BZ 06.30.2012 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 June 30, 2012
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 100,482,144 common shares, $0.0001 per share par value, of Boise Inc. outstanding as of July 31, 2012.

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
 
 
 
 
 
 
 
 
14. 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 Income
(unaudited, dollars and shares in thousands, except per-share data)
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012

2011
 
2012
 
2011
Sales
 
 
 
 
 
 
 
Trade
$
618,585

 
$
592,784

 
$
1,252,113

 
$
1,153,104

Related parties
19,255

 
10,351

 
30,573

 
18,794

 
637,840

 
603,135

 
1,282,686

 
1,171,898

 
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
Materials, labor, and other operating expenses
507,343

 
485,001

 
1,009,642

 
934,071

Fiber costs from related parties
4,466

 
4,383

 
9,412

 
8,823

Depreciation, amortization, and depletion
37,303

 
36,090

 
74,859

 
70,064

Selling and distribution expenses
30,568

 
29,483

 
61,210

 
48,856

General and administrative expenses
20,035

 
14,622

 
40,043

 
27,319

Other (income) expense, net
381

 
(813
)
 
81

 
264

 
600,096

 
568,766

 
1,195,247

 
1,089,397

 
 
 
 
 
 
 
 
Income from operations
37,744

 
34,369

 
87,439

 
82,501

 
 
 
 
 
 
 
 
Foreign exchange gain
102

 
55

 
259

 
187

Interest expense
(15,433
)
 
(16,072
)
 
(30,798
)
 
(32,439
)
Interest income
54

 
74

 
98

 
152

 
(15,277
)
 
(15,943
)
 
(30,441
)
 
(32,100
)
 
 
 
 
 
 
 
 
Income before income taxes
22,467

 
18,426

 
56,998

 
50,401

Income tax provision
(8,805
)
 
(6,529
)
 
(21,998
)
 
(19,810
)
Net income
$
13,662

 
$
11,897

 
$
35,000

 
$
30,591

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
100,116

 
106,754

 
99,584

 
93,928

Diluted
101,008

 
111,772

 
101,182

 
101,117

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.11

 
$
0.35

 
$
0.33

Diluted
$
0.14

 
$
0.11

 
$
0.35

 
$
0.30

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
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
Net income
$
13,662

 
$
11,897

 
$
35,000

 
$
30,591

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustment
(2,307
)
 
—

 
(1,452
)
 
—

Cash flow hedges:
 
 
 
 
 
 
 
Change in fair value, net of tax of $913, $0, ($475), and $0, respectively
1,459

 
—

 
(756
)
 
—

Loss included in net income, net of tax of $380, $0, $891, and $0, respectively
604

 
—

 
1,421

 
—

Amortization of actuarial loss and prior service cost for defined benefit pension plans, net of tax of $990, $539, $2,006, and $1,080, respectively
1,580

 
861

 
3,200

 
1,716

Other
—

 
20

 
—

 
(1
)
 
1,336

 
881

 
2,413

 
1,715

 


 


 
 
 
 
Comprehensive income
$
14,998

 
$
12,778

 
$
37,413

 
$
32,306

See accompanying condensed notes to unaudited quarterly consolidated financial statements.


2

Boise Inc.
Consolidated Balance Sheets
(unaudited, dollars in thousands)
 
June 30, 2012
 
December 31, 2011
ASSETS
 
 
 
 
 
 
 
Current
 
 
 
Cash and cash equivalents
$
59,502

 
$
96,996

Receivables
 
 
 
     Trade, less allowances of $1,091 and $1,343
240,157

 
228,838

Other
8,033

 
7,622

Inventories
327,259

 
307,305

Deferred income taxes
6,928

 
20,379

Prepaid and other
14,314

 
6,944

 
656,193

 
668,084

 
 
 
 
Property
 
 
 
Property and equipment, net
1,223,631

 
1,235,269

Fiber farms
22,331

 
21,193

 
1,245,962

 
1,256,462

 
 
 
 
Deferred financing costs
28,940

 
30,956

Goodwill
160,555

 
161,691

Intangible assets, net
152,634

 
159,120

Other assets
8,188

 
9,757

Total assets
$
2,252,472

 
$
2,286,070

 
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)
 
June 30, 2012
 
December 31, 2011
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
Current
 
 
 
Current portion of long-term debt
$
15,000

 
$
10,000

Income taxes payable
825

 
590

Accounts payable
197,339

 
201,994

Accrued liabilities
 
 
 
