BZ 03.31.2013 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
 
 1111 West Jefferson Street, Suite 200
Boise, Idaho 83702-5388
(Address of principal executive offices) (Zip Code)
(208) 384-7000
(Registrants' telephone number, including area code)
Commission
File Number
 
Exact Name of Registrant
as Specified in Its Charter
 
State or Other Jurisdiction of Incorporation or Organization
 
I.R.S. Employer Identification No.
001-33541
 
Boise Inc.
 
Delaware
 
20-8356960
333-166926-04
 
BZ Intermediate Holdings LLC
 
Delaware
 
27-1197223

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
Boise Inc.
  
Yes  x
  
No  ¨
 
BZ Intermediate Holdings LLC
  
Yes  x
  
No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
 
Boise Inc.
  
Large accelerated filer
  
x
Accelerated filer
  
¨
 
 
  
Non-accelerated filer
  
¨
Smaller reporting company
  
¨
 
 
  
(Do not check if smaller reporting company)
 
  
 
 
 
 
 
 
 
 
 
 
 
BZ Intermediate Holdings LLC
  
Large accelerated filer
  
¨
Accelerated filer
  
¨
 
 
  
Non-accelerated filer
  
x
Smaller reporting company
  
¨
 
 
  
(Do not check if smaller reporting company)
 
  
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
Boise Inc.
  
Yes  ¨
  
No  x
 
BZ Intermediate Holdings LLC
  
Yes  ¨
  
No  x

There were 100,885,033 common shares, $0.0001 per share par value, of Boise Inc. outstanding as of April 30, 2013.

This Form 10-Q is a combined quarterly report being filed separately by two registrants: Boise Inc. and BZ Intermediate Holdings LLC. BZ Intermediate Holdings LLC meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. Unless the context indicates otherwise, any reference in this report to the "Company," "we," "us," "our," or "Boise" refers to Boise Inc. together with BZ Intermediate Holdings LLC and its consolidated subsidiaries.


Table of Contents
 
PART I — FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
6. Debt
 
 
 
 
 
 
 
13. Leases
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 

i

 
 
 
 
PART II — OTHER INFORMATION
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
Item 5.
 
 
Item 6.
 
 
 

All reports we file with the Securities and Exchange Commission (SEC) are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.boiseinc.com as soon as reasonably practicable after filing such material with the SEC.


ii

PART I — FINANCIAL INFORMATION

ITEM 1.        FINANCIAL STATEMENTS

Boise Inc.
Consolidated Statements of Operations
(unaudited, dollars and shares in thousands, except per-share data)
 
Three Months Ended March 31
 
2013

2012
Sales
 
 
 
Trade
$
591,321

 
$
633,528

Related party
15,697

 
11,318

 
607,018

 
644,846

 
 
 
 
Costs and expenses
 
 
 
Materials, labor, and other operating expenses (excluding depreciation)
496,269

 
502,299

Fiber costs from related party
6,146

 
4,946

Depreciation, amortization, and depletion
43,428

 
37,556

Selling and distribution expenses
28,849

 
30,642

General and administrative expenses
18,923

 
20,008

Other (income) expense, net
331

 
(300
)
 
593,946

 
595,151

 
 
 
 
Income from operations
13,072

 
49,695

 
 
 
 
Foreign exchange gain (loss)
(341
)
 
157

Interest expense
(15,419
)
 
(15,365
)
Interest income
27

 
44

 
(15,733
)
 
(15,164
)
 
 
 
 
Income (loss) before income taxes
(2,661
)
 
34,531

Income tax (provision) benefit
1,436

 
(13,193
)
Net income (loss)
$
(1,225
)
 
$
21,338

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
100,242

 
99,052

Diluted
100,242

 
101,414

 
 
 
 
Net income (loss) per common share:
 
 
 
Basic
$
(0.01
)
 
$
0.22

Diluted
$
(0.01
)
 
$
0.21

See accompanying condensed notes to unaudited quarterly consolidated financial statements.


1

Boise Inc.
Consolidated Statements of Comprehensive Income
(unaudited, dollars in thousands)

 
Three Months Ended March 31
 
2013
 
2012
Net income (loss)
$
(1,225
)
 
$
21,338

Other comprehensive income (loss), net of tax
 
 
 
Foreign currency translation adjustment, net of tax of ($40) and $0, respectively
(228
)
 
855

Cash flow hedges:
 
 
 
Change in fair value, net of tax of $1,038 and ($1,388), respectively
1,656

 
(2,215
)
(Gain) loss included in net income, net of tax of ($62) and $511, respectively
(98
)
 
817

Actuarial gain (loss) and prior service cost (including related amortization) for defined benefit pension plans, net of tax of $825 and $1,019, respectively
1,316

 
1,625

Other, net of tax of ($15) and ($4), respectively
(24
)
 
(5
)
 
2,622

 
1,077

 
 
 
 
Comprehensive income
$
1,397

 
$
22,415

See accompanying condensed notes to unaudited quarterly consolidated financial statements.


2

Boise Inc.
Consolidated Balance Sheets
(unaudited, dollars in thousands)
 
March 31, 2013
 
December 31, 2012
ASSETS
 
 
 
 
 
 
 
Current
 
 
 
Cash and cash equivalents
$
57,416

 
$
49,707

Receivables
 
 
 
Trade, less allowances of $1,425 and $1,382
247,172

 
240,459

Other
9,289

 
8,267

Inventories
306,752

 
294,484

Deferred income taxes
9,521

 
17,955

Prepaid and other
10,321

 
8,828

 
640,471

 
619,700

 
 
 
 
Property
 
 
 
Property and equipment, net
1,214,785

 
1,223,001

Fiber farms
24,170

 
24,311

 
1,238,955

 
1,247,312

 
 
 
 
Deferred financing costs
25,528

 
26,677

Goodwill
160,219

 
160,130

Intangible assets, net
144,598

 
147,564

Other assets
6,802

 
7,029

Total assets
$
2,216,573

 
$
2,208,412

 
See accompanying condensed notes to unaudited quarterly consolidated financial statements.


3

Boise Inc.
Consolidated Balance Sheets (continued)
(unaudited, dollars and shares in thousands, except per-share data)
 
March 31, 2013
 
December 31, 2012
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
Current
 
 
 
Current portion of long-term debt
$
10,000

 
$
10,000

Accounts payable
206,778

 
185,078

Accrued liabilities
 
 
 
Compensation and benefits
54,669

 
70,950

Interest payable
23,724

 
10,516

Other
21,145

 
20,528

 
316,316

 
297,072

 
 
 
 
Debt
 
 
 
Long-term debt, less current portion
765,000

 
770,000

 
 
 
 
Other
 
 
 
Deferred income taxes
190,541

 
198,370

Compensation and benefits
121,311

 
121,682

Other long-term liabilities
73,076

 
73,102

 
384,928

 
393,154

 
 
 
 
Commitments and contingent liabilities

 

 
 
 
 
Stockholders' equity
 
 
 
Preferred stock, $0.0001 par value per share: 1,000 shares authorized; none issued
—

 
—

Common stock, $0.0001 par value per share: 250,000 shares authorized; 100,885 and 100,503 shares issued and outstanding
12

 
12

Treasury stock, 21,151 shares held
(121,423
)
 
(121,423
)
Additional paid-in capital
869,540

 
868,840

Accumulated other comprehensive income (loss)
(98,682
)
 
(101,304
)
Retained earnings
100,882

 
102,061

Total stockholders' equity
750,329

 
748,186

 
 
 
 
Total liabilities and stockholders' equity
$
2,216,573

 
$
2,208,412


See accompanying condensed notes to unaudited quarterly consolidated financial statements.


