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Item 2. Management’s Discussion and Analysis

2022-10-31 compared with 2022-08-01 · 145 added, 129 removed, 204 unchanged (57% of the section changed)

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These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Item 1A.

Risk Factors" in our 2021 Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission (SEC).

Risk Factors" in our 2021 Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission (the SEC).

We do not assume an obligation to update any forward-looking statement.

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Executive Overview

We recorded income from operations of $297.1 million during the three months ended June 30, 2022, compared with income from operations of $409.8 million during the three months ended June 30, 2021.

In our Wood Products segment, income decreased $59.7 million to $154.1 million for the three months ended June 30, 2022, from $213.8 million for the three months ended June 30, 2021, due primarily to lower sales prices of plywood and lower plywood and EWP sales volumes, offset partially by higher EWP sales prices.

In our BMD segment, income decreased $52.0 million to $154.3 million for the three months ended June 30, 2022, from $206.3 million for the three months ended June 30, 2021, driven by a gross margin decrease of $44.5 million, resulting from a decline in commodity prices during the second quarter 2022.

The negative impacts from commodity price declines were offset partially by improved gross margin percentages for EWP and general line products.

We recorded income from operations of $299.4 million during the three months ended September 30, 2022, compared with income from operations of $129.4 million during the three months ended September 30, 2021.

In our Wood Products segment, income increased $33.9 million to $156.0 million for the three months ended September 30, 2022, from $122.1 million for the three months ended September 30, 2021, due primarily to higher EWP sales prices, offset partially by lower sales prices of plywood, as well as higher manufacturing costs.

In addition, depreciation and amortization expense increased $7.0 million due to the acquisition of two plywood facilities on July 25, 2022.

In our BMD segment, income increased $137.8 million to $154.4 million for the three months ended September 30, 2022, from $16.6 million for the three months ended September 30, 2021, driven by a gross margin increase of $166.1 million, resulting primarily from margin improvements on commodity products, offset partially by increased selling and distribution expenses of $25.7 million.

These changes are discussed further in "Our Operating Results" below.

We ended second quarter 2022 with $1,033.0 million of cash and cash equivalents and $346.0 million of undrawn committed bank line availability, for total available liquidity of $1,379.0 million.

We had $445.0 million of outstanding debt at June 30, 2022.

We generated $284.1 million of cash during the six months ended June 30, 2022, as cash provided by operations was offset partially by capital spending, dividends paid on our common stock, and tax withholding payments on stock-based awards.

A further description of our cash sources and uses for the six month comparative periods are discussed in "Liquidity and Capital Resources" below.

On July 25, 2022, we and our wholly-owned subsidiary, Boise Cascade Wood Products, L.L.C., completed the acquisition of 100% of the equity interest of Coastal Forest Resources Company's (“CFRC”) wholly-owned subsidiary, Coastal Plywood Company, and its plywood manufacturing operations located in Havana, Florida, and Chapman, Alabama, (the "Acquisition") for a purchase price of $517 million, inclusive of estimated working capital at closing of $27 million, which is subject to post-closing adjustments.

On July 25, 2022, our wholly-owned subsidiary, Boise Cascade Wood Products, L.L.C., completed the acquisition of 100% of the equity interest in Coastal Plywood Company (Coastal Plywood), and its plywood manufacturing operations located in Havana, Florida, and Chapman, Alabama, (the Acquisition) for a purchase price of $516.9 million, inclusive of estimated working capital at closing of approximately $27 million, which is subject to post-closing adjustments.

We funded the Acquisition and related costs with cash on hand.

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EWP production capacity.

In addition, the Havana plywood operation will improve our mix of specialty plywood products and is well positioned geographically to support plywood demand in the southeastern U.S.

In addition, the Havana plywood operation improves our mix of specialty plywood products and is well positioned geographically to support plywood demand in the southeastern U.S.

We ended third quarter 2022 with $867.1 million of cash and cash equivalents and $396.2 million of undrawn committed bank line availability, for total available liquidity of $1,263.2 million.

We had $444.2 million of outstanding debt at September 30, 2022.

We generated $118.2 million of cash during the nine months ended September 30, 2022, as cash provided by operations was offset partially by funding the Acquisition, capital spending, and dividends paid on our common stock.

A further description of our cash sources and uses for the nine month comparative periods are discussed in "Liquidity and Capital Resources" below.

Demand for the products we manufacture, as well as the products we purchase and distribute, is correlated with new residential construction, residential repair-and-remodeling activity and light commercial construction.

Consensus forecasts for 2022 single- and multi-family housing starts in the U.S are around 1.6 million units, or essentially flat compared to 2021.

We believe that current U.S.

demographics and limited new and existing home inventory support this level of housing starts.

Consensus forecasts for 2022 single- and multi-family housing starts in the U.S are between 1.5 million and 1.6 million units, or essentially flat compared to 2021.

In addition, the age of U.S.

housing stock and elevated levels of homeowner equity provide a favorable backdrop for repair-and-remodel spending.

However, recent monetary policy shifts to increase interest rates to combat high levels of inflation have significantly increased mortgage rates and created a great deal of uncertainty broadly across the U.S.

As such, we expect the pace of new residential construction in second half of 2022 to slow due to home affordability constraints and a weakening economy.

