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

2004

 

 

 

(millions)

 

Capacity (a) (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

Laminated veneer lumber (LVL) (cubic feet) (c)

 

27.5

 

27.5

 

27.5

 

25.0

 

20.0

 

20.0

 

Plywood and veneer (sq. ft.) (3/8” basis) (d)

 

1,600

 

1,600

 

1,600

 

1,620

 

1,600

 

1,600

 

Lumber (board feet) (e)

 

230

 

250

 

270

 

270

 

275

 

275

 

Particleboard (sq. ft.) (3/4” basis)

 

170

 

170

 

170

 

160

 

200

 

200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

Laminated veneer lumber (LVL) (cubic feet) (c)

 

11.2

 

17.2

 

18.7

 

19.6

 

3.0

 

15.2

 

I-joists (equivalent lineal feet) (c)

 

109

 

194

 

202

 

228

 

37

 

192

 

Plywood and veneer (sq. ft.) (3/8” basis) (d)

 

1,351

 

1,467

 

1,546

 

1,603

 

271

 

1,395

 

Lumber (board feet) (e)

 

189

 

237

 

244

 

259

 

45

 

243

 

Particleboard (sq. ft.) (3/4” basis)

 

105

 

150

 

158

 

163

 

21

 

135

 

 


(a)                                  Annual capacity is production assuming normal operating shift configurations. Accordingly, production can exceed capacity under some operating conditions.

 

(b)                                 In 2008, we sold our wholly owned subsidiary in Brazil, which manufactured veneer. The annual capacity and production of that subsidiary have been excluded from this table.

 

(c)                                  A portion of LVL production is used to manufacture I-joists at two EWP plants. Capacity is based on LVL production only.

 

(d)                                 Production and capacity applicable to plywood only. Approximately 13%, 20%, 22%, and 20%, respectively, of the plywood we produced in 2008, 2007, 2006, and 2005 was utilized internally to produce EWP. For the period of October 29 (inception) through December 31, 2004, and the period of January 1 through October 28, 2004, internal utilization of plywood to produce EWP was 18% and 17%, respectively.

 

In December 2008, we committed to closing the plywood manufacturing facility in White City, Oregon, which is scheduled to occur in March 2009. This mill represents approximately 12% of the plywood capacity and 6% of the plywood production reflected in the table in 2008.

 

(e)                                  In March 2008, we permanently closed our lumber facility in White City, Oregon. This mill represents approximately 2% of the lumber production reflected in the table for the year ended December 31, 2008.

 

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The following table sets forth segment sales; segment income (loss) before interest and taxes; depreciation, amortization, and depletion; and EBITDA for the periods indicated:

 

 

 

BC Holdings

 

Predecessor

 

 

 

Year Ended December 31

 

October 29
(inception)
through
December 31,

 

January 1
through
October 28,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

2004

 

 

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

795.9

 

$

1,010.2

 

$

1,155.9

 

$

1,294.4

 

$

200.1

 

$

1,159.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment income (loss) before interest and taxes (a)

 

$

(55.1

)

$

23.6

 

$

37.2

 

$

119.4

 

$

15.6

 

$

203.0

 

Depreciation, amortization, and depletion

 

27.7

 

30.0

 

27.6

 

23.0

 

3.3

 

23.5

 

EBITDA (b) (c)

 

$

(27.4

)

$

53.7

 

$

64.9

 

$

142.4

 

$

18.9

 

$

226.5

 

 


(a)                                  Included a $5.7 million net gain related to the sale of our wholly owned subsidiary in Brazil in 2008.

 

Included $3.8 million of expense related to the closure of our veneer operations in St. Helens, Oregon, in 2008.

 

Included $7.5 million of expense recognized in December 2008, when we committed to closing the plywood manufacturing facility in White City, Oregon, which is scheduled to occur in March 2009.

 

(b)                                 The period of January 1 through October 28, 2004, included a $46.5 million pretax gain for the sale of our Predecessor’s 47% interest in Voyageur Panel.

 

(c)                                  Segment EBITDA is calculated as segment income (loss) before interest (interest expense, interest income, and change in fair value of interest rate swaps), income taxes, and depreciation, amortization, and depletion. EBITDA is the primary measure used by our chief operating decision makers to evaluate segment operating performance and to decide how to allocate resources to segments. See “Item 6. Selected Financial Information” of this Form 10-K for a description of our reasons for using EBITDA, for a discussion of the limitations of such a measure, and for a reconciliation of our EBITDA to net income (loss).

 

Facilities

 

We currently operate an integrated network of three EWP facilities and eight plywood and veneer plants, six of which manufacture inputs used in our EWP facilities. We also operate four sawmills and one particleboard plant. The following table lists annual capacities of our Wood Products facilities as of December 31, 2008, and production for the year then ended:

 

 

 

Number
of Mills

 

Capacity (a)

 

Production

 

 

 

(millions)

 

 

 

 

 

 

 

 

 

Engineered wood products (EWP) (b)

 

3

 

 

 

 

 

Laminated veneer lumber (LVL) (cubic feet)

 

 

 

27.5

 

11.2

 

I-joists (equivalent lineal feet)

 

 

 

 

 

109

 

Plywood and veneer (sq. ft.) (3/8” basis) (c)

 

8

 

1,600

 

1,351

 

Lumber (board feet) (d)

 

4

 

230

 

189

 

Particleboard (sq. ft.) (3/4” basis)

 

1

 

170

 

105

 

 


(a)                                  Capacity is production assuming normal operating shift configurations. Accordingly, production can exceed capacity under some operating conditions.

 

(b)                                 A portion of LVL production is used to manufacture I-joists at two EWP plants. Capacity is based on LVL production only.

 

(c)                                  Production and capacity applicable to plywood only. Approximately 13% of the plywood we produced in 2008 was utilized internally to produce EWP.

 

In December 2008, we committed to closing our plywood manufacturing facility in White City, Oregon, which is scheduled to occur in March 2009. This mill represents approximately 12% of the plywood capacity and 6% of the plywood production in 2008.

 

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(d)                                 In March 2008, we permanently closed our lumber facility in White City, Oregon. This mill represents approximately 2% of the 2008 lumber production.

 

Raw Materials and Input Costs

 

Our plywood and veneer facilities use Douglas fir, white woods, and pine logs as raw materials. We use ponderosa pine, spruce, and white fir logs to manufacture various grades of lumber. Our EWP facilities in Louisiana and Oregon use veneers and parallel-laminated veneer panels produced by our facilities and purchased from third parties, together with OSB purchased from third parties, to manufacture LVL and I-joists. Our manufacturing facilities are located in close proximity to active wood markets. We have long-term market-based contracts for a significant portion of our fiber needs. Other important materials used to manufacture and prepare our wood products for sale include resins, adhesives, plastic strapping, and lumber wrap, which we purchase both on the open market and through long-term contracts.

 

During 2008, energy, primarily electricity, natural gas, and fuel oil, accounted for approximately 5% of the sum of our materials, labor, and other operating expenses, including from related parties, in this segment. We purchase substantial portions of our natural gas and electricity under supply contracts, most of which are with local providers in regions in which our facilities are located. Our gas contracts have pricing mechanisms based primarily on current market prices, and our electricity contracts have pricing mechanisms based primarily on published tariffs. Depending on market conditions, we may use derivative instruments such as natural gas swaps, options, or a combination of these instruments to mitigate price risk.

 

Sales, Marketing, and Distribution

 

Sales of plywood, lumber, and particleboard are managed centrally by product. Our EWP sales force is managed centrally through a main office that oversees regional sales teams. Our sales force provides a variety of technical support services for our EWP, including integrated design, engineering, product specification software, distributor inventory management software, and job-pack preparation systems.

 

The following table lists sales volumes for our Wood Products facilities for the periods indicated:

 

 

 

BC Holdings

 

Predecessor

 

 

 

Year Ended December 31

 

October 29
(inception)
through
December 31,

 

January 1
through
October 28,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

2004

 

 

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Laminated veneer lumber (LVL)
(cubic feet)

 

7.6

 

10.6

 

12.1

 

12.3

 

1.8

 

10.1

 

I-joists (equivalent lineal feet)

 

117

 

188

 

219

 

243

 

31

 

192

 

Plywood (sq. ft.) (3/8” basis)

 

1,228

 

1,223

 

1,268

 

1,328

 

243

 

1,228

 

Lumber (board feet)

 

191

 

231

 

277

 

327

 

60

 

303

 

Particleboard (sq. ft.) (3/4” basis)

 

104

 

151

 

157

 

165

 

22

 

134

 

 

Customers

 

Our Building Materials Distribution segment is our Wood Products segment’s largest customer, representing approximately 34% of Wood Products overall sales, including approximately 65% of its EWP sales, in 2008. Our third-party customers in this segment include wholesalers, major retailers, and industrial converters in both domestic and export markets.

 

Business Plan

 

We plan to further expand our market position in EWP. We believe EWP will continue to gain market share from traditional building products and that margins for EWP, over time, will continue to exceed those for most commodity wood-based building products. We are focused on leveraging our competitive cost structure, comprehensive customer service offering, design support capabilities, and

 

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efficient distribution network to continue to gain market share among home builders, building products retailers, and other distributors. To that end, we have increased LVL capacity 7.5 million cubic feet, which represents a 38% increase since 2004. This capacity provides a platform to further expand our presence in EWP when future market conditions and the competitive environment support expansion.

 

Corporate and Other

 

Our Corporate and Other segment primarily includes corporate support staff services, related assets and liabilities, and foreign exchange gains and losses. These support services include, but are not limited to, finance, accounting, legal, information technology, and human resource functions. Since the Sale, we have purchased many of these services from Boise Inc. under an Outsourcing Services Agreement, under which Boise Inc. provides a number of corporate staff services to us at cost. See Note 5, Transactions With Related Parties, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for more information. Prior to the Sale, this segment also included certain rail and truck transportation businesses and related assets. During the years ended December 31, 2008, 2007, 2006, and 2005, segment sales related primarily to our rail and truck transportation businesses and were $8.6 million, $58.9 million, $60.7 million, and $70.0 million, respectively. Segment sales were $13.1 million and $77.4 million for the period of October 29 (inception) through December 31, 2004, and the period of January 1 through October 28, 2004, respectively.

 

The following table sets forth segment sales; segment income (loss) before interest and taxes; depreciation, amortization, and depletion; and EBITDA for the periods indicated:

 

 

 

BC Holdings

 

Predecessor

 

 

 

Year Ended December 31

 

October 29
(inception)
through
December 31,

 

January 1
through
October 28,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

2004

 

 

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

8.6

 

$

58.9

 

$

60.7

 

$

70.0

 

$

13.1

 

$

77.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment income (loss) before interest and taxes

 

$

(25.5

)

$

(23.1

)

$

(37.1

)

$

(29.4

)

$

(6.8

)

$

(56.8

)

Depreciation, amortization, and depletion

 

0.5

 

3.8

 

5.4

 

5.5

 

0.9

 

11.0

 

EBITDA (a)

 

$

(25.0

)

$

(19.4

)

$

(31.9

)

$

(23.8

)

$

(5.9

)

$

(45.8

)

 


(a)                                  Segment EBITDA is calculated as segment income (loss) before interest (interest expense, interest income, and change in fair value of interest rate swaps), income taxes, and depreciation, amortization, and depletion. EBITDA is the primary measure used by our chief operating decision makers to evaluate segment operating performance and to decide how to allocate resources to segments. See “Item 6. Selected Financial Information” of this Form 10-K for a description of our reasons for using EBITDA, for a discussion of the limitations of such a measure, and for a reconciliation of our EBITDA to net income (loss).

 

Competition

 

The markets in which we compete are highly competitive. The competitive environment in 2008 was particularly difficult because of weak demand resulting from the significant decline in new residential construction in the U.S. over the last 27 months. Industry capacity in a number of products, including those we produce and distribute, far exceeds the current level of demand. Our products and services compete with similar products manufactured and distributed by others. Many factors influence our competitive position in the markets in which we compete. Those factors include price, service, quality, product selection, and convenience of location.

 

Some of our competitors are larger than we are and have greater financial resources. These resources may afford those competitors greater purchasing power, increased financial flexibility, and more capital resources for expansion and improvement, which may enable those competitors to compete more effectively than we can.

 

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Building Materials Distribution.  The building materials distribution markets in which we operate are highly fragmented, and we compete in each of our geographic and product markets with national, regional, and local distributors. We compete on the basis of delivered cost, product availability, quality of service, and compatibility with customers’ needs, and our competition consists of distributors of all types of building materials. We compete with other national stocking distributors as well as wholesale brokers and buying cooperatives, some of which have sales greater than ours and/or have more extensive relationships with pro dealers and retail distributors. If one or more of these competitors are able to leverage geographic coverage and/or customer relationships into new markets, our growth strategy in this segment could be negatively affected. In recent years, there has been consolidation among home builders, pro dealers, and big box retailers. As the customer base consolidates, this dynamic could impact our ability to maintain margins. Proximity to customers is an important factor in minimizing shipping costs and facilitating quick order turnaround and on-time delivery. We believe our ability to obtain quality materials, from both internal and external sources, and our focus on customer service are our primary competitive advantages in this segment.