4

Boise Inc.
Consolidated Statements of Cash Flows
(unaudited, dollars in thousands)
 
Three Months Ended March 31
 
2013
 
2012
Cash provided by (used for) operations
 
 
 
Net income (loss)
$
(1,225
)
 
$
21,338

Items in net income (loss) not using (providing) cash
 
 
 
Depreciation, depletion, and amortization of deferred financing costs and other
44,659

 
38,702

Share-based compensation expense
1,324

 
1,233

Pension expense
1,348

 
2,771

Deferred income taxes
(1,003
)
 
8,838

Other
(92
)
 
(429
)
Decrease (increase) in working capital
 
 
 
Receivables
(7,070
)
 
(12,313
)
Inventories
(12,316
)
 
(12,467
)
Prepaid expenses
746

 
(21
)
Accounts payable and accrued liabilities
13,965

 
(7,585
)
Current and deferred income taxes
(770
)
 
(684
)
Pension payments
(49
)
 
(9,094
)
Other
346

 
1,190

Cash provided by operations
39,863

 
31,479

Cash provided by (used for) investment
 
 
 
Expenditures for property and equipment
(26,610
)
 
(23,133
)
Other
412

 
590

Cash used for investment
(26,198
)
 
(22,543
)
Cash provided by (used for) financing
 
 
 
Payments of long-term debt
(5,000
)
 
(2,500
)
Payments of special dividend
—

 
(47,483
)
Other
(956
)
 
(1,300
)
Cash used for financing
(5,956
)
 
(51,283
)
Increase (decrease) in cash and cash equivalents
7,709

 
(42,347
)
Balance at beginning of the period
49,707

 
96,996

Balance at end of the period
$
57,416

 
$
54,649


See accompanying condensed notes to unaudited quarterly consolidated financial statements.

5

BZ Intermediate Holdings LLC
Consolidated Statements of Operations
(unaudited, dollars in thousands)
 
Three Months Ended March 31
 
2013
 
2012
Sales
 
 
 
Trade
$
591,321

 
$
633,528

Related party
15,697

 
11,318

 
607,018

 
644,846

 
 
 
 
Costs and expenses
 
 
 
Materials, labor, and other operating expenses (excluding depreciation)
496,269

 
502,299

Fiber costs from related party
6,146

 
4,946

Depreciation, amortization, and depletion
43,428

 
37,556

Selling and distribution expenses
28,849

 
30,642

General and administrative expenses
18,923

 
20,008

Other (income) expense, net
331

 
(300
)
 
593,946

 
595,151

 
 
 
 
Income from operations
13,072

 
49,695

 
 
 
 
Foreign exchange gain (loss)
(341
)
 
157

Interest expense
(15,419
)
 
(15,365
)
Interest income
27

 
44

 
(15,733
)
 
(15,164
)
 
 
 
 
Income (loss) before income taxes
(2,661
)
 
34,531

Income tax (provision) benefit
1,436

 
(13,193
)
Net income (loss)
$
(1,225
)
 
$
21,338


See accompanying condensed notes to unaudited quarterly consolidated financial statements.

6

BZ Intermediate Holdings LLC
Consolidated Statements of Comprehensive Income
(unaudited, dollars in thousands)
 
Three Months Ended March 31
 
2013
 
2012
Net income (loss)
$
(1,225
)
 
$
21,338

Other comprehensive income (loss), net of tax
 
 
 
Foreign currency translation adjustment, net of tax of ($40) and $0, respectively
(228
)
 
855

Cash flow hedges:
 
 
 
Change in fair value, net of tax of $1,038 and ($1,388), respectively
1,656

 
(2,215
)
(Gain) loss included in net income, net of tax of ($62) and $511, respectively
(98
)
 
817

Actuarial gain (loss) and prior service cost (including related amortization) for defined benefit pension plans, net of tax of $825 and $1,019, respectively
1,316

 
1,625

Other, net of tax of ($15) and ($4), respectively
(24
)
 
(5
)
 
2,622

 
1,077

 
 
 
 
Comprehensive income
$
1,397

 
$
22,415


See accompanying condensed notes to unaudited quarterly consolidated financial statements.


7

BZ Intermediate Holdings LLC
Consolidated Balance Sheets
(unaudited, dollars in thousands)  
 
March 31, 2013
 
December 31, 2012
ASSETS
 
 
 
 
 
 
 
Current
 
 
 
Cash and cash equivalents
$
57,416

 
$
49,707

Receivables
 
 
 
     Trade, less allowances of $1,425 and $1,382
247,172

 
240,459

Other
9,289

 
8,267

Inventories
306,752

 
294,484

Deferred income taxes
11,451

 
17,955

Prepaid and other
10,321

 
8,828

 
642,401

 
619,700

 
 
 
 
Property
 
 
 
Property and equipment, net
1,214,785

 
1,223,001

Fiber farms
24,170

 
24,311

 
1,238,955

 
1,247,312

 
 
 
 
Deferred financing costs
25,528

 
26,677

Goodwill
160,219

 
160,130

Intangible assets, net
144,598

 
147,564

Other assets
6,802

 
7,029

Total assets
$
2,218,503

 
$
2,208,412

 
See accompanying condensed notes to unaudited quarterly consolidated financial statements.

8

BZ Intermediate Holdings LLC
Consolidated Balance Sheets (continued)
(unaudited, dollars in thousands) 
 
March 31, 2013
 
December 31, 2012
LIABILITIES AND CAPITAL
 
 
 
 
 
 
 
Current
 
 
 
Current portion of long-term debt
$
10,000

 
$
10,000

Accounts payable
206,778

 
185,078

Accrued liabilities
 
 
 
Compensation and benefits
54,669

 
70,950

Interest payable
23,724

 
10,516

Other
21,145

 
20,528

 
316,316

 
297,072

 
 
 
 
Debt
 
 
 
Long-term debt, less current portion
765,000

 
770,000

 
 
 
 
Other
 
 
 
Deferred income taxes
183,923

 
189,823

Compensation and benefits
121,311

 
121,682

Other long-term liabilities
73,127

 
73,152

 
378,361

 
384,657

 
 
 
 
Commitments and contingent liabilities

 

 
 
 
 
Capital
 
 
 
Business unit equity
857,508

 
857,987

Accumulated other comprehensive income (loss)
(98,682
)
 
(101,304
)
 
758,826

 
756,683

 
 
 
 
Total liabilities and capital
$
2,218,503

 
$
2,208,412


See accompanying condensed notes to unaudited quarterly consolidated financial statements.