While potentially tempered by an economic slowdown, we anticipate the primary drivers of repair-and-remodeling activity to continue to be supportive of homeowners' further investment in their residences.

However, continued actions by the Federal Reserve to increase interest rates to combat high levels of inflation have significantly increased mortgage rates and created a great deal of uncertainty broadly across the U.S.

As such, due to home affordability constraints and a weakening economy, the pace of new residential construction has slowed and we expect demand to continue to decline for the remainder of 2022 and into 2023.

Consensus forecasts for 2023 single- and multi-family housing starts in the U.S.

are estimated to be 15% to 20% below 2022 levels.

While likely tempered by an economic slowdown, we anticipate the primary drivers of repair-and-remodeling activity to continue to be supportive of homeowners' further investment in their residences.

As a manufacturer of certain commodity products, we have sales and profitability exposure to declines in commodity product prices and rising input costs.

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We expect future commodity product pricing and commodity input costs to be volatile in response to economic uncertainties, industry operating rates, transportation constraints or disruptions, net import and export activity, inventory levels in various distribution channels, and seasonal demand patterns.

EWP and general line products have historically experienced limited price volatility, but are also subject to price erosion as economic activity slows.

In addition, we expect future price erosion on our EWP and general line products as economic activity slows and demand weakens for new residential construction.

Factors That Affect Our Operating Results and Trends

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Our Operating Results

The following tables set forth our operating results in dollars and as a percentage of sales for the three and six months ended June 30, 2022 and 2021:

The following tables set forth our operating results in dollars and as a percentage of sales for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

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Set forth below are historical U.S.

housing starts data, segment sales volumes and average net selling prices for the principal products sold by our Wood Products segment, and sales mix and gross margin information for our BMD segment for the three and six months ended June 30, 2022 and 2021.

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

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Gross margin percentage is gross margin as a percentage of segment sales.

For the three months ended June 30, 2022, total sales decreased $165.1 million, or 7%, to $2,278.1 million from $2,443.2 million during the three months ended June 30, 2021.

For the six months ended June 30, 2022, total sales increased $339.9 million, or 8%, to $4,604.4 million from $4,264.5 million for the same period in the prior year.

For the three months ended September 30, 2022, total sales increased $275.1 million, or 15%, to $2,154.6 million from $1,879.5 million during the three months ended September 30, 2021.

For the nine months ended September 30, 2022, total sales increased $615.1 million, or 10%, to $6,759.0 million from $6,143.9 million for the same period in the prior year.

As described below, the change in sales was driven by the changes in sales prices and volumes for the products we manufacture and distribute with single-family residential construction activity being the key demand driver of our sales.

In second quarter 2022, total U.S.

housing starts increased 3% driven by an increase in multi-family housing starts compared to the same period in 2021.

However, single-family housing starts decreased 3% compared to the prior year quarter.

On a year-to-date basis through June 2022, total housing starts increased 6%, while single-family housing starts remained flat when compared with the same period in 2021.

Average composite panel and average composite lumber prices for the three months ended June 30, 2022 were 43% and 35% lower, respectively, than in the same period in the prior year, as reflected by Random Lengths composite panel and lumber pricing.

For the six months ended June 30, 2022, average composite panel and average composite lumber prices were 17% and 8% lower, respectively, compared with the same period in the prior year.

In third quarter 2022, total U.S.

housing starts decreased 7%, driven by a decrease in single-family housing starts of 18% compared with the same period in 2021.

On a year-to-date basis through September 2022, total housing starts increased 1%, driven by an increase in multi-family housing starts compared to the same period in 2021.

However, single-family housing starts decreased 6% when compared with the same period in 2021.

Average composite lumber prices were 25% higher, while average composite panel prices were 15% lower for the three months ended September 30, 2022 compared to the same period in the prior year, as reflected by Random Lengths composite lumber and panel pricing.

For the nine months ended September 30, 2022, average composite panel and average composite lumber prices were 17% and 2% lower, respectively, compared with the same period in the prior year.

Wood Products.

Sales, including sales to our BMD segment, decreased $58.6 million, or 10%, to $536.0 million for the three months ended June 30, 2022, from $594.6 million for the three months ended June 30, 2021.

The decrease in sales was driven by lower sales prices and sales volumes for plywood of 35% and 17%, respectively, resulting in decreased sales of $86.9 million and $50.1 million, respectively.

Plywood sales volumes decreased primarily as a result of downtime to replace an existing dryer at our Chester, South Carolina, plywood facility, as well as staffing shortages at our Western Oregon plywood facility.

In addition, lower sales volumes for I-joists and LVL (collectively referred to as EWP) of 8% and 3%, respectively, resulted in decreased sales of $8.5 million and $2.4 million, respectively.

EWP sales volumes decreased primarily related to veneer availability, labor shortages, and transportation constraints.

These decreases were offset partially by higher sales prices for I-joists and LVL of 52% and 45%, respectively, resulting in increased sales of $48.8 million and $40.6 million, respectively.

Sales, including sales to our BMD segment, increased $98.0 million, or 20%, to $595.3 million for the three months ended September 30, 2022, from $497.3 million for the three months ended September 30, 2021.