 

Wood Products.  Our markets in this segment are large and highly competitive. There are several major producers of most of our products, including EWP and plywood, as well as numerous local and regional manufacturers. We have leading market positions in the manufacture of EWP, plywood, and ponderosa pine lumber. We hold much smaller competitive positions with respect to our other building products. Our products in this segment compete primarily on the basis of price, quality, and particularly with respect to EWP, levels of customer service. We believe our cost-competitive production facilities and our customer service are our principal competitive advantages in this segment. Most of our competitors are located in the United States and Canada, although competition from manufacturers in other countries has increased in recent years. Many of these foreign competitors have lower operating costs than we do. We compete not only with manufacturers and distributors of similar building products but also with products made from alternative materials, such as steel and plastic. Some of our competitors, though, also enjoy strong reputations for product quality and customer service, and these competitors may have strong relationships with certain distributors, making it difficult for our products to gain additional market share. Some of our competitors in this segment are more vertically integrated than we are and/or have access to internal sources of wood fiber, which may allow them to subsidize their base manufacturing business in periods of rising fiber prices.

 

Environmental Issues

 

Our discussion of environmental issues is presented under the caption “Environmental” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 3. Legal Proceedings” of this Form 10-K.

 

Capital Investment
 

Information concerning our capital expenditures is presented under the caption “Investment Activities” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

 

Seasonality

 

Seasonal changes in levels of building activity affect our building products businesses, which are dependent on housing starts, repair-and-remodel activity, and light commercial and industrial conversion activities. In addition, seasonally cold weather increases costs, especially energy consumption, at most of our manufacturing facilities. Seasonality also affects working capital levels as described below.

 

Working Capital

 

Working capital levels fluctuate through the year and are impacted by seasonality and changing sales patterns. Typically, we build working capital (log inventories) in our Wood Products segment in the fall and early winter to ensure ample supply of fiber to our mills when logging activity is normally hindered by weather in the winter and spring. Changes in sales volumes affect accounts receivable levels in both our Building Materials Distribution and Wood Products segments. We typically have higher sales and working capital in the second and third quarters of the year because of increased construction activity (due to warmer weather).

 

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Acquisitions and Divestitures

 

We may engage in acquisition and divestiture discussions with other companies and make acquisitions and divestitures from time to time. We review our operations and dispose of assets that fail to meet our criteria for return on investment or cease to warrant retention for other reasons. For more information about our acquisitions and divestitures, see “Sale of Our Paper and Packaging & Newsprint Assets” and “Industry Mergers and Acquisitions” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

 

Employees

 

As of February 28, 2009, we had approximately 4,600 employees. Approximately 1,700, or 37%, of these employees work pursuant to collective bargaining agreements. Labor contracts covering approximately 700 employees with the Carpenters Industrial Council expire on July 15, 2009, at our Florien and Oakdale, Louisiana, plywood plants. We do not anticipate that we will start bargaining these contracts until late in the second quarter of 2009. We do not expect material work interruptions or increases in our costs during the course of the negotiations with our collective bargaining units. Nevertheless, if our expectations are not accurate, we could experience a material labor disruption or significantly increased labor costs at one or more of our facilities, any of which could prevent us from meeting customer demand or reduce our sales and profitability.

 

Identification of Executive Officers

 

Information with respect to our executive officers is set forth in “Item 10. Directors, Executive Officers, and Corporate Governance” of this Form 10-K.

 

ITEM 1A.                                        RISK FACTORS

 

This Annual Report on Form 10-K contains forward-looking statements. Statements that are not historical or current facts, including statements about our expectations, anticipated financial results, projected capital expenditures, and future business prospects, are forward-looking statements. You can identify these statements by our use of words such as “may,” “will,” “expect,” “believe,” “should,” “plan,” “anticipate,” and other similar expressions. You can find examples of these statements throughout this report, including the description of our business in “Item 1. Business” and the “Recent Trends and Operational Outlook” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. We cannot guarantee that our actual results will be consistent with the forward-looking statements we make in this report. You should review carefully the risk factors listed below, as well as those factors listed in other documents we file with the SEC. We do not assume an obligation to update any forward-looking statement.

 

The products we manufacture, purchase, and resell are commodities whose price is determined by the market’s supply and demand for such products, and the markets in which we operate are cyclical.  Many of the building products we produce or distribute, including oriented strand board, plywood, lumber, and particleboard, are commodities that are widely available from other producers or distributors. Commodity products have few distinguishing qualities from producer to producer, and as a result, competition for these products is based primarily on price, which is determined by supply relative to demand. As a result, prices for these products are driven by factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. The price for any one or more of these products may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our manufacturing facilities. Therefore, our profitability with respect to these commodity products depends, in significant part, on managing our cost structure, particularly raw materials, labor, and energy prices, which represent the largest components of our operating costs. The cost of these raw materials can and do fluctuate based upon factors beyond our control, as described below. If the prices for our products decline, or if our raw materials or energy costs increase, or both, our profitability and cash flow could be materially and adversely affected.

 

Historically, demand for the products we manufacture, as well as the products we purchase and distribute, has been closely correlated with new residential construction in the United States and to a lesser extent light commercial construction and residential repair-and-remodeling activity. Demand for

 

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new residential construction is influenced by seasonal weather factors, mortgage availability and rates, unemployment levels, household formation rates, immigration rates, homeowner vacancies, demand for second homes, existing home prices, consumer confidence, and other general economic factors. Industry supply is influenced primarily by operating rates of existing facilities but is also influenced over time by the introduction of new product technologies and capacity additions. The balance of supply and demand in the U.S. is also heavily influenced by imported products, principally from Canada.

 

Due to residential construction in excess of demand, household formation, and immigration during the last up cycle in housing demand, U.S. housing starts have fallen dramatically over the last 27 months. This has resulted in lower building products shipments and pricing for us and many others in the industry. The impact on housing demand in this cyclical downturn has been exacerbated by much higher levels of residential housing foreclosures than seen in prior cyclical downturns and the related crisis in credit markets, which has severely restricted traditional sources of construction and mortgage financing for residential realty. The length and magnitude of industry cycles have varied over time, and we are uncertain as to how long the current supply-demand imbalances will persist.

 

The state of the credit markets could adversely affect our costs of doing business, demand for our products, and our financial performance.  Recent turmoil in the credit markets has increased our exposure to several risk factors, including the impact on building product prices, margins, and sales volumes resulting from lack of financing for housing and commercial construction. It has also affected our customers, whose sales, cash flows, and financing are dependent upon their access to credit markets, and the access of their customer base to credit markets to finance building projects. Significant financial failures in our customer base may cause us to suffer increased bad debt losses and reduce credit availability under our five-year $350 million senior secured asset-based revolving credit facility (the Revolving Credit Facility). We are unable to predict the timing of any recovery in the credit markets or whether markets will continue to deteriorate.

 

The state of the housing, construction, and home improvement markets could adversely affect demand for our products.  Over the last two years, the housing, residential construction, and home improvement markets have deteriorated dramatically. Higher unemployment rates, increasing mortgage delinquency and foreclosure rates, reduction in the availability of mortgage financing and consumer credit, lower housing turnover, and home price depreciation, could limit consumers’ discretionary spending and affect their confidence level. This could lead to further reduced spending on new single-family home construction as well as home improvement projects, which in turn would result in decreased demand for our products.

 

The value of our pension investments is dependent on public equity and debt markets, which have been volatile. Our requirements for cash contributions to our pension plans will be highly dependent on future pension investment results, interest rates, the pension regulatory environment, and to a lesser extent, our benefit plan design.  Our target asset allocation in our pension plans is approximately 67% equity securities and 33% fixed-income securities. In 2008, the significant decline in global equity markets and turmoil in the credit markets caused our pension investment portfolio to suffer significant losses. As a result of investment losses, new benefits earned, and actuarial assumption changes, our funding shortfall increased from $86.9 million at December 31, 2007, to $162.6 million at December 31, 2008, measured on a projected benefit obligation basis. While the Worker, Retiree, and Employee Recovery Act of 2008 provides some relief as to the timing of our required future cash contributions, we expect to make material contributions to our pension plans for the next several years barring a dramatic recovery in equity and debt market security valuations or a sizable increase in the discount rate used to measure our liabilities. We are required to contribute $4.4 million to our pension plans in 2009. In March 2009, we made $25.0 million of discretionary contributions to improve the funded status of our plans. There can be no assurances our investment portfolio will not suffer further losses or interest rates will not decline in the future and exacerbate our current funding shortfall.

 

We may be unable to find short-term investments that meet our investment safety criteria.  Returns on the short-term investments recorded in “Cash and cash equivalents” on our balance sheet have been and may continue to be adversely affected by difficult markets. Until normal conditions in short-term credit markets are restored, it will continue to be more difficult to find short-term investment opportunities that meet our investment safety criteria. For more information, see the discussion in “Liquidity and Capital Resources” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

 

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We face strong competition in our markets.  The forest products industry is highly competitive. We face competition from numerous competitors, domestic as well as foreign. A few of our competitors in each of our businesses are larger companies that have greater financial and other resources, greater manufacturing economies of scale, and/or lower operating costs than we do. This competition will continue to pressure our financial results during the various stages of the business cycle and the current cyclical downturn. Future merger and acquisition activity by our competitors, suppliers, or customers could negatively affect our competitive position in the market.

 

Current adverse conditions may increase the credit risk from our customers.  Our Building Materials Distribution and Wood Products segments extend credit to numerous customers who are heavily exposed to the effect of the downturn in the housing market. Current housing market conditions could result in financial failures of one or more of our significant customers, which could impair our ability to fully collect receivables from such customers.

 

Our manufacturing businesses may have difficulty obtaining logs and fiber at favorable prices or at all.  Wood fiber is our principal raw material, which accounted for approximately 39% of the aggregate amount of materials, labor, and other operating expenses, including from related parties, for our Wood Products segment in 2008. Wood fiber is a commodity, and prices have historically been cyclical. Availability of residual wood fiber for our particleboard operation has been negatively affected by significant mill closures and curtailments that have occurred among solid-wood product producers.

 

Future domestic or foreign legislation and litigation concerning the use of timberlands, the protection of endangered species, the promotion of forest health, and the response to and prevention of catastrophic wildfires can also affect log and fiber supply. Availability of harvested logs and fiber may be further limited by fire, insect infestation, disease, ice storms, windstorms, hurricanes, flooding, and other natural and man-made causes, thereby reducing supply and increasing prices. In addition, since a number of our manufacturing facilities use wood-based biomass as an alternative energy source, an increase in wood fiber costs or a reduction in availability can increase the price of or reduce the total usage of biomass, which could result in higher energy costs.

 

Some of our wood products are vulnerable to long-term declines in demand due to competing technologies or materials.  In particular, demand for plywood may decline as customers continue to shift to oriented strand board, a product we do not manufacture. Any substantial shift in demand from our products to competing technologies or materials could result in a material decrease in sales of our products.

 

A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales, and/or negatively affect our net income.  Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:

 

·                        Maintenance outages;

 

·                        Prolonged power failures;

 

·                        An equipment failure, particularly a press at one of our major EWP production facilities;

 

·                        Disruptions in the supply of raw materials, such as wood fiber, energy, or chemicals;

 

·                        A chemical spill or release;

 

·                        Closure because of environmental-related concerns;

 

·                        Disruptions in the transportation infrastructure, including roads, bridges, railroad tracks, and tunnels;

 

·                        Fires, floods, earthquakes, hurricanes, or other catastrophes;

 

·                        Terrorism or threats of terrorism;

 

·                        Labor difficulties; or

 

·                        Other operational problems.

 

Future events may cause shutdowns, which may result in downtime and/or may cause damage to our facilities. Any such downtime or facility damage could prevent us from meeting customer demand for

 

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our products and/or require us to make unplanned capital expenditures. If our machines or facilities were to incur significant downtime, our ability to meet our production capacity targets and satisfy customer requirements would be impaired, resulting in lower sales and net income.

 

Our operations require substantial capital, and we may not have adequate capital resources to provide for all of our capital requirements.  Our manufacturing businesses are capital-intensive, and we regularly incur capital expenditures to expand our operations, maintain our equipment, increase our operating efficiency, and comply with environmental laws. During 2008, our total capital expenditures, excluding acquisitions, were approximately $51.9 million, including approximately $10.2 million related to the Paper and Packaging & Newsprint businesses we sold on February 22, 2008. We expect to spend approximately $30 million to $35 million, excluding acquisitions, on capital expenditures during 2009.

 

We are subject to significant environmental regulation and environmental compliance expenditures, as well as other potential environmental liabilities.  We are subject to a wide range of general and industry-specific environmental laws and regulations, particularly with respect to air emissions, wastewater discharges, solid and hazardous waste management, and site remediation. Our capital expenditures for environmental compliance were approximately $7 million in 2008 and approximately $9 million in 2007 and 2006. We expect to incur approximately $1 million in 2009. We expect to continue to incur capital and operating expenditures in order to maintain compliance with applicable environmental laws and regulations. If we fail to comply with applicable environmental laws and regulations, we may face civil or criminal fines, penalties, or enforcement actions, including orders limiting our operations or requiring corrective measures, installation of pollution control equipment, or other remedial actions.