9

BZ Intermediate Holdings LLC
Consolidated Statements of Cash Flows
(unaudited, dollars in thousands)
 
Three Months Ended March 31
 
2013
 
2012
Cash provided by (used for) operations
 
 
 
Net income (loss)
$
(1,225
)
 
$
21,338

Items in net income (loss) not using (providing) cash
 
 
 
Depreciation, depletion, and amortization of deferred financing costs and other
44,659

 
38,702

Share-based compensation expense
1,324

 
1,233

Pension expense
1,348

 
2,771

Deferred income taxes
(1,003
)
 
8,838

Other
(92
)
 
(429
)
Decrease (increase) in working capital
 
 
 
Receivables
(7,070
)
 
(12,313
)
Inventories
(12,316
)
 
(12,467
)
Prepaid expenses
746

 
(21
)
Accounts payable and accrued liabilities
13,965

 
(7,585
)
Current and deferred income taxes
(770
)
 
(684
)
Pension payments
(49
)
 
(9,094
)
Other
346

 
1,190

Cash provided by operations
39,863

 
31,479

Cash provided by (used for) investment
 
 
 
Expenditures for property and equipment
(26,610
)
 
(23,133
)
Other
412

 
590

Cash used for investment
(26,198
)
 
(22,543
)
Cash provided by (used for) financing
 
 
 
Payments of long-term debt
(5,000
)
 
(2,500
)
Payments (to) from Boise Inc., net
(873
)
 
(48,033
)
Other
(83
)
 
(750
)
Cash used for financing
(5,956
)
 
(51,283
)
Increase (decrease) in cash and cash equivalents
7,709

 
(42,347
)
Balance at beginning of the period
49,707

 
96,996

Balance at end of the period
$
57,416

 
$
54,649


See accompanying condensed notes to unaudited quarterly consolidated financial statements.


10

Condensed Notes to Unaudited Quarterly Consolidated Financial Statements

1. Nature of Operations and Basis of Presentation

Boise Inc. is a large, diverse manufacturer and seller of packaging and paper products. Our operations began in February 2008. We are headquartered in Boise, Idaho, and we operate largely in the United States but also have operations in Europe, Mexico, and Canada. We manufacture and sell corrugated containers and sheets, protective packaging products and papers associated with packaging, such as label and release papers, and newsprint. Additionally, we manufacture linerboard, which when combined with corrugating medium is used in the manufacture of corrugated sheets and containers. The term containerboard is used to describe linerboard, corrugating medium, or a combination of the two.

Our organizational structure is noted below:
 
 
 
 
 
Boise Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BZ Intermediate Holdings LLC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Boise Paper Holdings, L.L.C.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Packaging Segment
 
Paper Segment
 
Corporate and Other Segment

See Note 16, Segment Information, for additional information about our three reportable segments, Packaging, Paper, and Corporate and Other (support services).

The unaudited quarterly consolidated financial statements included herein are those of the following:
•
Boise Inc. and its wholly owned subsidiaries, including BZ Intermediate Holdings LLC (BZ Intermediate).
•
BZ Intermediate and its wholly owned subsidiaries, including Boise Paper Holdings, L.L.C. (Boise Paper Holdings).

In these unaudited quarterly consolidated financial statements, unless the context indicates otherwise, the terms "the Company," "we," "us," "our," or "Boise" refer to Boise Inc. and its consolidated subsidiaries, including BZ Intermediate. There are no significant differences between the results of operations, financial condition, and cash flows of Boise Inc. and those of BZ Intermediate other than income taxes and common stock activity. Some amounts in prior periods' consolidated financial statements have been reclassified to conform with the current period's presentation, none of which were considered material.

The quarterly consolidated financial statements presented have not been audited by an independent registered public accounting firm but, in the opinion of management, include all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the results for the periods presented. The preparation of the consolidated financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. Quarterly results are not necessarily indicative of results that may be expected for the full year. These condensed notes to unaudited quarterly consolidated financial statements should be read in conjunction with our 2012 Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, and the other reports we file with the Securities and Exchange Commission (SEC).


11

2. St. Helens Charges

In December 2012, we ceased paper production on our one remaining paper machine at our St. Helens, Oregon, paper mill. This reduced our annual uncoated freesheet capacity by almost 60,000 tons and resulted in the loss of approximately 100 jobs, primarily at the mill. For more information, see Note 3, St. Helens Charges, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in our 2012 Form 10-K.     

The following table sets forth a summary of changes of the employee-related and other costs included in "Accrued liabilities, Other" on our Consolidated Balance Sheets during the three months ended March 31, 2013 (in thousands):
 
Employee-Related and Other Costs
Balance at January 1, 2013
$
5,099

Additions and adjustments (a)
463

Payments
(4,080
)
Balance at March 31, 2013
$
1,482

____________
(a)
During the three months ended March 31, 2013, we recorded the additional expense in "Other (income) expense, net" in the Consolidated Statements of Operations.

3. Net Income (Loss) Per Common Share

Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Net income (loss) per common share is not applicable to BZ Intermediate because it does not have common shares. Boise Inc.'s basic and diluted net income (loss) per share is calculated as follows (dollars and shares in thousands, except per-share data): 
 
Three Months Ended March 31
 
2013
 
2012
Net income (loss)
$
(1,225
)
 
$
21,338

Weighted average number of common shares for basic net income (loss) per common share
100,242

 
99,052

Incremental effect of dilutive common stock equivalents: (a)
 
 
 
Restricted stock and restricted stock units
—

 
2,043

Performance units
—

 
319

Total stockholder return units
—

 
—

Stock options
—

 
—

Weighted average number of common shares for diluted net income (loss) per common share
100,242

 
101,414

 
 
 
 
Net income (loss) per common share:
 
 
 
Basic
$
(0.01
)
 
$
0.22

Diluted
$
(0.01
)
 
$
0.21

____________
(a)
During the three months ended March 31, 2013 and 2012, we excluded a weighted average 1.1 million and 0.8 million potentially dilutive shares, respectively, from the diluted net income (loss) per share calculation as they would have been antidilutive or were out-of the money.


12

4. Income Taxes

For the three months ended March 31, 2013, we recorded $1.4 million of income tax benefit and had an effective tax rate of 54.0%. During the three months ended March 31, 2013, the primary reason for the difference from the federal statutory income tax rate of 35% was the effect of recording the 2012 benefit related to the American Tax Relief Act in first quarter 2013, when the Act was enacted. We recorded the benefit as a discrete item.

For the three months ended March 31, 2012, we recorded $13.2 million of income tax expense and had an effective tax rate of 38.2%. During the three months ended March 31, 2012, the primary reason for the difference from the federal statutory income tax rate of 35% was the effect of state taxes.

Uncertain Income Tax Positions

We recognize tax liabilities and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available or as new uncertainties occur. We recognize interest and penalties related to uncertain tax positions as income tax expense in the Consolidated Statements of Operations. Interest expense and penalties relating to uncertain tax positions were nominal for all periods presented. There were no significant changes to our uncertain tax positions. For more information, see Note 6, Income Taxes, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in our 2012 Form 10-K.     

As of March 31, 2013, we had not recognized U.S. deferred income taxes on our cumulative total of undistributed earnings for non-U.S. subsidiaries. Determining the unrecognized deferred tax liability related to investments in these non-U.S. subsidiaries that are indefinitely reinvested is not practicable. We currently intend to indefinitely reinvest those earnings in operations outside the United States.

During the three months ended March 31, 2013 and 2012, refunds received, net of cash paid for taxes, were $0.4 million and $2.0 million, respectively.

5. Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. All of our goodwill is recorded in our Packaging segment. At March 31, 2013, and December 31, 2012, the carrying amount of goodwill was $160.2 million and $160.1 million, respectively. The change in the carrying amount related to foreign currency translations.