The increase in sales was driven by higher sales prices for I-joists and LVL (collectively referred to as EWP) of 54% and 52%, respectively, resulting in increased sales of $55.0 million and $59.8 million, respectively.

The increase in EWP pricing was due to realizations of previously announced price increases and the expiration of certain temporary price protection arrangements.

For the six months ended June 30, 2022, sales, including sales to our BMD segment, increased $68.1 million, or 7%, to $1,095.0 million from $1,026.9 million for the same period in the prior year.

In addition, higher sales volumes for LVL and plywood of 12% and 5%, respectively, resulted in increased sales of $12.1 million and $8.3 million, respectively.

Plywood sales volumes increased due to the Acquisition.

These increases were offset partially by lower plywood sales prices of 15%, resulting in decreased sales of $27.6 million.

In addition, I-joist sales volumes decreased 15%, resulting in decreased sales of $18.6 million, due to a decline in housing starts and continued strong demand for LVL.

For the nine months ended September 30, 2022, sales, including sales to our BMD segment, increased $166.1 million, or 11%, to $1,690.3 million from $1,524.2 million for the same period in the prior year.

The increase in sales was driven by higher sales prices for I-joists and LVL of 49% and 46%, respectively, resulting in increased sales of $139.4 million and $135.4 million, respectively.

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These increases were offset partially by lower sales prices and sales volumes for plywood of 14% and 3%, respectively, resulting in decreased sales of $87.4 million and $19.2 million, respectively.

In addition, lower sales volumes for I-joists and lumber of 8% and 16%, respectively, resulted in decreased sales of $16.7 million and $6.9 million.

In addition, lower sales volumes for I-joists of 11% resulted in decreased sales of $34.5 million.

Building Materials Distribution.

Sales decreased $41.5 million, or 2%, to $2,131.2 million for the three months ended June 30, 2022, from $2,172.7 million for the three months ended June 30, 2021.

Compared with the same quarter in the prior year, the overall decrease in sales was driven by a sales volume decrease of 4%, offset partially by a sales price increase of 2%.

By product line, commodity sales decreased 27%, or $352.4 million;

Sales increased $235.6 million, or 14%, to $1,956.8 million for the three months ended September 30, 2022, from $1,721.2 million for the three months ended September 30, 2021.

Compared with the same quarter in the prior year, the overall increase in sales was driven by a sales price increase of 15%, offset partially by a sales volume decrease of 1%.

By product line, commodity sales increased 1%, or $4.2 million;

general line product sales increased 19%, or $110.2 million;

and sales of EWP (substantially all of which are sourced through our Wood Products segment) increased 33%, or $121.2 million.

During the six months ended June 30, 2022, sales increased $435.5 million, or 11%, to $4,243.0 million from $3,807.5 million for the same period in the prior year.

During the nine months ended September 30, 2022, sales increased $671.0 million, or 12%, to $6,199.8 million from $5,528.8 million for the same period in the prior year.

Compared with the same period in the prior year, the overall increase in sales was driven by a sales price increase of 13%, offset partially by a sales volume decrease of 1%.

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Costs and Expenses

Materials, labor, and other operating expenses (excluding depreciation) decreased $66.6 million, or 4%, to $1,797.9 million for the three months ended June 30, 2022, compared with $1,864.5 million during the same period in the prior year.

In our Wood Products segment, materials, labor, and other operating expenses decreased due to lower sales volumes, offset partially by higher per-unit costs of logs of approximately 5%, compared with second quarter 2021.

However, materials, labor, and other operating expenses as a percentage of sales (MLO rate) in our Wood Products segment increased by 610 basis points.

The increase in MLO rate was primarily the result of lower plywood sales prices, as well as lower sales volumes, which resulted in higher per-unit labor, wood fiber, and other manufacturing costs.

In BMD, the increase in materials, labor, and other

operating expenses was driven by higher purchased materials costs as a result of higher product prices, compared with second quarter 2021.

The BMD segment MLO rate increased 180 basis points compared with second quarter 2021.

The increase in MLO rate was driven by a declining commodity price environment during the second quarter 2022, offset partially by improved margins on our EWP and general line product sales.

In our BMD Segment, periods of increasing prices provide the opportunity for higher sales and increased margins, while declining price environments generally result in declines in sales and profitability, as we experienced in commodity products during second quarter 2022.

For the six months ended June 30, 2022, materials, labor, and other operating expenses (excluding depreciation) increased $212.9 million or 6%, to $3,527.8 million, compared with $3,315.0 million in the same period in the prior year.

In our Wood Products segment, materials, labor, and other operating expenses increased due to higher per-unit costs of logs of approximately 7% compared with the first half of 2021, as well as increased labor and other manufacturing costs.

However, the MLO rate in our Wood Products segment decreased by 100 basis points, which was primarily due to higher EWP sales prices, resulting in improved leveraging of wood fiber costs and labor costs.

In BMD, the increase in materials, labor, and other operating expenses was driven by higher purchased materials costs as a result of higher product prices, compared with the first half of 2021.

However, the BMD segment MLO rate improved 50 basis points as a decrease in commodity product margins compared with the first half of 2021 was more than offset by improved sales of EWP and general line products, which typically have higher margins than commodity products.

