Edgar Filing: BOISE INC.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2011

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

For the transition period from to

LOGO

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	I.R.S. Employer Identification No.	State or Other Jurisdiction of Incorporation or Organization
001-33541	Boise Inc.	20-8356960	Delaware
333-166926-04	BZ Intermediate Holdings LLC	27-1197223	Delaware

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	¨	No	¨
BZ Intermediate Holdings LLC	Yes	¨	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	¨	Accelerated filer	x
	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

Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.

There were 83,207,315 common shares, $0.0001 per share par value, of Boise Inc. and 1,000 common units, $0.01 per unit par value, of BZ Intermediate Holdings LLC outstanding as of March 31, 2011.

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.	Financial Statements	1
	Boise Inc. and Subsidiaries Consolidated Financial Statements	1
	BZ Intermediate Holdings LLC and Subsidiaries Consolidated Financial Statements	5

	Condensed Notes to Unaudited Quarterly Consolidated Financial Statements	9
	1. Nature of Operations and Basis of Presentation	9
	2. Acquisition of Tharco Packaging, Inc.	10
	3. Net Income (Loss) Per Common Share	12
	4. Income Taxes	12
	5. Transactions With Related Parties	13
	6. Leases	13
	7. Concentrations of Risk	14
	8. Inventories	14
	9. Property and Equipment	14
	10. Goodwill and Intangible Assets	15
	11. Debt	16
	12. Financial Instruments	17
	13. Retirement and Benefit Plans	18
	14. Share-Based Compensation	19
	15. New and Recently Adopted Accounting Standards	20
	16. Comprehensive Income (Loss)	21
	17. Segment Information	21
	18. Commitments, Guarantees, and Legal Proceedings	23
	19. Subsequent Event	23
	20. Consolidating Guarantor and Nonguarantor Financial Information	23

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
	Background	33
	Executive Summary	33
	Factors That Affect Our Operating Results	35
	Our Operating Results	39
	Liquidity and Capital Resources	42
	Contractual Obligations	45
	Off-Balance-Sheet Activities	45
	Guarantees	45
	Inflationary and Seasonal Influences	46
	Working Capital	46
	Environmental	46
	Critical Accounting Estimates	46
	New and Recently Adopted Accounting Standards	47

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	47



PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	(Removed and Reserved)	50

Item 5.	Other Information	50

Item 6.	Exhibits	50

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.

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Boise Inc.

Consolidated Statements of Income (Loss)

(unaudited, dollars and shares in thousands, except per-share data)


	Three Months Ended March 31
	2011			2010
Sales
Trade	$	560,320		$	485,851
Related parties		8,443			8,254

		568,763			494,105


Costs and expenses
Materials, labor, and other operating expenses		449,070			408,485
Fiber costs from related parties		4,440			9,831
Depreciation, amortization, and depletion		33,974			32,131
Selling and distribution expenses		19,373			13,734
General and administrative expenses		12,697			11,459
Other (income) expense, net		1,077			(175	)

		520,631			475,465


Income from operations		48,132			18,640


Foreign exchange gain		132			687
Loss on extinguishment of debt		—			(22,197	)
Interest expense		(16,367	)		(16,474	)
Interest income		78			37

		(16,157	)		(37,947	)


Income (loss) before income taxes		31,975			(19,307	)
Income tax (provision) benefit		(13,281	)		6,622

Net income (loss)	$	18,694		$	(12,685	)


Weighted average common shares outstanding:
Basic		80,964			79,800
Diluted		90,417			79,800

Net income (loss) per common share:
Basic	$	0.23		$	(0.16	)
Diluted	$	0.21		$	(0.16	)

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

Boise Inc.

Consolidated Balance Sheets

(unaudited, dollars in thousands)


	March 31, 2011		December 31, 2010
ASSETS

Current
Cash and cash equivalents	$	60,136	$	166,833
Short-term investments		—		10,621
Receivables
Trade, less allowances of $822 and $603		223,660		188,589
Other		8,841		3,839
Inventories		278,020		261,471
Deferred income taxes		18,490		16,658
Prepaid and other		8,769		5,214

		597,916		653,225

Property
Property and equipment, net		1,218,630		1,199,035
Fiber farms and deposits		18,505		18,285

		1,237,135		1,217,320


Deferred financing costs		29,042		30,396
Goodwill		101,258		—
Intangible assets, net		104,225		29,605
Other assets		8,788		8,444

Total assets	$	2,078,364	$	1,938,990

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

Boise Inc.

Consolidated Balance Sheets (continued)

(unaudited, dollars and shares in thousands, except per-share data)


	March 31, 2011			December 31, 2010
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current
Current portion of long-term debt	$	50,000		$	43,750
Income taxes payable		278			82
Accounts payable		186,196			179,214
Accrued liabilities
Compensation and benefits		48,872			54,574
Interest payable		23,271			10,535
Other		17,793			16,123

		326,410			304,278


Debt
Long-term debt, less current portion		780,581			738,081


Other
Deferred income taxes		135,964			88,200
Compensation and benefits		120,885			121,318
Other long-term liabilities		47,544			40,278

		304,393			249,796


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; 83,207 shares and 84,845 shares issued and outstanding		8			8
Additional paid-in capital		582,059			581,442
Accumulated other comprehensive income (loss)		(77,988	)		(78,822	)
Retained earnings		162,901			144,207

Total stockholders’ equity		666,980			646,835

Total liabilities and stockholders’ equity	$	2,078,364		$	1,938,990

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

Boise Inc.

Consolidated Statements of Cash Flows

(unaudited, dollars in thousands)


	Three Months Ended March 31
	2011			2010
Cash provided by (used for) operations
Net income (loss)	$	18,694		$	(12,685	)
Items in net income (loss) not using (providing) cash
Depreciation, depletion, and amortization of deferred financing costs and other		35,539			35,066
Share-based compensation expense		648			894
Pension expense		3,169			2,568
Deferred income taxes		11,420			(7,461	)
Change in fair value of energy derivatives		(742	)		3,330
(Gain) loss on sales of assets, net		278			(114	)
Other		1,629			(658	)
Loss on extinguishment of debt		—			22,197
Decrease (increase) in working capital, net of acquisitions
Receivables		(8,361	)		58,213
Inventories		2,379			(16,085	)
Prepaid expenses		(578	)		389
Accounts payable and accrued liabilities		(5,481	)		(13,057	)
Current and deferred income taxes		1,634			831
Pension payments		(3,370	)		(5,689	)
Other		5,392			223

Cash provided by operations		62,250			67,962


Cash provided by (used for) investment
Acquisition of businesses and facilities, net of cash acquired		(201,734	)		—
Expenditures for property and equipment		(24,650	)		(14,734	)
Purchases of short-term investments		(3,514	)		(2,388	)
Maturities of short-term investments		14,114			5,182
Sales of assets		1,088			22
Other		(779	)		1,093

Cash used for investment		(215,475	)		(10,825	)


Cash provided by (used for) financing
Issuances of long-term debt		75,000			300,000
Payments of long-term debt		(26,250	)		(323,683	)
Payments of deferred financing costs		(160	)		(11,779	)
Other		(2,062	)		—

Cash provided by (used for) financing		46,528			(35,462	)


Increase (decrease) in cash and cash equivalents		(106,697	)		21,675

Balance at beginning of the period		166,833			69,393


Balance at end of the period	$	60,136		$	91,068

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Statements of Income (Loss)

(unaudited, dollars in thousands)


	Three Months Ended March 31
	2011			2010
Sales
Trade	$	560,320		$	485,851
Related parties		8,443			8,254

		568,763			494,105


Costs and expenses
Materials, labor, and other operating expenses		449,070			408,485
Fiber costs from related parties		4,440			9,831
Depreciation, amortization, and depletion		33,974			32,131
Selling and distribution expenses		19,373			13,734
General and administrative expenses		12,697			11,459
Other (income) expense, net		1,077			(175	)