Intangible Assets

Intangible assets consist of customer relationships, trademarks and trade names, technology, and noncompete agreements. We had $144.6 million and $147.6 million of intangible assets at March 31, 2013, and December 31, 2012, net of $29.0 million and $26.3 million of accumulated amortization, respectively. During the three months ended March 31, 2013 and 2012, we recorded intangible asset amortization of $2.8 million and $3.3 million, respectively. Foreign intangible assets are affected by foreign currency translation.


13

6. Debt

At March 31, 2013, and December 31, 2012, our long-term debt and the interest rates on that debt were as follows (dollars in thousands): 
 
March 31, 2013
 
December 31, 2012
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Revolving credit facility, due 2016
$
—

 
—
%
 
$
5,000

 
2.21
%
Tranche A term loan, due 2016
175,000

 
2.21

 
175,000

 
2.22

9% senior notes, due 2017
300,000

 
9.00

 
300,000

 
9.00

8% senior notes, due 2020
300,000

 
8.00

 
300,000

 
8.00

Long-term debt
775,000

 
7.08

 
780,000

 
7.05

Current portion of long-term debt
(10,000
)
 
2.21

 
(10,000
)
 
2.22

Long-term debt, less current portion
$
765,000

 
7.14
%
 
$
770,000

 
7.11
%

As of March 31, 2013, our debt consisted of the following:
•
The Revolving Credit Facility: A five-year nonamortizing $500 million senior secured revolving credit facility with variable annual interest. In addition to paying interest, we pay an annual commitment fee for undrawn amounts at a rate of either 0.35% or 0.50% depending on our total leverage ratio.
•
The Tranche A Term Loan Facility: A five-year amortizing $200 million senior secured loan facility with variable annual interest.
•
The 9% Senior Notes: An eight-year nonamortizing $300 million senior unsecured debt obligation with fixed annual interest of 9%.
•
The 8% Senior Notes: A ten-year nonamortizing $300 million senior unsecured debt obligation with fixed annual interest of 8%.

Under our Credit Facilities (the Revolving Credit Facility together with the Term Loan Facility) we elect whether interest on our Term Loan and, separately, interest under any Revolving Credit Facility is based on an alternative base rate or the London Interbank Offered Rate (LIBOR), plus an applicable spread based on our total leverage ratio. Our total leverage ratio is essentially our total net debt divided by our trailing four quarters of Adjusted Consolidated EBITDA (as defined in the Credit Agreement). Based on our current one-month LIBOR election, at March 31, 2013, the interest rate on our Credit Facilities was LIBOR plus 200 basis points, and we pay interest on the Credit Facilities monthly in arrears.

At March 31, 2013, we had no borrowings outstanding under our Revolving Credit Facility and had availability of $493.0 million, which is net of outstanding letters of credit of $7.0 million. The maximum borrowings under our Revolving Credit Facility for the three months ended March 31, 2013, was $5.0 million, and the weighted average was $1.5 million. For the three months ended March 31, 2013, the average interest rate for our outstanding borrowings under our Revolving Credit Facility was 2.21%.

The Credit Facilities and senior note agreements contain certain restrictions relating to dividend payments, capital expenditures, financial ratios, guarantees, and the incurrence of additional indebtedness, which are discussed in Note 8, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in our 2012 Form 10-K. Under our Credit Facilities and the indentures governing our Senior Notes, a dividend may be paid if it does not exceed our permitted restricted payment amount, which is calculated as the sum of 50% of our net income for distributions, together with other amounts as specified in the Credit Facilities. At March 31, 2013, the available restricted payment amount under our 8% Senior Notes indenture, which is more restrictive than our Credit Agreement and our 9% Senior Notes indenture, was approximately $106.9 million. To the extent we do not have adequate surplus or net profits, or available restricted payment amounts, we will be prohibited from paying dividends.

The Credit Facilities require the proceeds from asset sales, subject to specified exceptions and casualty insurance, be used to pay down outstanding borrowings.

 

14

As of March 31, 2013, required debt principal repayments were as follows (dollars in thousands): 
 
Remaining
 
 
 
 
 
 
 
 
 
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
Required debt principal repayments
$
5,000

 
$
20,000

 
$
30,000

 
$
120,000

 
$
300,000

 
$
300,000


For the three months ended March 31, 2013 and 2012, cash payments for interest were $1.0 million and $1.6 million, respectively.

With the exception of the Credit Facilities, our debt is fixed-rate debt. At March 31, 2013, the book value of our fixed-rate debt was $600.0 million, and the fair value was estimated to be $658.5 million. The difference between the book value and fair value is due to the difference between the period-end market interest rate and the stated rate of our fixed-rate, long-term debt. We estimated the fair value of our fixed-rate debt using quoted market prices (Level 1 inputs), discussed further in Note 7, Financial Instruments.

7. Financial Instruments

Our primary objective in holding derivative financial instruments is to manage cash flow risk. We do not use derivative instruments for speculative purposes.

We enter into transactions to hedge the variable cash flow risk of natural gas purchases. At March 31, 2013, these derivatives included caps and call spreads, which we account for as economic hedges, and swaps, which are designated and accounted for as cash flow hedges. As of March 31, 2013, we had entered into derivative instruments related to the following approximate percentages of our forecasted natural gas purchases:

 
April 2013
Through
October 2013
 
November 2013
Through
March 2014
 
April 2014
Through
October 2014
 
November 2014
Through
March 2015
 
April 2015
Through
October 2015
 
November 2015
Through
March 2016
Approximate percent hedged
79
%
 
57
%
 
50
%
 
43
%
 
37
%
 
13
%

Economic Hedges

For derivative instruments that are not designated as cash flow hedges for accounting purposes, the gain or loss on the derivatives is recognized in "Materials, labor, and other operating expenses (excluding depreciation)" in the Consolidated Statements of Operations. During the three months ended March 31, 2013 and 2012, we recognized an insignificant amount of expense and/or income related to natural gas contracts we account for as economic hedges.

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of "Accumulated other comprehensive income (loss)" on our Consolidated Balance Sheets and is recognized in "Materials, labor, and other operating expenses (excluding depreciation)" in our Consolidated Statements of Operations in the period in which the hedged transaction affects earnings. Financial instruments designated as cash flow hedges are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in the cash flows of the related underlying exposures. The fair value of the instruments is reclassified out of accumulated other comprehensive income (loss) to earnings if the hedge ceases to be highly effective or if the hedged transaction is no longer probable. At March 31, 2013, and December 31, 2012, we had $0.3 million of income and $1.2 million of losses, respectively, net of tax, recorded in "Accumulated other comprehensive income (loss)" on our Consolidated Balance Sheets related to our natural gas contracts.


15

The effects of our cash flow hedging instruments on our Consolidated Balance Sheets and Consolidated Statements of Operations were as follows (dollars in thousands):
 
(Gain) Loss Recognized in Accumulated Other Comprehensive Income
 
(Gain) Loss Reclassified From Accumulated Other Comprehensive Income Into Earnings
 
Three Months Ended March 31
 
2013 (a)
 
2012
 
2013
 
2012
Natural gas contracts
$
(2,694
)
 
$
3,603

 
$
(160
)
 
$
1,328

____________
(a)
Based on March 31, 2013, pricing, the estimated income, net of tax, to be recognized in earnings during the next 12 months is $0.2 million.