Compensation and benefits
57,402

 
64,907

Interest payable
10,540

 
10,528

Other
25,847

 
22,540

 
306,953

 
310,559

 
 
 
 
Debt
 
 
 
Long-term debt, less current portion
780,000

 
790,000

 
 
 
 
Other
 
 
 
Deferred income taxes
172,273

 
161,260

Compensation and benefits
156,107

 
172,394

Other long-term liabilities
54,515

 
57,010

 
382,895

 
390,664

 
 
 
 
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; 100,487 and 100,272 shares issued and outstanding
12

 
12

Treasury stock, 21,151 shares held
(121,423
)
 
(121,421
)
Additional paid-in capital
865,206

 
866,901

Accumulated other comprehensive income (loss)
(119,549
)
 
(121,962
)
Retained earnings
158,378

 
171,317

Total stockholders' equity
782,624

 
794,847

 
 
 
 
Total liabilities and stockholders' equity
$
2,252,472

 
$
2,286,070


See accompanying condensed notes to unaudited quarterly consolidated financial statements.


4

Boise Inc.
Consolidated Statements of Cash Flows
(unaudited, dollars in thousands)
 
Six Months Ended
June 30
 
2012
 
2011
Cash provided by (used for) operations
 
 
 
Net income
$
35,000

 
$
30,591

Items in net income not using (providing) cash
 
 
 
Depreciation, depletion, and amortization of deferred financing costs and other
77,190

 
73,188

Share-based compensation expense
2,729

 
1,771

Pension expense
5,474

 
5,875

Deferred income taxes
12,610

 
17,182

Other
(43
)
 
298

Decrease (increase) in working capital, net of acquisitions
 
 
 
Receivables
(12,050
)
 
(11,060
)
Inventories
(20,224
)
 
8,640

Prepaid expenses
(4,869
)
 
(3,326
)
Accounts payable and accrued liabilities
(14,061
)
 
(4,505
)
Current and deferred income taxes
7,452

 
690

Pension payments
(18,191
)
 
(25,291
)
Other
2,110

 
2,049

Cash provided by operations
73,127

 
96,102

Cash provided by (used for) investment
 
 
 
Acquisition of businesses and facilities, net of cash acquired
—

 
(200,832
)
Expenditures for property and equipment
(52,457
)
 
(53,737
)
Purchases of short-term investments
—

 
(3,494
)
Maturities of short-term investments
—

 
14,114

Other
586

 
1,318

Cash used for investment
(51,871
)
 
(242,631
)
Cash provided by (used for) financing
 
 
 
Payments of special dividend
(47,483
)
 
(47,916
)
Issuances of long-term debt
—

 
75,000

Payments of long-term debt
(5,000
)
 
(93,750
)
Proceeds from exercise of warrants
—

 
284,785

Other
(6,267
)
 
(2,160
)
Cash provided by (used for) financing
(58,750
)
 
215,959

Increase (decrease) in cash and cash equivalents
(37,494
)
 
69,430

Balance at beginning of the period
96,996

 
166,833

Balance at end of the period
$
59,502

 
$
236,263


See accompanying condensed notes to unaudited quarterly consolidated financial statements.

5

BZ Intermediate Holdings LLC
Consolidated Statements of Income
(unaudited, dollars in thousands)
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
Sales
 
 
 
 
 
 
 
Trade
$
618,585

 
$
592,784

 
$
1,252,113

 
$
1,153,104

Related parties
19,255

 
10,351

 
30,573

 
18,794

 
637,840

 
603,135

 
1,282,686

 
1,171,898

 
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
Materials, labor, and other operating expenses
507,343

 
485,001

 
1,009,642

 
934,071

Fiber costs from related parties
4,466

 
4,383

 
9,412

 
8,823

Depreciation, amortization, and depletion
37,303

 
36,090

 
74,859

 
70,064

Selling and distribution expenses
30,568

 
29,483

 
61,210

 
48,856

General and administrative expenses
20,035

 
14,622

 
40,043

 
27,319

Other (income) expense, net
381

 
(813
)
 
81

 
264

 
600,096

 
568,766

 
1,195,247

 
1,089,397

 
 
 
 
 
 
 
 
Income from operations
37,744

 
34,369

 
87,439

 
82,501

 
 
 
 
 
 
 
 
Foreign exchange gain
102

 
55

 
259

 
187

Interest expense
(15,433
)
 
(16,072
)
 
(30,798
)
 
(32,439
)
Interest income
54

 
74

 
98

 
152

 
(15,277
)
 
(15,943
)
 
(30,441
)
 