Depreciation and amortization expenses increased $0.3 million, or 1%, to $20.7 million for the three months ended June 30, 2022, compared with $20.4 million during the same period in the prior year.

For the six months ended June 30, 2022, these expenses increased $1.3 million, or 3%, to $41.2 million, compared with $40.0 million in the same period in the prior year.

The increases in both periods were due primarily to purchases of property and equipment.

Selling and distribution expenses increased $3.5 million, or 3%, to $134.3 million for the three months ended June 30, 2022, compared with $130.7 million during the same period in the prior year, due primarily to higher shipping and handling costs of $5.7 million, as well as increased discretionary expenses related to travel and entertainment and professional fees of $2.2 million.

These increases were offset partially by lower employee-related expenses related to sales and incentive compensation of $4.7 million.

For the six months ended June 30, 2022, selling and distribution expenses increased $29.3 million, or 12%, to $280.9 million, compared with $251.7 million during the same period in 2021, due primarily to higher employee-related expenses, including base pay increases, special bonuses, and sales and incentive compensation of $12.7 million, as well as higher shipping and handling costs of $11.0 million.

Materials, labor, and other operating expenses (excluding depreciation) increased $61.6 million, or 4%, to $1,656.0 million for the three months ended September 30, 2022, compared with $1,594.4 million during the same period in the prior year.

In our Wood Products segment, materials, labor, and other operating expenses increased due to higher per-unit costs of logs of approximately 4%, compared with third quarter 2021, as well as increased labor and other manufacturing costs.

However, materials, labor, and other operating expenses as a percentage of sales (MLO rate) in our Wood Products segment decreased by 315 basis points.

The decrease in MLO rate was primarily the result of higher EWP sales prices, resulting in improved leveraging of wood fiber costs and other manufacturing costs.

In BMD, the increase in materials, labor, and other operating expenses was driven by higher purchased materials costs as a result of higher product prices for the majority of the

period, compared with third quarter 2021.

The BMD segment MLO rate improved by 755 basis points compared with third quarter 2021, driven primarily by higher commodity prices in the current year compared to sharp declines in third quarter 2021.

For the nine months ended September 30, 2022, materials, labor, and other operating expenses (excluding depreciation) increased $274.4 million or 6%, to $5,183.8 million, compared with $4,909.4 million in the same period in the prior year.

In our Wood Products segment, materials, labor, and other operating expenses increased due to higher per-unit costs of logs of approximately 6% compared with the first nine months of 2021, as well as increased labor and other manufacturing costs.

However, the MLO rate in our Wood Products segment decreased by 165 basis points, which was primarily due to higher EWP sales prices, resulting in improved leveraging of wood fiber costs.

In BMD, the increase in materials, labor, and other operating expenses was driven by higher purchased materials costs as a result of higher product prices, compared with the first nine months of 2021.

However, the BMD segment MLO rate improved 270 basis points due to improved margins on all product lines compared with the first nine months of 2021.

Depreciation and amortization expenses increased $8.1 million, or 40%, to $28.4 million for the three months ended September 30, 2022, compared with $20.3 million during the same period in the prior year.

For the nine months ended September 30, 2022, these expenses increased $9.3 million, or 15%, to $69.6 million, compared with $60.3 million in the same period in the prior year.

The increases in both periods were due primarily to the Acquisition and other capital expenditures.

Selling and distribution expenses increased $27.7 million, or 24%, to $142.2 million for the three months ended September 30, 2022, compared with $114.5 million during the same period in the prior year, due primarily to higher employee-related expenses of $13.9 million, most of which relates to sales and incentive compensation, as well as higher shipping and handling costs of $8.3 million.

In addition, discretionary expenses related to travel and entertainment and professional fees increased $1.8 million.

For the nine months ended September 30, 2022, selling and distribution expenses increased $57.0 million, or 16%, to $423.1 million, compared with $366.1 million during the same period in 2021, due primarily to higher employee-related expenses, including base pay increases, special bonuses, and sales and incentive compensation of $26.6 million, as well as higher shipping and handling costs of $19.2 million.

In addition, travel and entertainment expenses and occupancy expenses increased $4.1 million and $3.9 million, respectively.

General and administrative expenses increased $9.7 million, or 54%, to $27.7 million for the three months ended June 30, 2022, compared with $18.0 million for the same period in the prior year, due to higher employee-related expenses of $6.7 million, most of which relates to incentive compensation.

In addition, employee-related expenses were reduced in the three months ended June 30, 2021 due to the departure of two officers and related forfeiture of accrued incentive compensation.

Discretionary expenses related to professional fees and travel and entertainment also increased $2.8 million during the three months ended June 30, 2022 compared with the same period in the prior year.

For the six months ended June 30, 2022, general and administrative expenses increased $10.5 million, or 24%, to $53.8 million, compared with $43.3 million during the same period in 2021.

The increase was primarily the result of higher employee-related expenses, including base pay increases, special bonuses, and incentive compensation of $7.2 million.

In addition, discretionary expenses related to professional fees and travel and entertainment increased $3.5 million.

Other (income) expense, net for the three months ended June 30, 2022 and 2021, and for the six months ended June 30, 2021, was insignificant.

