**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                                                                                                                         | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of 1934**        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                               |                                                                                          |
| **For the quarterly period ended   September 30, 2003**                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                               |
| **OR**                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                               |
| **o**                                                                                                                                                                                                                                                              | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                                                               |
| **For the transition period from                      to                    ** |
|                                                                                                                                                                                                                                                               |
| **Commission file number 0-19335**                                                                                                                                                                                                                                 |

 

**BUILDING MATERIALS HOLDINGCORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                                        |   | **91-1834269**                     |
|-------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                     |   | (IRS Employer  Identification No.) |
|                                                                                |   |                               |
| **Four Embarcadero Center, Suite 3250, San Francisco, CA  94111**              |
| (Address of principle executive offices, including zip code)                        |
|                                                                                |
| **(415) 627-9100**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |
| **N/A**                                                                             |
| (Former name, former address and former fiscal  year, if changed since last report) |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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.

 

Yes ýNo o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).  Yes ý No o

 

| **Class**                    |   | **Shares  Outstanding as  of November 10, 2003:** |
|------------------------------|--------|---------------------------------------------------|
| Common stock $.001 par value |   | 13,324,011                                        |

 

 

----

 

BUILDING MATERIALS HOLDING CORPORATION

 

INDEX

 
| PART I —  FINANCIAL INFORMATION |   |
|--------------------------------------|--------|
|                                 |   |
|                                 |   | Item 1 - Financial Statements (Unaudited) |   |
|                                 |   |   |   |
|                                 |   | Condensed Consolidated Statements of  Operations for the three and nine months ended September 30, 2003 and 2002 |   |
|                                 |   |   |   |
|                                 |   | Condensed Consolidated Balance Sheets as of  September 30, 2003 and December 31, 2002 |   |
|                                 |   |   |   |
|                                 |   | Condensed Consolidated Statements of Cash  Flows for the nine months ended September 30, 2003 and 2002 |   |
|                                 |   |   |   |
|                                 |   | Notes to Condensed Consolidated Financial  Statements |   |
|                                 |   |   |   |
|                                 |   | Item 2 - Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                                 |   |
|                                 |   | Item 4 - Controls and Procedures |   |
|                                 |   |
| PART II — OTHER INFORMATION     |   |
|                                 |   |
|                                 |   | Item  1 - Legal Proceedings |   |
|                                 |   |   |   |
|                                 |   | Item 6 - Exhibits and Reports on Form 8-K |   |
|                                 |   |
| SIGNATURES                           |   |
|                                 |   |
| CERTIFICATIONS                       |   |

 

2

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| Item 1 | BUILDING MATERIALS HOLDING CORPORATION          |
|--------|-------------------------------------------------|
|   | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
|   | (UNAUDITED)                                     |
|   | (amounts in thousands, except per share data)   |