 

As owners and operators of real estate, we may be liable under environmental laws for cleanup and other damages, including tort liability, resulting from releases of hazardous substances on or from our properties. We may have liability under these laws whether or not we knew of, or were responsible for, the presence of these substances on our property, and in some cases, our liability may not be limited to the value of the property.

 

Enactment of new environmental laws or regulations or changes in existing laws or regulations might require significant expenditures. We may be unable to generate funds or other sources of liquidity and capital to fund unforeseen environmental liabilities or expenditures. In addition, we may be affected negatively if carbon emission laws are enacted that require the company to install additional equipment or pay for existing emissions.

 

Labor disruptions or increased labor costs could adversely affect our business.  We could experience a material labor disruption or significantly increased labor costs at one or more of our facilities, either in the course of negotiations of a labor agreement or otherwise, any of which could prevent us from meeting customer demand or increase costs, thereby reducing our sales and profitability. As of February 28, 2009, we had approximately 4,600 employees. Approximately 1,700, or 37%, of these employees work pursuant to collective bargaining agreements. Labor contracts covering approximately 700 employees with the Carpenters Industrial Council expire on July 15, 2009, at our Florien and Oakdale, Louisiana, plywood plants. We do not anticipate that we will start bargaining these contracts until late in the second quarter of 2009. We do not expect material work interruptions or increases in our costs during the course of the negotiations with our collective bargaining units. Nevertheless, if our expectations are not accurate, we could experience a material labor disruption or significantly increased labor costs at one or more of our facilities, any of which could prevent us from meeting customer demand or reduce our sales and profitability.

 

Increases in the cost of our purchased energy or chemicals would lead to higher manufacturing costs, thereby reducing our margins.  Energy accounted for approximately 5% of the aggregate amount of materials, labor, and other operating expenses, including from related parties, for our Wood Products segment in 2008. Prices for energy, particularly natural gas, diesel fuel, and electricity, have been volatile in recent years. These fluctuations affect our manufacturing costs and contribute to earnings volatility. Increased demand (which could be driven by a recovery of economic activity) or further supply constraints could drive prices higher. The rates we are charged are affected by the increase in natural gas prices, although the degree of impact depends on each utility’s mix of energy resources and regulatory situation.

 

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Other raw materials we use include various chemical compounds, primarily resins and glues. Purchases of chemicals accounted for approximately 6% of the aggregate amount of materials, labor, and other operating expenses, including from related parties, for our Wood Products segment in 2008. The costs of these chemicals have been volatile historically and are influenced by capacity utilization, energy prices, and other factors beyond our control.

 

For most of our products, the relationship between industry supply and demand, rather than changes in the cost of raw materials, determines our ability to increase prices. Consequently, we may be unable to pass increases in our operating costs to our customers in the short term. Any sustained increase in chemical or energy prices would reduce our operating margins and potentially require us to limit or cease operations of one or more of our machines or facilities.

 

If our long-lived assets become impaired, we may be required to record noncash impairment charges that could have a material impact on our results of operations.  In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. As discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 2008 results for our business segments were weak, compared with those achieved in the periods of 2004 through the first half of 2007, when single-family housing starts were more robust. Although we expect market conditions during 2009 to remain difficult, we currently believe we have adequate support for the carrying value of all of our assets based on anticipated undiscounted cash flows that will result from our estimates of future demand, pricing, and production costs, assuming certain levels of capital expenditures. However, should the markets for our products deteriorate further or should we decide to invest capital differently and should other cash flow assumptions change, it is possible that we will be required to record noncash impairment charges in the near term that could have a material impact on our results of operations.

 

The terms of the Revolving Credit Facility and the indenture governing our notes restrict our ability to operate our business and to pursue our business strategies.  The Revolving Credit Facility and the indenture governing our notes contain, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose customary operating and financial restrictions on us. The Revolving Credit Facility and the indenture governing our notes limit our ability, among other things, to:

 

·                  Make material acquisitions;

 

·                  Incur additional indebtedness;

 

·                  Make distributions to our equity holders;

 

·                  Enter into transactions with our affiliates;

 

·                  Incur liens;

 

·                  Enter into new lines of business; and

 

·                  Engage in consolidations, mergers, or sales of substantially all of our assets.

 

Our indebtedness also requires periodic interest payments, which reduce the cash we have available to fund our operations or make capital expenditures. While we do not anticipate any liquidity issues at this time, our ability to meet future cash interest requirements will depend on our results of operations, as well as maintaining sufficient borrowing availability under the Revolving Credit Facility. A portion of the interest on our indebtedness is based on floating interest rates. An increase in the London Interbank Offered Rate (LIBOR) or the prime rate may increase our interest expense.

 

The value of our investment in Boise Inc. is and may continue to be impaired.  Recent adverse events in equity markets and the financial performance of Boise Inc. have significantly reduced the value of our investment in that company and have caused us to reduce the carrying value of that investment on our financial statements. For additional information see “Our Operating Results” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.

 

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Because we account for our investment in Boise Inc. under the equity method of accounting, Boise Inc.’s reported earnings will materially affect our reported financial results.  In 2008, our reported earnings were materially affected by our recording a $208.1 million other-than-temporary impairment charge to reflect the decrease in the fair value of our investment below its carrying value. In addition, our reported earnings are affected by recording our proportionate share of Boise Inc.’s net income or loss in our income statement. Although Boise Inc. has no obligation to pay us dividends, a proportionate share of Boise Inc.’s net income or loss flows through our income statement. Boise Inc. has significant financial leverage, and its operating earnings have been historically cyclical. This may result in volatility in our reported results of operations.

 

As a result of the Sale, we now rely on Boise Inc. for many of our administrative services.  In conjunction with the Sale, we entered into an Outsourcing Services Agreement under which Boise Inc. provides a number of corporate staff services to us at cost. These services include information technology, accounting, and human resource services. Most of the Boise Inc. staff who provide these services are providing the same services they provided when they were our employees. Nevertheless, we cannot be assured that these employees will remain with Boise Inc. or that there will not be a disruption in the continuity or level of service provided. If Boise Inc. is unwilling or unable to provide services at the same quality levels as those services have been provided in the past, our business and compliance activities and results of operations could be substantially and negatively affected.

 

ITEM 1B.                                        UNRESOLVED STAFF COMMENTS

 

We have no unresolved comments from the Commission staff.

 

ITEM 2.                                                 PROPERTIES

 

We own substantially all of our manufacturing facilities. Our properties are in good operating condition and are suitable and adequate for the operations for which they are used. We own substantially all equipment used in our facilities. Information concerning production capacity and the utilization of our manufacturing facilities is presented in “Item 1. Business” of this Form 10-K.

 

The following is a list of our facilities by segment as of February 28, 2009. We lease a portion of the corporate headquarters building in Boise, Idaho.

 

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Building Materials Distribution

 

The following table summarizes our 30 Building Materials Distribution facilities:

 

Location

 

Owned
or
Leased

 

Approximate
Warehouse
Square Footage

 

Phoenix, Arizona

 

Owned/Leased

 

32,027

 

Lathrop, California

 

Leased

 

162,000

 

Riverside, California

 

Leased

 

131,263

 

Denver, Colorado

 

Owned

 

203,212

 

Grand Junction, Colorado

 

Owned

 

82,000

 

Milton, Florida

 

Leased

 

80,000

 

Orlando, Florida

 

Owned

 

105,000

 

Auburn, Georgia

 

Leased

 

155,000

 

Boise, Idaho

 

Owned

 

62,297

 

Idaho Falls, Idaho

 

Owned/Leased

 

51,752

 

Rochelle, Illinois

 

Leased

 

86,000

 

Annapolis Junction, Maryland

 

Owned/Leased

 

14,000

 

Westfield, Massachusetts

 

Leased

 

112,400

 

Wayne, Michigan

 

Leased

 

40,500

 

Lakeville, Minnesota

 

Leased

 

72,000

 

Billings, Montana

 

Owned

 

77,024

 

Portsmouth, New Hampshire

 

Owned/Leased

 

39,400

 

Delanco, New Jersey

 

Owned/Subleased

 

15,000

 

Albuquerque, New Mexico

 

Owned

 

30,000

 

Greensboro, North Carolina

 

Leased

 

88,140

 

Marion, Ohio

 

Leased

 

60,250

 

Tulsa, Oklahoma

 

Owned

 

128,552

 

Memphis, Tennessee

 

Owned

 

38,926

 

Dallas, Texas

 

Owned

 

137,840

 

Sugarland, Texas

 

Leased

 

104,949

 

Salt Lake City, Utah

 

Owned

 

114,610

 

Spokane, Washington

 

Owned/Leased

 

43,060

 

Vancouver, Washington

 

Leased

 

50,600

 

Woodinville, Washington

 

Owned/Leased

 

32,200

 

Yakima, Washington

 

Owned/Leased

 

33,779

 

 

Wood Products

 

The following table summarizes our Wood Products facilities:

 

Facility Type

 

Number of
Facilities

 

Locations

LVL/I-joist plants

 

3

 

Louisiana, Oregon, and Canada

Plywood and veneer plants (a)

 

8

 

Louisiana (2), Oregon (5), and Washington

Sawmills

 

4

 

Oregon (2) and Washington (2)

Particleboard plant

 

1

 

Oregon

Wood beam plant

 

1

 

Idaho

 


(a)                                  Includes the plywood manufacturing facility in White City, Oregon. In December 2008, we committed to closing the facility, which is scheduled to occur in March 2009.

 

ITEM 3.                                                 LEGAL PROCEEDINGS

 

We are a party to routine legal proceedings that arise in the ordinary course of our business. We are not currently a party to any legal proceedings or environmental claims that we believe would have a material adverse effect on our financial position, results of operations, or cash flows.

 

ITEM 4.                                                 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

None.

 

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PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

We are a limited liability company, and the equity in our company is neither listed nor publicly traded in any market. The equity units issued and outstanding on February 28, 2009, were as follows:

 

Series A Common Units

 

66,000,000

Series B Common Units

 

535,329,693

Series C Common Units

 

31,165,150

 

As of February 28, 2009, OfficeMax owned all of the Series A equity units. Forest Products Holdings, L.L.C. (FPH) and OfficeMax owned 426,329,693 and 109,000,000 Series B equity units, respectively. FPH holds all 31,165,150 Series C equity units.

 

The Series A equity units accrue dividends daily at a rate of 8% per annum, compounded semiannually, on the holder’s capital contributions (net of any distributions previously received by such holder) plus any accumulated dividends. Accrued and unpaid dividends accumulate on the Series A equity units on June 30 and December 31 of each year. At December 31, 2008 and 2007, $19.2 million and $12.9 million, respectively, of dividends were accrued on our Consolidated Balance Sheets as an increase in the value of the Series A equity units. Neither the Series B nor Series C equity units accrue dividends, but they do participate in distributions (liquidating and otherwise).

 

Our parent company, FPH, from time to time issues or awards grants of equity to our employees and directors. Each issue or award of equity by FPH to our employees or directors is matched by a parallel issuance of the same amount of our equity on the same terms to FPH. However, under the terms of our operating agreements neither we nor FPH have authority to issue such equity absent specific ad hoc authorization by our respective boards of directors.

 

We do not have compensation plans that provide for the issuance of equity in our company. The Management Equity Agreement described elsewhere in this Annual Report on Form 10-K provides for the grant of equity units in FPH, our majority owner.

 

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ITEM 6.                                                 SELECTED FINANCIAL DATA

 

The following table sets forth our selected financial data for the periods indicated and should be read in conjunction with the disclosures in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

 

 

 

BC Holdings

 

Predecessor

 

 

 

Year Ended December 31

 

October 29
(inception)
through
December 31,

 

January 1
through
October 28,

 

 

 

2008 (a)

 

2007 (b)

 

2006 (c)

 

2005 (d)

 

2004 (e)

 

2004 (f)

 

 

 

(millions)

 

Statement of income (loss) data

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,977

 

$

5,413

 

$

5,780

 

$

5,907

 

$

873

 

$

4,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(288

)

$

128

 

$

72

 

$

121

 

$

25

 

$

69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before interest, taxes, depreciation, and amortization (EBITDA) (g)

 

$

(218

)

$

349

 

$

339

 

$

401

 

$

65

 

$

382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet data (at end of year)

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

644

 

$

2,381

 

$

1,083

 

$

1,136

 

$

1,112

 

$

1,049

 

Property and equipment, net

 

301

 

337

 

1,503

 

1,549

 

1,510

 

2,191

 

Investment in equity affiliate

 

21

 

 

 

 

 

 

Deferred financing costs

 

8

 

23

 

31

 

38

 

84

 

17

 

Note receivable from related party

 

 

 

 

 

158

 

 

Other

 

26

 

33

 

88

 

91

 

68

 

109

 

 

 

$

1,000

 

$

2,774

 

$

2,705

 

$

2,814

 

$

2,932

 

$

3,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

145

 

$

605

 

$

504

 

$

546

 

$

438

 

$

701

 

Long-term debt, less current portion

 

315

 

1,113

 

1,214

 

1,366

 

1,967

 

1,109

 

Note payable to related party, net

 

 

 

 

271

 

 

 

Other

 

184

 

64

 

148

 

153

 

157

 

691

 

Redeemable equity units

 

6

 

27

 

24

 

13

 

10

 

 

Capital

 

350

 

965

 

815

 

465

 

360

 

865

 

 

 

$

1,000

 

$

2,774

 

$

2,705

 

$

2,814

 

$

2,932

 

$

3,366

 

 


(a)                                  The following were included in our 2008 net loss:

 

·                  Operating results of the Paper and Packaging & Newsprint businesses through February 21, 2008;

 

·                  $208.1 million charge for the other-than-temporary impairment of our investment in Boise Inc.;

 

·                  $11.0 million of net expense for facility closure costs and asset sales; and

 

·                  $6.3 million of expense related to changes in the fair value of our interest rate swaps, which were terminated in February 2008.