For the six months ended June 30, 2022, other (income) expense, net, was $2.1 million of income, which included $2.5 million of earn-out income from a previous asset sale in our Wood Products segment.

General and administrative expenses increased $6.6 million, or 31%, to $27.6 million for the three months ended September 30, 2022, compared with $21.0 million for the same period in the prior year, due to higher employee-related expenses of $4.0 million, including base pay increases and incentive compensation.

In addition, we purchased acquisition-related insurance for $1.8 million.

Discretionary expenses related to professional fees and travel and entertainment also increased during the three months ended September 30, 2022 compared with the same period in the prior year.

For the nine months ended September 30, 2022, general and administrative expenses increased $17.1 million, or 27%, to $81.4 million, compared with $64.3 million during the same period in 2021.

The increase was primarily the result of higher employee-related expenses, including base pay increases, special bonuses, and incentive compensation of $11.2 million, as well as a $3.0 million increase in discretionary expenses related to professional fees and travel and entertainment.

In addition, in our Wood Products segment, we purchased $1.8 million of insurance related to the Acquisition and incurred $1.3 million of acquisition-related expenses.

Income From Operations

Income from operations decreased $112.7 million to $297.1 million for the three months ended June 30, 2022, compared with $409.8 million for the three months ended June 30, 2021.

Income from operations increased $87.7 million to $702.7 million for the six months ended June 30, 2022, compared with $615.0 million for the six months ended June 30, 2021.

Income from operations increased $170.0 million to $299.4 million for the three months ended September 30, 2022, compared with $129.4 million for the three months ended September 30, 2021.

Income from operations increased $257.7 million to $1,002.1 million for the nine months ended September 30, 2022, compared with $744.4 million for the nine months ended September 30, 2021.

Wood Products.

Segment income decreased $59.7 million to $154.1 million for the three months ended June 30, 2022, compared with $213.8 million for the three months ended June 30, 2021.

The decrease in segment income was due primarily to lower plywood sales prices, as well as higher per-unit labor, wood fiber, and other manufacturing costs due in part to lower plywood and EWP sales volumes.

These decreases in segment income were offset partially by higher EWP sales prices.

For the six months ended June 30, 2022, segment income increased $33.4 million to $344.2 million from $310.8 million for the six months ended June 30, 2021.

Segment income increased $33.9 million to $156.0 million for the three months ended September 30, 2022, compared with $122.1 million for the three months ended September 30, 2021.

The increase in segment income was due primarily to higher EWP sales prices.

This increase in segment income was offset partially by lower plywood sales prices, as well as higher manufacturing costs.

In addition, depreciation and amortization expense increased $7.0 million related to the Acquisition, and we purchased acquisition-related insurance for $1.8 million.

For the nine months ended September 30, 2022, segment income increased $67.3 million to $500.2 million from $432.9 million for the nine months ended September 30, 2021.

The increase in segment income was due primarily to higher EWP sales prices.

This increase in segment income was offset partially by lower plywood sales prices, lower plywood and EWP sales volumes, and higher wood fiber costs and other manufacturing costs.

In addition, depreciation and amortization expense increased $7.0 million related to the Acquisition, we purchased $1.8 million of acquisition-related insurance, and incurred $1.3 million of acquisition-related expenses.

Building Materials Distribution.

Segment income decreased $52.0 million to $154.3 million for the three months ended June 30, 2022, from $206.3 million for the three months ended June 30, 2021.

The decrease in segment income was driven by lower sales volumes and a gross margin decrease of $44.5 million, resulting from a decline in commodity prices during the second quarter 2022.

However, the negative impacts from commodity price declines were offset partially by margin improvements for both EWP and general line products.

In addition, general and administrative and selling and distribution expenses increased $3.3 million and $2.0 million, respectively.

For the six months ended June 30, 2022, segment income increased $53.6 million to $380.2 million from $326.6 million for the six months ended June 30, 2021.

The increase in segment income was driven by a gross margin increase of $89.1 million, resulting from improved gross margins on EWP and general line products, offset partially by decreased gross margins on commodity products.

The margin improvement was also offset partially by increased selling and distribution expenses and general and administrative expenses of $27.5 million and $5.0 million, respectively.

Unallocated corporate expenses increased $1.0 million to $11.3 million for the three months ended June 30, 2022, from $10.3 million for the same period in the prior year.

The increase was primarily due to higher employee-related expenses and professional fees.

During the three months ended June 30, 2021, employee-related expenses were lower due to the departure of an officer and related forfeiture of accrued incentive compensation.

In addition, as part of our self-insured risk retention program, corporate absorbed approximately $3.4 million of estimated insurance losses resulting from a fire at our BMD Phoenix location during second quarter 2021.

For the six months ended June 30, 2022, unallocated corporate expenses decreased $0.6 million to $21.7 million from $22.3 million for the six months ended June 30, 2021.

The decrease was primarily due to 2021 results including estimated insurance losses absorbed at corporate, as described above, offset partially by higher employee-related expenses during the first half of 2022.

Segment income increased $137.8 million to $154.4 million for the three months ended September 30, 2022, from $16.6 million for the three months ended September 30, 2021.

The increase in segment income was driven primarily by a gross margin increase of $166.1 million, resulting primarily from margin improvements on commodity products.