		520,631			475,465


Income from operations		48,132			18,640


Foreign exchange gain		132			687
Loss on extinguishment of debt		—			(22,197	)
Interest expense		(16,367	)		(16,474	)
Interest income		78			37

		(16,157	)		(37,947	)


Income (loss) before income taxes		31,975			(19,307	)
Income tax (provision) benefit		(13,281	)		7,458

Net income (loss)	$	18,694		$	(11,849	)

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Balance Sheets

(unaudited, dollars in thousands)


	March 31, 2011		December 31, 2010
ASSETS

Current
Cash and cash equivalents	$	60,136	$	166,833
Short-term investments		—		10,621
Receivables
Trade, less allowances of $822 and $603		223,660		188,589
Other		8,841		3,839
Inventories		278,020		261,471
Deferred income taxes		18,490		16,658
Prepaid and other		8,769		5,214

		597,916		653,225

Property
Property and equipment, net		1,218,630		1,199,035
Fiber farms and deposits		18,505		18,285

		1,237,135		1,217,320

Deferred financing costs		29,042		30,396
Goodwill		101,258		—
Intangible assets, net		104,225		29,605
Other assets		8,788		8,444

Total assets	$	2,078,364	$	1,938,990

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Balance Sheets (continued)

(unaudited, dollars in thousands)


	March 31, 2011		December 31, 2010
LIABILITIES AND CAPITAL

Current
Current portion of long-term debt	$	50,000	$	43,750
Income taxes payable		278		82
Accounts payable		186,196		179,214
Accrued liabilities
Compensation and benefits		48,872		54,574
Interest payable		23,271		10,535
Other		17,793		16,123

		326,410		304,278


Debt
Long-term debt, less current portion		780,581		738,081


Other
Deferred income taxes		127,215		79,451
Compensation and benefits		120,885		121,318
Other long-term liabilities		47,796		40,530

		295,896		241,299


Commitments and contingent liabilities

Capital
Business unit equity		675,477		655,332

Total liabilities and capital	$	2,078,364	$	1,938,990

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Statements of Cash Flows

(unaudited, dollars in thousands)


	Three Months Ended March 31
	2011			2010
Cash provided by (used for) operations
Net income (loss)	$	18,694		$	(11,849	)
Items in net income (loss) not using (providing) cash
Depreciation, depletion, and amortization of deferred financing costs and other		35,539			35,066
Share-based compensation expense		648			894
Pension expense		3,169			2,568
Deferred income taxes		11,420			(7,461	)
Change in fair value of energy derivatives		(742	)		3,330
(Gain) loss on sales of assets, net		278			(114	)
Other		1,629			(658	)
Loss on extinguishment of debt		—			22,197
Decrease (increase) in working capital, net of acquisitions
Receivables		(8,361	)		58,213
Inventories		2,379			(16,085	)
Prepaid expenses		(578	)		389
Accounts payable and accrued liabilities		(5,481	)		(13,057	)
Current and deferred income taxes		1,634			(5	)
Pension payments		(3,370	)		(5,689	)
Other		5,392			223

Cash provided by operations		62,250			67,962


Cash provided by (used for) investment
Acquisition of businesses and facilities, net of cash acquired		(201,734	)		—
Expenditures for property and equipment		(24,650	)		(14,734	)
Purchases of short-term investments		(3,514	)		(2,388	)
Maturities of short-term investments		14,114			5,182
Sales of assets		1,088			22
Other		(779	)		1,093

Cash used for investment		(215,475	)		(10,825	)


Cash provided by (used for) financing
Issuances of long-term debt		75,000			300,000
Payments of long-term debt		(26,250	)		(323,683	)
Payments of deferred financing costs		(160	)		(11,779	)
Payments (to) from Boise Inc., net		(62	)		—
Other		(2,000	)		—

Cash provided by (used for) financing		46,528			(35,462	)


Increase (decrease) in cash and cash equivalents		(106,697	)		21,675

Balance at beginning of the period		166,833			69,393


Balance at end of the period	$	60,136		$	91,068

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

Condensed Notes to Unaudited Quarterly Consolidated Financial Statements

1. Nature of Operations and Basis of Presentation

Nature of Operations

Boise Inc. is a large, diverse United States-based manufacturer of paper and packaging products. The products we manufacture include papers used for communication, such as office papers, commercial printing papers, envelopes, forms, and newsprint, as well as papers that are associated with packaging, including label and release and flexible papers used for food wrap and other applications. We also manufacture linerboard and corrugating medium, which are combined to make containerboard, the base raw material in our corrugated sheets and containers. We own mill operations in the following locations: Jackson, Alabama; International Falls, Minnesota; St. Helens, Oregon; and Wallula, Washington, all of which manufacture uncoated freesheet paper. We also own a mill in DeRidder, Louisiana, which produces linerboard as well as newsprint. Additionally, we have a network of eight corrugated container plants located in the Western U.S.; four corrugated sheet plants in Georgia, Nevada, Texas, and Washington; a corrugated sheet feeder plant in Texas; and four distribution facilities.

The following sets forth our operating structure:

LOGO

As of March 31, 2011, we had approximately 5,000 employees. Approximately 53% of these employees worked pursuant to collective bargaining agreements. In April 2011, our hourly employees at our DeRidder, Louisiana, mill approved a new collective bargaining agreement. Following the approval of this agreement, approximately 36% of our employees are now working pursuant to collective bargaining agreements that have expired or will expire within one year.

Basis of Presentation

Boise Inc., headquartered in Boise, Idaho, operates and reports its business in three reportable segments: Paper, Packaging, and Corporate and Other (support services). See Note 17, Segment Information, for additional information about our reportable segments.

The unaudited 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, parent company to Boise Paper Holdings, L.L.C. (Boise Paper Holdings).

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. Unless the context indicates otherwise, the terms “Company,” “we,” “us,” “our,” or “Boise” refer to Boise Inc. and its consolidated subsidiaries, including BZ Intermediate.

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 2010 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).

2. Acquisition of Tharco Packaging, Inc.

On March 1, 2011, our wholly owned subsidiary Boise Paper Holdings acquired 100% of the outstanding stock of Tharco Packaging, Inc. (Tharco) for a preliminary purchase price of $201.1 million plus or minus working capital adjustments (the Tharco Acquisition). We financed the acquisition with existing cash and $75 million in borrowings on our revolving credit facility, which is discussed further in Note 11, Debt. The acquisition expands and diversifies our presence in packaging markets; extends our geographical reach from the Pacific Northwest to California, Colorado, Arizona, and Georgia; and will increase our containerboard integration from approximately 70% to approximately 85%.

Our purchase price allocation is preliminary. Once fair values are finalized, we may have changes to the amounts we have included in our preliminary allocation. The stock purchase agreement provides for, among other terms, (1) an adjustment to the purchase price based on a final working capital true-up and (2) indemnification provisions for claims that may arise including other third-party claims.

The following table summarizes our preliminary allocation of the purchase price to the assets acquired and liabilities assumed, based on our current estimates of the fair value at the date of the Tharco Acquisition (dollars in thousands):


	March 1, 2011 Fair Value

Current assets (a)	$	53,911
Property and equipment (b)		27,505
Intangible assets (c):
Customer relationships		64,500
Trademarks and trade name		10,900
Noncompete agreement		300
Goodwill (d)		101,258
Other long-term assets		477

Assets acquired		258,851


Current liabilities		21,359
Deferred tax liability		33,653
Unfavorable leases		2,583
Other long-term liabilities		136

Liabilities assumed		57,731


Net assets acquired	$	201,120

(a)	Includes $29.6 million of receivables and $20.7 million of inventories.