(32,100
)
 
 
 
 
 
 
 
 
Income before income taxes
22,467

 
18,426

 
56,998

 
50,401

Income tax provision
(8,805
)
 
(6,529
)
 
(21,998
)
 
(19,810
)
Net income
$
13,662

 
$
11,897

 
$
35,000

 
$
30,591


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
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
Net income
$
13,662

 
$
11,897

 
$
35,000

 
$
30,591

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustment
(2,307
)
 
—

 
(1,452
)
 
—

Cash flow hedges:
 
 
 
 
 
 
 
Change in fair value, net of tax of $913, $0, ($475), and $0, respectively
1,459

 
—

 
(756
)
 
—

Loss included in net income, net of tax of $380, $0, $891, and $0, respectively
604

 
—

 
1,421

 
—

Amortization of actuarial loss and prior service cost for defined benefit pension plans, net of tax of $990, $539, $2,006, and $1,080, respectively
1,580

 
861

 
3,200

 
1,716

Other
—

 
20

 
—

 
(1
)
 
1,336

 
881

 
2,413

 
1,715

 
 
 
 
 
 
 
 
Comprehensive income
$
14,998

 
$
12,778

 
$
37,413

 
$
32,306


See accompanying condensed notes to unaudited quarterly consolidated financial statements.


7

BZ Intermediate Holdings LLC
Consolidated Balance Sheets
(unaudited, dollars in thousands)  
 
June 30, 2012
 
December 31, 2011
ASSETS
 
 
 
 
 
 
 
Current
 
 
 
Cash and cash equivalents
$
59,502

 
$
96,996

Receivables
 
 
 
Trade, less allowances of $1,091 and $1,343
240,157

 
228,838

Other
8,033

 
7,622

Inventories
327,259

 
307,305

Deferred income taxes
6,928

 
20,379

Prepaid and other
14,314

 
6,944

 
656,193

 
668,084

 
 
 
 
Property
 
 
 
Property and equipment, net
1,223,631

 
1,235,269

Fiber farms
22,331

 
21,193

 
1,245,962

 
1,256,462

 
 
 
 
Deferred financing costs
28,940

 
30,956

Goodwill
160,555

 
161,691

Intangible assets, net
152,634

 
159,120

Other assets
8,188

 
9,757

Total assets
$
2,252,472

 
$
2,286,070

 
See accompanying condensed notes to unaudited quarterly consolidated financial statements.

8

BZ Intermediate Holdings LLC
Consolidated Balance Sheets (continued)
(unaudited, dollars in thousands) 
 
June 30, 2012
 
December 31, 2011
LIABILITIES AND CAPITAL
 
 
 
 
 
 
 
Current
 
 
 
Current portion of long-term debt
$
15,000

 
$
10,000

Income taxes payable
825

 
590

Accounts payable
197,339

 
201,994

Accrued liabilities
 
 
 
Compensation and benefits
57,402

 
64,907

Interest payable
10,540

 
10,528

Other
25,847

 
22,540

 
306,953

 
310,559

 
 
 
 
Debt
 
 
 
Long-term debt, less current portion
780,000

 
790,000

 
 
 
 
Other
 
 
 
Deferred income taxes
163,726

 
152,712

Compensation and benefits
156,107

 
172,394

Other long-term liabilities
54,565

 
57,061

 
374,398

 
382,167

 
 
 
 
Commitments and contingent liabilities

 

 
 
 
 
Capital
 
 
 
Business unit equity
910,670

 
925,306

Accumulated other comprehensive income (loss)
(119,549
)
 
(121,962
)
 
791,121

 
803,344

 
 
 
 
Total liabilities and capital
$
2,252,472

 
$
2,286,070


See accompanying condensed notes to unaudited quarterly consolidated financial statements.



9

BZ Intermediate Holdings LLC
Consolidated Statements of Cash Flows
(unaudited, dollars in thousands)
 
Six Months Ended
June 30
 
2012
 
2011
Cash provided by (used for) operations
 
 
 
Net income
$
35,000

 
$
30,591

Items in net income not using (providing) cash
 
 
 
Depreciation, depletion, and amortization of deferred financing costs and other
77,190

 
73,188

Share-based compensation expense
2,729

 
1,771

Pension expense
5,474

 
5,875

Deferred income taxes
12,610

 
17,182

Other
(43
)
 
298

Decrease (increase) in working capital, net of acquisitions
 
 
 
Receivables
(12,050
)
 
(11,060
)
Inventories
(20,224
)
 
