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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-10-31 · 101 added, 182 removed, 167 unchanged (63% of the section changed)

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Executive Overview

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.

We recorded income from operations of $127.6 million during the three months ended March 31, 2023, compared with income from operations of $405.6 million during the three months ended March 31, 2022.

In our Wood Products segment, income decreased $120.7 million to $69.4 million for the three months ended March 31, 2023, from $190.1 million for the three months ended March 31, 2022, due primarily to lower plywood sales prices, lower EWP sales volumes, higher per-unit conversion costs, and an increase in depreciation and amortization expense due to the acquisition of two plywood facilities located in Havana, Florida, and Chapman, Alabama, on July 25, 2022 (the Acquisition).

These decreases were offset partially by higher EWP sales prices and higher plywood sales volumes, as well as lower OSB costs (used in the manufacture of I-joists).

In our BMD segment, income decreased $156.2 million to $69.7 million for the three months ended March 31, 2023, from $225.9 million for the three months ended March 31, 2022, driven by a gross margin decrease of $177.3 million, resulting primarily from lower margins on commodity products and lower sales volumes, offset partially by decreased selling and distribution expenses of $20.3 million.

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

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.

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

EWP production capacity.

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.

We ended first quarter 2023 with $1,000.7 million of cash and cash equivalents and $395.9 million of undrawn committed bank line availability, for total available liquidity of $1,396.7 million.

We had $444.6 million of outstanding debt at March 31, 2023.

We generated $2.4 million of cash during the three months ended March 31, 2023, 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 three-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 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, 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.

housing starts in March 2023 were approximately 1.42 million on a seasonally adjusted annual rate basis, as reported by the U.S.

Census Bureau.

In addition, mortgage rates have declined from peak levels in late 2022, and measures of builder sentiment have improved from fourth quarter 2022 levels.

However, home affordability remains a challenge for consumers, and the Federal Reserve's ongoing actions in response to inflationary data and what impacts these actions have on future mortgage rates and the broader economy

will influence the near-term demand environment.

As such, the full year outlook for 2023 is uncertain and is reflected in various industry forecasts for 2023 U.S.

housing starts that generally range from 1.2 million to 1.4 million units, compared with actual housing starts of 1.55 million in 2022, as reported by the U.S.

Census Bureau.

Regarding home improvement spending, the age of U.S.

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

However, industry forecasts project continued moderation of year-over-year growth in renovation spending, and economic uncertainty may also negatively impact 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.

Our distribution business purchases and resells a broad mix of commodity products with periods of increasing prices providing the opportunity for higher sales and increased margins, while declining price environments expose us to declines in sales and profitability.

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.

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.

Future commodity product pricing and commodity input costs may 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.

In addition, EWP volumes will continue to be influenced by demand for new residential construction, particularly single-family housing starts and we expect further EWP price erosion in the second quarter.

Factors That Affect Our Operating Results and Trends

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• the commodity nature of a portion of our products and their price movements, which are driven largely by industry capacity and operating rates, industry cycles that affect supply and demand, and net import and export activity;

unemployment rates, household formation rates, prospective home buyers' access to and cost of financing, and housing affordability, that ultimately affect demand for our products;

• general economic conditions, including but not limited to housing starts, repair-and-remodeling activity, light commercial construction, inventory levels of new and existing homes for sale, foreclosure rates, interest rates, inflation, unemployment rates, household formation rates, prospective home buyers' access to and cost of financing, and housing affordability, that ultimately affect demand for our products;

• the highly competitive nature of our industry;

• declines in demand for our products due to competing technologies or materials, as well as changes in building code provisions;

• the duration and magnitude of impacts of the ongoing COVID-19 pandemic and related variants, including the impact of any government mandates relating to vaccines and testing;

• disruptions to information systems used to process and store customer, employee, and vendor information, as well as the technology that manages our operations and other business processes;

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• our ability to successfully and efficiently complete and integrate acquisitions;

• concentration of our sales among a relatively small group of customers, as well as the financial condition and creditworthiness of our customers;

• the concentration of our sales among a relatively small group of customers, as well as the financial condition and creditworthiness of our customers;

• impairment of our long-lived assets, goodwill, and/or intangible assets;

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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 nine months ended September 30, 2022 and 2021:

The following tables set forth our operating results in dollars and as a percentage of sales for the three months ended March 31, 2023 and 2022:

Three Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

Sales $ 1,544.3 $ 2,326.3

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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 nine months ended September 30, 2022 and 2021.