Fair Value Measurements

The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) establishes a fair value hierarchy, which prioritizes the inputs of valuation techniques used to measure fair value into three levels. The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). Where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value (Level 1). If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly (Level 2). If quoted prices for identical or similar assets are not available or are unobservable, we may use internally developed valuation models, whose inputs include bid prices and third-party valuations utilizing underlying asset assumptions (Level 3). Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements. We monitor credit ratings of counterparties to the agreements, which are large financial institutions, to consider the impact, if any, on the determination of fair value. No significant adjustments were made in any periods presented.

Fair Values of Derivative Instruments

At March 31, 2013, and December 31, 2012, the fair value of our financial instruments was determined based on New York Mercantile Exchange (NYMEX) price quotations under the terms of the contracts, using current market information as of the reporting date. The derivatives were valued by us using third-party valuations based on quoted prices for similar assets and liabilities. Accordingly, all of our fair value measurements use Level 2 inputs.


16

We offset asset and liability balances, by counterparty, where legal right of offset exists. Our derivative contracts provide for netting of like transactions in the event a counterparty defaults or upon termination. No collateral was received or pledged in connection with these agreements. The following table presents the fair value of these instruments at March 31, 2013, and December 31, 2012 (dollars in thousands): 
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Assets (Liabilities) Presented in the Consolidated Balance Sheets
 
March 31, 2013
Instruments in a net asset position, by counterparty (a)
 
 
 
 
 
Cash flow hedges
$
648

 
$
(17
)
 
$
631

Instruments in a net liability position, by counterparty (b)
 
 
 
 
 
Cash flow hedges
(749
)
 
287

 
(462
)
Economic hedges
(2,369
)
 
363

 
(2,006
)
Total
$
(2,470
)
 
$
633

 
$
(1,837
)
 
 
 
 
 
 
 
December 31, 2012
Instruments in a net liability position, by counterparty (b)
 
 
 
 
 
Cash flow hedges
$
(2,568
)
 
$
203

 
$
(2,365
)
Economic hedges
(2,582
)
 
385

 
(2,197
)
Total
$
(5,150
)
 
$
588

 
$
(4,562
)
____________
(a)
Instruments in a net asset position, by counterparty, are recorded in "Receivables, Other" on our Consolidated Balance Sheet.
(b)
At March 31, 2013, $1.2 million was recorded in both "Accrued liabilities, Other" and "Other long-term liabilities." At December 31, 2012, amounts were $4.1 million and $0.5 million, respectively.

8. Retirement and Benefit Plans

The components of net periodic benefit cost are as follows (dollars in thousands):
 
Three Months Ended March 31
2013
 
2012
Service cost
$
573

 
$
735

Interest cost
5,979

 
6,168

Expected return on plan assets
(7,345
)
 
(6,776
)
Amortization of actuarial loss
2,141

 
2,641

Amortization of prior service costs and other
—

 
3

Net periodic benefit cost
$
1,348

 
$
2,771


Our funding practice for our pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that we determine to be appropriate considering the funded status of the plans, tax deductibility, our cash flows from operations, and other factors.

9. Share-Based Compensation

Our shareholders have approved the Boise Inc. Incentive and Performance Plan (the Plan), which authorizes awards of share-based compensation, such as restricted stock, restricted stock units, performance units payable in stock, and stock options. These awards are at the discretion of the Compensation Committee of our board of directors, and they vest and expire in accordance with terms established at the time of grant. Most awards under the Plan are eligible to participate in dividend or dividend equivalent payments, if any, which we accrue to be paid when the awards vest.

Shares issued pursuant to awards under the Plan are from our authorized but unissued shares or from treasury shares. The maximum number of shares approved for grant under the Plan is 17.2 million shares. As of

17

March 31, 2013, 7.8 million shares remained available for future issuance under the Plan. Share-based compensation costs in BZ Intermediate's financial statements represent expenses for restricted stock, restricted stock units, stock options, and performance units of Boise Inc., which have been pushed down to BZ Intermediate for accounting purposes. Additional information regarding the Plan and awards can be found in Note 11, Share-Based Compensation, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in our 2012 Form 10-K.

Restricted Stock and Performance Units

Members of management and our directors have been granted restricted stock and restricted stock units (collectively restricted stock), the majority of which are subject to an EBITDA (earnings before interest, taxes, and depreciation, amortization, and depletion) goal and all of which are subject to service-based vesting restrictions. These awards generally vest over a three-year period. The fair values of our restricted stock awards were based on the closing market price of our common stock on the date of grant, and compensation expense is recorded over the awards' vesting period.

Members of management have been granted performance units, with some measured based on our return on net operating assets (RONOA) and others based on our comparative total stockholder return (TSR awards). The number of RONOA performance units awarded is subject to adjustment based on the two-year average RONOA. Because the RONOA component contains a performance condition, we record compensation expense, net of estimated forfeitures, over the requisite service period based on the most probable number of awards expected to vest. Any shares not vested are forfeited. The fair values of the RONOA performance units were based on the closing market price of our common stock on the date of grant, and compensation expense is recorded over the awards' vesting period.

Market-condition awards, or TSR awards, have been granted to members of management. Each TSR award reflects a target number of shares that may be issued to the award recipient. The actual number of shares the recipient receives is determined at the end of a three-year performance period based on total stockholder return relative to a set of comparator companies. Market condition awards represent a more difficult threshold to meet before payout, with greater uncertainty that the market condition will be satisfied; therefore, these awards have a lower fair value than those that vest based primarily on the passage of time. Compensation expense is required to be recognized for these awards regardless of when, if ever, the market condition is satisfied. The fair value of the TSR awards estimated on the grant date using a Monte Carlo simulation was $8.56 per unit. Compensation expense is recorded over the awards' vesting period.
 
The following table presents the assumptions used to calculate the fair value of the TSR awards:
Expected volatility
44.62
%
Stock price on grant date
$
8.87

Risk-free interest rate
0.37
%
Expected term (years)
2.8
Expected dividend yield
—
%


18

The following table presents restricted stock, RONOA performance award, and TSR award activity for the three months ended March 31, 2013 (shares in thousands):
 
Restricted Stock
 
RONOA Performance Awards
 
TSR Market-Condition Awards
 
Nonvested Shares
 
Weighted Average Grant-Date Fair Value
 
Nonvested Shares
 
Weighted Average Grant-Date Fair Value
 
Nonvested Shares
 
Weighted Average Grant-Date Fair Value
Outstanding at December 31, 2012 (a)
636

 
$
6.66

 
489

 
$
7.90

 
—

 
$
—

Granted
417

 
8.61

 
258

 
8.87

 
232

 
8.56

Vested
(231
)
 
8.52

 
(93
)
 
8.53

 
—

 
—

Forfeited
(2
)
 
8.24

 
—

 
—

 
—

 
—

Outstanding at March 31, 2013 (a)
820

 
$
7.13

 
654

 
$
8.20

 
232

 
$
8.56

____________
(a)    Outstanding awards include all nonvested and nonforfeited awards.

Stock Options

In 2012 and 2011, we granted nonqualified stock options to members of management. The stock options generally vest and become exercisable over three years. Our stock options generally have a contractual term of ten years, meaning the option must be exercised by the holder before the tenth anniversary of the grant date. No options were granted during the three months ended March 31, 2013.
The following is a summary of our stock option activity (number of options and aggregate intrinsic value in thousands):
 
Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Life (in years)
 
Aggregate Intrinsic Value
Outstanding at December 31, 2012
841

 
$
8.34

 
 