8,640

Prepaid expenses
(4,869
)
 
(3,326
)
Accounts payable and accrued liabilities
(14,061
)
 
(4,505
)
Current and deferred income taxes
7,452

 
690

Pension payments
(18,191
)
 
(25,291
)
Other
2,110

 
2,049

Cash provided by operations
73,127

 
96,102

Cash provided by (used for) investment
 
 
 
Acquisition of businesses and facilities, net of cash acquired
—

 
(200,832
)
Expenditures for property and equipment
(52,457
)
 
(53,737
)
Purchases of short-term investments
—

 
(3,494
)
Maturities of short-term investments
—

 
14,114

Other
586

 
1,318

Cash used for investment
(51,871
)
 
(242,631
)
Cash provided by (used for) financing
 
 
 
Issuances of long-term debt
—

 
75,000

Payments of long-term debt
(5,000
)
 
(93,750
)
Payments (to) from Boise Inc., net
(52,440
)
 
236,869

Other
(1,310
)
 
(2,160
)
Cash provided by (used for) financing
(58,750
)
 
215,959

Increase (decrease) in cash and cash equivalents
(37,494
)
 
69,430

Balance at beginning of the period
96,996

 
166,833

Balance at end of the period
$
59,502

 
$
236,263


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 have recently expanded our operations into 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 and corrugating medium, which are combined to make corrugated board, the base raw material in our corrugated sheets and containers. We are also the third-largest North American manufacturer of communication papers such as office papers, commercial printing papers, envelope papers, and forms.

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

See Note 5, 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, parent company to 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 2011 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. Acquisition of Hexacomb

On December 1, 2011, we acquired Hexacomb Corporation and its affiliated companies and all of the honeycomb packaging-related assets of Pregis Mexico (Hexacomb) for $125 million (Hexacomb Acquisition), subject to post-closing adjustments. In connection with the acquisition, we allocated the purchase price to the assets acquired and liabilities assumed based on estimates of the fair value at the date of the acquisition. See Note 3, Acquisitions, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 2011 Form 10-K. During the six months ended June 30, 2012, we recorded approximately $1.1 million of purchase price adjustments that decreased goodwill. These adjustments related primarily to changes in deferred tax liabilities that resulted from further analysis of the tax basis of acquired assets and liabilities and other tax adjustments. The purchase price continues to be preliminary.

3. Net Income Per Common Share

Net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Net income per common share is not applicable to BZ Intermediate because it does not have common shares. For the three and six months ended June 30, 2012 and 2011, Boise Inc.'s basic and diluted net income per share is calculated as follows (dollars and shares in thousands, except per-share data): 
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
Net income
$
13,662

 
$
11,897

 
$
35,000

 
$
30,591

Weighted average number of common shares for basic net income per common share (a)
100,116

 
106,754

 
99,584

 
93,928

Incremental effect of dilutive common stock equivalents:
 
 
 
 
 
 
 
Restricted stock and restricted stock units
680

 
2,500

 
1,362

 
2,721

Performance units
211

 
—

 
235

 
—

Common stock warrants (a)
—

 
2,513

 
—

 
4,464

Stock options (b)
1

 
5

 
1

 
4

Weighted average number of common shares for diluted net income per common share
101,008

 
111,772

 
101,182

 
101,117

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.11

 
$
0.35

 
$
0.33

Diluted
$
0.14

 
$
0.11

 
$
0.35

 
$
0.30

____________
(a)
During the six months ended June 30, 2011, warrant holders exercised their warrants, resulting in the issuance of 38.4 million common shares. We repurchased 21.2 million common shares in the second half of 2011.
(b)
We excluded 0.8 million and 0.3 million stock options from the computation of diluted net income per share because they were antidilutive for both the three and six months ended June 30, 2012 and 2011, respectively.
 
4. Income Taxes

For the three and six months ended June 30, 2012, we recorded $8.8 million and $22.0 million of income tax expense and had an effective tax rate of 39.2% and 38.6%, respectively. During the three and six months ended June 30, 2012, the primary reason for the difference from the federal statutory income tax rate of 35% was the effect of state income taxes.

For the three and six months ended June 30, 2011, we recorded $6.5 million and $19.8 million of income tax expense and had an effective tax rate of 35.4% and 39.3%, respectively. During the three and six months ended June 30, 2011, the primary reason for the difference from the federal statutory income tax rate of 35% was the effect of state income taxes and discrete tax items.


12

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 Income. Interest expense and penalties relating to uncertain tax positions were nominal for all periods presented.

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. To the extent the annual limitation is not used in any year, the unutilized limitation amount will carry over and add to the limitation in the subsequent tax year. However, we believe it is more likely than not that our net operating losses will be fully realized before they expire.

We file federal income tax returns in the U.S., state income tax returns in various state jurisdictions, and foreign income tax returns in various foreign 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 2011, 2010, 2009, and 2008. Some foreign tax jurisdictions are also open for the 2007 tax year.

As of June 30, 2012, 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 six months ended June 30, 2012, refunds received, net of cash paid for taxes, were $0.7 million. Cash paid for taxes, net of refunds received, was $1.7 million during the six months ended June 30, 2011.

5. 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 6, Segment Information, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in our 2011 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
 
EBITDA 
(b)
 
Three Months Ended June 30, 2012
 
Trade
 
Related
Parties
 
Inter-
segment
 
Total
 
 
 
 
Packaging
 
$
264.9

 
$
19.3

 
$
0.6

 
$
284.8

 
$
24.8

 
$
15.1

 
$
40.0

 
Paper
 
345.5

 
—

 
17.7

 
363.3

 
19.6

 
21.3

 
40.9

 
Corporate and Other
 
8.2

 
—

 
9.0

 
17.2

 
(6.6
)
 
0.8

 
(5.7
)
 
Intersegment eliminations
 
—

 
—

 
(27.4
)
 
(27.4
)
 
—

 
—

 
—

 
 
 
$
618.6

 
$
19.3

 
$
—

 
$
637.8

 
37.8

 
$
37.3

 
$
75.1

 
Interest expense
 
 
 
 
 
 
 
 
 
(15.4
)
 
 
 
 
 
Interest income
 
 
 
 
 
 
 
 
 
0.1

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
22.5

  
 
 
 
 


13

 
 
Sales
 
Income (Loss) Before Income Taxes
 
Depreciation,
Amortization, and Depletion
 
EBITDA 
(b)
 
Three Months Ended June 30, 2011
 
Trade
 
Related
Parties
 
Inter-
segment
 
Total
 
 
 
 
Packaging
 
$
231.9

 
$
10.4

 
$
1.1

 
$
243.3

 
$
27.5

 
$
12.8

 
$
40.3

 
Paper
 
353.2

 
—

 
17.8

 
371.1

 
13.2

 
22.4

 
35.5

 
Corporate and Other
 
7.7

 
—

 
8.9

 
16.6

 
(6.2
)
 
0.9

 
(5.3
)
 
Intersegment eliminations
 
—

 
—

 
(27.9
)
 
(27.9
)
 
—

 
—

 
—

 
 
 
$
592.8

 
$
10.4

 
$
—

 
$
603.1

 
34.4

 
$
36.1

 
$
70.5

 
Interest expense
 
 
 
 
 
 
 
 
 
(16.1
)
 
 
 
 
 
Interest income
 
 
 
 
 
 
 
 
 
0.1

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
18.4

  
 
 
 
 

 
 
Sales
 
Income (Loss) Before Income Taxes
 
Depreciation,
Amortization, and Depletion
 
EBITDA 
(b)
 
Six Months Ended June 30, 2012
 
Trade
 
Related
Parties
 
Inter-
segment
 
Total
 
 
 
 
Packaging
 
$
525.1

 
$
30.6

 
$
1.4

 
$
557.1

 
$
47.3

 
$
30.6

 
$
77.9

 
Paper
 
711.1

 
—

 
34.6

 
745.7

 
53.5

 
42.5

 
96.0

 
Corporate and Other
 
15.9

 
—

 
19.5

 
35.3

 
(13.1
)
 
1.7

 
(11.4
)
 
Intersegment eliminations
 
—

 
—

 
(55.4
)
 
(55.4
)
 
—

 
—

 
—

 
 
 
$
1,252.1

 
$
30.6

 
$
—

 
$
1,282.7

 
87.7

 
$
74.9

 
$
162.6

 
Interest expense
 
 
 
 
 
 
 
 
 
(30.8
)
 
 
 
 
 
Interest income
 
 
 
 
 
 
 
 
 
0.1

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
57.0

  
 
 
 
 
 
 
Sales
 
Income (Loss) Before Income Taxes
 
Depreciation,
Amortization, and Depletion
 
EBITDA 
(b)
 
Six Months Ended June 30, 2011
 
Trade
 
Related
Parties
 
Inter-
segment
 
Total
 
 
 
 
Packaging
 
$
426.3

 
$
18.8

 
$
1.6

 
$
446.7

 
$
41.1

(a)
$
23.8

 
$
64.9

(a)
Paper
 
711.9

 
—

 
34.3

 
746.2

 
54.1

 
44.4

 
98.5

 
Corporate and Other
 
14.9

 
—

 
17.9

 
32.7

 
(12.6
)
 
1.8

 
(10.7
)
 
Intersegment eliminations
 
—

 
—

 
(53.8
)
 
(53.8
)
 
—

 
—

 
—

 
 
 
$
1,153.1

 
$
18.8

 
$
—

 
$
1,171.9

 
82.7

 
$
70.1

 
$
152.8

 
Interest expense
 
 
 
 
 
 
 
 
 
(32.4
)
 
 
 
 
 
Interest income
 
 
 
 
 
 
 
 
 
0.2

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
50.4

  
 
 
 
 
____________
(a)
In connection with the Tharco purchase price allocation, inventories were written up to their estimated fair market value. As the related inventories were sold, we recognized $2.2 million of expense in "Materials, labor, and other operating expenses" in our Consolidated Statement of Income for the six months ended June 30, 2011.
(b)
EBITDA represents income before interest (interest expense and interest income), income tax provision, 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 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.


14

The following is a reconciliation of net income to EBITDA for Boise Inc. and BZ Intermediate (dollars in millions):
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
Net income
$
13.7

 
$
11.9

 
$
35.0

 
$
30.6

Interest expense
15.4

 
16.1

 
30.8

 
32.4

Interest income
(0.1
)
 
(0.1
)
 
(0.1
)
 
(0.2
)
Income tax provision
8.8

 
6.5

 
22.0

 
19.8

Depreciation, amortization, and depletion
37.3

 
36.1

 
74.9

 
70.1

EBITDA
$
75.1

 
$
70.5

 
$
162.6

 
$
152.8


6. Debt

At June 30, 2012, and December 31, 2011, our long-term debt and the interest rates on that debt were as follows (dollars in thousands): 
 
June 30, 2012
 
December 31, 2011
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Tranche A term loan, due 2016
$
195,000

 
2.25
%
 
$
200,000

 
2.30
%
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
795,000

 
6.97

 
800,000

 
6.95

Current portion of long-term debt
(15,000
)
 
2.25

 
(10,000
)
 
2.30

Long-term debt, less current portion
$
780,000

 
7.06
%
 
$
790,000

 
7.01
%

As of June 30, 2012, 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%.

Interest on our Credit Facilities is determined at our election and is based on an alternate base rate or the London Interbank Offered Rate (LIBOR), which is our current election, plus an applicable spread based on our total leverage ratio. Our total leverage ratio is essentially our total net debt divided by our four trailing quarters of Adjusted Consolidated EBITDA (as defined in the credit agreement). At June 30, 2012, the interest rate on our Credit Facilities is LIBOR plus 200 basis points. Based on our current election of one-month LIBOR, we pay interest on the Credit Facilities monthly and in arrears.

At June 30, 2012, and December 31, 2011, we had no borrowings outstanding under our Revolving Credit Facility. We had availability of $492.6 million under our Revolving Credit Facility at June 30, 2012, which is net of outstanding letters of credit of $7.4 million.

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 7, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in our 2011 Form 10-K.


15

Other

Subject to specified exceptions, the 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 June 30, 2012, required debt principal repayments were as follows (dollars in thousands): 
 
Remaining
 
 
 
 
 
 
 
 
 
 
 
2012
 
2013
 
2014
 
2015
 
2016
 
Thereafter
Required debt principal repayments
$
5,000

 
$
20,000

 
$
20,000

 
$
30,000

 
$
120,000

 
$
600,000


At June 30, 2012, and December 31, 2011, we had $28.9 million and $31.0 million, respectively, of costs recorded in "Deferred financing costs" on our Consolidated Balance Sheets. We record the amortization of deferred financing costs in interest expense using the effective interest method over the term of the loans. For the three months ended June 30, 2012 and 2011, we recorded $1.1 million and $1.5 million, respectively, and for the six months ended June 30, 2012 and 2011, we recorded $2.2 million and $3.0 million, respectively, of amortization expense in "Interest expense" in our Consolidated Statements of Income.

For the six months ended June 30, 2012 and 2011, cash payments for interest were $28.7 million and $29.4 million, respectively.

With the exception of the Credit Facilities, our debt is fixed-rate debt. At June 30, 2012, the book value of our fixed-rate debt was $600.0 million, and the fair value was estimated to be $728.4 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 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 June 30, 2012, these derivatives included caps and call spreads, which we account for as economic hedges, and swaps, which are accounted for as cash flow hedges. As of June 30, 2012, we had entered into derivative instruments related to the following approximate percentages of our forecasted natural gas purchases:

 
July 2012
Through
October 2012
 
November 2012
Through
March 2013
 
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
Approximate percent hedged
83
%
 
71
%
 
63
%
 
46
%
 
42
%
 
40
%
 
35
%

Economic Hedges

For derivative instruments that are designated and qualify as economic hedges, the gain or loss on the derivatives is recognized in "Materials, labor, and other operating expenses" in the Consolidated Statements of Income. During the three months ended June 30, 2012 and 2011, we recognized $0.1 million of income and $0.1 million of expense, respectively, and during the six months ended June 30, 2012 and 2011, we recognized $0.2 million and $0.7 million of 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" in our Consolidated Statements of Income 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

16

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 June 30, 2012, and December 31, 2011, we had $3.0 million and $3.7 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. Based on June 30, 2012, pricing, the estimated loss, net of tax, to be recognized in earnings during the next 12 months is $2.2 million.

The effects of our cash flow hedging instruments on our Consolidated Balance Sheets and Consolidated Statements of Income were as follows (dollars in thousands):
 
(Gain) Loss Recognized in Accumulated Other Comprehensive Income
 
Loss Reclassified From Accumulated Other Comprehensive Income Into Earnings
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Natural gas contracts
$
(2,372
)
 
$
—

 
$
1,231

 
$
—

 
$
984

 
$
—

 
$
2,312

 
$
—


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 June 30, 2012, and December 31, 2011, 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.

All of our derivative instruments are recorded in "Accrued liabilities, Other" on our Consolidated Balance Sheets. We offset asset and liability balances, by counterparty, where legal right of setoff exists. The following table presents the fair value of these instruments at June 30, 2012, and December 31, 2011 (dollars in thousands): 
 
Level 2: Significant Other Observable Inputs
 
June 30, 2012
 
December 31, 2011
Natural gas contracts
 
 
 
Cash flow hedges
$
4,941

 
$
6,022

Economic hedges
2,156

 
2,370

Total
$
7,097

 
$
8,392


Derivative instruments in an asset position at June 30, 2012, were not material. We did not have any derivative instruments in an asset position at December 31, 2011.


17

8. Retirement and Benefit Plans

The components of net periodic benefit cost are as follows (dollars in thousands):
 
Three Months Ended
June 30
 
Six Months Ended
June 30
2012
 
2011
 
2012
 
2011
Service cost
$
705

 
$
1,140

 
$
1,440

 
$
2,478

Interest cost
6,157

 
6,402

 
12,325

 
12,811

Expected return on plan assets
(6,803
)
 
(6,125
)
 
(13,579
)
 
(12,223
)
Amortization of actuarial loss
2,576

 
1,395

 
5,217

 
2,784

Amortization of prior service costs and other
2

 
12

 
5

 
25

Plan settlement curtailment loss
66

 
—

 
66

 
—

Net periodic benefit cost
$
2,703

 
$
2,824

 
$
5,474

 
$
5,875


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 plan, tax deductibility, our cash flows from operations, and other factors. During the six months ended June 30, 2012, we contributed $18.2 million to our pension plans. Due to recent legislation, we expect our 2012 minimum required contributions to decrease below the amount we have already contributed. However, we may make additional contributions in 2012 to improve the funded status of our plans.

9. Stockholders' Equity and Share-Based Compensation

Special Dividend

On March 21, 2012, we paid a special cash dividend of $0.48 per common share to Boise Inc. shareholders of record at the close of business on March 9, 2012. The dividend payment was $47.5 million.

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 or from treasury shares. 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.

Restricted Stock and Performance Unit Awards. During the first half of 2012, we granted approximately 285,000 shares of restricted stock and approximately 151,000 restricted stock units (collectively restricted stock), the majority of which are subject to an EBITDA (earnings before interest, taxes, and depreciation, amortization, and depletion) performance-based goal and all of which are subject to time-based vesting restrictions. For members of management, one-third of the awards vest in each of the years 2013, 2014, and 2015, respectively, subject to the provisions of the award agreements. For elected non-employee directors, the awards will vest at the end of 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. These awards are eligible to participate in dividend payments, if any, which we accrue to be paid upon the vesting of those awards.