Three Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

Housing Starts (a)

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Multi-family 129.4 122.9

388.2 419.1 1,227.7 1,212.4

Segment Sales

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General line 38.7 % 29.1 %

Engineered wood 25.1 % 21.5 % 21.9 % 16.7 %

Engineered wood products 21.6 % 18.7 %

Gross margin percentage (b) 14.8 % 18.0 %

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

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 third quarter 2022, total U.S.

For the three months ended March 31, 2023, total sales decreased $782.0 million, or 34%, to $1,544.3 million from $2,326.3 million during the three months ended March 31, 2022.

As described below, the decrease 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 first quarter 2023, total U.S.

housing starts decreased 18%, driven by a decrease in single-family housing starts of 29% compared with the same period in 2022.

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.

Average composite lumber and average composite panel prices for the three months ended March 31, 2023 were 67% and 59% lower, respectively, than in the same period in the prior year, as reflected by Random Lengths composite lumber and panel pricing.

Wood Products.

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.

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.

Sales, including sales to our BMD segment, decreased $121.5 million, or 22%, to $437.4 million for the three months ended March 31, 2023, from $558.9 million for the three months ended March 31, 2022.

The decrease in sales was driven by lower plywood sales prices of 47%, resulting in decreased sales of $130.6 million.

In addition, lower sales volumes of I-joists and LVL (collectively referred to as EWP) of 41% and 22%, respectively, resulted in decreased sales of $50.0 million and $26.4 million, respectively.

EWP sales volumes decreased due to a decline in housing starts.

I-joist volumes were also impacted by the availability of product substitutes and construction methods in certain geographies that reduce the wood floor opportunity.

These decreases were offset partially by higher sales volumes for plywood of 28%, resulting in increased sales of $61.3 million.

In addition, higher sales prices for LVL and I-joists of 18% and 16%, respectively, resulted in increased sales of $17.4 million and $11.3 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.

Higher sales volumes for LVL of 5% resulted in increased sales of $14.3 million.

In addition, price increases for laminated beam and OSB rimboard combined increased sales by $24.7 million.

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 of 11% resulted in decreased sales of $34.5 million.

Building Materials Distribution.

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 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%.

Sales decreased $732.6 million, or 35%, to $1,379.2 million for the three months ended March 31, 2023, from $2,111.8 million for the three months ended March 31, 2022.

Compared with the same quarter in the prior year, the overall decrease in sales was driven by sales price and sales volume decreases of 20% and 15%, respectively.

By product line, commodity sales decreased 50%, or $554.5 million;

general line product sales increased 24%, or $386.4 million;

and sales of EWP increased 47%, or $436.7 million.

general line product sales decreased 13%, or $81.6 million;

and sales of EWP (substantially all of which are sourced through our Wood Products segment) decreased 24%, or $96.5 million.

Costs and Expenses

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.

Materials, labor, and other operating expenses (excluding depreciation) decreased $499.3 million, or 29%, to $1,230.6 million for the three months ended March 31, 2023, compared with $1,729.9 million during the same period in the prior year.

In our Wood Products segment, materials, labor, and other operating expenses decreased due to lower EWP sales volumes, as well as lower per-unit costs of OSB (used in the manufacture of I-joists) of approximately 19%, compared with first quarter 2022, as well as decreased other manufacturing costs, offset partially by increased labor costs.

However, materials, labor, and other operating expenses as a percentage of sales (MLO rate) in our Wood Products segment increased by 1,340 basis points.

The increase in the MLO rate was primarily the result of lower plywood sales prices, resulting in decreased leveraging of labor, wood fiber, and other manufacturing costs.

In BMD, the decrease in materials, labor, and other operating expenses was driven by lower purchased materials costs as a result of lower sales volumes and lower commodity prices, compared with first quarter 2022.