 
|                                                                                                                             |   | **Three  months ended  September 30,** |    | **Nine  months ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                                                                                                             |   | **2003**                               |    | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Net sales                                                                                                                        |   | $                                      | 396,325 |                                  | $      | 316,930 |   | $ | 994,983 |   | $ | 864,593 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Cost of sales                                                                                                                    |   | 294,587                                |    | 227,008                               |   | 730,223 |   | 617,944 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Gross profit                                                                                                                     |   | 101,738                                |    | 89,922                                |   | 264,760 |   | 246,649 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Selling, general and administrative expense                                                                                      |   | 85,136                                 |    | 71,522                                |   | 237,090 |   | 210,799 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Income from operations                                                                                                           |   | 16,602                                 |    | 18,400                                |   | 27,670 |   | 35,850 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Other (income) expense, net                                                                                                      |   | 1,048                                  |    | (193                                  | )      | (374 | ) | (558 | ) |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Interest expense                                                                                                                 |   | 2,409                                  |    | 2,635                                 |   | 6,827 |   | 7,590 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Income before income taxes, minority  interest, equity earnings of an unconsolidated company and change in  accounting principle |   | 13,145                                 |    | 15,958                                |   | 21,217 |   | 28,818 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Income taxes                                                                                                                     |   | 4,875                                  |    | 6,079                                 |   | 8,104 |   | 11,030 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Minority interest                                                                                                                |   | 675                                    |    | 169                                   |   | 393 |   | 169 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Equity in earnings of an unconsolidated  company, net of tax                                                                     |   | 321                                    |    | —                                |   | 1,431 |   | — |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Income before change in accounting  principle                                                                                    |   | 7,916                                  |    | 9,710                                 |   | 14,151 |   | 17,619 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Change in accounting principle, net of tax  benefit of $6,286                                                                    |   | —                                 |    | —                                |   | —— |   | (11,650 | ) |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Net income                                                                                                                       |   | $                                      | 7,916   |                                  | $      | 9,710 |   | $ | 14,151 |   | $ | 5,969 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Income before change in accounting  principle per common share:                                                                  |   |                                   |    |                                  |   |   |   |   |   |
| Basic                                                                                                                            |   | $                                      | 0.59    |                                  | $      | 0.74 |   | $ | 1.07 |   | $ | 1.35 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Diluted                                                                                                                          |   | $                                      | 0.59    |                                  | $      | 0.73 |   | $ | 1.05 |   | $ | 1.33 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Change in accounting principle, net of tax,  per common share:                                                                   |   |                                   |    |                                  |   |   |   |   |   |
| Basic                                                                                                                            |   | $                                      | —  |                                  | $      | — |   | $ | — |   | $ | (0.89 | ) |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Diluted                                                                                                                          |   | $                                      | —  |                                  | $      | — |   | $ | — |   | $ | (0.88 | ) |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Net income per common share:                                                                                                     |   |                                   |    |                                  |   |   |   |   |   |
| Basic                                                                                                                            |   | $                                      | 0.59    |                                  | $      | 0.74 |   | $ | 1.07 |   | $ | 0.46 |   |
|                                                                                                                             |   |                                   |    |                                  |   |   |   |   |   |
| Diluted                                                                                                                          |   | $                                      | 0.59    |                                  | $      | 0.73 |   | $ | 1.05 |   | $ | 0.45 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

3

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BUILDING MATERIALS HOLDING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(UNAUDITED)

 
|                                                                                                                                  |   | **September  30,  2003** |    | **December  31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
| ASSETS                                                                                                                                |   |                     |    |                    |   |
| Current assets:                                                                                                                       |   |                     |    |                    |   |
| Cash                                                                                                                                  |   | $                        | 19,794  |                    | $      | 9,217 |   |
| Receivables, net                                                                                                                      |   | 188,764                  |    | 132,757                 |   |
| Inventory                                                                                                                             |   | 104,797                  |    | 89,828                  |   |
| Costs in excess of billings                                                                                                           |   | 12,542                   |    | 3,920                   |   |
| Deferred income taxes                                                                                                                 |   | 7,387                    |    | 5,302                   |   |
| Prepaid expenses and other current assets                                                                                             |   | 2,017                    |    | 7,456                   |   |
|                                                                                                                                  |   |                     |    |                    |   |
| Total current assets                                                                                                                  |   | 335,301                  |    | 248,480                 |   |
|                                                                                                                                  |   |                     |    |                    |   |
| Property and equipment, net                                                                                                           |   | 167,676                  |    | 178,137                 |   |
| Goodwill                                                                                                                              |   | 81,344                   |    | 52,111                  |   |
| Other intangibles, net                                                                                                                |   | 21,637                   |    | 12,950                  |   |
| Deferred income taxes                                                                                                                 |   | 346                      |    | 529                     |   |
| Deferred loan costs                                                                                                                   |   | 2,432                    |    | 2,732                   |   |
| Other long-term assets                                                                                                                |   | 9,054                    |    | 8,135                   |   |
|                                                                                                                                  |   |                     |    |                    |   |
| Total assets                                                                                                                          |   | $                        | 617,790 |                    | $      | 503,074 |   |
|                                                                                                                                  |   |                     |    |                    |   |
| LIABILITIES, MINORITY INTEREST AND  SHAREHOLDERS’ EQUITY                                                                         |   |                     |    |                    |   |
| Current liabilities:                                                                                                                  |   |                     |    |                    |   |
| Billings in excess of costs                                                                                                           |   | $                        | 9,988   |                    | $      | 3,927 |   |
| Accounts payable and accrued expenses                                                                                                 |   | 122,353                  |    | 74,061                  |   |
|                                                                                                                                  |   |                     |    |                    |   |
| Total current liabilities                                                                                                             |   | 132,341                  |    | 77,988                  |   |
|                                                                                                                                  |   |                     |    |                    |   |
| Long-term debt                                                                                                                        |   | 181,013                  |    | 157,375                 |   |
| Other long-term liabilities                                                                                                           |   | 14,735                   |    | 11,428                  |   |
|                                                                                                                                  |   |                     |    |                    |   |
| Total liabilities                                                                                                                     |   | 328,089                  |    | 246,791                 |   |
|                                                                                                                                  |   |                     |    |                    |   |
| Minority interest                                                                                                                     |   | 23,916                   |    | 4,983                   |   |
|                                                                                                                                  |   |                     |    |                    |   |
| Shareholders’ equity:                                                                                                            |   |                     |    |                    |   |
| Common stock, $0.001 par value, 20,000,000  shares authorized; 13,324,011 and 13,135,562 shares issued and outstanding,  respectively |   | 13                       |    | 13                      |   |
| Additional paid-in capital                                                                                                            |   | 115,035                  |    | 112,709                 |   |
| Retained earnings                                                                                                                     |   | 150,737                  |    | 138,578                 |   |
|                                                                                                                                  |   |                     |    |                    |   |
| Total shareholders’ equity                                                                                                       |   | 265,785                  |    | 251,300                 |   |
|                                                                                                                                  |   |                     |    |                    |   |
| Total liabilities, minority interest and  shareholders’ equity                                                                   |   | $                        | 617,790 |                    | $      | 503,074 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

4

----

 

BUILDING MATERIALS HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(amounts in thousands)

 
|                                                                                   |   | **Nine  months ended  September 30,** |   |
|----------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                   |   | **2003**                              |   | **2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                   |   |                                  |   |   |   |
| Net income                                                                             |   | $                                     | 14,151 |   | $ | 5,969 |   |
| Adjustments to reconcile net income to cash  flows from operating activities:          |   |                                  |   |   |   |
| Depreciation and amortization                                                          |   | 15,752                                |   | 14,236 |   |
| Deferred income taxes                                                                  |   | (1,902                                | )      | (597 | ) |
| Net loss/(gain) on sale of assets                                                      |   | (773                                  | )      | 725 |   |
| Equity in earnings of an unconsolidated  company, before tax expense of $918           |   | (2,349                                | )      | — |   |
| Change in accounting principle, net of tax  benefit of $6,286                          |   | —                                |   | 11,650 |   |
| Deferred financing costs                                                               |   | 660                                   |   | — |   |
| Minority interest                                                                      |   | 393                                   |   | 169 |   |
| Changes in assets and liabilities, net of  effects of acquisitions and location sales: |   |                                  |   |   |   |
| Receivables, net                                                                       |   | (39,563                               | )      | (29,669 | ) |
| Inventory                                                                              |   | (19,638                               | )      | (9,135 | ) |
| Costs in excess of billings                                                            |   | (4,486                                | )      | (1,353 | ) |
| Prepaid expenses and other current assets                                              |   | 5,648                                 |   | 6,840 |   |
| Accounts payable and accrued expenses                                                  |   | 34,151                                |   | 23,927 |   |
| Billings in excess of costs                                                            |   | 4,287                                 |   | 3,059 |   |
| Other long-term assets and liabilities                                                 |   | 4,948                                 |   | 2,719 |   |
| Other, net                                                                             |   | 502                                   |   | — |   |
|                                                                                   |   |                                  |   |   |   |
| Net cash flows from operating activities                                               |   | 11,781                                |   | 28,540 |   |
|                                                                                   |   |                                  |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                   |   |                                  |   |   |   |
| Purchases of property and equipment                                                    |   | (10,960                               | )      | (14,837 | ) |
| Acquisition of businesses                                                              |   | (24,278                               | )      | (7,919 | ) |
| Proceeds from dispositions of property and  equipment                                  |   | 5,937                                 |   | 534 |   |
| Proceeds from sale of business units, net  of cash sold                                |   | 6,591                                 |   | 2,750 |   |
| Other, net                                                                             |   | (950                                  | )      | (907 | ) |
|                                                                                   |   |                                  |   |   |   |
| Net cash flows from investing activities                                               |   | (23,660                               | )      | (20,379 | ) |
|                                                                                   |   |                                  |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                   |   |                                  |   |   |   |
| Net change under revolving credit  agreements                                          |   | 300                                   |   | 1,900 |   |
| Principal payments on term note                                                        |   | (9,113                                | )      | (3,300 | ) |
| Borrowings under term note                                                             |   | 31,500                                |   | — |   |
| Principal payments on other notes payable                                              |   | —                                |   | (156 | ) |
| Increase/(decrease) in book overdrafts                                                 |   | 2,673                                 |   | (2,184 | ) |
| Deferred financing costs                                                               |   | (1,299                                | )      | — |   |
| Stock options exercised                                                                |   | 792                                   |   | 1,043 |   |
| Dividends paid                                                                         |   | (1,983                                | )      | — |   |
| Other, net                                                                             |   | (414                                  | )      | (91 | ) |
|                                                                                   |   |                                  |   |   |   |
| Net cash flows from financing activities                                               |   | 22,456                                |   | (2,788 | ) |
|                                                                                   |   |                                  |   |   |   |
| Net change in cash                                                                     |   | 10,577                                |   | 5,373 |   |
| Cash, beginning of period                                                              |   | 9,217                                 |   | 5,182 |   |
| Cash, end of period                                                                    |   | $                                     | 19,794 |   | $ | 10,555 |   |
|                                                                                   |   |                                  |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                                      |   |                                  |   |   |   |
| Accrued but unpaid dividends                                                           |   | $                                     | 665    |   | $ | — |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

5

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BUILDING MATERIALS HOLDING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.                    BASIS OF PRESENTATION

 

The condensed consolidatedfinancial statements included herein have been prepared by Building MaterialsHolding Corporation (“BMHC” or the “Company”) on a consolidated basis, withoutaudit, pursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in the consolidated financial statementsprepared in accordance with generally accepted accounting principles in theUnited States of America (“GAAP”) have been condensed or omitted pursuant tothe rules and regulations of the Securities and Exchange Commission.  Although the Company believes that thedisclosures are adequate to make the information presented not misleading, thesecondensed consolidated financial statements should be read in conjunction withthe Company’s audited consolidated financial statements and notes theretoincluded in the Company’s 2002 Annual Report. In the opinion of management, all adjustments necessary to presentfairly the results for the periods presented have been included.  The adjustments made were of a normal,recurring nature.  Certainreclassifications have been made to amounts reported in prior periods, none ofwhich affect the Company’s financial position, results of operations or cashflows.

 

Due to the seasonal nature ofBMHC’s business, the condensed consolidated results of operations and resultingcash flows for the periods presented are not necessarily indicative of theresults that might be expected for the fiscal year.

 

2.                    NET SALES BYPRODUCT (in thousands)

 
|                               |   | **Three  months ended September 30,** |       | **Nine months  ended September 30,** |       |
|------------------------------------|--------|---------------------------------------|------------|--------------------------------------|------------|
|                               |   | **2003**                              | ** ** | **2002**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Services and manufactured products |   | $                                     | 227,810    |                                 | 57.5       | % | $ | 168,503 |   | 53.2 | % | $ | 570,474 |   | 57.3 | % | $ | 454,591 |   | 52.6 | % |
| Wood products                      |   | 111,283                               |       | 28.1                                 |       | 100,138 |   | 31.6 |   | 275,830 |   | 27.7 |   | 280,762 |   | 32.5 |   |
| Building materials and other       |   | 57,232                                |       | 14.4                                 |       | 48,289 |   | 15.2 |   | 148,679 |   | 15.0 |   | 129,240 |   | 14.9 |   |
|                               |   | $                                     | 396,325    |                                 | 100.0      | % | $ | 316,930 |   | 100.0 | % | $ | 994,983 |   | 100.0 | % | $ | 864,593 |   | 100.0 | % |