(b)	We are depreciating the property and equipment acquired on a straight-line basis over their estimated remaining lives, which range from one to twenty years.

(c)	We are amortizing the intangible assets on a straight-line basis over the following (in years):


Customer relationships			17
Trademarks and trade name			15
Noncompete agreement			2

(d)

The Tharco Acquisition resulted in $101.3 million of goodwill, which we recorded in our Packaging segment. Goodwill is the excess of purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed. The goodwill recognized in the transaction is not deductible for income tax purposes. However, we assumed $12.9 million of goodwill in the transaction that Tharco had been amortizing in connection with previous acquisitions, which we will continue to amortize and deduct for income tax purposes.

During first quarter 2011, we expensed $0.6 million of costs related to the Tharco Acquisition for legal, professional, and advisory services. All costs were expensed as incurred and recorded in “Other (income) expense, net” in our Consolidated Statement of Income (Loss).

Beginning March 1, 2011, we included Tharco’s results of operations in our Consolidated Statements of Income (Loss) and Cash Flows, which included $25.3 million of net sales and a $1.1 million operating loss. Tharco’s operating loss is primarily the result of $2.2 million of expense related to the inventory purchase price adjustments that were recognized in March 2011. These results are included in our Packaging segment.

The following pro forma financial information presents the combined results of operations as if Tharco had been combined with us on January 1, 2010. The pro forma results are intended for information purposes only and do not purport to represent what the combined companies’ results of operations would actually have been had the transaction in fact occurred on January 1, 2010. They also do not reflect any cost savings, operating synergies, or revenue enhancements that we may achieve or the costs necessary to achieve those cost savings, operating synergies, revenue enhancements, or integration efforts (dollars in thousands, except per-share amounts).


	Pro Forma
	Three Months Ended March 31		Year Ended December 31
	2011		2010

Sales	$	610,414	$	2,355,737
Net income (a)		18,959		67,566
Net income per share—diluted		0.21		0.80

(a)

The March 31, 2011, pro forma financial information was adjusted to exclude $3.3 million of expenses for legal, accounting, and other advisory-related services and $2.2 million of expense related to inventory purchase price adjustments. The December 31, 2010, pro forma financial information was adjusted to include these charges. Pro forma net income for the year ended December 31, 2010, includes $22.2 million of noncash expense associated with refinancing our debt in 2010.

3. Net Income (Loss) Per Common Share

For the three months ended March 31, 2011, 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. 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
	2011		2010

Net income (loss)	$	18,694	$	(12,685	)

Weighted average number of common shares for basic net income (loss) per share		80,964		79,800
Incremental effect of dilutive common stock equivalents:
Common stock warrants (a)		6,504		—
Stock options		10		—
Restricted stock and restricted stock units (b)		2,939		—

Weighted average number of shares for diluted net income (loss) per share		90,417		79,800


Net income (loss) per share:

Basic	$	0.23	$	(0.16	)

Diluted (a)(b)	$	0.21	$	(0.16	)

(a)

For the three months ended March 31, 2010, warrants to purchase 44.4 million shares of common stock, which are accounted for under the treasury stock method, were not included in the computation of diluted net loss per share, because the exercise price exceeded the average market price of our common stock.

(b)	Restricted stock and restricted stock units for the three months ended March 31, 2010, were not included in the computation of diluted net loss per share, because inclusion of these amounts would have been antidilutive.

Net income (loss) per common share is not applicable to BZ Intermediate, because it does not have common shares.

4. Income Taxes

For the three months ended March 31, 2011 and 2010, Boise Inc. recorded $13.3 million of income tax expense and a $6.6 million income tax benefit, respectively. For the three months ended March 31, 2011, Boise Inc.’s effective tax rate was 41.5%, compared with a 34.3% tax benefit rate for the same period in 2010. In both periods, the primary reason for the difference from the federal statutory income tax rate of 35.0% was the effect of state income taxes and discrete tax items.

For the three months ended March 31, 2011 and 2010, BZ Intermediate recorded $13.3 million of income tax expense and a $7.5 million income tax benefit, respectively. For the three months ended March 31, 2011, BZ Intermediate’s effective tax rate was 41.5%, compared with a 38.6% tax benefit rate for the same period in 2010. In both periods, the primary reason for the difference from the federal statutory income tax rate of 35.0% was the effect of state income taxes and discrete tax items.

Uncertain Income Tax Positions

Both Boise Inc. and BZ Intermediate recognize interest and penalties related to uncertain tax positions as income tax expense in the Consolidated Statements of Income (Loss). Interest expense related to uncertain tax positions was nominal for the three months ended March 31, 2011 and 2010. We did not record any penalties associated with our uncertain tax positions during the three months ended March 31, 2011 and 2010.

Other

Due to Internal Revenue Code Section 382, changes in our ownership limit the amount of net operating losses that we may utilize in any one year. However, we believe it is more likely than not that our net operating losses will be fully realized before they expire in 2028 and 2029.

We file federal income tax returns in the U.S. and state income tax returns in various state jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. BZ Intermediate is a wholly owned, consolidated entity of Boise Inc., and its tax return is filed under the consolidated tax return of Boise Inc. Open tax years for Boise Inc. are 2010, 2009, 2008, and 2007.

During the three months ended March 31, 2011, payments made for taxes, net of refunds received, were $0.2 million, and during the three months ended March 31, 2010, refunds received for taxes, net of payments made, were $0.3 million.

5. Transactions With Related Parties

For the period of February 22, 2008, through early March 2010, Boise Cascade Holdings, L.L.C. (Boise Cascade) held a significant equity interest in us, and our transactions with Boise Cascade were recorded as related-party transactions. In early March 2010, Boise Cascade sold all of its remaining investment in us, and accordingly, it is no longer a related party. As a result, beginning in March 2010, our transactions (discussed below) with Louisiana Timber Procurement Company, L.L.C. (LTP) represent the only significant related-party activity recorded in our Consolidated Financial Statements.

Related-Party Sales

LTP is a variable-interest entity that is 50% owned by Boise Inc. and 50% owned by Boise Cascade. LTP procures saw timber, pulpwood, residual chips, and other residual wood fiber to meet the wood and fiber requirements of Boise Inc. and Boise Cascade. 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. At both March 31, 2011, and December 31, 2010, the carrying amounts of LTP’s assets and liabilities on our Consolidated Balance Sheets were $2.8 million and $2.1 million, and they related primarily to noninventory working capital items. During the three months ended March 31, 2011 and 2010, we recorded $8.4 million and $5.6 million, respectively, of LTP sales to Boise Cascade in “Sales, Related parties” in the Consolidated Statements of Income (Loss) and approximately the same amount of expenses in “Materials, labor, and other operating expenses.” The sales were at prices designed to approximate market prices.

We have an outsourcing services agreement under which we provide a number of corporate staff services to Boise Cascade at our cost. These services include information technology, accounting, and human resource services. The agreement, as extended, expires on February 22, 2013. It will automatically renew for one-year terms unless either party provides notice of termination to the other party at least 12 months in advance of the expiration date. During the three months ended March 31, 2010, we recorded $2.6 million of revenues in “Sales, Related parties” in our Consolidated Statements of Income (Loss). We also provide transportation services to Boise Cascade at our cost. During the three months ended March 31, 2010, the costs and revenues associated with our transportation services to Boise Cascade were not significant.

Related-Party Costs and Expenses

During the three months ended March 31, 2011 and 2010, fiber purchases from related parties were $4.4 million and $9.8 million, respectively. In 2011, most of these purchases related to chip and log purchases from LTP’s wood products business, whereas in 2010, the purchases related to chip and log purchases from Boise Cascade while they were a related party as well as purchases from LTP. All of the costs associated with these purchases were recorded as “Fiber costs from related parties” in the Consolidated Statements of Income (Loss). Fiber purchases from Boise Cascade subsequent to February 2010 are recorded as “Materials, labor, and other operating expenses” in the Consolidated Statements of Income (Loss).