 
 
Exercised
—

 
—

 
 
 
 
Forfeited
—

 
—

 
 
 
 
Outstanding at March 31, 2013
841

 
$
8.34

 
8.6
 
$
266

Exercisable at March 31, 2013
335

 
$
8.37

 
8.5
 
$
96

Vested and expected to vest at March 31, 2013
821

 
$
8.34

 
8.6
 
$
260


Compensation Expense
    
Most of our share-based compensation expense was recorded in "General and administrative expenses" in our Consolidated Statements of Operations. Total recognized share-based compensation expense, net of estimated forfeitures, is as follows (dollars in thousands):
 
Three Months Ended March 31
 
2013
 
2012
Restricted stock
$
449

 
$
833

RONOA performance awards
472

 
242

TSR market-condition awards
27

 
—

Stock options
376

 
158

Total share-based compensation expense
$
1,324

 
$
1,233



19

The unrecognized compensation expense for all share-based awards at March 31, 2013, is as follows (dollars in thousands):
 
Unrecognized Compensation Expense
 
Remaining Weighted Average Recognition Period (in years)
Restricted stock
$
5,066

 
2.2
RONOA performance awards
3,623

 
2.0
TSR market-condition awards
1,815

 
3.0
Stock options
1,664

 
1.7
Total unrecognized share-based compensation expense
$
12,168

 
2.2

10. Stockholders' Equity

The following tables detail the changes in accumulated other comprehensive income, net of tax, for the three months ended March 31, 2013 and 2012, respectively.
 
 
Changes in Accumulated Other Comprehensive Income (Loss)
 
 
Three Months Ended March 31, 2013
 
 
Foreign Currency Translation Adjustments
 
Effective Portion of Cash Flow Hedges
 
Pension Benefits
 
Other
 
Total
Beginning balance
 
$
(302
)
 
$
(1,230
)
 
$
(100,108
)
 
$
336

 
$
(101,304
)
Other comprehensive income (loss) before reclassification, net of tax
 
(228
)
 
1,656

 
—

 
—

 
1,428

Amounts reclassified from accumulated other comprehensive income, net of tax
 
—

 
(98
)
 
1,316

 
(24
)
 
1,194

Ending balance
 
$
(530
)
 
$
328

 
$
(98,792
)
 
$
312

 
$
(98,682
)
 
 
Changes in Accumulated Other Comprehensive Income (Loss)
 
 
Three Months Ended March 31, 2012
 
 
Foreign Currency Translation Adjustments
 
Effective Portion of Cash Flow Hedges
 
Pension Benefits
 
Other
 
Total
Beginning balance
 
$
(352
)
 
$
(3,702
)
 
$
(118,141
)
 
$
233

 
$
(121,962
)
Other comprehensive income (loss) before reclassification, net of tax
 
855

 
(2,215
)
 
—

 
—

 
(1,360
)
Amounts reclassified from accumulated other comprehensive income, net of tax
 
—

 
817

 
1,625

 
(5
)
 
2,437

Ending balance
 
$
503

 
$
(5,100
)
 
$
(116,516
)
 
$
228

 
$
(120,885
)

20

 
 
Reclassifications Out of Accumulated Other Comprehensive Income
 
 
Three Months Ended
 
 
March 31, 2013
 
March 31, 2012
(Gains) losses on cash flow hedges
 
 
 
 
Natural gas contracts (a)
 
$
(160
)
 
$
1,328

Tax expense (benefit)
 
62

 
(511
)
Net of tax
 
$
(98
)
 
$
817

 
 
 
 
 
Pension benefits
 
 
 
 
Amortization of prior service cost
 
$
—

 
$
3

Amortization of actuarial loss
 
2,141

 
2,641

Total before tax (b)
 
2,141

 
2,644

Tax benefit
 
(825
)
 
(1,019
)
Net of tax
 
$
1,316

 
$
1,625

 
 
 
 
 
Other
 
$
(39
)
 
$
(9
)
Tax expense
 
15

 
4

Net of tax
 
$
(24
)
 
$
(5
)
____________
(a)
Amounts are recorded in "Materials, labor and other operating expenses (excluding depreciation)" in our Consolidated Statements of Operations.
(b)
Amounts are included in the computation of net periodic pension cost. For additional information, see Note 8, Retirement and Benefit Plans.

11. Inventories

The majority of our inventories are valued at the lower of cost or market, where cost is based on the average cost method of inventory valuation. Manufactured inventories include costs for materials, labor, and factory overhead. Other inventories are valued at the lower of either standard cost, which approximates cost based on the actual first-in, first-out usage pattern, or market.

Inventories included the following (dollars in thousands):
 
March 31, 2013
 
December 31, 2012
Finished goods
$
156,638

 
$
150,496

Work in process
41,989

 
41,575

Fiber
40,343

 
35,840

Other raw materials and supplies
67,782

 
66,573

 
$
306,752

 
$
294,484



21

12. Property and Equipment

Property and equipment consisted of the following asset classes (dollars in thousands): 
 
March 31, 2013
 
December 31, 2012
Land
$
28,821

 
$
28,899

Buildings and improvements
264,286

 
260,607

Machinery and equipment
1,491,388

 
1,479,212

Construction in progress
59,492

 
46,538

 
1,843,987

 
1,815,256

Less accumulated depreciation
(629,202
)
 
(592,255
)
 
$
1,214,785

 
$
1,223,001


Depreciation expense for the three months ended March 31, 2013 and 2012, was $38.7 million and $32.7 million, respectively.

We periodically assess the estimated useful lives of our assets. Changes in circumstances, such as changes to our operational or capital strategy, changes in regulation, or technological advances, may result in the actual useful lives differing from our estimates. Revisions to the estimated useful lives of assets requires judgment and constitutes a change in accounting estimate, which is accounted for prospectively by adjusting or accelerating depreciation and amortization rates. During the three months ended March 31, 2013, we recognized $5.3 million of incremental depreciation expense related to shortening the useful lives of some of our assets, primarily at International Falls, Minnesota. See Note 19, Subsequent Events, for more information.

13. Leases

We lease some of our locations, as well as other property and equipment, under operating leases. For purposes of determining straight-line rent expense, the lease term is calculated from the date of possession of the facility, including any periods of free rent and any renewal option periods that are reasonably assured of being exercised. Straight-line rent expense is also adjusted to reflect any allowances or reimbursements provided by the lessor. Rental expense for operating leases was $6.9 million and $7.0 million for the three months ended March 31, 2013 and 2012, respectively. Sublease rental income was not material in any of the periods presented.

14. Concentrations of Risk

Business

Our largest customer is OfficeMax Incorporated (OfficeMax). Although we expect our long-term business relationship with OfficeMax to continue, the relationship exposes us to a significant concentration of business and financial risk. Sales to OfficeMax were $117.7 million and $130.0 million, respectively, during the three months ended March 31, 2013 and 2012, representing 19% and 20% of total sales for those periods. At March 31, 2013, and December 31, 2012, we had $35.8 million and $39.5 million, respectively, of accounts receivable due from OfficeMax, which represents 14% and 16%, respectively, of our total company receivables.