 

(b)                                 The following were included in 2007 net income:

 

·                  $4.4 million gain for changes in our retiree healthcare programs;

 

·                  Approximately $8.4 million of income related to the change in the fair value of interest rate swaps in connection with the repayment of some of our variable-rate debt, partially offset by $4.6 million of expense related to changes in the fair value of our interest rate swaps that we accounted for as economic hedges; and

 

·                  $6.3 million of expense related to the write-off of deferred financing costs in connection with the repayment of debt.

 

(c)                                  Net income in 2006 included a $3.7 million gain for changes in our retiree healthcare programs.

 

(d)                                 The following were included in 2005 net income:

 

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·                  $9.9 million net gain for the change in the fair value of interest rate swaps;

 

·                  $43.0 million of expense related to the write-off of deferred financing costs in connection with the repayment of debt; and

 

·                  $9.9 million gain for changes in our retiree healthcare programs.

 

(e)                                  We used purchase accounting to account for the acquisition of the forest products and paper assets from OfficeMax (the Forest Products Acquisition). As a result of purchase price accounting, we increased the value of our inventory, which increased the costs and expenses recognized by us upon the sale of the inventory by $20.2 million for the period of October 29 (inception) through December 31, 2004.

 

(f)                                    Net income for the period of January 1 through October 28, 2004, included the following:

 

·                  $46.5 million pretax gain for the sale of our Predecessor’s 47% interest in Voyageur Panel;

 

·                  $7.1 million of costs incurred in connection with the February 2004 sale of our Predecessor’s plywood and lumber operations in Yakima, Washington;

 

·                  $12.7 million of expense, primarily for a one-time retention bonus OfficeMax granted to our employees; and

 

·                  $14.6 million of noncash restricted stock expenses.

 

(g)                                   The following table reconciles net income (loss) to EBITDA for the periods indicated:

 

 

 

BC Holdings

 

Predecessor

 

 

 

Year Ended December 31

 

October 29
(inception)
through
December 31,

 

January 1
through
October 28,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

2004

 

 

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(288

)

$

128

 

$

72

 

$

121

 

$

25

 

$

69

 

Change in fair value of interest rate swaps

 

6

 

(4

)

 

(10

)

 

 

Interest expense

 

34

 

97

 

112

 

166

 

22

 

72

 

Interest income

 

(8

)

(4

)

(4

)

(3

)

(2

)

 

Income tax provision (benefit)

 

 

8

 

4

 

(2

)

 

47

 

Depreciation, amortization, and depletion

 

36

 

124

 

155

 

129

 

20

 

194

 

EBITDA

 

$

(218

)

$

349

 

$

339

 

$

401

 

$

65

 

$

382

 

 

EBITDA represents income (loss) before interest (interest expense, interest income, and change in fair value of interest rate swaps), income taxes, and depreciation, amortization, and depletion. EBITDA is the primary measure used by our chief operating decision makers to evaluate segment operating performance and to decide how to allocate resources to segments. We believe EBITDA is useful to investors because it provides a means to evaluate the operating performance of our segments and our company on an ongoing basis using criteria that are used by our internal decision makers and because it is frequently used by investors and other interested parties in the evaluation of companies. We believe EBITDA is a meaningful measure because it presents a transparent view of our recurring operating performance and allows management to readily view operating trends, perform analytical comparisons, and identify strategies to improve operating performance. For example, we believe that the inclusion of items such as taxes, interest expense, and interest income distorts management’s ability to assess and view the core operating trends in our segments. EBITDA, however, is not a measure of our liquidity or financial performance under generally accepted accounting principles (GAAP) and should not be considered as an alternative to net income (loss), income (loss) from operations, or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity. The use of EBITDA instead of net income (loss) or segment income (loss) has limitations as an analytical tool, including the inability to determine profitability; the exclusion of interest expense, interest income, change in the fair value of interest rate swaps, and associated significant cash requirements; and the exclusion of depreciation, amortization, and depletion. Management compensates for these limitations by relying on our GAAP results. Our measures of EBITDA are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation.

 

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements, along with any other nonhistorical statements in the discussion, are forward-looking. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Item 1A. Risk Factors” of this Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission (SEC). We do not assume an obligation to update any forward-looking statement. Our actual results may differ materially from those contained in or implied by any of the forward-looking statements in this Form 10-K.

 

Executive Overview

 

Background

 

Our operations began on October 29, 2004 (inception), when we acquired the forest products and paper assets of OfficeMax (the Forest Products Acquisition). Before the Forest Products Acquisition, OfficeMax was known as Boise Cascade Corporation. We acquired the name “Boise Cascade” as part of the Forest Products Acquisition.

 

On February 22, 2008, Boise Cascade, L.L.C., our wholly owned direct subsidiary, sold its Paper and Packaging & Newsprint assets and most of its Corporate and Other assets (the Sale) to Boise Inc. (formerly Aldabra 2 Acquisition Corp.) for cash and securities equal to $1.6 billion, plus working capital adjustments. See the discussion under “Sale of Our Paper and Packaging & Newsprint Assets” below for more information. After the Sale, we became a focused building products company headquartered in Boise, Idaho. We manufacture engineered wood products, plywood, lumber, and particleboard and distribute a broad line of building materials, including wood products we manufacture.

 

Overview

 

We begin this discussion and analysis with a general overview of the effects of the “Sale of Our Paper and Packaging & Newsprint Assets,” including the impact on our segment reporting, anticipated impact of decreased leverage, changes in pension expense as a result of operating as a smaller company, and the effect of entering into an Outsourcing Services Agreement with Boise Inc. through which they provide us with a number of corporate staff services to us at cost.

 

Next, we discuss our three operating segments – Building Materials Distribution, Wood Products, and Corporate and Other. The discussion of “Recent Trends and Operational Outlook” and “Factors That Affect Our Operating Results,” is intended to give the reader an overview of the goals and challenges of our business and the direction in which our business and products are moving. Recent results for our business segments remain weak, compared with those we achieved in the periods of 2004 through the first half of 2007, when single-family housing starts were more robust. Tightening credit markets and an overhang of homes available for sale have created uncertainty for potential home buyers. The result has been very weak demand for building products and continued downward pricing pressure. Our results are also affected by, among other things, volatility in raw material prices, including chemical costs, labor costs, and energy costs. We do not expect housing starts to improve in 2009. See additional comments below in “Recent Trends and Operational Outlook.”

 

The analysis then reviews “Our Operating Results” for 2008, compared with 2007, and 2007, compared with 2006. Following the analysis of our results, relevant merger activity in our industry is discussed in “Industry Mergers and Acquisitions.”

 

The analysis then provides discussion of changes in our balance sheet and cash flows and our financial commitments in the section entitled “Liquidity and Capital Resources.” The analysis then addresses our “Contractual Obligations” and “Disclosures of Financial Market Risks.” These sections are followed by a discussion of the “Critical Accounting Estimates” that our management believes are important to understanding the assumptions and judgments incorporated in our reported financial results.

 

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Sale of Our Paper and Packaging & Newsprint Assets

 

On February 22, 2008, Boise Cascade, L.L.C., our wholly owned direct subsidiary, sold its Paper and Packaging & Newsprint assets and most of its Corporate and Other assets (the Sale) to Boise Inc. (formerly Aldabra 2 Acquisition Corp.) for $1,277.2 million of cash consideration, $285.2 million of net stock consideration, and a $41.0 million paid-in-kind promissory note receivable. In connection with the Sale, we recorded a $5.7 million gain, of which we recognized $2.9 million in our 2008 Consolidated Statement of Loss. We deferred $2.8 million of the gain as a reduction of our investment in Boise Inc., in accordance with Emerging Issues Task Force (EITF) No. 01-02, Interpretations of Accounting Principles Board (APB) Opinion No. 29.

 

Immediately following the Sale, Boise Cascade, L.L.C., distributed the stock and paid-in-kind note receivable to us. Subsequent to the distribution to us, the note receivable from Boise Inc. increased $17.3 million for working capital adjustments, and in June 2008, we sold the note receivable for $52.7 million after selling expenses. For more information, see Note 5, Transactions With Related Parties, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. As a result, we became a 49% owner of Boise Inc. and continue to have a significant indirect financial interest in the results of the sold businesses. We account for our interest in Boise Inc. using the equity method of accounting. See the “Our Operating Results” section of Management’s Discussion and Analysis and Results of Operations of this Form 10-K for more information related to our investment in Boise Inc.

 

Use of Sale Proceeds

 

With the proceeds from the Sale and an initial borrowing under our five-year $350 million senior secured asset-based revolving credit facility (the Revolving Credit Facility), we:

 

·                  Repaid $1,085.6 million of our long-term debt;

 

·                  Paid $11.9 million to unwind all of our interest rate swaps;

 

·                  Made $120.7 million of tax distributions to our equity holders to permit the equity holders to pay a portion of the income taxes related to the gain on the Sale. In connection with the Sale, we accrued $200 million for these distributions; however, the taxable gain on the Sale was partially offset by 2008 taxable losses. At December 31, 2008, we recorded $11.0 million in “Accrued liabilities, Other” on our Consolidated Balance Sheet for our final expected tax distribution related to the gain on the Sale;

 

·                  Paid $18.3 million to repurchase equity units from management investors that terminated employment with us in connection with the Sale; and

 

·                  In January 2009, we paid $2.5 million of the $4.4 million accrued under the deferred compensation agreements for employees terminated in connection with the Sale.

 

The disposition of the net proceeds from the sale of the note receivable from Boise Inc. and any future disposition by us of Boise Inc. shares must comply with the terms of our senior subordinated notes indenture, which generally requires us to use the net proceeds (as defined in the indenture) from asset sales within one year to repay senior indebtedness, acquire additional assets, or make a tender offer at par for a portion of the senior subordinated notes.

 

Pro Forma

 

The following pro forma financial information was derived from the consolidated financial statements of Boise Cascade Holdings, L.L.C. (BC Holdings). The pro forma financial information gives effect to the Sale as if it were consummated on January 1, 2008. The pro forma financial information is intended for informational purposes only and is not necessarily indicative of the results of operations that may have actually occurred if the Sale had been consummated on January 1, 2008, or the operating results that may be obtained in the future.

 

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Year Ended
December 31,

 

 

 

2008

 

 

 

(millions)

 

 

 

 

 

Sales

 

$

2,635.1

 

 

 

 

 

Net income (loss)

 

$

(304.8

)(a)

 


(a)                                  The pro forma net loss for the year ended December 31, 2008, included pro forma expense of $16.2 million related to our equity interest in Boise Inc.; included a $208.1 million write-down of our investment in Boise Inc.; included $6.3 million of expense related to changes in the fair value of our interest rate swaps, which we terminated in February 2008; included $4.1 million of related-party interest income from the note receivable from Boise Inc., which was sold in June 2008; and excluded $2.9 million of gain on the Sale.

 

Effects of the Sale

 

Segments

 

Prior to the Sale, we operated our business using five reportable segments:  Building Materials Distribution, Wood Products, Paper, Packaging & Newsprint, and Corporate and Other. After the Sale, we operate our business using three reportable segments:  Building Materials Distribution, Wood Products, and Corporate and Other. There are no differences in our basis of measurement of segment profit or loss from the basis used in prior periods. The equity interest we own in Boise Inc. after the Sale represents a significant continuing involvement as defined in Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As a result, we continue to show the results of the Paper and Packaging & Newsprint segments through February 21, 2008, and we did not define the sold assets as discontinued operations.

 

Decreased Leverage

 

With the proceeds from the Sale and an initial borrowing under the Revolving Credit Facility, we repaid $1,085.6 million of long-term debt, including all of the borrowings under the previous revolving credit facility, Tranche E term loan, delayed-draw term loan, borrowings secured by our receivables, and $160.0 million of our 7.125% senior subordinated notes. At December 31, 2008, we had $315.0 million of debt outstanding, compared with $1,171.1 million at December 31, 2007. For more information, see “Financing Activities” under “Liquidity and Capital Resources” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Pension and Benefit Plans

 

Effective January 1, 2008, we spun off the portion of each benefit plan attributable to employees or retirees of the Paper and Packaging & Newsprint businesses. Effective February 22, 2008, under the terms of the Purchase and Sale Agreement with Boise Inc., we transferred sponsorship of the spunoff plans to Boise Paper Holdings, L.L.C., a subsidiary of Boise Inc., and only those employees, terminated vested participants, and retirees whose employment was with our Wood Products, Building Materials Distribution, and some corporate and discontinued operations continue to be covered under the plans remaining with us. As a result of the Sale, our annual pension expense and contributions to the plans going forward will be less than they would have been had the Sale not occurred.