During 2012, we also granted members of management approximately 278,000 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 in 2014 and the remaining will vest in 2015. Any shares not vested on or before March 16, 2015, will be forfeited. We based the fair value of these awards on the closing market price of our common stock on the grant date, and we record

18

compensation expense over the awards' vesting periods. These awards are eligible to participate in dividend payments, if any, which we accrue to be paid upon the vesting of those awards.

Stock Option Awards. During the first half of 2012, we granted approximately 508,000 nonqualified stock options to members of management, of which one-third of the option awards vest and become exercisable in each of the years 2013, 2014, and 2015, respectively. The stock options have a contractual term of ten years. These awards are eligible to participate in dividend payments, if any, which we accrue to be paid upon the vesting of those awards.

The weighted average fair value of the stock options granted was $3.97 per share. We recognize compensation expense over the awards' vesting period. 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 historical stock performance and the volatility of related industry stocks. We did not have sufficient historical data to provide a reasonable basis upon which to estimate expected life; therefore, we used the "simplified method" to determine the expected life assumption for the options. 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 range of assumptions used to calculate the fair value of stock options for the six months ended June 30, 2012:
     
Black-Scholes-Merton assumptions:
 
 
 
Exercise price
$7.57
-
$8.24
Expected volatility
50.00%
-
50.10%
Expected life (years)
5.91
-
6.00
Risk-free interest rate
1.08%
-
1.39%
Expected dividend yield
—
 
—
    
Compensation Expense. Most of our share-based compensation expense was recorded in "General and administrative expenses" in our Consolidated Statements of Income. Total recognized share-based compensation expense related to restricted stock, performance units, and stock options, net of estimated forfeitures, for the three months and six months ended June 30, 2012 and 2011, is as follows (dollars in thousands):

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2012
 
2011
 
2012
 
2011
Restricted stock awards and performance units
$
1,233

 
$
1,007

 
$
2,309

 
$
1,615

Stock options
262

 
116

 
420

 
156

Total share-based compensation expense
$
1,495

 
$
1,123

 
$
2,729

 
$
1,771


The unrecognized compensation expense for all share-based awards at June 30, 2012, is as follows (dollars in thousands):
 
Unrecognized Compensation Expense
 
Remaining Weighted Average Recognition Period (in Years)
Restricted stock awards and performance units
$
6,908

 
1.7
Stock options
2,276

 
2.3
Total unrecognized share-based compensation expense
$
9,184

 
1.9


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10. 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.

Changes in the carrying amount of our goodwill are as follows (dollars in thousands):
 
Goodwill
Balance at January 1, 2011
$
—

Goodwill acquired
162,169

Foreign currency translation adjustments
(478
)
Balance at December 31, 2011
161,691

Foreign currency translation adjustments
(54
)
Additions (reductions) (a)
(1,082
)
Balance at June 30, 2012
$
160,555

____________
(a)
For further information regarding the Hexacomb acquisition, including purchase price adjustments, see Note 2, Acquisition of Hexacomb.

Intangible Assets

Intangible assets represent primarily the values assigned to customer relationships, trademarks and trade names, technology, and noncompete agreements. We had $152.6 million and $159.1 million of intangible assets at June 30, 2012, and December 31, 2011, net of $20.6 million and $14.3 million of accumulated amortization, respectively. During the three months ended June 30, 2012 and 2011, we recorded intangible asset amortization of $3.0 million and $1.8 million, respectively. During the six months ended June 30, 2012 and 2011, we recorded intangible asset amortization of $6.3 million and $2.9 million, respectively. Foreign intangible assets are affected by foreign currency translation.

11. Concentrations of Risk

Business

Sales to OfficeMax Incorporated (OfficeMax) represent a concentration in the volume of business transacted and in revenue generated from those transactions. Sales to OfficeMax were $121.9 million and $118.0 million, respectively, during the three months ended June 30, 2012 and 2011, representing 19% and 20% of total sales for those periods. Sales to OfficeMax were $251.9 million and $244.4 million, respectively, during the six months ended June 30, 2012 and 2011, representing 20% and 21% of total sales for those periods. At June 30, 2012, and December 31, 2011, we had $32.9 million and $35.3 million, respectively, of accounts receivable due from OfficeMax. We expect OfficeMax to continue to represent a concentration of our revenues and transacted business. Any significant change in the willingness of OfficeMax 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 cash flows.

Labor

As of June 30, 2012, we had approximately 5,400 employees. Approximately 51% of these employees worked pursuant to collective bargaining agreements. Approximately 6% worked pursuant to collective bargaining agreements that will expire within one year.


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12. 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 incl