However, the BMD segment MLO rate increased by 330 basis points compared with first quarter 2022, driven primarily by lower margin percentages on our commodity 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.

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 $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.

Depreciation and amortization expenses increased $10.7 million, or 52%, to $31.2 million for the three months ended March 31, 2023, compared with $20.5 million during the same period in the prior year.

The increase was due primarily to the Acquisition on July 25, 2022, and other capital expenditures.

Selling and distribution expenses decreased $17.9 million, or 12%, to $128.8 million for the three months ended March 31, 2023, compared with $146.7 million during the same period in the prior year, primarily as a result of lower incentive compensation expenses of $20.0 million, offset partially by an increase in shipping and handling costs and discretionary expenses during the three months ended March 31, 2023 compared with the same period in the prior year.

General and administrative expenses increased $0.4 million, or 2%, to $26.5 million for the three months ended March 31, 2023, compared with $26.1 million for the same period in the prior year, primarily due to an increase in professional fees and employee-related expenses, offset partially by lower incentive compensation expenses during the three months ended March 31, 2023 compared with the same period in the prior year.

For the three months ended March 31, 2023, other income (expense), net, was $0.3 million of income, compared with $2.5 million of income for the three months ended March 31, 2022.

Other income for the three months ended March 31, 2022 primarily included earn-out income related to a previous asset sale in our Wood Products segment.

Income From Operations

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.

Income from operations decreased $278.0 million to $127.6 million for the three months ended March 31, 2023, compared with $405.6 million for the three months ended March 31, 2022.

Wood Products.

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.

Segment income decreased $120.7 million to $69.4 million for the three months ended March 31, 2023, compared with $190.1 million for the three months ended March 31, 2022.

The decrease in segment income was due primarily to lower plywood sales prices and lower EWP sales volumes.

In addition, segment income was negatively impacted by higher per-unit conversion costs and an increase in depreciation and amortization expense of $10.7 million related to the Acquisition.

These decreases in segment income were offset partially by higher EWP sales prices and higher plywood sales volumes, as well as lower OSB costs (used in the manufacture of I-joists).

Building Materials Distribution.

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.

Segment income decreased $156.2 million to $69.7 million for the three months ended March 31, 2023, from $225.9 million for the three months ended March 31, 2022.

The decline in segment income was driven by a gross margin decrease of $177.3 million, resulting primarily from lower margins on commodity products and lower sales volumes, offset partially by decreased selling and distribution expenses of $20.3 million.

Unallocated corporate expenses increased $1.1 million to $11.5 million for the three months ended March 31, 2023, from $10.4 million for the same period in the prior year.

The increase was due primarily to an increase in professional fees.

Interest Income.

Interest income increased $9.6 million to $9.7 million for the three months ended March 31, 2023, from $0.1 million for the three months ended March 31, 2022.

The increase was due primarily to higher interest rates on cash equivalents and increases in the average balances of cash equivalents.

Change in fair value of interest rate swaps.

For information related to our interest rate swaps, see the discussion under "Interest Rate Risk and Interest Rate Swaps" of Note 2, Summary of Significant Accounting Policies, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1.

For information related to our interest rate swap, see the discussion under "Interest Rate Risk and Interest Rate Swap" of Note 2, Summary of Significant Accounting Policies, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Item 1.

Financial Statements" of this Form 10-Q.

Income Tax Provision

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 closed in early August 2022.

Pacific Woodtech is a competitor to our Wood Products segment.

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 closed in early August 2022.

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

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

For the three months ended March 31, 2023 and 2022, we recorded $33.3 million and $98.9 million, respectively, of income tax expense and had an effective rate of 25.6% and 24.6%, respectively.

For both 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.

Liquidity and Capital Resources

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 ended first quarter 2023 with $1,000.7 million of cash and cash equivalents and $444.6 million of debt.

At March 31, 2023, we had $1,396.7 million of available liquidity (cash and cash equivalents and undrawn committed bank line availability).

Further descriptions of our cash sources and uses for the three 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.

We expect to fund our seasonal and intra-month working capital requirements in 2023 from cash on hand and, if necessary, borrowings under our revolving credit facility.

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.