6. Leases

We lease our distribution centers, as well as other property and equipment, under operating leases, including facilities and equipment acquired in the Tharco Acquisition. 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. We had an insignificant amount of sublease rental income in the periods

presented below. Accordingly, our future minimum lease payment requirements have not been reduced by sublease rental income. Rental expense for operating leases is as follows (dollars in thousands):


	Three Months Ended March 31
	2011		2010

Rental expense	$	4,605	$	3,727

For noncancelable operating leases with remaining terms of more than one year, the minimum lease payment requirements are as follows (dollars in thousands):


	Remaining 2011		2012		2013		2014		2015		2016 & Thereafter

Minimum payment	$	15,557	$	20,369	$	16,286	$	12,324	$	10,014	$	18,381

Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to purchase the leased property. Additionally, some agreements contain renewal options averaging approximately five years, with fixed payment terms similar to those in the original lease agreements.

7. Concentrations of Risk

Sales to OfficeMax represent a concentration in the volume of business transacted and in revenue generated from those transactions. Sales to OfficeMax were $126.4 million and $128.2 million during the three months ended March 31, 2011 and 2010, representing 22% and 26% of total sales for those periods. At March 31, 2011, and December 31, 2010, we had $37.1 million and $30.3 million, respectively, of accounts receivable due from OfficeMax.

8. 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 actual first-in, first-out usage pattern, or market.

Inventories include the following (dollars in thousands):


	March 31, 2011		December 31, 2010

Finished goods	$	133,313	$	123,329
Work in process		30,258		34,906
Fiber		41,180		36,166
Other raw materials and supplies		73,269		67,070

	$	278,020	$	261,471

9. Property and Equipment

Property and equipment consist of the following asset classes (dollars in thousands):


	March 31, 2011			December 31, 2010

Land	$	31,875		$	31,875
Buildings and improvements		224,657			219,345
Machinery and equipment		1,296,635			1,260,265
Construction in progress		35,762			27,667

		1,588,929			1,539,152
Less accumulated depreciation		(370,299	)		(340,117	)

	$	1,218,630		$	1,199,035

Depreciation expense for the three months ended March 31, 2011 and 2010, was $31.2 million and $29.9 million, respectively.

10. Goodwill and Intangible Assets

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. At March 31, 2011, we had $101.3 million of goodwill recorded on our Consolidated Balance Sheet, all of which was recorded in connection with the Tharco Acquisition in our Packaging segment. For further information regarding the Tharco Acquisition, see Note 2, Acquisition of Tharco Packaging, Inc. At March 31, 2011, the net carrying amount of intangible assets with indefinite lives, which represents the trade names and trademarks acquired from Boise Cascade, L.L.C., in 2008, was $16.8 million, all of which is recorded in our Paper segment. All of our other intangible assets amortize based on their estimated useful lives.

We maintain two reporting units for purposes of our goodwill and intangible asset impairment testing, Paper and Packaging, which are the same as our operating segments discussed in Note 17, Segment Information. We test the goodwill and indefinite-lived intangible assets in each of our reporting units for impairment annually in the fourth quarter or sooner if events or changes in circumstances indicate that the carrying value of the asset may exceed fair value. Additionally, we evaluate the remaining useful lives of our finite-lived purchased intangible assets to determine whether any adjustments to the useful lives are necessary. There is currently no indication of goodwill and intangible asset impairment.

The following table sets forth our intangible asset amortization for the three months ended March 31, 2011 and 2010 (dollars in thousands):


	Three Months Ended March 31
	2011		2010

Intangible asset amortization	$	1,079	$	688

Our estimated future amortization expense for the remainder of 2011 and the next five years is as follows (dollars in thousands):


	Remaining 2011		2012		2013		2014		2015		2016

Amortization expense	$	5,584	$	7,435	$	6,165	$	5,912	$	5,912	$	5,912

The gross carrying amount, accumulated amortization, and net carrying amount of our intangible assets at March 31, 2011, and December 31, 2010, were as follows (dollars in thousands):


	As of March 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Customer relationships	$	78,200	$	(4,540	)	$	73,660
Trademarks and trade names		27,700		(62	)		27,638
Technology and other		6,895		(4,255	)		2,640
Noncompete agreements		300		(13	)		287

	$	113,095	$	(8,870	)	$	104,225


	As of December 31, 2010
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Trademarks and trade names	$	16,800	$	—		$	16,800
Customer relationships		13,700		(3,882	)		9,818
Technology and other		6,895		(3,908	)		2,987

	$	37,395	$	(7,790	)	$	29,605

11. Debt

At March 31, 2011, and December 31, 2010, our long-term debt and the interest rates on that debt were as follows (dollars in thousands):


	March 31, 2011						December 31, 2010
	Amount			Interest Rate			Amount			Interest Rate

Revolving credit facility, due 2013	$	55,000			3.25	%	$	—			—	%
Tranche A term loan, due 2013		175,581			3.25			181,831			3.06
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
Current portion of long-term debt		(50,000	)		3.25			(43,750	)		3.06

Long-term debt, less current portion		780,581			7.29			738,081			7.48
Current portion of long-term debt		50,000			3.25			43,750			3.06

	$	830,581			7.04	%	$	781,831			7.24	%

As of March 31, 2011, Boise Inc. and BZ Intermediate’s debt consisted of the following:

•

The Revolving Credit Facility: A five-year nonamortizing $250.0 million senior secured revolving credit facility with interest at either the London Interbank Offered Rate (LIBOR) plus an applicable margin, which is currently 300 basis points, or a calculated base rate plus an applicable margin, which is currently 200 basis points (collectively with the Tranche A term loan facility, the Amended Credit Facilities).

•

The Tranche A Term Loan Facility: A five-year amortizing senior secured loan facility with interest at LIBOR plus an applicable margin, which is currently 300 basis points, or a calculated base rate plus an applicable margin, which is currently 200 basis points. The Tranche A term loan facility was originally issued at $250.0 million.

•

The 9% Senior Notes: An eight-year nonamortizing $300.0 million senior unsecured debt obligation with annual interest at 9%.

•

The 8% Senior Notes: A ten-year nonamortizing $300.0 million senior unsecured debt obligation with annual interest at 8%.

In addition to paying interest, we pay a commitment fee to the lenders under the Revolving Credit Facility at a rate of 0.50% per annum (which shall be reduced to 0.375% when the leverage ratio is less than 2.25:1.00) times the daily average undrawn portion of the Revolving Credit Facility (reduced by the amount of letters of credit issued and outstanding). We also pay letter of credit fees of 300 basis points times the average daily maximum outstanding amount of the letters of credit and a fronting fee of 15 basis points to the issuing bank of outstanding letters of credit. These fees are payable quarterly and in arrears.

The borrowings under the Revolving Credit Facility ranged from a low of zero to a high of $75 million during the three months ended March 31, 2011. The weighted average amount of borrowings outstanding under the Revolving Credit Facility during the three months ended March 31, 2011, was $26.4 million. At March 31, 2011, we had availability of $186.9 million, which is net of outstanding letters of credit of $8.1 million.

The Amended Credit Facilities and the 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 11, Debt, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” in our 2010 Form 10-K.

Other Provisions

Subject to specified exceptions, the Amended Credit Facilities require that the proceeds from certain asset sales, casualty insurance, and certain debt issuances be used to pay down outstanding borrowings. As of March 31, 2011, required debt principal repayments were as follows (dollars in thousands):


	Remaining 2011		2012		2013		2014-2016		Thereafter

Required debt principal repayments	$	37,500	$	129,688	$	63,393	$	—	$	600,000

Other

At March 31, 2011, and December 31, 2010, we had $29.0 million and $30.4 million, respectively, of costs recorded in “Deferred financing costs” on our Consolidated Balance Sheet. The amortization of these costs is recorded in interest expense using the effective interest method over the life of the loans. For the three months ended March 31, 2011 and 2010, we recorded $1.5 million and $2.3 million, respectively, of amortization expense in “Interest expense” in our Consolidated Statements of Income (Loss).

For the three months ended March 31, 2011 and 2010, cash payments for interest were $2.1 million and $6.0 million, respectively.

12. Financial Instruments

Our primary objective in holding derivative financial instruments is to manage cash flow risk related to natural gas purchases and, to a lesser extent, interest rate risk. We do not use derivative instruments for speculative purposes.

Interest Rate Risk—Debt

With the exception of the Amended Credit Facilities, our debt is fixed-rate debt. At March 31, 2011, the book value of our fixed-rate debt was $600.0 million, and the fair value was estimated to be $682.4 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 based on quoted market prices for our debt and the discounted value of our expected future cash payments.

Energy Risk

We enter into transactions to hedge the variable cash flow risk of natural gas purchases. At March 31, 2011, these derivatives included three-way collars and call spreads. We have elected to account for these instruments as economic hedges. As of March 31, 2011, we had entered into derivative instruments related to the following approximate percentages of our forecasted natural gas purchases:


	April 2011 Through October 2011			November 2011 Through March 2012			April 2012 Through October 2012			November 2012 Through March 2013

Approximate percent hedged		45	%		32	%		23	%		5	%

Fair Value Measurements

The Fair Value Measurements and Disclosures Topic of 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). In general, and 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). We enter into our hedges with large financial institutions, and we monitor credit ratings 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, 2011, and December 31, 2010, the fair value of our financial instruments was determined based on applicable interest rates such as LIBOR, interest rate curves, and New York Mercantile Exchange (NYMEX) price quotations under the terms of the contracts, using current market information as of the reporting date. Certificates of deposit, interest rate contracts, and energy derivatives are valued using third-party valuations based on quoted prices for similar assets and liabilities. Accordingly, all of our fair value measurements use Level 2 inputs. During first quarter 2011, we liquidated all of our certificates of deposit. At December 31, 2010, the fair value of the certificates of deposit was $10.6 million.

The fair value of our derivative instruments as of March 31, 2011, and December 31, 2010, was as follows (dollars in thousands):


	Level 2: Significant Other Observable Inputs
	Assets				Liabilities
	March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010

Derivatives not designated as hedging instruments Energy derivatives (a)	$	—	$	—	$	1,315	$	2,056

Total derivatives not designated as hedging instruments		—		—		1,315		2,056

Total derivatives	$	—	$	—	$	1,315	$	2,056

(a)	Recorded in “Accrued liabilities, Other” on our Consolidated Balance Sheet.

Derivatives Not Designated as Hedging Instruments

The effects of derivative instruments not designated as hedging instruments in our Consolidated Statements of Income (Loss) were as follows (dollars in thousands):


		Three Months Ended March 31
Derivative	Location of Gain (Loss) Recognized in Income on Derivatives	2011		2010

Interest rate contracts	Interest expense	$	—	$	(29	)
Energy derivatives	Materials, labor, and other operating expenses		742		(3,330	)

		$	742	$	(3,359	)

13. Retirement and Benefit Plans

The components of net periodic pension benefit costs are as follows (dollars in thousands):


	Pension Benefits
	Three Months Ended March 31
	2011			2010

Service cost	$	1,338		$	1,508
Interest cost		6,409			6,346
Expected return on plan assets		(6,098	)		(5,879	)
Amortization of actuarial loss		1,389			455
Amortization of prior service costs and other		13			13

Company-sponsored plans		3,051			2,443
Multiemployer plans		118			125

Net periodic benefit cost	$	3,169		$	2,568

During the three months ended March 31, 2011, we made contributions of $3.4 million to our qualified pension plans. Including our first quarter contributions, we expect to contribute approximately $25 million to our qualified pension plans during 2011.

14. Share-Based Compensation

Under the Boise Inc. Incentive and Performance Plan (the Plan), the compensation committee of our board of directors has the ability to authorize the grant of restricted stock, restricted stock units, performance awards payable in stock upon the attainment of specified performance goals, stock options, and other stock- and cash-based awards. Awards granted under the Plan vest and expire in accordance with terms established at the time of grant. Shares issued pursuant to awards under the Plan are from our authorized but unissued shares. A detailed discussion of previous grants made under the Plan is presented in Note 14, Stockholders’ Equity and Capital, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” in our 2010 Form 10-K. The discussion below focuses on activity from January through March 31, 2011.

March 15, 2011, Equity Grants

Pursuant to the Plan, on March 15, 2011, we granted a combination of restricted stock, restricted stock units, stock options, and performance units to our directors and key employees as follows.

Restricted Stock Awards. We granted approximately 137,000 shares of restricted stock and approximately 103,000 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 time-based vesting restrictions. For members of management, 50% of the awards vest on March 15, 2013, and the remaining 50% vest on March 17, 2014, subject to the provisions of the award agreements. We also granted to our directors approximately 99,000 shares of restricted stock, which will vest on March 15, 2012. The fair values of these 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 periods.

Stock Option Awards. We granted approximately 359,000 nonqualified stock options to members of management. 50% of the option awards vest and become exercisable on March 15, 2013, and the remaining 50% vest and become exercisable on March 17, 2014. The stock options have a contractual term of ten years. The exercise price of these stock options is $8.55 per share, which was the closing market price of our common stock on the grant date. We recognize the grant date fair value of stock options as compensation expense over the awards’ vesting periods.

The fair value of the stock options granted on March 15, 2011, was $4.21. We calculated the fair value using a Black-Scholes-Merton option-pricing model based on the market price of our common stock at the grant date and the assumptions specific to the underlying options. We based the expected volatility assumption on our historic stock performance and the volatility of related industry stocks. We used the “simplified method” defined in SEC Staff Accounting Bulletin (SAB) No. 107 to determine the expected life assumption for the options. As this is our first issuance of stock options and our equity shares have been traded for a relatively short period of time, we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected life. We based the risk-free interest rate upon yields of U.S. Treasury issues with terms similar to the expected life of the options.

The following table presents the assumptions used to calculate the fair value of stock options:


Black-Scholes-Merton assumptions:
Expected volatility	47.85	%
Expected life (years)	6.25
Risk-free interest rate	2.48	%
Expected dividend yield	—

Performance-Unit Awards. We granted members of management approximately 200,000 performance units, subject to adjustment based on the achievement of defined percentages of the two-year average return on net operating assets (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. If the RONOA performance criteria are met, 50% of the performance units will vest on March 15, 2013, and the remaining 50% will vest on March 17, 2014. Any shares not vested on or before March 17, 2014, will be forfeited. We based the fair value of this award on the closing market price of our common stock on the grant date, and we record compensation expense over the awards’ vesting periods.

Special Equity Award in Lieu of Special Dividend. In 2010, we declared a special cash dividend payable on December 3, 2010, to shareholders of record on November 17, 2010. On the record date, the executive officers held unvested restricted stock that, pursuant to the terms of their award agreements, did not accrue dividends. We approved a special equity award to our executive officers to align management and shareholder interests regarding dividend strategy. We awarded approximately 68,000 shares of restricted stock and approximately 26,000 restricted stock units to our executive officers, equivalent in value to the dividends the officer would have received on his or her restricted stock held as of the record date. These awards will vest on March 15, 2012. We calculated the number of shares awarded to each officer by using the company’s share price on February 28, 2011 (for restricted stock vesting on that date) or March 15, 2011 (for remaining restricted stock). We based the fair value of this award on the closing market price of our common stock on the grant date, and we record compensation expense on a straight-line basis over the awards’ vesting periods.

The other key members of management that held unvested restricted stock or restricted stock units as of the record date received a cash bonus equivalent in value to the dividends the member would have received on his or her restricted stock held as of the record date.

Compensation Expense

Total recognized share-based compensation expense related to restricted stock, performance units, and stock options, net of estimated forfeitures, for the three months ended March 31, 2011 and 2010, is as follows (dollars in thousands):


	Three Months Ended March 31
	2011 (a)		2010 (a)

Restricted stock and performance units	$	608	$	894
Stock options		40		—

Total share-based compensation expense	$	648	$	894

(a)	Most of these costs were recorded in “General and administrative expenses” in our Consolidated Statements of Income (Loss).

The unrecognized compensation expense related to restricted stock and performance units was $5.8 million at March 31, 2011, and is expected to be recognized over a weighted average period of 1.9 years. The unrecognized compensation expense related to stock options was $1.4 million at March 31, 2011, and is expected to be recognized over a weighted average period of 2.9 years.

Clawback for Financial Reporting Misconduct

Effective February 23, 2011, in accordance with our Executive Compensation Recovery Policy and in addition to other remedies available to us, we may recover from current and former elected officers of the company in whole or in part any incentive payment, unvested equity award, or other compensation, including forfeiture of the awards or incentives, to the extent such incentive payment, equity award, or other compensation is or was based on any financial result or operating metric affected by participants who knowingly are or were fraudulent, engaged in illegal activities, or engaged in other wrongful conduct, including gross negligence, determined to be detrimental to us.

15. New and Recently Adopted Accounting Standards

In December 2010, the FASB issued Accounting Standards Update (ASU) 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The ASU states that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable

prior annual reporting period only. In addition, the ASU expands the supplemental pro forma disclosures under FASB Accounting Standards Codification (ASC) 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. We adopted this guidance on January 1, 2011, and the adoption did not have a material impact on our financial position or results of operations. See Note 2, Acquisition of Tharco Packaging, Inc., for our pro forma disclosures.

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. This ASU amends FASB ASC 820, Fair Value Measurements and Disclosures, to require reporting entities to make new disclosures about recurring or nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The ASU also clarifies existing fair value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. We adopted this guidance on January 1, 2010, and the adoption did not have a material impact on our financial position or results of operations. The detailed Level 3 roll-forward disclosures were effective January 1, 2011. The level 3 roll-forward disclosures did not have a material impact on our financial position or results of operations.

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.

16. Comprehensive Income (Loss)

Comprehensive income (loss) includes the following (dollars in thousands):


	Boise Inc.
	Three Months Ended March 31
	2011			2010

Net income (loss)	$	18,694		$	(12,685	)
Other comprehensive income (loss), net of tax:
Cash flow hedges		—			259
Unfunded accumulated benefit obligation		855			264
Unrealized gains (losses) on short-term investments		(21	)		3

Comprehensive income (loss)	$	19,528		$	(12,159	)


	BZ Intermediate Holdings LLC
	Three Months Ended March 31
	2011			2010

Net income (loss)	$	18,694		$	(11,849	)
Other comprehensive income (loss), net of tax:
Cash flow hedges		—			259
Unfunded accumulated benefit obligation		855			264
Unrealized gains (losses) on short-term investments		(21	)		3

Comprehensive income (loss)	$	19,528		$	(11,323	)

17. Segment Information

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 18, Segment Information, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” in our 2010 Form 10-K. As discussed in Note 2, Acquisition of Tharco Packaging, Inc., during the three months ended March 31, 2011, we acquired $258.9 million of assets as part of the Tharco Acquisition. Tharco is now included in the Packaging segment. Segment operating results for Boise Inc. and BZ Intermediate are identical for all periods presented. For differences in interest expense and income tax provision (benefit), see the reconciliation of net income (loss) to EBITDA below.

An analysis of operations by segment is as follows (dollars in millions):


	Sales										Income (Loss) Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)
Three Months Ended March 31, 2011	Trade		Related Parties		Inter- segment			Total			Income (Loss) Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)

Paper	$	358.7	$	—	$	16.5		$	375.2		$	41.0		$	22.1	$	63.0
Packaging		194.5		8.4		0.5			203.4			13.6	(a)		11.0		24.6	(a)
Corporate and Other		7.2		—		8.9			16.1			(6.3	)		0.9		(5.4	)

		560.4		8.4		25.9			594.7			48.3			34.0		82.2

Intersegment eliminations		—		—		(25.9	)		(25.9	)		—			—		—
Interest expense		—		—		—			—			(16.4	)		—		—
Interest income		—		—		—			—			0.1			—		—

	$	560.4	$	8.4	$	—		$	568.8		$	32.0		$	34.0	$	82.2


	Sales										Income (Loss) Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)
Three Months Ended March 31, 2010	Trade		Related Parties		Inter- segment			Total			Income (Loss) Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)

Paper	$	339.3	$	—	$	14.2		$	353.5		$	29.9	(b)	$	21.5	$	51.4	(b)
Packaging		141.9		5.6		0.7			148.2			(5.8	)(b)		9.7		3.9	(b)
Corporate and Other		4.7		2.6		9.2			16.5			(4.8	)(b)		0.9		(3.8	)(b)

		485.9		8.2		24.1			518.2			19.3			32.1		51.5

Intersegment eliminations		—		—		(24.1	)		(24.1	)		—			—		—
Loss on extinguishment of debt		—		—		—			—			(22.2	)(b)		—		(22.2	)(b)
Interest expense		—		—		—			—			(16.5	)		—		—

	$	485.9	$	8.2	$	—		$	494.1		$	(19.3	)	$	32.1	$	29.3

(a)	Included $2.2 million of expense related to inventory purchase price accounting adjustments.

(b)	Included $3.3 million of expense related to the change in fair value of energy hedges, of which $2.8 million was recorded in the Paper segment and $0.5 million was recorded in the Packaging segment.

Included $22.2 million of noncash expense recorded in the Corporate and Other segment associated with the refinancing of our debt.

(c)

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 makers to evaluate segment operating performance and to decide how to allocate resources to segments. We believe EBITDA is useful to investors because it provides a means to evaluate the operating performance of our segments and our company on an ongoing basis using criteria that are used by our internal decision makers and because it is frequently used by investors and other interested parties in the evaluation of companies with substantial financial leverage. We believe EBITDA is a meaningful measure because it presents a transparent view of our recurring operating performance and allows management to readily view operating trends, perform analytical comparisons, and identify strategies to improve operating performance. For example, we believe that the inclusion of items such as taxes, interest expense, and interest income distorts management’s ability to assess and view the core operating trends in our segments. EBITDA, however, is not a measure of our liquidity or financial performance under generally accepted accounting principles (GAAP) and should not be considered as an alternative to net income (loss), income (loss) from operations, or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity. The use of EBITDA instead of net income (loss) or segment income (loss) has limitations as an analytical tool, including the inability to determine profitability; the exclusion of interest expense, interest income, and associated significant cash requirements; and the exclusion of depreciation, amortization, and depletion, which represent significant and unavoidable operating costs, given the level of our indebtedness and 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 (dollars in millions):


	Boise Inc.
	Three Months Ended March 31
	2011			2010

Net income (loss)	$	18.7		$	(12.7	)
Interest expense		16.4			16.5
Interest income		(0.1	)		—
Income tax provision (benefit)		13.3			(6.6	)
Depreciation, amortization, and depletion		34.0			32.1

EBITDA	$	82.2		$	29.3


	BZ Intermediate Holdings LLC
	Three Months Ended March 31
	2011			2010

Net income (loss)	$	18.7		$	(11.8	)
Interest expense		16.4			16.5
Interest income		(0.1	)		—
Income tax provision (benefit)		13.3			(7.5	)
Depreciation, amortization, and depletion		34.0			32.1

EBITDA	$	82.2		$	29.3

18. Commitments, Guarantees, and Legal Proceedings

Commitments

We have financial commitments for leases and long-term debt that are disclosed in Note 6, Leases, and Note 11, Debt. We are party to a number of wood fiber and utilities contracts that are discussed in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” in our 2010 Form 10-K. In addition, we have other financial obligations that we enter into in the normal course of our business to purchase goods and services and to make capital improvements to our facilities. At March 31, 2011, there have been no material changes to our commitments outside of the normal course of business, except as disclosed in Note 2, Acquisition of Tharco Packaging, Inc., and Note 11, Debt.

Guarantees

We provide guarantees, indemnifications, and assurances to others in the normal course of our business. See Note 11, Debt, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” in our 2010 Form 10-K for a description of the 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.

Legal Proceedings

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

19. Subsequent Event

On April 20, 2011, we announced a special cash dividend of $0.40 per common share, payable May 13, 2011, to shareholders of record at the close of business on May 4, 2011. Based on the shares outstanding at March 31, 2011, and assuming all warrants were exercised before the dividend record date, the dividend payment will be approximately $50 million. As of the end of April, a majority of the warrants had been exercised.

20. Consolidating Guarantor and Nonguarantor Financial Information

Our 9% and 8% senior notes are jointly and severally guaranteed on a senior unsecured basis by BZ Intermediate and each of its existing and future subsidiaries (other than: (i) the co-issuers, Boise

Paper Holdings, Boise Co-Issuer Company, and Boise Finance Company; (ii) Louisiana Timber Procurement Company, L.L.C.; and (iii) our foreign subsidiaries). The following consolidating financial statements present the results of operations, financial position, and cash flows of (i) BZ Intermediate Holdings LLC (parent); (ii) co-issuers; (iii) guarantor subsidiaries; (iv) nonguarantor subsidiaries; and (v) eliminations to arrive at the information on a consolidated basis. Other than the consolidated financial statements and footnotes for Boise Inc. and BZ Intermediate, financial statements and other disclosures concerning the guarantors have not been presented, because management believes that such information is not material to investors.

BZ Intermediate Holdings LLC and Subsidiaries

Consolidating Statements of Income (Loss)

For the Three Months Ended March 31, 2011

(unaudited, dollars in thousands)


	BZ Intermediate Holdings LLC (Parent)		Co-issuers			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
Sales
Trade	$	—	$	3,581		$	555,457		$	1,282		$	—		$	560,320
Intercompany		—		—			—			22,339			(22,339	)		—
Related parties		—		—			—			8,443			—			8,443

		—		3,581			555,457			32,064			(22,339	)		568,763


Costs and expenses
Materials, labor, and other operating expenses		—		3,408			435,936			32,065			(22,339	)		449,070
Fiber costs from related parties		—		—			4,440			—			—			4,440
Depreciation, amortization, and depletion		—		803			33,171			—			—			33,974
Selling and distribution expenses		—		—			19,270			103			—			19,373
General and administrative expenses		—		5,494			7,203			—			—			12,697
Other (income) expense, net		—		885			302			(110	)		—			1,077

		—		10,590			500,322			32,058			(22,339	)		520,631


Income (loss) from operations		—		(7,009	)		55,135			6			—			48,132


Foreign exchange gain (loss)		—		140			(8	)		—			—			132
Interest expense		—		(16,310	)		(57	)		—			—			(16,367	)
Interest expense—intercompany		—		(44	)		—			(3	)		47			—
Interest income		—		76			2			—			—			78
Interest income—intercompany		—		3			44			—			(47	)		—

		—		(16,135	)		(19	)		(3	)		—			(16,157	)


Income (loss) before income taxes and equity in net income (loss) of affiliates		—		(23,144	)		55,116			3			—			31,975
Income tax provision		—		(13,233	)		(48	)		—			—			(13,281	)


Income (loss) before equity in net income (loss) of affiliates		—		(36,377	)		55,068			3			—			18,694
Equity in net income (loss) of affiliates		18,694		55,071			—			—			(73,765	)		—

Net income (loss)	$	18,694	$	18,694		$	55,068		$	3		$	(73,765	)	$	18,694

BZ Intermediate Holdings LLC and Subsidiaries

Consolidating Statements of Income (Loss)

For the Three Months Ended March 31, 2010

(unaudited, dollars in thousands)


	BZ Intermediate Holdings LLC (Parent)			Co-issuers			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
Sales
Trade	$	—		$	1,214		$	483,445		$	1,192		$	—		$	485,851
Intercompany		—			—			—			26,763			(26,763	)		—
Related parties		—			2,364			332			5,558			—			8,254

		—			3,578			483,777			33,513			(26,763	)		494,105


Costs and expenses
Materials, labor, and other operating expenses		—			3,432			398,303			33,513			(26,763	)		408,485
Fiber costs from related parties		—			—			9,831			—			—			9,831
Depreciation, amortization, and depletion		—			824			31,307			—			—			32,131
Selling and distribution expenses		—			—			13,680			54			—			13,734
General and administrative expenses		—			5,314			6,145			—			—			11,459
Other (income) expense, net		—			17			(162	)		(30	)		—			(175	)

		—			9,587			459,104			33,537			(26,763	)		475,465


Income (loss) from operations		—			(6,009	)		24,673			(24	)		—			18,640


Foreign exchange gain		—			432			255			—			—			687
Loss on extinguishment of debt		—			(22,197	)		—			—			—			(22,197	)
Interest expense		—			(16,474	)		—			—			—			(16,474	)
Interest expense—intercompany		—			(49	)		—			(4	)		53			—
Interest income		—			35			2			—			—			37
Interest income—intercompany		—			4			49			—			(53	)		—

		—			(38,249	)		306			(4	)		—			(37,947	)


Income (loss) before income taxes and equity in net income (loss) of affiliates		—			(44,258	)		24,979			(28	)		—			(19,307	)
Income tax (provision) benefit		—			7,496			(38	)		—			—			7,458


Income (loss) before equity in net income (loss) of affiliates		—			(36,762	)		24,941			(28	)		—			(11,849	)
Equity in net income (loss) of affiliates		(11,849	)		24,913			—			—			(13,064	)		—

Net income (loss)	$	(11,849	)	$	(11,849	)	$	24,941		$	(28	)	$	(13,064	)	$	(11,849	)

BZ Intermediate Holdings LLC and Subsidiaries

Consolidating Balance Sheets at March 31, 2011

(unaudited, dollars in thousands)


	BZ Intermediate Holdings LLC (Parent)		Co-issuers		Guarantor Subsidiaries		Nonguarantor Subsidiaries		Eliminations			Consolidated
ASSETS

Current
Cash and cash equivalents	$	—	$	55,771	$	4,069	$	296	$	—		$	60,136
Receivables
Trade, less allowances		—		1,236		221,418		1,006		—			223,660
Intercompany		—		—		47		1,486		(1,533	)		—
Other		—		3,814		5,023		4		—			8,841
Inventories		—		14		278,006		—		—			278,020
Deferred income taxes		—		18,482		—		8		—			18,490
Prepaid and other		—		8,065		696		8		—			8,769

		—		87,382		509,259		2,808		(1,533	)		597,916


Property
Property and equipment, net		—		5,999		1,212,631		—		—			1,218,630
Fiber farms and deposits		—		—		18,505		—		—			18,505

		—		5,999		1,231,136		—		—			1,237,135


Deferred financing costs		—		29,042		—		—		—			29,042
Goodwill		—		—		101,258		—		—			101,258
Intangible assets, net		—		—		104,225		—		—			104,225
Investments in affiliates		675,477		1,676,633		—		—		(2,352,110	)		—
Other assets		—		5,371		3,417		—		—			8,788

Total assets	$	675,477	$	1,804,427	$	1,949,295	$	2,808	$	(2,353,643	)	$	2,078,364

BZ Intermediate Holdings LLC and Subsidiaries

Consolidating Balance Sheets at March 31, 2011 (continued)

(unaudited, dollars in thousands)


	BZ Intermediate Holdings LLC (Parent)		Co-issuers			Guarantor Subsidiaries		Nonguarantor Subsidiaries		Eliminations			Consolidated
LIABILITIES AND CAPITAL

Current
Current portion of long-term debt	$	—	$	50,000		$	—	$	—	$	—		$	50,000
Income taxes payable		—		(622	)		898		2		—			278
Accounts payable
Trade		—		9,971			173,616		2,609		—			186,196
Intercompany		—		—			1,486		47		(1,533	)		—
Accrued liabilities
Compensation and benefits		—		16,946			31,926		—		—			48,872
Interest payable		—		23,271			—		—		—			23,271
Other		—		2,187			15,474		132		—			17,793

		—		101,753			223,400		2,790		(1,533	)		326,410


Debt
Long-term debt, less current portion		—		780,581			—		—		—			780,581


Other
Deferred income taxes		—		93,070			34,145		—		—			127,215
Compensation and benefits		—		120,719			166		—		—			120,885
Other long-term liabilities		—		32,827			14,969		—		—			47,796

		—		246,616			49,280		—		—			295,896


Commitments and contingent liabilities

Capital
Business unit equity		675,477		675,477			1,676,615		18		(2,352,110	)		675,477


Total liabilities and capital	$	675,477	$	1,804,427		$	1,949,295	$	2,808	$	(2,353,643	)	$	2,078,364

BZ Intermediate Holdings LLC and Subsidiaries

Consolidating Balance Sheets at December 31, 2010

(unaudited, dollars in thousands)


	BZ Intermediate Holdings LLC (Parent)		Co-issuers		Guarantor Subsidiaries		Nonguarantor Subsidiaries		Eliminations			Consolidated
ASSETS

Current
Cash and cash equivalents	$	—	$	166,410	$	6	$	417	$	—		$	166,833
Short-term investments		—		10,621		—		—		—			10,621
Receivables
Trade, less allowances		—		1,004		187,502		83		—			188,589
Intercompany		—		—		2		1,634		(1,636	)		—
Other		—		331		3,504		4		—			3,839
Inventories		—		15		261,456		—		—			261,471
Deferred income taxes		—		16,651		—		7		—			16,658
Prepaid and other		—		4,697		517		—		—			5,214

		—		199,729		452,987		2,145		(1,636	)		653,225


Property
Property and equipment, net		—		5,952		1,193,083		—		—			1,199,035
Fiber farms and deposits		—		—		18,285		—		—			18,285

		—		5,952		1,211,368		—		—			1,217,320


Deferred financing costs		—		30,396		—		—		—			30,396
Intangible assets, net		—		—		29,605		—		—			29,605
Investments in affiliates		655,332		1,479,253		—		—		(2,134,585	)		—
Other assets		—		5,175		3,269		—		—			8,444

Total assets	$	655,332	$	1,720,505	$	1,697,229	$	2,145	$	(2,136,221	)	$	1,938,990

BZ Intermediate Holdings LLC and Subsidiaries

Consolidating Balance Sheets at December 31, 2010 (continued)

(unaudited, dollars in thousands)


	BZ Intermediate Holdings LLC (Parent)		Co-issuers			Guarantor Subsidiaries		Nonguarantor Subsidiaries		Eliminations			Consolidated
LIABILITIES AND CAPITAL

Current
Current portion of long-term debt	$	—	$	43,750		$	—	$	—	$	—		$	43,750
Income taxes payable		—		(818	)		898		2		—			82
Accounts payable
Trade		—		13,513			163,710		1,991		—			179,214
Intercompany		—		2			1,634		—		(1,636	)		—
Accrued liabilities
Compensation and benefits		—		23,081			31,493		—		—			54,574
Interest payable		—		10,535			—		—		—			10,535
Other		—		5,336			10,645		142		—			16,123

		—		95,399			208,380		2,135		(1,636	)		304,278


Debt
Long-term debt, less current portion		—		738,081			—		—		—			738,081


Other
Deferred income taxes		—		78,959			492		—		—			79,451
Compensation and benefits		—		121,318			—		—		—			121,318
Other long-term liabilities		—		31,416			9,114		—		—			40,530

		—		231,693			9,606		—		—			241,299

Commitments and contingent liabilities

Capital
Business unit equity		655,332		655,332			1,479,243		10		(2,134,585	)		655,332


Total liabilities and capital	$	655,332	$	1,720,505		$	1,697,229	$	2,145	$	(2,136,221	)	$	1,938,990

BZ Intermediate Holdings LLC and Subsidiaries

Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2011

(unaudited, dollars in thousands)


	BZ Intermediate Holdings LLC (Parent)			Co-issuers			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
Cash provided by (used for) operations
Net income (loss)	$	18,694		$	18,694		$	55,068		$	3		$	(73,765	)	$	18,694
Items in net income (loss) not using (providing) cash
Equity in net (income) loss of affiliates		(18,694	)		(55,071	)		—			—			73,765			—
Depreciation, depletion, and amortization of deferred financing costs and other		—			2,368			33,171			—			—			35,539
Share-based compensation expense		—			648			—			—			—			648
Pension expense		—			3,169			—			—			—			3,169
Deferred income taxes		—			11,420			—			—			—			11,420
Change in fair value of energy derivatives		—			—			(742	)		—			—			(742	)
(Gain) loss on sales of assets, net		—			17			261			—			—			278
Other		—			(140	)		1,769			—			—			1,629
Decrease (increase) in working capital, net of acquisitions
Receivables		—			(3,714	)		(3,768	)		(776	)		(103	)		(8,361	)
Inventories		—			1			2,378			—			—			2,379
Prepaid expenses		—			(1,900	)		1,330			(8	)		—			(578	)
Accounts payable and accrued liabilities		—			506			(6,745	)		655			103			(5,481	)
Current and deferred income taxes		—			1,634			—			—			—			1,634
Pension payments		—			(3,370	)		—			—			—			(3,370	)
Other		—			976			4,416			—			—			5,392

Cash provided by (used for) operations		—			(24,762	)		87,138			(126	)		—			62,250


Cash provided by (used for) investment
Acquisitions of businesses and facilities, net of cash acquired		—			—			(201,734	)		—			—			(201,734	)
Expenditures for property and equipment		—			(835	)		(23,815	)		—			—			(24,650	)
Purchases of short-term investments		—			(3,514	)		—			—			—			(3,514	)
Maturities of short-term investments		—			14,114			—			—			—			14,114
Sales of assets		—			—			1,088			—			—			1,088
Other		—			139			(918	)		—			—			(779	)

Cash provided by (used for) investment		—			9,904			(225,379	)		—			—			(215,475	)


Cash provided by (used for) financing
Issuances of long-term debt		—			75,000			—			—			—			75,000
Payments of long-term debt		—			(26,250	)		—			—			—			(26,250	)
Payments of deferred financing costs		—			(160	)		—			—			—			(160	)
Payments (to) from Boise Inc., net		(62	)		—			—			—			—			(62	)
Due to (from) affiliates		62			(142,371	)		142,304			5			—			—
Other		—			(2,000	)		—			—			—			(2,000	)

Cash provided by (used for) financing		—			(95,781	)		142,304			5			—			46,528


Increase (decrease) in cash and cash equivalents		—			(110,639	)		4,063			(121	)		—			(106,697	)