On February 20, 2013, OfficeMax announced it had signed a definitive merger agreement with its competitor, Office Depot. Our paper purchase agreement with OfficeMax provides that it would survive the merger with respect to the office paper requirements of the legacy OfficeMax business. We cannot predict how the merger, if finalized, would affect the financial condition of the combined company, the paper requirements of the legacy OfficeMax business, or the effects the combined company would have on the pricing and competition for office papers. Significant reductions in paper purchases from OfficeMax (or the post-merger entity) would cause us to expand our customer base and could potentially decrease our profitability if new customer sales required either a decrease in our pricing and/or an increase in our cost of sales. Any significant deterioration in the financial condition of OfficeMax (or the post-merger entity) affecting the ability to pay or causing a significant change in the willingness to purchase our products or a significant deterioration in the financial condition of OfficeMax that affects their ability to pay could have a material adverse effect on our business, financial condition, results of operations, and liquidity.


22

Labor

At March 31, 2013, we had approximately 5,200 employees, and approximately 50% of these employees worked pursuant to collective bargaining agreements. Approximately 3% of our employees work pursuant to collective bargaining agreements that will expire within the next 12 months.

15. Transactions With Related Party

Related-Party Sales

Louisiana Timber Procurement Company, L.L.C. (LTP) is a variable-interest entity that is 50% owned by Boise Inc. and 50% owned by Boise Cascade Holdings, L.L.C. (Boise Cascade). LTP procures sawtimber, pulpwood, residual chips, and other residual wood fiber to meet the wood and fiber requirements of Boise Inc. and Boise Cascade in Louisiana. We are the primary beneficiary of LTP, as we have the power to direct the activities that most significantly affect the economic performance of LTP. Therefore, we consolidate LTP in our financial statements in our Packaging segment. The carrying amounts of LTP's assets and liabilities (which relate primarily to noninventory working capital items) on our Consolidated Balance Sheets were $4.6 million and $4.0 million at March 31, 2013, and December 31, 2012, respectively. During the three months ended March 31, 2013 and 2012, we recorded $15.7 million and $11.3 million, respectively, of LTP sales to Boise Cascade in "Sales, Related party" in the Consolidated Statements of Operations and approximately the same amount of expenses in "Materials, labor, and other operating expenses (excluding depreciation)." The sales were at prices designed to approximate market prices.

Related-Party Costs and Expenses

During the three months ended March 31, 2013 and 2012, fiber purchases from a related party were $6.1 million and $4.9 million, respectively. Most of these purchases related to log and chip purchases by LTP from Boise Cascade's wood products business. Costs associated with these purchases were recorded as "Fiber costs from related party" in the Consolidated Statements of Operations.

16. Segment Information
    
We operate and report our business in three reportable segments: Packaging, Paper, and Corporate and Other (support services). These segments represent distinct businesses that are managed separately because of differing products and services. Each of these businesses requires distinct operating and marketing strategies. Management reviews the performance of the Company based on these segments. There are no differences in our basis of segmentation or in our basis of measurement of segment profit or loss from those disclosed in Note 17, Segment Information, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in our 2012 Form 10-K.
        
An analysis of operations by segment is as follows (dollars in millions):
 
 
Sales
 
Income (Loss) Before Income Taxes
 
Depreciation,
Amortization, and Depletion (a)
 
EBITDA 
(b)
Three Months Ended
March 31, 2013
 
Trade
 
Related
Party
 
Inter-
segment
 
Total
 
 
 
Packaging
 
$
270.7

 
$
15.7

 
$
0.7

 
$
287.0

 
$
0.9

 
$
16.3

 
$
17.2

Paper
 
312.9

 
—

 
19.8

 
332.7

 
19.7

 
26.0

 
45.6

Corporate and Other
 
7.7

 
—

 
8.5

 
16.3

 
(7.8
)
 
1.1

 
(6.7
)
Intersegment eliminations
 
—

 
—

 
(29.0
)
 
(29.0
)
 
—

 
—

 
—

 
 
$
591.3

 
$
15.7

 
$
—

 
$
607.0

 
12.7

 
$
43.4

 
$
56.2

Interest expense
 
 
 
 
 
 
 
 
 
(15.4
)
 
 
 
 
Interest income
 
 
 
 
 
 
 
 
 
—

  
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(2.7
)
  
 
 
 


23

 
 
Sales
 
Income (Loss) Before Income Taxes
 
Depreciation,
Amortization, and Depletion
 
EBITDA 
(b)
Three Months Ended
March 31, 2012
 
Trade
 
Related
Party
 
Inter-
segment
 
Total
 
 
 
Packaging
 
$
260.3

 
$
11.3

 
$
0.7

 
$
272.3

 
$
22.4

 
$
15.5

 
$
37.9

Paper
 
365.6

 
—

 
16.9

 
382.4

 
33.9

 
21.2

 
55.2

Corporate and Other
 
7.7

 
—

 
10.5

 
18.2

 
(6.5
)
 
0.9

 
(5.7
)
Intersegment eliminations
 
—

 
—

 
(28.0
)
 
(28.0
)
 
—

 
—

 
—

 
 
$
633.5

 
$
11.3

 
$
—

 
$
644.8

 
49.9

 
$
37.6

 
$
87.4

Interest expense
 
 
 
 
 
 
 
 
 
(15.4
)
 
 
 
 
Interest income
 
 
 
 
 
 
 
 
 
—

  
 
 
 
 
 
 
 
 
 
 
 
 
 
$
34.5

  
 
 
 
____________
(a)
During the three months ended March 31, 2013, we recognized $5.3 million of incremental depreciation expense related to shortening the useful lives of some of our assets, primarily at International Falls, Minnesota.
(b)
EBITDA represents income (loss) before interest (interest expense and interest income), income tax provision (benefit), and depreciation, amortization, and depletion. EBITDA is the primary measure used by our chief operating decision maker to evaluate segment operating performance and to decide how to allocate resources to segments. We believe EBITDA is useful to investors because it provides a means to evaluate the operating performance of our segments and our company on an ongoing basis using criteria that are used by our internal decision makers and because it is frequently used by investors and other interested parties in the evaluation of companies. We believe EBITDA is a meaningful measure because it presents a transparent view of our recurring operating performance and allows management to readily view operating trends, perform analytical comparisons, and identify strategies to improve operating performance. For example, we believe that the inclusion of items such as taxes, interest expense, and interest income distorts management's ability to assess and view the core operating trends in our segments. EBITDA, however, is not a measure of our liquidity or financial performance under generally accepted accounting principles (GAAP) and should not be considered as an alternative to net income, income from operations, or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity. The use of EBITDA instead of net income (loss) or segment income (loss) has limitations as an analytical tool, including the inability to determine profitability; the exclusion of interest expense, interest income, and associated significant cash requirements; and the exclusion of depreciation, amortization, and depletion, which represent significant and unavoidable operating costs given the capital expenditures needed to maintain our businesses. Management compensates for these limitations by relying on our GAAP results. Our measures of EBITDA are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation.

The following is a reconciliation of net income (loss) to EBITDA for Boise Inc. and BZ Intermediate (dollars in millions):
 
Three Months Ended March 31
 
2013
 
2012
Net income (loss)
$
(1.2
)
 
$
21.3

Interest expense
15.4

 
15.4

Interest income
—

 
—

Income tax provision (benefit)
(1.4
)
 
13.2

Depreciation, amortization, and depletion
43.4

(a)
37.6

EBITDA
$
56.2

 
$
87.4


17. New and Recently Adopted Accounting Standards

In February 2013, the FASB issued Accounting Standards Update (ASU) 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires entities to disclose additional information about changes in and significant items reclassified out of accumulated other comprehensive income. We have adopted the provisions of this guidance, and it had no effect on our financial position and results of operations. See Note 10, Stockholders' Equity, for the additional required disclosures.