Nine Months Ended

Three Months Ended

Net cash provided by operations $ 47,992 $ 198,945

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Operating Activities

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.

For the three months ended March 31, 2023, our operating activities generated $48.0 million of cash, compared with $198.9 million of cash generated in the same period in 2022.

The $150.9 million decrease in cash provided by operations was due primarily to a decrease in income from operations, offset partially by a lesser year-over-year increase in working capital and a decrease in cash paid for taxes, net of refunds, of $2.9 million.

Working capital increased $117.7 million during the three months ended March 31, 2023, compared with a $217.8 million increase for the same period in the prior year.

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, 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 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.

The increases in receivables in both periods primarily reflect increased sales of approximately 26% and 49%, comparing sales for the months of March 2023 and 2022 with sales for the months of December 2022 and 2021, respectively.

Inventories increased during the three months ended March 31, 2023 in preparation for the spring building season.

During the three months ended March 31, 2022 inventories increased primarily due to increased cost of inventory purchased for resale and higher production costs for our manufactured products.

The increase in accounts payable and accrued liabilities as of March 31, 2023 was related to the increase in inventories, offset partially by employee incentive compensation payouts made during the quarter and lower accrued rebates.

The increase in accounts payable and accrued liabilities as of March 31, 2022 was related to the increase in inventories and higher accrued rebates, offset partially by employee incentive compensation payouts made during first quarter 2022.

Investment Activities

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.

During the three months ended March 31, 2023 and 2022, we used $30.1 million and $17.4 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 three months ended March 31, 2022, we received $2.5 million of earn-out income related to a previous asset sale in our Wood Products segment.

We expect capital expenditures in 2023 to total approximately $120 million to $140 million.

We expect our capital spending in 2023 will be for business improvement and quality/efficiency projects, replacement and expansion projects, and ongoing environmental compliance.

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.

Our 2023 capital expenditures range includes funding for greenfield distribution centers in South Carolina and Texas, projects at our mills in the southeast to expand our EWP capacity, and the purchase of property to house an additional door shop assembly operation in Kansas City, Missouri.

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.

Financing Activities

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.

During the three months ended March 31, 2023, our financing activities used $16.1 million of cash, including $8.3 million for common stock dividend payments, $5.9 million of tax withholding payments on stock-based awards, and $1.5

million for the repurchase of 24,727 shares of our common stock.

During the three months ended March 31, 2023, we did not borrow under our revolving credit facility, and therefore have no borrowings outstanding on the facility as of March 31, 2023.

During the three months ended March 31, 2022, our financing activities used $10.3 million of cash, including $5.9 million for common stock dividend payments and $3.9 million of tax withholding payments on stock-based awards.

During the three months ended March 31, 2022, we did not borrow under our revolving credit facility.

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 2022 Form 10-K.

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.

As of March 31, 2023, there have been no material changes in other material cash requirements outside the ordinary course of business since December 31, 2022.

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

As of March 31, 2023, there have been no material changes to the guarantees disclosed in our 2022 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 October 16, 2022, we had approximately 6,820 employees.

As of April 30, 2023, we had approximately 6,660 employees.

Approximately 19% of these employees work pursuant to 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.

We may not be able to renew these agreements or may renew them on terms that are less favorable to us than the current agreements.

As of April 30, 2023, we had ten collective bargaining agreements.

One agreement covering approximately 80 employees at our Canadian EWP facility expired on December 31, 2022, but the terms and conditions of this agreement remain in effect pending negotiation of a new agreement.

We may not be able to renew this agreement or may renew it on terms that are less favorable to us than the current agreement.

If any of these agreements are not renewed or extended upon their termination, we could experience a material labor disruption, strike, or significantly increased labor costs at one or more of our facilities, either in the course of negotiations of a labor agreement or otherwise.

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

As of March 31, 2023, there have been no material changes to financial market risks disclosed in our 2022 Form 10-K.

Environmental

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

As of March 31, 2023, there have been no material changes to environmental issues disclosed in our 2022 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 2022 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.

At March 31, 2023, there have been no material changes to our critical accounting estimates from those disclosed in our 2022 Form 10-K.

New and Recently Adopted Accounting Standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis