BOISE, Idaho — Boise Cascade Company has reported net income of $13.8 million, or $0.35 per share, on sales of $1.3 billion for the third quarter ended September 30, 2018. Third quarter results include $21.7 million of pre-tax losses, or $0.41 per share after-tax, from a non-cash pension settlement charge and a non-cash impairment loss on assets held for sale in Northeast Oregon. These charges also negatively impacted reported EBITDA and adjusted EBITDA.
Third Quarter 2018 Highlights
In the third quarter 2018, total U.S. housing starts increased 4% compared to the same period last year. Single-family starts, which are the primary demand driver of our sales, increased 2% and multi-family starts increased 6% in the third quarter of 2018.
“While both of our businesses operated well during the quarter, the economic backdrop was challenging given sharp declines in commodity prices and flattening housing data. The impact of a falling price environment was most notable in our distribution business,” commented CEO Tom Corrick. “However, strategic steps we have taken thus far in 2018 have the Company well-positioned now and into the future. The decisions we make are closely aligned with our strategic focus on veneer-based manufacturing and nationwide building materials distribution.”
“As announced this morning, we have decided to permanently curtail laminated veneer lumber production at our Roxboro, North Carolina facility by December 31, 2018. As a result, we will record curtailment-related charges in the fourth quarter. Unfortunately, after a great effort by the team at Roxboro, we have been unable to reduce manufacturing costs to an acceptable level. Roxboro will continue to produce I-joists and we anticipate no impact on our customers from the laminated veneer lumber curtailment, as we have additional capacity and expansion opportunities at our Alexandria, Louisiana, and Thorsby, Alabama, EWP facilities that allow us to maintain our current service profile and also support future growth.”
Wood Products
Wood Products sales, including sales to Building Materials Distribution (BMD), increased $35.8 million, or 10%, to $402.7 million for the three months ended September 30, 2018, from $366.9 million for the three months ended September 30, 2017. The increase in sales was driven primarily by higher sales prices for plywood, I-joists, and LVL (I-joists and LVL are collectively referred to as EWP). In addition, increases in EWP sales volumes contributed to improved sales. These increases were offset by a decrease in plywood sales volumes.
Wood Products segment income, including the $10.4 million impairment loss described below, decreased $10.1 million to $13.9 million for the three months ended September 30, 2018, from $24.0 million for the three months ended September 30, 2017. Wood Products segment income benefited from higher sales prices of plywood and EWP, offset partially by higher log costs in the western U.S. In addition, depreciation and amortization expense and general and administrative expenses increased $3.4 million and $1.6 million, respectively, compared to the prior year quarter.
On September 10, 2018, Wood Products entered into an agreement to sell two lumber mills and a particleboard plant located in Northeast Oregon to Woodgrain Millwork (the “Sale”). On November 2, 2018, we closed on the Sale and received proceeds of $15.0 million, which is subject to a final adjustment per the terms of the agreement. The assets sold were classified as held for sale as of September 30, 2018. Upon the classification as held for sale, we recorded a non-cash pre-tax impairment loss of $10.4 million during the three months ended September 30, 2018, recorded in “Other (income) expense, net” in our Consolidated Statements of Operations.
Building Materials Distribution
BMD’s sales increased $113.7 million, or 11%, to $1,159.3 million for the three months ended September 30, 2018, from $1,045.6 million for the three months ended September 30, 2017. Compared with the same quarter in the prior year, the overall increase in sales was driven by sales price and sales volume increases of 7% and 4%, respectively. By product line, commodity sales increased 10%, general line product sales increased 9%, and sales of EWP (substantially all of which is sourced through our Wood Products segment) increased 18%.
BMD segment income decreased $15.9 million to $23.5 million for the three months ended September 30, 2018, from $39.4 million in the comparative prior year quarter. The decline in segment income was driven primarily by a gross margin decrease of $10.3 million, resulting from a steady decline in commodity prices throughout the third quarter 2018. In addition, selling and distribution expenses increased by $5.7 million.
BMD recently announced the planned acquisition of Arling Lumber, Inc. in Cincinnati, Ohio, and expects to complete the transaction in fourth quarter 2018.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted by the U.S. government. The most significant impact to our financial statements is the reduction of the corporate federal income tax rate from 35% to 21%. For the three months ended September 30, 2018, we recorded $0.8 million of income tax benefit on $13.0 million of income before income taxes, resulting in a negative effective rate of 6.2%. During third quarter 2018, we recorded a $3.8 million discrete tax benefit, which mostly relates to the $20.0 million discretionary pension contribution made during the current period, for which we received a tax deduction at the 2017 federal income tax rate. For the three months ended September 30, 2017, we recorded $18.3 million of income tax expense and had an effective rate of 36.6%.
Balance Sheet
Boise Cascade ended the third quarter with $181.3 million of cash and cash equivalents and $395.4 million of undrawn committed bank line availability, for total available liquidity of $576.7 million. The Company had $439.1 million of outstanding debt at September 30, 2018.
On November 2, 2018, our board of directors declared a quarterly dividend of $0.09 per share on our common stock payable on December 17, 2018, to stockholders of record on December 3, 2018.
On August 10, 2018, Boise Cascade completed its second pension risk transfer of 2018 by transferring $124.8 million of its pension plan assets to The Prudential Insurance Company of America (Prudential) for the purchase of a group annuity contract. As a result of the transaction, the Company recognized a non-cash pension settlement charge of $11.3 million before tax in third quarter 2018. As a result of the April 2018 and August 2018 pension risk transfers, Prudential assumed ongoing responsibility for administration and benefit payments for over 60% of our U.S. qualified pension plan projected benefit obligations.
Outlook
We expect to experience seasonally slower demand in fourth quarter 2018. The October 2018 Blue Chip consensus forecast for 2018 and 2019 total U.S. housing starts reflects 1.28 million and 1.32 million units, respectively, compared with actual housing starts of 1.20 million in 2017. Although we believe U.S. demographics are supportive of further recovery in housing starts, we expect only modest residential construction growth due to constraints faced by builders, such as availability of labor and building lots. The pace of household formation rates and residential repair-and-remodeling activity will be affected by continued employment growth, wage growth, prospective home buyers’ access to and cost of financing, housing affordability, improved consumer confidence, as well as other factors. Improved household formation rates in turn will help stimulate new construction.
Future commodity product pricing and commodity input costs could be volatile in response to industry operating rates, net import and export activity, transportation constraints or disruptions, inventory levels in various distribution channels, and seasonal demand patterns. Commodity product pricing was above historical levels in the first half of 2018; however, prices sharply declined during third quarter 2018 and continued to trend downward during October 2018. As a wholesale distributor of a broad mix of commodity products and a manufacturer of certain commodity products, we have sales and profitability exposure to declines in commodity product prices.
On November 2, 2018, the Company made a decision to permanently curtail laminated veneer lumber (LVL) production at our Roxboro, North Carolina facility by December 31, 2018. After extended efforts to improve the throughput and cost position of LVL production at Roxboro, we have concluded that we would be unable to reduce manufacturing costs to an acceptable level. Roxboro will continue to produce I-joists and we anticipate no impact on our customers from the laminated veneer lumber curtailment, as we have additional capacity and expansion opportunities at our Alexandria, Louisiana, and Thorsby, Alabama, EWP facilities that allow us to maintain our current service profile and also support future growth. We expect to record approximately $60 million of charges during fourth quarter 2018, substantially all of which will be to fully depreciate the curtailed LVL production assets.
We expect our capital spending, excluding acquisitions, to be $75-$85 million during 2018. In addition, we expect our capital spending, excluding acquisitions, to be $85-$95 million in 2019.