In July 2012, the FASB issued Accounting Standards Update (ASU) 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.  This ASU gives entities testing indefinite-lived intangible assets for impairment the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, the entity is not required to take further action. However, if an entity concludes otherwise, a quantitative impairment test is required. We will consider the provisions

24

of this guidance when we test our indefinite-lived intangible assets for impairment in the fourth quarter. This ASU will have no effect on our financial position and results of operations.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU improves reporting and transparency of offsetting (netting) assets and liabilities and the related effects on the financial statements. In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. We adopted the provisions of this guidance on January 1, 2013, and it had no effect on our financial position and results of operations. See Note 7, Financial Instruments, for the additional required disclosures.

There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

18. Commitments, Guarantees, Indemnifications, and Legal Proceedings

Commitments

We have financial commitments and obligations that arise in the ordinary course of our business. These include long-term debt, lease payments, derivative instruments, and obligations to purchase goods and services that are discussed in Note 8, Debt; Note 9, Financial Instruments; Note 14, Leases; and Note 18, Commitments, Guarantees, Indemnifications, and Legal Proceedings, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in our 2012 Form 10-K. At March 31, 2013, there have been no material changes to commitments outside the normal course of business.

Guarantees and Indemnifications

We provide guarantees, indemnifications, and other assurances to third parties in the normal course of our business. These include tort indemnifications, environmental assurances, and representations and warranties in merger and acquisition agreements. At March 31, 2013, we are not aware of any material liabilities arising from any guarantee, indemnification, or financial assurance we have provided. If we determined such liability was probable and subject to reasonable determination, we would accrue for it at that time.

Legal Proceedings

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

19. Subsequent Events
    
In May 2013, we announced a significant capital investment in our DeRidder, Louisiana, paper mill. The investment, which we expect to be between $110 million and $120 million, will allow us to produce containerboard on an idled newsprint machine and upgrade the mill's pulping capabilities. We expect these investments to create approximately 50 jobs, add approximately 270,000 tons of lightweight containerboard capacity to our system, and optimize the product mix on our existing linerboard machine, increasing the mill's overall containerboard output by 300,000 tons. We are targeting a mid-2014 start-up date for the project.

To improve the cost competitiveness of our Paper business, where we operate against declining demand for our products, in May 2013, we announced our decision to close two paper machines and an off-machine coater at our mill in International Falls, Minnesota. These closures, which we expect to occur no later than fourth quarter 2013, will reduce our annual uncoated freesheet capacity by approximately 115,000 tons, or 9%, and allow us to focus our efforts on key products and machines that drive our profitability, improve our cash flow, and enhance the overall competitiveness of our International Falls mill and our Paper business. This decision will result in the loss of approximately 300 jobs. During the three months ended March 31, 2013, we recognized $3.8 million of incremental depreciation expense related to shortening the useful lives of these assets. We expect to record an additional $10 million of incremental depreciation expense through the remainder of the year and $20 million to $25 million of other closure-related costs in second quarter. After considering working capital recapture and tax benefits, we estimate the closure will have a modestly positive net cash effect.

25

20. Consolidating Guarantor and Nonguarantor Financial Information

Our 9% and 8% senior notes (Senior Notes) were issued by Boise Paper Holdings and co-issuers (Boise Co-Issuer Company and Boise Finance Company). The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by BZ Intermediate and each of its existing and, to the extent they become guarantors under the Credit Facilities, future subsidiaries (other than: (i) Boise Paper Holdings and the co-issuers; (ii) Louisiana Timber Procurement Company, L.L.C.; and (iii) our foreign subsidiaries, including those acquired as part of the Hexacomb Acquisition). Each of the co-issuers of the senior subordinated notes and each of the subsidiaries of BZ Intermediate that is a guarantor thereof is 100% owned, directly or indirectly, by Boise Paper Holdings.

The following consolidating financial statements present the results of operations, comprehensive income, financial position, and cash flows of (i) BZ Intermediate Holdings LLC (parent); (ii) Boise Paper Holdings and co-issuers; (iii) guarantor subsidiaries; (iv) nonguarantor subsidiaries; and (v) eliminations to arrive at the information on a consolidated basis. Other than these consolidated financial statements and footnotes for Boise Inc. and BZ Intermediate, financial statements and other disclosures concerning the guarantors have not been presented. Management believes that such information is not material to investors and because the cancellation provisions of the guarantor subsidiaries guarantees are customary and do not permit a guarantor subsidiary to opt out of the obligation prior to or during the term of the debt. Under these cancellation provisions, each guarantor subsidiary is automatically released from its obligations as a guarantor upon the sale of the subsidiary or substantially all of its assets to a third party, the designation of the subsidiary as an unrestricted subsidiary for the purposes of the covenants included in the indentures, the release of the indebtedness under the indentures, or if the issuers exercise their legal defeasance option or discharge their obligations in accordance with the indentures.

In the following consolidating financial statements, the reclassifications to net income (loss) from accumulated other comprehensive income are recorded primarily in our guarantor subsidiaries. See Note 10, Stockholders' Equity, for additional information related to reclassifications out of accumulated other comprehensive income.


26

BZ Intermediate Holdings LLC and Subsidiaries
Consolidating Statements of Operations
For the Three Months Ended March 31, 2013
(unaudited, dollars in thousands)
 
BZ
Intermediate
Holdings
LLC
(Parent)
 
Boise Paper Holdings and Co-issuers
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
 
 
Trade
$
—

 
$
3,866

 
$
574,711

 
$
12,744

 
$
—

 
$
591,321

Intercompany
—

 
—

 
2,393

 
27,990

 
(30,383
)
 
—

Related party
—

 
—

 
—

 
15,697

 
—

 
15,697

 
—

 
3,866

 
577,104

 
56,431

 
(30,383
)
 
607,018

 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Materials, labor, and other operating expenses (excluding depreciation)
—

 
3,736

 
475,320

 
47,596

 
(30,383
)
 
496,269

Fiber costs from related party
—

 
—

 
—

 
6,146

 
—

 
6,146

Depreciation, amortization, and depletion
—

 
950

 
41,817

 
661

 
—

 
43,428

Selling and distribution expenses
—

 
—

 
28,596

 
253

 
—

 
28,849

General and administrative expenses
—

 
7,214

 
10,424

 
1,285

 
—

 
18,923

Other (income) expense, net
—

 
30

 
391

 
(90
)
 
—

 
331

 
—

 
11,930

 
556,548

 
55,851

 
(30,383
)
 
593,946

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
—

 
(8,064
)
 
20,556

 
580

 
—

 
13,072

 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange loss
—

 
(164
)
 
(16
)
 
(161
)
 
—

 
(341
)
Interest expense
—

 
(15,427
)
 
—

 
8

 
—

 
(15,419
)
Interest expense—intercompany
—

 
(47
)
 
—

 
(19
)
 
66

 
—

Interest income
—

 
—

 
7

 
20

 
—

 
27

Interest income—intercompany
—

 
14

 
52

 
—

 
(66
)
 
—

 
—

 
(15,624
)
 
43

 
(152
)
 
—