 

Outsourcing Services Agreement

 

In connection with the Sale, we entered into an Outsourcing Services Agreement under which Boise Inc. provides a number of corporate staff services to us at cost. These services include information technology, accounting, and human resource services. The initial term of the agreement is for three years. It will automatically renew for one-year terms unless either party provides notice of termination to the other party at least 12 months in advance of the applicable term. The Outsourcing Services Agreement also gives us (but not Boise Inc.) the right to terminate all or any portion of the services provided to us on 30 days’ notice, subject to payment of an absorption fee. The absorption fee of $5.0 million is allocated among the services provided under the contract and declines to zero in total and on an allocable basis over the initial three-year term of the agreement. In 2008, we recognized $12.1 million of costs related to this agreement, of which we recorded $1.7 million in “Materials, labor, and

 

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other operating expenses from related parties,” $2.3 million in “Selling and distribution expenses,” and $8.1 million in “General and administrative expenses from related party” in our Consolidated Statement of Loss.

 

Assets and Liabilities Held for Sale

 

In September 2007, in anticipation of the Sale, we reclassified the assets and liabilities of our Paper and Packaging & Newsprint segments, as well as some of the assets and liabilities included in our Corporate and Other segment, to “Assets held for sale” and “Liabilities related to assets held for sale” on our Consolidated Balance Sheet and stopped depreciating and amortizing those assets. As discussed above, we sold these assets to Boise Inc. on February 22, 2008.

 

Our Segments

 

After the Sale, we operate our business using three reportable segments:  Building Materials Distribution, Wood Products, and Corporate and Other. These segments represent distinct businesses that are managed separately because of differing products and services. Each of these businesses requires distinct operating and marketing strategies. Management reviews the performance of the company based on these segments.

 

Building Materials Distribution.  Our Building Materials Distribution segment is a leading national stocking wholesale distributor of building materials. We distribute a broad line of building materials, including engineered wood products (EWP), oriented strand board (OSB), plywood, lumber, and general line items such as framing accessories, composite decking, roofing, siding, and insulation. We purchase most of these building materials from third-party suppliers and market them primarily to customers that resell building materials to professional builders in the residential, light commercial construction, and repair-and-remodeling markets.

 

Wood Products.  Our Wood Products segment manufactures and sells EWP, consisting of laminated veneer lumber (LVL), a high-strength engineered lumber often used in beams; I-joists, a structural support typically used in floors and roofs; and laminated beams. We also produce plywood, particleboard, dimension lumber, and high-quality ponderosa pine lumber, a premium lumber grade sold primarily to manufacturers of specialty wood windows, moldings, and doors. Our wood products are used primarily in residential, light commercial construction, and repair-and-remodeling markets. Most of these products are sold to wholesalers, major retailers, and industrial converters or through our own wholesale building materials distribution outlets. During 2008, approximately 46% of the wood products we manufactured, including approximately 67% of our EWP, were sold to our Building Materials Distribution segment.

 

Corporate and Other.  Our Corporate and Other segment primarily includes corporate support staff services, related assets and liabilities, and foreign exchange gains and losses. These support services include, but are not limited to, finance, accounting, legal, information technology, and human resource functions. Since the Sale, we have purchased many of these services from Boise Inc. under an Outsourcing Services Agreement, under which Boise Inc. provides a number of corporate staff services to us at cost. See Note 5, Transactions With Related Parties, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for more information. Prior to the Sale, this segment also included certain rail and truck transportation businesses and related assets. During the years ended December 31, 2008, 2007, and 2006, segment sales related primarily to our rail and truck transportation businesses and were $8.6 million, $58.9 million, and $60.7 million, respectively.

 

Recent Trends and Operational Outlook

 

The U.S. Census Bureau reported 2008 housing starts in the U.S. at 0.9 million units, which is significantly below historical trends of an average of approximately 1.7 million units per year over the prior ten years. In December 2008 and January 2009, the number of seasonally adjusted annualized units declined to 0.6 million units and 0.5 million units, respectively. Housing starts in 2004 and 2005 were approximately 2.0 million per year, with 2006 and 2007 coming in around 1.8 million units and 1.4 million units, respectively. This above-trend period was fueled by low mortgage rates, a strong economy with low unemployment, and the growth of the subprime mortgage market and the various mortgage securitization mechanisms developed by financial institutions. In the second half of 2007, turbulence in the mortgage

 

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market and a significant oversupply of homes for sale led to a sharp drop-off in housing construction and demand for our products. The inventory of unsold homes is elevated relative to historical levels and foreclosure rates have increased in many parts of the United States. Housing markets across the country have been negatively affected by recent events.

 

While our products are used in repair-and-remodel activities, as well as light commercial construction, our results are principally driven by new single-family home construction. In many parts of the country, demand for building products continues to be weak, and there is ongoing pricing pressure as suppliers compete for the limited business available.

 

Input costs are another key factor of our recent results. Energy costs, including electricity, natural gas, and diesel fuel, were higher than historical norms in the spring and summer of 2008. This raised our freight and manufacturing costs both directly and indirectly by raising key variable-cost inputs, such as glues and resins. Global supply and demand factors, as well as the weak U.S. dollar, contributed to the persistence of higher energy and other commodity price trends. These trends in energy and commodity prices reversed in the second half of the year as the markets began to anticipate a global economic slowdown. Our log costs have started to decline as a result of weak industry conditions.

 

We expect market conditions during 2009 to remain difficult. During 2008, we took rolling curtailments at a number of our wood products operations to maintain appropriate inventory levels, while trying to minimize the negative impact of the curtailments on our employees and our operating results. In 2008, we permanently closed our White City, Oregon, lumber operation and our St. Helens, Oregon, veneer operation. We also sold our Brazilian subsidiary. In March 2009, we will close our plywood operation in White City, Oregon. It is likely that we will need to continue our practice of rolling curtailments at a number of our facilities, doing so in a manner that allows us to retain our skilled workforce and keep our inventories in balance in light of weak demand and product pricing. We will continue to evaluate the long-term viability and value to our business strategy of our remaining operating facilities and may conclude that additional facilities should be closed or sold in response to market conditions.

 

Factors That Affect Our Operating Results

 

Our results of operations and financial performance are influenced by a variety of factors, including the following:

 

·                  General economic conditions, including but not limited to housing starts, repair-and-remodel activity and nonresidential construction, and relative currency values;

 

·                  Mortgage pricing and availability, as well as other consumer financing mechanisms, that ultimately impact demand for our products;

 

·                  Volatility in raw material costs, including energy prices and log costs;

 

·                  The commodity nature of our products and their price movements, which are driven largely by supply and demand;

 

·                  Pricing volatility in our distribution business;

 

·                  Industry cycles and capacity utilization rates;

 

·                  The cost and ability to obtain necessary financing;

 

·                  Continued compliance with government regulations;

 

·                  Legislative or regulatory environments, requirements, or changes affecting the businesses in which we are engaged;

 

·                  Labor and personnel relations and shortages of skilled and technical labor;

 

·                  Credit or currency risks affecting our revenue and profitability;

 

·                  Major equipment failure;

 

·                  Severe weather phenomena such as drought, hurricanes, tornadoes, and fire;

 

·                  Our ability to implement our strategies;

 

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·                  Actions of suppliers, customers, and competitors, including merger and acquisition activities;

 

·                  Financial results of Boise Inc., which we account for under the equity method of accounting;

 

·                  Boise Inc.’s performance under the Outsourcing Services Agreement; and

 

·                  The other factors described in “Part I, Item 1A. Risk Factors” in this Form 10-K.

 

Commodity and Differentiated Products and Services

 

Many of the products we manufacture and distribute are widely available and can be readily produced or distributed by our competitors. Because commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand. Generally, market conditions beyond our control determine the price for our commodity products, and the price for any one or more of these products may fall below our cash production costs or our cost of procurement. Therefore, our profitability with respect to these products depends on managing our cost structure, particularly raw material and energy costs, which also exhibit commodity characteristics.

 

Not all of our products are viewed as commodities in the marketplace. Our engineered wood products (EWP) are differentiated from competing products based on quality and product design, as well as related customer service. In the case of EWP products, we are generally able to influence price based on the strength of differentiation and levels of customer service and are generally able to sell these products at higher margins than our commodity products. A fundamental component of our strategy is to grow EWP as a share of our total Wood Products segment sales. We believe this product is less susceptible to commodity pricing dynamics.

 

Comparing 2008 with 2007, sales of EWP from our Wood Products segment decreased from approximately 42% of segment sales in 2007 to 33% of sales in 2008. The ongoing weakness in new residential construction has impeded our ability to grow our EWP sales. Comparing 2008 with 2007, our laminated veneer lumber (LVL) and I-joist sales volumes decreased 28% and 38%, respectively.

 

Our Building Materials Distribution segment distributes a significant number of commodity and branded building materials. While we must be competitive on price, our associates and management team understand the positive impact excellent customer service, process innovation, and local market adaptation can have on differentiating our function in the marketplace and generating superior returns on invested capital.

 

Demand

 

Historically, demand for the products we manufacture, as well as the products we purchase and distribute, has been closely correlated with new residential construction in the United States and to a lesser extent light commercial construction and residential repair-and-remodeling activity. Demand for new residential construction is influenced by seasonal weather factors, mortgage availability and rates, unemployment levels, household formation rates, immigration rates, homeowner vacancies, demand for second homes, existing home prices, consumer confidence, and other general economic factors. Industry supply is influenced primarily by operating rates of existing facilities but is also influenced over time by the introduction of new product technologies and capacity additions. The balance of supply and demand in the U.S. is also heavily influenced by imported products, principally from Canada.

 

Housing starts in the U.S. have fallen dramatically since early 2006, resulting in much lower building products shipments and pricing for us and many others in the industry. The length and magnitude of industry cycles have varied over time, and we are uncertain as to how long the current supply-demand imbalances will persist. Many of the wood products we produce or distribute, including oriented strand board (OSB), plywood, lumber, and particleboard, are commodities that are widely available from other producers or distributors. Even our noncommodity products, such as EWP, are affected by commodity prices since the cost of producing EWP is affected by veneer and OSB prices. Commodity products have few distinguishing qualities from producer to producer, and as a result, competition for these products is based primarily on price, which is determined by supply relative to demand.

 

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Supply

 

Industry supply of wood products is affected by the number of operational or idled facilities, the building of new capacity, and the shutting down of existing capacity. Capacity also tends to increase gradually over time without significant capital expenditures, as manufacturers improve production efficiencies. Generally, more capacity is added or employed when supply is tight and margins are relatively high, and capacity is idled or eliminated when capacity significantly exceeds demand and margins are poor.

 

While new capacity additions are constrained by the high capital investment and long lead times required to plan, obtain regulatory approvals for, and build a new mill, a favorable pricing environment may prompt manufacturers to initiate expansion projects.

 

Some major OSB producers have announced indefinite shutdowns or permanent closures of existing facilities, and others have announced delays in previously announced capacity additions. A number of OSB producers have announced the intention to produce a strand lumber product that is intended to be a substitute for EWP in some applications. One of the strand lumber mills recently announced commencement of production. The ability of the facility to cost-effectively produce such a product that meets required performance standards and its impact on the EWP market are uncertain. A number of lumber and plywood producers have also announced temporary, indefinite, or permanent facility curtailments in response to the weak demand environment.

 

Industry supply of wood products is also influenced by the level of imports and overseas production capacity, which has grown in recent years. The relative weakness of the U.S. dollar has mitigated the level of imports in recent years.

 

Operating Costs

 

Our major costs in our Wood Products segment are labor, wood fiber, energy, and chemicals. Given the significance of raw material and energy costs to our total operating expenses and our limited ability to control these costs, volatility in these costs can materially affect our margins. In addition, the timing and degree of price cycles of raw materials and energy differ with respect to each type of raw material and energy we use.

 

In our Building Materials Distribution segment, the primary cost is for products procured for resale, which represents over 90% of our total costs. Occupancy, labor, and delivery costs are also important factors that affect our earnings in this segment.

 

Labor.  Our labor costs tend to increase steadily due to inflation in healthcare and wage costs.

 

As of February 28, 2009, we had approximately 4,600 employees. Approximately 1,700, or 37%, of these employees work pursuant to collective bargaining agreements. Labor contracts covering approximately 700 employees with the Carpenters Industrial Council expire on July 15, 2009, at our Florien and Oakdale, Louisiana, plywood plants. We do not anticipate that we will start bargaining these contracts until late in the second quarter of 2009. We do not expect material work interruptions or increases in our costs during the course of the negotiations with our collective bargaining units. Nevertheless, if our expectations are not accurate, we could experience a material labor disruption or significantly increased labor costs at one or more of our facilities, any of which could prevent us from meeting customer demand or reduce our sales and profitability.

 

Wood fiber.  Our primary raw material is wood fiber. For the years ended December 31, 2008, 2007, and 2006, wood fiber accounted for 39%, 42%, and 40% of materials, labor, and other operating expenses, including from related parties, in our Wood Products segment.

 

Our primary sources of logs and wood fiber are timber and byproducts of timber, such as wood shavings and sawdust. Our wood fiber costs also include purchases of semifinished materials, such as OSB and lumber, for use in EWP production. We acquire substantially all of our fiber from outside sources. In our Wood Products segment, we convert logs into lumber and veneer, and in turn, we convert veneer into EWP and plywood. Logs are a lower percentage of the total cost of materials, labor, and other operating expenses in producing EWP than commodity products, such as lumber and plywood. While log costs are still a significant component of costs, as we produce more EWP relative to commodity products

 

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over time, direct-log costs decline as a percentage of the total cost of materials, labor, and other operating expenses. We also convert residual wood fiber from our operations, as well as from third parties, into particleboard.

 

Curtailments of solid wood manufacturing in the Northwest led to limited availability and higher prices for residual fiber in the first half of 2008. Pulp mill curtailments in the Northwest in the second half of 2008, as well as steps taken by pulp producers to manufacture wood chips, resulted in weaker prices for residual fiber as the year progressed. This negatively impacted our byproducts sales of wood chips from our lumber, veneer, and plywood operations in the second half of 2008, and we expect this oversupply situation to continue into 2009.

 

Other raw materials and energy purchasing and pricing.  We purchase other raw materials and energy used to manufacture our products in both the open market and through long-term contracts. These contracts are generally with regional suppliers who agree to supply all of our needs for a certain raw material or energy at one of our facilities. These contracts normally contain minimum purchase requirements and are for terms of various lengths. They also contain price adjustment mechanisms that take into account changes in market prices. Therefore, although our long-term contracts provide us with supplies of raw materials and energy that are more stable than open-market purchases, in many cases, they may not alleviate fluctuations in market prices.

 

Our costs for raw materials are influenced by increases in energy costs. Specifically, some of our key chemicals, including glues and resins consumed in our Wood Products segment, are heavily influenced by energy costs. A number of our major suppliers have obtained price increases tied to their increased energy costs. For our commodity products, the relationship between industry supply and demand, rather than changes in the cost of raw materials, determines our ability to increase prices. Consequently, we may be unable to pass increases in our operating costs to our customers in the short term.

 

Energy.  Prices for energy, particularly electricity, natural gas, and diesel, have been volatile in recent years, at times substantially exceeding historical averages. For the years ended December 31, 2008, 2007, and 2006, energy costs represented approximately 5%, 4%, and 4% of materials, labor, and other operating expenses, including from related parties, in our Wood Products segment. Relative to the prior year, fuel costs increased in our Building Materials Distribution segment.

 

Chemicals.  Important chemicals we use in the production of our wood products are resins and glues. For the years ended December 31, 2008, 2007, and 2006, purchases of chemicals represented 6%, 7%, and 6% of materials, labor, and other operating expenses, including from related parties, in our Wood Products segment. We experienced higher chemical costs in the current year, compared with historical standards, due primarily to chemical market supply and demand dynamics.

 

Inflationary and seasonal influences.  Our major costs of production are labor, wood fiber, energy, and chemicals. Energy costs, particularly for electricity, natural gas, and fuel oil, have been volatile in recent years. We also experienced higher volatility in chemical costs in 2008, compared with historical trends, due primarily to chemical market supply and demand dynamics and the impact of energy markets on chemical producers. Seasonal changes in levels of building activity affect our building products businesses, which are dependent on housing starts, repair-and-remodel activity, and light commercial and industrial conversion activities. We typically have higher sales and working capital in the second and third quarters because of increased construction activity (due to warmer weather). In addition, seasonally cold weather increases costs, especially energy consumption, at most of our manufacturing facilities.

 

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Our Operating Results

 

The following tables set forth the results of operations in dollars and as a percentage of sales for the years ended December 31, 2008, 2007, and 2006:

 

 

 

Year Ended December 31

 

 

 

2008

 

2007

 

2006

 

 

 

(millions)

 

Sales

 

 

 

 

 

 

 

Trade

 

$

2,831.3

 

$

4,797.8

 

$

5,204.0

 

Related parties

 

146.2

 

615.7

 

575.9

 

 

 

2,977.5

 

5,413.5

 

5,779.9

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Materials, labor, and other operating expenses

 

2,620.1

 

4,705.3

 

5,063.1

 

Materials, labor, and other operating expenses from related parties

 

70.0

 

 

 

Depreciation, amortization, and depletion

 

36.3

 

123.9

 

155.3

 

Selling and distribution expenses

 

231.6

 

285.7

 

283.6

 

General and administrative expenses

 

36.6

 

84.1

 

88.4

 

General and administrative expenses from related party

 

8.1

 

 

 

Gain on sale of Paper and Packaging & Newsprint assets

 

(2.9

)

 

 

Other (income) expense, net

 

10.6

 

(5.7

)

6.1

 

 

 

3,010.4

 

5,193.3

 

5,596.5

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

(32.9

)

$

220.2

 

$

183.4

 

 

 

 

(percentage of sales)

 

Sales

 

 

 

 

 

 

 

Trade

 

95.1

%

88.6

%

90.0

%

Related parties

 

4.9

 

11.4

 

10.0

 

 

 

100.0

%

100.0

%

100.0

%

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Materials, labor, and other operating expenses, including from related parties

 

90.3

%

86.9

%

87.6

%

Depreciation, amortization, and depletion

 

1.2

 

2.3

 

2.7

 

Selling and distribution expenses

 

7.8

 

5.3

 

4.9

 

General and administrative expenses, including from related party

 

1.5

 

1.5

 

1.5

 

Gain on sale of Paper and Packaging & Newsprint assets

 

(0.1

)

 

 

Other (income) expense, net

 

0.4

 

(0.1

)

0.1

 

 

 

101.1

%

95.9

%

96.8

%

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(1.1

)%

4.1

%

3.2

%

 

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Sales Volumes and Prices

 

Set forth below are our segment sales volumes and average net selling prices for our principal products in our Building Materials Distribution and Wood Products segments for the years ended December 31, 2008, 2007, and 2006:

 

 

 

Year Ended December 31

 

 

 

2008

 

2007

 

2006

 

 

 

(millions)

 

Segment Sales

 

 

 

 

 

 

 

Building Materials Distribution

 

$

2,109.4

 

$

2,564.0

 

$

2,950.3

 

Wood Products

 

795.9

 

1,010.2

 

1,155.9

 

 

 

 

(percentage of Building Materials Distribution sales)

 

Product Line Sales

 

 

 

 

 

 

 

Commodity

 

46.2

%

44.0

%

45.2

%

Engineered wood

 

11.9

 

14.7

 

15.7

 

General line

 

41.9

 

41.3

 

39.1

 

 

 

 

(millions)

 

Sales Volumes

 

 

 

 

 

 

 

Wood Products

 

 

 

 

 

 

 

Laminated veneer lumber (LVL) (cubic feet)

 

7.6

 

10.6

 

12.1

 

I-joists (equivalent lineal feet)

 

117

 

188

 

219

 

Plywood (sq. ft.) (3/8” basis)

 

1,228

 

1,223

 

1,268

 

Lumber (board feet)

 

191

 

231

 

277

 

Particleboard (sq. ft.) (3/4” basis)

 

104

 

151

 

157

 

 

 

 

(dollars per unit)

 

Average Net Selling Prices

 

 

 

 

 

 

 

Wood Products

 

 

 

 

 

 

 

Laminated veneer lumber (LVL) (100 cubic feet)

 

$

1,573

 

$

1,702

 

$

1,896

 

I-joists (1,000 equivalent lineal feet)

 

942

 

1,026

 

1,110

 

Plywood (1,000 sq. ft.) (3/8” basis)

 

248

 

264

 

256

 

Lumber (1,000 board feet)

 

369

 

437

 

478

 

Particleboard (1,000 sq. ft.) (3/4” basis)

 

357

 

317

 

339

 

 

Operating Results

 

2008 Compared With 2007

 

Total sales decreased $2.4 billion, or 45%, to $3.0 billion in 2008 from $5.4 billion in 2007. The decrease was driven primarily by the sale of our Paper and Packaging & Newsprint assets in first quarter 2008. The sold businesses had sales of $2.3 billion in 2007. For the period of January 1 through February 21, 2008, the sold businesses had sales of $359.9 million. Sales decreased in our Building Materials Distribution and Wood Products segments due to weaker product demand and prices as new residential housing demand in the U.S. declined.

 

Building Materials Distribution.  Sales decreased $454.6 million, or 18%, to $2,109.4 million in 2008 from $2,564.0 million in 2007. The decrease was driven primarily by a 19% decline in the volume of product sold, offset in part by a 1% increase in product prices. The reduced volumes were the result of decreased demand in new residential construction markets. Relative to 2007, EWP sales represented a lower percentage of our overall Building Materials Distribution sales, as EWP sales are more dependent on new residential construction than the commodity products we sell.

 

Wood Products.  Sales decreased $214.3 million, or 21%, to $795.9 million in 2008 from $1,010.2 million in 2007. The decrease in sales was driven primarily by lower volumes and/or prices for all of our products. In 2008, the decline in EWP volumes and prices had the biggest impact on our reported sales. Compared with 2007, sales volumes for LVL and I-joists declined 28% and 38%, respectively, while the average net selling prices for both LVL and I-joists decreased approximately 8%. Also contributing to the decrease in sales during the year were lower sales prices for plywood, lower sales volumes for particleboard, and lower sales volumes and prices for lumber.

 

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Costs and Expenses
 

Materials, labor, and other operating expenses, including from related parties, decreased $2.0 billion, or 43%, to $2.7 billion in 2008, compared with $4.7 billion in 2007. The decrease was driven primarily by the sale of our Paper and Packaging & Newsprint assets in first quarter 2008. The sold businesses had materials, labor, and other operating expenses, including from related parties, of $2.0 billion in 2007. For the period of January 1 through February 21, 2008, the sold businesses had materials, labor, and other operating expenses, including from related parties, of $321.6 million. In our building products businesses, materials, labor, and other operating expenses, including from related parties, decreased due to lower purchased materials costs in our Building Materials Distribution segment due to lower sales volumes. Also contributing to the decline were lower log costs, offset in large part by higher conversion costs, in our Wood Products segment. Fiber costs for our Wood Products segment declined, primarily due to lower log prices and lower log consumption.

 

Depreciation, amortization, and depletion expenses decreased $87.6 million, or 71%, to $36.3 million in 2008, compared with $123.9 million in 2007. The year ended December 31, 2007, included approximately $84.6 million of depreciation and amortization expense related to the sold Paper, Packaging & Newsprint, and Corporate and Other segments that was not included in 2008, because the assets were sold on February 22, 2008, and because, prior to the Sale, we had discontinued depreciation and amortization on the assets as a result of classifying them as held for sale. Of the $84.6 million of depreciation and amortization expense recorded during the year ended December 31, 2007, $45.0 million related to our Paper segment, $37.7 million related to our Packaging & Newsprint segment, and $1.9 million related to our Corporate and Other segment.

 

Selling and distribution expenses decreased $54.1 million, or 19%, to $231.6 million in 2008, compared with $285.7 million in 2007. Relative to 2007, selling and distribution expenses decreased $50.4 million as a result of the sale of our Paper and Packaging & Newsprint assets in first quarter 2008. Selling and distribution expenses declined in our Building Materials Distribution and Wood Products segments due to lower sales activity; however, selling and distribution expenses were higher as a percentage of sales, as these costs did not decline at the same pace as sales.

 

General and administrative expenses, including $8.1 million of related party expenses incurred under the Outsourcing Services Agreement with Boise Inc., decreased $39.4 million, or 47%, to $44.7 million in 2008, compared with $84.1 million in 2007. The decrease was driven primarily by lower compensation costs associated with operating as a smaller company.

 

“Other (income) expense, net” includes miscellaneous income and expense items. The components of “Other (income) expense, net” in the Consolidated Statements of Income (Loss) are as follows:

 

 

 

Year Ended
December 31

 

 

 

2008

 

2007

 

 

 

(millions)

 

 

 

 

 

 

 

Facility closures (a)

 

$

9.9

 

$

 

Loss on sale of note receivable from related party (b)

 

8.4

 

 

Sales of assets, net (c)

 

(7.9

)

(2.3

)

Changes in retiree healthcare programs

 

 

(4.4

)

Other, net

 

0.2

 

1.0

 

 

 

$

10.6

 

$

(5.7

)

 


(a)                                  In 2008, we permanently closed our veneer operation in St. Helens, Oregon, and recorded $1.8 million of expense related to the closure in “Other (income) expense, net” and $2.0 million of expense for the write-down of log inventories in “Materials, labor, and other operating expenses” in our Consolidated Statement of Loss.

 

In December 2008, we committed to closing the plywood manufacturing facility in White City, Oregon, and we recorded $7.5 million of expense related to the planned closure. The facility is scheduled to close in March 2009.

 

(b)                                 In 2008, we sold the note receivable from Boise Inc. for $52.7 million after selling expenses, and we recorded an $8.4 million loss on the sale.

 

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(c)                                  In 2008, we sold our indirect wholly owned subsidiary in Brazil, Boise Cascade do Brasil LTDA., to Aracruz Celulose, S.A., for $45.5 million after selling expenses, and we recorded a $5.7 million net gain on the sale.

 

Income (Loss) From Operations

 

Income (loss) from operations decreased $253.1 million, or 115%, from income of $220.2 million in 2007 to a loss of $32.9 million in 2008. The decrease was primarily the result of the sale of our Paper and Packaging & Newsprint assets in first quarter 2008, which reported $160.5 million of income from operations in 2007 and $23.1 million of income from operations for the period of January 1 through February 21, 2008. We also reported lower operating income in our Building Materials Distribution and Wood Products segments as unprecedented turmoil in the mortgage market and a significant oversupply of homes for sale led to a sharp drop-off in housing construction and demand for our products. The impact of reduced demand on sales prices and volume is discussed in more detail below.

 

Building Materials Distribution.  Segment income decreased $32.3 million, or 62%, from $51.8 million in 2007 to $19.5 million in 2008. The decrease was driven primarily by lower gross margin dollars available to cover relatively fixed expenses, such as occupancy, payroll, and delivery costs, as sales volumes declined year over year.

 

Wood Products. Segment income (loss) decreased $78.7 million, or 333%, from income of $23.6 million in 2007 to a loss of $55.1 million in 2008. The decrease was driven primarily by a combination of lower sales volumes and/or prices for most of our products, coupled with higher conversion costs. These negatives were slightly offset by lower log costs. In addition, during 2008, the Wood Products segment recorded a $5.9 million net loss related to nonstrategic asset sales and/or expenses related to facility closures, compared with a $0.9 million net gain recorded in 2007.

 

Other

 

Equity in net loss of affiliate and impairment of investment in equity affiliate.  In connection with the Sale, we received 37.9 million, or 49%, of Boise Inc.’s shares. We recorded our investment in “Investment in equity affiliate” on our Consolidated Balance Sheet. This ownership interest provides us with the ability to exercise significant influence. Accordingly, we account for our investment under the equity method of accounting. We adjust the amount of our investment monthly for our proportionate share of Boise Inc.’s net income or loss and our share of other comprehensive income or loss based on the most recently available financial statements. Our ownership interest and consequently our proportionate share of Boise Inc.’s net income or loss, changes when we or Boise Inc. engage in transactions of Boise Inc. common stock with third parties. Changes in ownership interest may also result in our recording an ownership interest dilution gain or loss.

 

In 2008, we recorded $219.4 million of expense related to our investment in Boise Inc. in our Consolidated Statement of Loss. Of the $219.4 million of expense, we recorded $208.1 million of expense in “Impairment of investment in equity affiliate” and $11.3 million of expense in “Equity in net loss of affiliate” in our Consolidated Statement of Loss as follows (in millions):

 

Impairment of investment in equity affiliate (a)

 

$

(208.1

)

 

 

 

 

Equity in Boise Inc.’s net loss

 

(22.8

)

Adjustment for impairment recognized by Boise Inc. (b)

 

6.2

 

Amortization of basis differential (c)

 

5.3

 

Equity in net loss of affiliate

 

(11.3

)

 

 

 

 

Total

 

$

(219.4

)

 


(a)                                  On September 30, 2008, we concluded that our investment in Boise Inc. met the definition of other than temporarily impaired as defined in APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. We made this determination based primarily on the length of time and extent to which the fair value of our investment had been trading below its carrying value. The Boise Inc. stock trading price declined from $8.56 on February 21, 2008, to $1.56 on September 30, 2008. Accordingly, we recorded a $208.1 million charge in “Impairment of investment in equity affiliate” in our Consolidated Statement of Loss in 2008. This charge reflects the decrease in the fair value of the investment below its carrying value. The fair value of our investment in Boise Inc. was calculated based on our 37.9 million of Boise Inc. shares and Boise Inc.’s stock price on September 30, 2008, of $1.56.

 

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(b)                                 In accordance with APB No. 18, we allocated the $208.1 million impairment charge to Boise Inc.’s long-lived assets on a pro rata basis based on the net book values assigned to their assets on September 30, 2008. Subsequent to our recording an impairment of our investment, Boise Inc. recognized a $19.8 million charge for the impairment of long-lived assets, of which we were allocated 49% when we recorded our proportionate share of Boise Inc.’s net loss. Based on our allocation of the $208.1 million charge to Boise Inc.’s long-lived assets, we concluded we had already expensed $6.2 million of the $19.8 million charge Boise Inc. recorded for long-lived asset impairment. Accordingly, we adjusted our equity in net loss of Boise Inc. for the $6.2 million we had already expensed.

 

(c)                                  At December 31, 2008, the carrying value of our investment in Boise Inc. was approximately $199.2 million less than our share of Boise Inc.’s underlying equity in net assets. The difference is due to the write-down of our investment in Boise Inc. In accordance with APB Opinion No. 18, we are amortizing the difference to income on a straight-line basis over 10.4 years, which represents the remaining weighted-average useful life of Boise Inc.’s assets. In 2008, the amortization of the basis differential resulted in our recognizing $5.3 million of income in “Equity in net loss of affiliate” and will result in our recognizing approximately $19.2 million of income per year for the next 10.4 years, which will be increased or decreased by our proportionate share of Boise Inc.’s net income or loss.

 

In accordance with SEC Regulation S-X Rule 3-09, Separate Financial Statements of Subsidiaries not Consolidated and 50 Percent or Less Owned Persons, we filed Boise Inc.’s 2008 audited consolidated financial statements as Exhibit 99 to this Form 10-K.

 

Change in fair value of interest rate swaps.  The years ended December 31, 2008 and 2007, included $6.3 million of expense and $3.7 million of income related to changes in the fair value of our interest rate swaps. We terminated all of the swaps in February 2008.

 

Interest expense.  In 2008, interest expense was $34.3 million, compared with $96.8 million in 2007. The decrease in interest expense is primarily attributable to the significant reduction in our long-term debt. At December 31, 2008, our long-term debt was $315.0 million, compared with $1.1 billion a year ago. The decrease in long-term debt is primarily attributable to the use of the majority of the proceeds from the Sale to reduce debt. For more information, see “Financing Activities” under “Liquidity and Capital Resources” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Income tax (provision) benefit.  Our income tax provision generally consists of income taxes payable to states that do not allow for the income tax liability to be passed through to our equity holders, as well as income taxes payable by our separate subsidiaries that are taxed as corporations. For the year ended December 31, 2008, income tax expense was $0.5 million, compared with $8.0 million in 2007. Relative to 2007, the decrease in income tax expense is primarily related to no income tax expense related to cash flow hedges in 2008. During the years ended December 31, 2008 and 2007, our effective tax rates for our separate subsidiaries that are taxed as corporations were 43.9% and 40.3%. The primary reason for the difference in tax rates is the effect of state income taxes and the mix of domestic and foreign sources of income.

 

2007 Compared With 2006

 

Sales

 

Total sales decreased $366.4 million, or 6%, to $5.4 billion in 2007 from $5.8 billion in 2006. Relative to 2006, sales decreased in Building Materials Distribution and Wood Products and increased in Paper and Packaging & Newsprint. The decrease in sales in Building Materials Distribution and Wood Products was driven primarily by lower residential construction demand. The increase in sales in Paper was driven primarily by higher sales prices, as producers curtailed production in response to lower demand. The increase in Packaging & Newsprint sales was driven primarily by higher sales prices for corrugated products and linerboard, as continued strong demand kept supply and demand well balanced. In addition, in both our Paper and Packaging & Newsprint segments, the weak U.S. dollar helped reduce the competitiveness of imports while increasing the competitiveness of U.S. exports.

 

Building Materials Distribution.  Sales decreased $386.3 million, or 13%, to $2,564.0 million in 2007 from $2,950.3 million in 2006. Sales volumes and prices decreased approximately 10% and 4%, respectively. The reduced volumes and prices were the result of decreased demand in new residential construction markets.

 

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Wood Products. Sales decreased $145.7 million, or 13%, to $1,010.2 million in 2007 from $1,155.9 million in 2006. Lower sales were the result of lower sales volumes for all of our products and lower sales prices for engineered wood products, lumber, and particleboard. The reduction in sales volumes and sales prices was the result of lower demand in new residential construction markets.

 

Paper.  Sales increased $101.5 million, or 7%, to $1,596.2 million in 2007 from $1,494.7 million in 2006. The increase in sales was the result of increased sales prices, as producers closed, converted, or curtailed operations to keep production balanced with demand.

 

Packaging & Newsprint.  Sales increased $16.6 million, or 2%, to $783.1 million in 2007 from $766.5 million in 2006. The increase in sales was driven by increased sales prices for corrugated products and linerboard, offset in part by lower sales prices for newsprint. The increase in sales prices for corrugated products was due to strong demand, while the decrease in newsprint sales prices was driven by continued lower demand trends, due in part to the growth of online media.

 

Costs and Expenses

 

Materials, labor, and other operating expenses decreased $357.8 million, or 7%, to $4.7 billion in 2007 from $5.1 billion in 2006. This decrease was driven primarily by lower purchased materials costs in our Building Materials Distribution segment of $368.1 million and lower wood costs in our Wood Products segment of $35.1 million, as decreased residential construction activity led to lower demand for these materials. In addition, compared with 2006, we had $9.2 million lower energy costs in our manufacturing businesses. These lower costs were offset in part by higher conversion costs in our Wood Products segment. Compared with 2006, fiber costs increased approximately $19.0 million and $25.4 million in our Paper and Packaging & Newsprint segments, respectively. These increases in fiber costs resulted primarily from a 12% per ton increase and 25% per ton increase in wood costs in our Paper and Packaging & Newsprint segments. In our Paper segment, fiber costs increased in early 2007, compared with 2006, as a result of reduced residual availability in the Pacific Northwest and higher purchased pulp and purchased wastepaper costs. In our Packaging & Newsprint segment, fiber costs increased as unusually wet weather in Louisiana reduced access to lowland forests, forcing us to procure wood from further distances. Compared with 2006, chemical costs increased $9.6 million and $3.8 million in our Paper and Packaging & Newsprint segments, respectively, as a result of higher prices for many of the commodity chemical inputs to our processes. Our Paper segment’s chemical cost increases were the result of higher prices for pulp, bleaching, and additives. In addition, we experienced increased fixed costs.

 

Depreciation, amortization, and depletion expenses decreased $31.4 million, or 20%, to $123.9 million in 2007 from $155.3 million in 2006. The year ended December 31, 2007, included $41.8 million of lower depreciation and amortization expense as a result of discontinuing depreciation and amortization on the assets recorded as held for sale in our Paper, Packaging & Newsprint, and Corporate and Other segments. This reduction in depreciation and amortization expenses was partially offset by an increase in depreciation expense as the result of our reviewing the estimated useful lives of some of our depreciable assets earlier in the year and determining that some of our assets would be used for a shorter period of time than the depreciable lives previously assigned to them. As a result, we revised our depreciation estimates to reflect the remaining expected use of the assets. This change in estimates increased depreciation, amortization, and depletion expenses by approximately $11 million in 2007.

 

Selling and distribution expenses increased $2.1 million, or 1%, to $285.7 million in 2007 from $283.6 million in 2006. As a percentage of sales, selling and distribution expenses increased to 5.3% in 2007 from 4.9% in 2006. The increase was driven primarily by increased distribution costs in our Building Materials Distribution segment as a result of incremental costs related to the additional lease expense for expansion of our distribution centers in California, Florida, and Ohio and the relocation of our distribution center in Georgia, primarily offset by lower depreciation expense in this segment.

 

General and administrative expenses decreased $4.3 million, or 5%, to $84.1 million in 2007 from $88.4 million in 2006. Relative to 2006, general and administrative expenses decreased, primarily due to lower training and compensation costs.

 

Other (income) expense, net, was $5.7 million of income in 2007, compared with $6.1 million of expense in 2006. In 2007, other (income) expense, net, primarily included $4.4 million of income for changes in our retiree healthcare programs and $2.3 million of income from the sales of assets, net. The

 

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income in 2007 was offset in part by $1.0 million of expense for project costs and other miscellaneous items. In 2006, other (income) expense, net, included $3.7 million of income for changes in our retiree healthcare programs, offset by $4.5 million of expense for special projects, $3.7 million of expense related to the loss on sale of assets, which includes $1.7 million of expense for the loss on the sale of our headquarters building, and other miscellaneous income and expense items.

 

Income (Loss) From Operations

 

Income from operations increased $36.8 million, or 20%, from $183.4 million in 2006 to $220.2 million in 2007. The increase was primarily the result of improved performance in the Paper segment, offset in part by lower income in the Wood Products, Building Materials Distribution, and Packaging & Newsprint segments.