In addition, selling and distribution expenses increased $25.7 million.

For the nine months ended September 30, 2022, segment income increased $191.5 million to $534.6 million from $343.1 million for the nine months ended September 30, 2021.

The increase in segment income was driven by a gross margin increase of $255.2 million, resulting from improved gross margins across all product lines.

The margin improvement was offset partially by increased selling and distribution expenses and general and administrative expenses of $53.2 million and $6.6 million, respectively.

Unallocated corporate expenses increased $1.8 million to $11.0 million for the three months ended September 30, 2022, from $9.2 million for the same period in the prior year.

The increase was primarily due to higher employee-related expenses.

For the nine months ended September 30, 2022, unallocated corporate expenses increased $1.2 million to $32.8 million from $31.6 million for the nine months ended September 30, 2021.

The increase was primarily due to higher employee-related expenses offset partially by lower self-insurance losses during the first nine months of 2022.

Change in fair value of interest rate swaps.

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Income Tax Provision

For the three and six months ended June 30, 2022, we recorded $73.9 million and $172.8 million, respectively, of income tax expense and had an effective rate of 25.3% and 24.9%, respectively.

During the three and six months ended June 30, 2022, the primary reason for the difference between the federal statutory income tax rate of 21% and the effective tax rate was the effect of state taxes.

For the three and six months ended June 30, 2021, we recorded $101.0 million and $152.5 million, respectively, of income tax expense and had an effective rate of 25.0% and 25.2%, respectively.

During the three and six months ended June 30, 2021, the primary reason for the difference between the federal statutory income tax rate of 21% and the effective tax rate was the effect of state taxes.

For the three and nine months ended September 30, 2022, we recorded $76.0 million and $248.8 million, respectively, of income tax expense and had an effective rate of 25.7% and 25.2%, respectively.

For the three and nine months ended September 30, 2021, we recorded $31.2 million and $183.6 million, respectively, of income tax expense and had an effective rate of 25.4% and 25.3%, respectively.

For all periods, the primary reason for the difference between the federal statutory income tax rate of 21% and the effective tax rate was the effect of state taxes.

Industry Mergers and Acquisitions

On June 21, 2022, Pacific Woodtech, a manufacturer of engineered wood products, announced an agreement to acquire Louisiana-Pacific Corporation's EWP division.

The acquisition is expected to close in third quarter of 2022.

The acquisition closed in early August 2022.

Pacific Woodtech is a competitor to our Wood Products segment.

Until this transaction closes, we cannot assess the impact, if any, this transaction may have on our future results of operations.

This transaction has not, and we do not expect it to have, a material impact on our future results of operations.

On July 11, 2022, US LBM, a distributor of specialty building materials, announced an agreement to acquire Foxworth-Galbraith Lumber, a building products supplier and manufacturer in the Southwest U.S.

The acquisition is expected to close in third quarter of 2022.

The acquisition closed in early August 2022.

US LBM and Foxworth-Galbraith are both customers of ours.

We believe we have good relationships with these customers.

However, until this transaction closes, we cannot assess the impact, if any, this customer combination may have on our future results of operations.

This transaction has not, and we do not expect it to have, a material impact on our future results of operations.

Liquidity and Capital Resources

We ended second quarter 2022 with $1,033.0 million of cash and cash equivalents and $445.0 million of debt.

At June 30, 2022, we had $1,379.0 million of available liquidity (cash and cash equivalents and undrawn committed bank line availability).

Further descriptions of our cash sources and uses for the six month comparative periods are noted below.

We ended third quarter 2022 with $867.1 million of cash and cash equivalents and $444.2 million of debt.

At September 30, 2022, we had $1,263.2 million of available liquidity (cash and cash equivalents and undrawn committed bank line availability).

We generated $118.2 million of cash during the nine months ended September 30, 2022, as cash provided by

operations was offset partially by funding the Acquisition, capital spending, and dividends paid on our common stock.

Further descriptions of our cash sources and uses for the nine month comparative periods are noted below.

We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations, working capital, income tax payments, and to pay cash dividends to holders of our common stock over the next 12 months.

We expect to fund our seasonal and intra-month working capital requirements in the remainder of 2022 from cash on hand and, if necessary, borrowings under our revolving credit facility.

On July 25, 2022, the Company completed the acquisition of Coastal Plywood Company for a purchase price of $517 million, inclusive of estimated working capital at closing of $27 million, which is subject to post-closing adjustments.

We funded the acquisition and related costs with cash on hand.

For further discussion, see Note 5, Acquisition, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1.

Financial Statements" of this Form 10-Q.

Sources and Uses of Cash

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Below is a discussion of our sources and uses of cash for operating activities, investing activities, and financing activities.

Six Months Ended

Nine Months Ended

Net cash provided by operations $ 814,125 $ 527,091

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Operating Activities

For the six months ended June 30, 2022, our operating activities generated $436.1 million of cash, compared with $291.2 million of cash generated in the same period in 2021.

For the nine months ended September 30, 2022, our operating activities generated $814.1 million of cash, compared with $527.1 million of cash generated in the same period in 2021.

The $287.0 million increase in cash provided by operations was due primarily to an improvement in income from operations.