 

Building Materials Distribution.  Segment income decreased $23.5 million, or 31%, from $75.3 million in 2006 to $51.8 million in 2007. The decrease was primarily due to lower sales volumes and sales prices, which were driven by lower demand in new residential construction markets. These decreases were offset in part by lower costs for purchased materials.

 

Wood Products. Segment income decreased $13.6 million, or 37%, from $37.2 million in 2006 to $23.6 million in 2007. The decrease was driven primarily by lower sales prices and sales volumes, coupled with higher conversion costs. These decreases were offset in part by lower log and other raw material costs.

 

Paper.  Segment income increased $69.2 million, or 110%, to $132.3 million in 2007, compared with $63.1 million in 2006. The increase was driven by higher sales prices, offset in part by higher fiber and chemical costs. In addition, we recorded $21.7 million of lower depreciation and amortization expenses as a result of discontinuing depreciation and amortization on the assets recorded as held for sale.

 

Packaging & Newsprint.  Segment income decreased $5.2 million, or 11%, from $45.3 million in 2006 to $40.1 million for 2007. The decrease was driven primarily by lower newsprint prices, coupled with higher fiber costs, offset in part by higher prices for corrugated products and linerboard. In addition, we recorded $19.1 million of lower depreciation and amortization expenses as a result of discontinuing depreciation and amortization on the assets recorded as held for sale.

 

Other

 

Change in fair value of interest rate swaps. For the year ended December 31, 2007, we recorded $3.7 million of income in “Change in fair value of interest rate swaps,” which included $8.4 million of income related to the change in the fair value of interest rate swaps in connection with the repayment of some of our variable-rate debt, partially offset by $4.6 million of expense related to changes in the fair value of our interest rate swaps that we accounted for as economic hedges.

 

Interest expense.  For the year ended December 31, 2007, interest expense was $96.8 million, compared with $112.4 million in 2006. The decrease in interest expense is primarily attributable to repaying the note payable to a related-party entity, Boise Land & Timber Corp., in November 2006, as well as a $46.0 million decrease in debt outstanding at December 31, 2007, compared with December 31, 2006. Partially offsetting the decrease in interest expense were the write-off of $4.5 million of deferred financing costs resulting from the repayment of our $250 million unsecured floating-rate notes and the $1.8 million write-off resulting from the repayment of our Tranche D term loan and reduction in borrowing capacity under our previous revolving credit facility.

 

Income tax (provision) benefit.  Income tax expense was $8.0 million in 2007, compared with $3.6 million in 2006. For the year ended December 31, 2007, the increase primarily related to income tax expense related to our cash flow hedges and the true-up of miscellaneous state income tax items. For the year ended December 31, 2007, our effective tax rate for our separate subsidiaries that are taxed as corporations was 40.3%, compared with 37.3% for 2006. The primary reason for the difference in tax rates is the effect of state income taxes and the mix of domestic and foreign sources of income. The 2006 income tax expense relates primarily to expense recognized by our taxable subsidiaries.

 

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Industry Mergers and Acquisitions

 

We have not seen significant merger and acquisition activity in the building products area other than the acquisition of International Paper’s wood products facilities by Georgia-Pacific in 2007.

 

We may engage in acquisition or divestiture discussions, including those entered into during the year, as discussed in “Sale of Our Paper and Packaging & Newsprint Assets” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, with other companies and make divestitures from time to time. We review our operations and dispose of assets that fail to meet our criteria for return on investment or cease to warrant retention for other reasons. In 2008, we sold our Brazilian subsidiary. For additional information related to the sale of our Brazil operations, see the discussion of “Other (income) expense, net” in “Costs and Expenses” under “Our Operating Results” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Liquidity and Capital Resources

 

During 2008, our liquidity position strengthened as we used the proceeds from the Sale and an initial borrowing under the Revolving Credit Facility to repay $1,085.6 million of long-term debt. In addition, we received $121.8 million in net proceeds from the sale of other nonstrategic assets (see Investment Activities below for more information). At December 31, 2008, we had $275.8 million of cash and cash equivalents, compared with $57.6 million at December 31, 2007. We are obligated under our 7.125% senior subordinated notes to use the net proceeds (as defined in the indenture) of $98.3 from the sale of nonstrategic assets within one year to repay senior indebtedness, acquire additional assets, or make a tender offer at par for a portion of the senior subordinated notes. At December 31, 2008, we had approximately $72.5 million of cash that remained governed by the senior subordinated note asset sale provision. The one year provision in our senior subordinated note agreement requires that we use $27.0 million and $45.5 million of the proceeds by June 10 and July 1, 2009, respectively. We expect to use $15 million to $20 million of the remaining cash from these asset sales to make capital expenditures with the remainder expected to be used to repay indebtedness under the Revolving Credit Facility.

 

At December 31, 2008, the net cash proceeds received from the asset sales were invested in high-quality, short-term investments, which we record in “Cash and cash equivalents.” The securities in which we are investing include money market funds that invest solely in U.S. Treasury securities, commercial paper issued by leading financial institutions rated at least upper medium grade (A-1) or prime (P-1), commercial paper issued by asset-backed conduits where the backup liquidity facility is provided by a leading financial institution and the program is rated at least A-1 or P-1, and similar instruments where we believe the risk of default or illiquidity is minimal. We diversify our short-term investments to reduce our credit exposure to a single obligor.

 

Against the backdrop of a weak economy and a sharp drop-off in housing construction and demand for our products, there is uncertainty around the amount of cash flow we will generate in 2009. However, we believe that our cash and short-term investments, as well as our available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, and working capital needs for the next 12 months. If a contractually committed lender fails to honor its commitment under the Revolving Credit Facility, the other lenders would remain committed for their portion of the total facility. A total of 12 lenders participated in the Revolving Credit Facility at December 31, 2008, and the largest single commitment under the Revolving Credit Facility was $75 million. In early 2009, two of our lenders merged and, on a combined basis, represent a commitment of $112 million. At December 31, 2008, we had $75.0 million of outstanding loans under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility are constrained by a borrowing base formula dependent upon levels of eligible inventory and receivables reduced by outstanding letters of credit and, when our fixed-charge coverage ratio is below 1:1, as it was on December 31, 2008, by a further requirement that we maintain a combination of unrestricted cash and borrowing base less outstanding loans at or in excess of the greater of $45 million or 15% of the borrowing base determined under the Revolving Credit Facility. Thus, at December 31, 2008, our aggregate liquidity from unrestricted cash and cash equivalents and unused borrowing capacity under the Revolving Credit Facility totaled $333.9 million calculated as follows:

 

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Net availability under Revolving Credit Facility

 

$

103.1

 

Cash

 

275.8

 

Availability threshold

 

(45.0

)

 

 

$

333.9

 

 

In 2008, the significant decline in global equity markets and turmoil in the credit markets caused our pension investment portfolio to suffer significant losses. As a result of investment losses, new benefits earned, and actuarial assumption changes, our funding shortfall increased from $86.9 million at December 31, 2007, to $162.6 million at December 31, 2008, measured on a projected benefit obligation basis. While the Worker, Retiree, and Employee Recovery Act of 2008 provides some relief as to the timing of our required future cash contributions, we expect to make material contributions to our pension plans for the next several years barring a dramatic recovery in equity and debt market security valuations or a sizable increase in the discount rate used to measure our liabilities. We are required to contribute $4.4 million to our pension plans in 2009. In March 2009, we made $25.0 million of discretionary contributions to improve the funded status of our plans.

 

Our ability to continue to fund our debt service requirements and operations may be affected by general economic, financial, competitive, legislative, and regulatory factors, and as a result, we cannot assure that our business will generate sufficient cash flow from operations or that future borrowings will be available for use under the Revolving Credit Facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.

 

Sources and Uses of Cash

 

In 2008, our primary source of cash was revenue generated from the sale of our building products. As discussed under “Operating Results” in this Management’s Discussion and Analysis and Results of Operations, sales decreased in 2008 primarily due to the sale of our Paper and Packaging & Newsprint businesses in first quarter 2008. The sales of our building products also decreased in 2008 due to weaker product demand and prices as new residential housing demand in the U.S. declined. We also generate cash from borrowings on our credit facilities. See the discussion of our credit facilities including our covenants under “Financing Activities” below. In recent years, we have generated cash proceeds from the sale of nonstrategic assets (see the “Investment Activities” discussion below).

 

Our primary uses of cash are for expenses related to the manufacture and distribution of building products, including fiber, inventory purchased for resale, labor, energy, and chemicals. In addition to paying for ongoing operating costs, we use cash to invest in our business, repay debt, and meet our contractual obligations and commercial commitments. See the “Contractual Obligations” section of this Management’s Discussion and Analysis and Results of Operations for information related to our enforceable and legally binding obligations at December 31, 2008.

 

Operating Activities

 

We operate in a cyclical industry, and our operating cash flows vary accordingly. Our principal operating cash expenditures are for purchased inventories in our Building Materials Distribution segment and expenditures related to the manufacture of building products, including fiber, energy, labor, and chemicals, in our Wood Products segment. Operating activities provided (used) cash in 2008, 2007, and 2006 as follows:

 

2008 Compared With 2007

 

In 2008 and 2007, our operating activities used $24.4 million and provided $250.1 million of cash, respectively. Relative to 2007, the decrease in cash provided by operations relates primarily to the following:

 

·                        Items in net income (loss) provided $1.8 million of cash during 2008, compared with $275.4 million of cash in 2007.  The decrease is due to the sale of our Paper and Packaging & Newsprint assets in first quarter 2008 and lower income in our Building Materials Distribution and Wood Products segments due to significant deterioration in the U.S. housing market. As discussed under “Our Operating Results” above, this lower income was driven primarily by lower sales activity, resulting in fewer gross margin dollars being generated to cover cash operating costs, in our Building Materials Distribution segment and by a combination of lower sales volumes

 

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and/or prices for most of our products, coupled with higher conversion costs, in our Wood Products segment.

 

·                  Changes in working capital.  Unfavorable changes in working capital used $4.6 million of cash from operations. Working capital is subject to cyclical operating needs, the timing of the collection of receivables, the payment of payables and expenses, and seasonal fluctuations in our operations. During 2008, the increase in working capital was primarily attributable to a decrease in accounts payable and accrued liabilities, offset by decreases in accounts receivable, inventory, and other assets. The decrease in accounts receivable reflects a lower level of sales activity due to weaker product demand and prices as U.S. new residential housing demand declined. Due to the decrease in product demand, we took rolling curtailments at a number of our wood products operations and reduced inventories in our building materials distribution business to maintain appropriate inventory levels. The decrease in accounts payable was due primarily to a reduction in inventory and a decrease in overall costs in 2008. See “Our Operating Results” above for more information.

 

·                        More cash contributions to our pension and postretirement benefit plans.  During 2008, we used $21.0 million of cash to make pension contributions and other postretirement benefit payments, compared with $1.1 million during 2007. Of the 2008 contributions, $11.0 million was included in the pension assets transferred in the Sale.

 

2007 Compared With 2006

 

In 2007, our operating activities provided $250.1 million of cash, compared with $253.7 million in 2006. Relative to 2006, the decrease in cash provided by operations related primarily to the following:

 

·                  Changes in working capital.  In 2007, changes in working capital used $26.4 million of cash from operations, compared with $8.0 million in 2006. During the year ended December 31, 2007, the increase in working capital was primarily attributable to a decrease in accounts payable and accrued liabilities in Building Materials Distribution and Wood Products, as well as higher inventories in these segments. The lower levels of accounts payable and accrued liabilities in Building Materials Distribution reflected a lower level of sales activity due to the continued housing market slowdown. Higher inventory levels in Building Materials Distribution were primarily the result of the expansion of and additions to our distribution operations, which resulted in those locations carrying higher levels of inventory relative to 2006. Wood Products experienced higher levels of inventories primarily as a result of higher EWP and, to a lesser extent, log inventories. Relative to 2006, the increase in EWP inventories was primarily the result of returning to traditional inventory levels in 2007 from lower-than-usual levels in the prior year. The increase in inventories and lower level of accounts payable and accrued liabilities were partially offset by lower receivables.

 

·                  Lower cash contributions to our pension and postretirement benefit plans.  Partially offsetting the unfavorable changes in working capital was $19.6 million of lower pension and other postretirement benefit contributions in 2007 relative to 2006.

 

Investment Activities

 

Cash investing activities provided $1,271.4 million in 2008, compared with $186.7 million used in 2007 and $150.7 million used in 2006. In all periods, capital expenditures for property and equipment consisted primarily of expansion, business improvement and quality/efficiency projects, replacement projects, and ongoing environmental compliance.

 

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2008

 

We received $1,323.7 million of net cash from the sale of assets in 2008, as follows:

 

 

 

(millions)

 

 

 

 

 

Proceeds from sale of Paper and Packaging & Newsprint assets

 

$

1,277.2

 

Selling expenses

 

(37.3

)

Cash contributed to Boise Inc.

 

(38.0

)

Sales proceeds, net of selling expenses and cash contributed

 

1,201.9

 

Proceeds from the sale of Brazil operations, net

 

45.5

 

Proceeds from other asset sales, net