See "Our Operating Results" in this Management's Discussion and Analysis of Financial Condition and Results of Operations for more information related to factors affecting our operating results.

In addition, the increase in cash provided by operations was due to an increase in working capital of $152.6 million during the six months ended June 30, 2022, compared with a $203.4 million increase for the same period in the prior year.

In addition, cash paid for taxes, net of refunds received, decreased $14.5 million compared to the prior year.

The increase in working capital during both periods was primarily attributable to higher receivables and inventories, offset by an increase in accounts payable and accrued liabilities.

The increases in receivables in both periods primarily reflect increased sales of approximately 25% and 69%, comparing sales for the months of June 2022 and 2021 with sales for the months of December 2021 and 2020, respectively.

Inventories increased during the six months ended June 30, 2022 primarily due to increased cost of inventory purchased for resale on EWP and general line products and higher production costs for our manufactured products, offset partially by decreased costs for commodity products.

During the six months ended June 30, 2021 inventories increased primarily due to the growth of inventory for the building season, as well as elevated commodity prices.

The increase in accounts payable and accrued liabilities as of June 30, 2022 was related to the increase in inventories and higher accrued rebates.

During the six months ended June 30, 2021, seasonally higher purchase activity and extended terms offered by major vendors to our BMD segment led to an increase in accounts payable and an increase in accrued rebates contributed to the increase in accrued liabilities.

The increases in receivables in both periods primarily reflect increased sales of approximately 13% and 17%, comparing sales for the months of September 2022 and 2021 with sales for the months of December 2021 and 2020, respectively.

Inventories increased during the nine months ended September 30, 2022 primarily due to increased cost of inventory purchased for resale for EWP and general line products, the acquisition of two plywood facilities during the third quarter, and higher production costs for our manufactured products.

During the nine months ended September 30, 2021 inventories increased primarily due to increased cost of inventory purchased for resale.

The increase in accounts payable and accrued liabilities as of September 30, 2022 was primarily related to the increase in inventories .

During the nine months ended September 30, 2021, seasonally higher purchase activity and extended terms offered by major vendors to our BMD segment led to an increase in accounts payable and an increase in accrued rebates contributed to the increase in accrued liabilities.

Investment Activities

During the six months ended June 30, 2022 and 2021, we used $40.8 million and $31.5 million, respectively, of cash for purchases of property and equipment, including business improvement and quality/efficiency projects, replacement and expansion projects, and ongoing environmental compliance.

During the six months ended June 30, 2022, we received $2.5 million of earn-out income related to a previous asset sale in our Wood Products segment.

During the nine months ended September 30, 2022, we used $516.9 million for the Acquisition.

These facilities will provide incremental stress-rated veneer needed to optimize and expand our southeastern U.S.

EWP production capacity and improve our mix of specialty plywood products.

During the nine months ended September 30, 2022 and 2021, we used $61.8 million and $51.5 million, respectively, of cash for purchases of property and equipment, including business improvement and quality/efficiency projects, replacement and expansion projects, and ongoing environmental compliance.

During the nine months ended September 30, 2022, we received $2.5 million of earn-out income related to a previous asset sale in our Wood Products segment.

Excluding acquisitions, we expect capital expenditures in 2022 to total approximately $100 million to $120 million.

We expect our capital spending in 2022 will be for business improvement and quality/efficiency projects, replacement and expansion projects, and ongoing environmental compliance.

Our 2022 capital expenditures range includes funding to complete our BMD organic expansions in Ohio, Kentucky, and Minnesota, replacement of a dryer at our Chester, South Carolina, veneer and plywood plant, and initial veneer equipment related spending at the Chapman, Alabama facility.

This level of capital expenditures could increase or decrease as a result of several factors, including acquisitions, efforts to further accelerate organic growth, exercise of lease purchase options, our financial results, future economic conditions, availability of engineering and construction resources, and timing and availability of equipment purchases.

Our 2022 capital expenditures range includes funding for our

BMD organic expansions in Ohio, Kentucky, and Minnesota, replacement of a dryer at our Chester, South Carolina, veneer and plywood plant, and post-acquisition veneer equipment related spending at our Chapman, Alabama facility.

We expect our capital spending, excluding acquisitions, to be approximately $120 million to $140 million in 2023.

These levels of capital expenditures could increase or decrease as a result of several factors, including acquisitions, efforts to further accelerate organic growth, exercise of lease purchase options, our financial results, future economic conditions, availability of engineering and construction resources, and timing and availability of equipment purchases.

Financing Activities

During the six months ended June 30, 2022, our financing activities used $114.0 million of cash, including $109.3 million for common stock dividend payments and $3.9 million of tax withholding payments on stock-based awards.

During the six months ended June 30, 2022, we did not borrow under our revolving credit facility, and therefore have no borrowing outstanding on the facility as of June 30, 2022.

During the six months ended June 30, 2021, our financing activities used $11.8 million of cash, including $8.4 million for common stock dividend payments and $2.7 million of tax withholding payments on stock-based awards.

During the six months ended June 30, 2021, we also borrowed $28.0 million under our revolving credit facility, which was subsequently repaid during the same period with cash on hand.

During the nine months ended September 30, 2022, our financing activities used $120.3 million of cash, including $114.0 million for common stock dividend payments and $3.9 million of tax withholding payments on stock-based awards.

During the nine months ended September 30, 2022, we did not borrow under our revolving credit facility, and therefore have no borrowing outstanding on the facility as of September 30, 2022.

During the nine months ended September 30, 2021, our financing activities used $94.8 million of cash, including $91.0 million for common stock dividend payments and $2.7 million of tax withholding payments on stock-based awards.

During the nine months ended September 30, 2021, we also borrowed $28.0 million under our revolving credit facility, which was subsequently repaid during the same period with cash on hand.

Future dividend declarations, including amount per share, record date and payment date, will be made at the discretion of our board of directors and will depend upon, among other things, legal capital requirements and surplus, our future operations and earnings, general financial condition, material cash requirements, restrictions imposed by our asset-based credit facility and the indenture governing our senior notes, applicable laws, and other factors that our board of directors may deem relevant.

On September 9, 2022, we entered into the Eighth Amendment to the Amended and Restated Credit Agreement (the Amendment) related to our senior secured asset-based revolving credit facility and term loan.

The Amendment increases the maximum amount available for revolving loans from $350 million to $400 million, extends the maturity date of the agreement, and replaced the LIBOR rate with SOFR.

The term loan remains at $50.0 million.

On July 28, 2022, our board of directors authorized the repurchase of an additional 1.5 million shares of our common stock.

This increase is in addition to the remaining authorized shares under our prior common stock repurchase program (the Program).

The total combined authorization is approximately 2.0 million shares.

Share repurchases may be made on an opportunistic basis through open market transactions, privately negotiated transactions, or by other means in accordance with applicable federal securities laws.

We are not obligated to purchase any shares, and there is no set date that the program will expire.

Our board of directors, at its discretion, may increase or decrease the number of authorized shares or terminate the program at any time.

During the nine months ended September 30, 2022, we did not purchase any shares under the Program.

For more information related to our debt transactions and structure, our dividend policy, and our stock repurchase program, see the discussion in Note 7, Debt, and Note 10, Stockholders' Equity, respectively, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1.

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Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K.

As of June 30, 2022, there have been no material changes in other material cash requirements outside the ordinary course of business since December 31, 2021.

As of September 30, 2022, there have been no material changes in other material cash requirements outside the ordinary course of business since December 31, 2021.

Note 9, Debt, and Note 17, Commitments, Legal Proceedings and Contingencies, and Guarantees, of the Notes to Consolidated Financial Statements in "Item 8.

Financial Statements and Supplementary Data" in our 2021 Form 10-K describe the nature of our guarantees, including the approximate terms of the guarantees, how the guarantees arose, the events or circumstances that would require us to perform under the guarantees, and the maximum potential undiscounted amounts of future payments we could be required to make.

As of June 30, 2022, there have been no material changes to the guarantees disclosed in our 2021 Form 10-K.

As of September 30, 2022, there have been no material changes to the guarantees disclosed in our 2021 Form 10-K.

Seasonal Influences

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Seasonally cold weather increases costs, especially energy consumption costs, at most of our manufacturing facilities.

As of July 24, 2022, we had approximately 6,210 employees.

As of October 16, 2022, we had approximately 6,820 employees.

Approximately 21% of these employees work pursuant to collective bargaining agreements.

As of July 24, 2022, we had ten collective bargaining agreements.

As of October 16, 2022, we had ten collective bargaining agreements.

One agreement covering approximately 100 employees at our Canadian EWP facility is set to expire on December 31, 2022.

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In the normal course of business, we are exposed to financial risks such as changes in commodity prices, interest rates, and foreign currency exchange rates.

As of June 30, 2022, there have been no material changes to financial market risks disclosed in our 2021 Form 10-K.

As of September 30, 2022, there have been no material changes to financial market risks disclosed in our 2021 Form 10-K.

Environmental

As of June 30, 2022, there have been no material changes to environmental issues disclosed in our 2021 Form 10-K.

As of September 30, 2022, there have been no material changes to environmental issues disclosed in our 2021 Form 10-K.

For additional information, see Environmental in "Item 7.

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Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K.

At June 30, 2022, there have been no material changes to our critical accounting estimates from those disclosed in our 2021 Form 10-K.

At September 30, 2022, there have been no material changes to our critical accounting estimates from those disclosed in our 2021 Form 10-K, except as noted below.

Business Combinations

From time to time, we may enter into material business combinations.

We allocate the total purchase price of a business combination to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date, with the excess purchase price recorded as goodwill.

The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values (fair value is determined using the income approach, cost approach and/or market approach) of inventory, property, plant and equipment, and identifiable intangible assets, among others.

This method also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.

If we are required to retroactively adjust provisional amounts that we have recorded for the fair value of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations.

Additionally, we expense any acquisition-related costs as incurred in connection with each business combination.

Significant estimates and assumptions used to determine the fair value of assets acquired, including property, plant, and equipment, customer relationships, and other identifiable intangible assets, includes future cash flows that we expect to generate from the acquired assets.

If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges.

In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense.

If our estimates of the economic lives change, depreciation and amortization expenses could be increased or decreased.

New and Recently Adopted Accounting Standards

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What changed 10-Q

Item 2. Management’s Discussion and Analysis