 

The Company’s locationsprincipally derive revenues from construction services (framing andinstallation) and manufactured products (millwork, roof and floor trusses,pre-hung doors, windows, moldings and installation), commodity wood products(lumber, plywood and oriented strand board), building materials

 

6

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(roofing, siding, insulationand steel products), and other products (paint, hardware, tools, electrical andplumbing).

 

3.                    NET INCOME PERCOMMON SHARE

 

Net income per common share wasdetermined using the following information (in thousands, except per sharedata):

 
|                                                                           |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|--------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                           |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                           |   |                                   |   |                                  |   |   |   |   |   |
| Income before change in accounting  principle                                  |   | $                                      | 7,916  |                                  | $      | 9,710 |   | $ | 14,151 |   | $ | 17,619 |   |
|                                                                           |   |                                   |   |                                  |   |   |   |   |   |
| Weighted average shares used to determine  basic net income per common share   |   | 13,308                                 |   | 13,134                                |   | 13,263 |   | 13,070 |   |
|                                                                           |   |                                   |   |                                  |   |   |   |   |   |
| Net effect of dilutive stock options (1)                                       |   | 140                                    |   | 116                                   |   | 160 |   | 163 |   |
|                                                                           |   |                                   |   |                                  |   |   |   |   |   |
| Weighted average shares used to determine  diluted net income per common share |   | 13,448                                 |   | 13,250                                |   | 13,423 |   | 13,233 |   |
|                                                                           |   |                                   |   |                                  |   |   |   |   |   |
| Net income per common share:                                                   |   |                                   |   |                                  |   |   |   |   |   |
|                                                                           |   |                                   |   |                                  |   |   |   |   |   |
| Basic                                                                          |   | $                                      | 0.59   |                                  | $      | 0.74 |   | $ | 1.07 |   | $ | 1.35 |   |
| Diluted                                                                        |   | $                                      | 0.59   |                                  | $      | 0.73 |   | $ | 1.05 |   | $ | 1.33 |   |
|                                                                           |   |                                   |   |                                  |   |   |   |   |   |
| Cash dividends per share (2)                                                   |   | $                                      | 0.05   |                                  | $      | — |   | $ | 0.15 |   | $ | — |   |

 

(1)               Stock options topurchase 589,254 and 436,719 shares for the third quarter 2003 and 2002,respectively, and 578,004 and 204,469 shares for the nine months endedSeptember 30, 2003 and 2002, respectively, were not dilutive and, therefore,excluded in the computations of diluted income per common share amounts.  Stock options categorized as not dilutivewere defined on the basis of the exercise price being greater than the averagemarket value of the shares of common stock in the periods presented.

(2)               Cash dividendsattributable to the third quarter of 2003 and for the nine months endedSeptember 30, 2003 were $665 and $1,992, respectively.

 

4.                    STOCK-BASEDCOMPENSATION

 

At September 30, 2003, BMHC hadfive stock-based employee compensation plans, which are described more fully inNote 12 of the Company’s Annual Report on Form 10-K.  The Company accounts for those plans under the recognition andmeasurement principles of Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.  The following table illustrates the effecton net income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation,” to stock-based employee compensation (in thousands, except pershare data):

 
|                                                                                                                                          |   | **Three  months  ended September 30,** |   | **Nine  months  ended September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                          |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                                                                                          |   |                                   |   |                                  |   |   |   |   |   |
| Net income, as reported                                                                                                                       |   | $                                      | 7,916  |                                  | $      | 9,710 |   | $ | 14,151 |   | $ | 5,969 |   |
| Add (Deduct): Total stock-based employee  compensation expense determined under APB 25, net of related tax effects                            |   | (6                                     | )      | (55                                   | )      | 215 |   | 703 |   |
|                                                                                                                                          |   |                                   |   |                                  |   |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | 294                                    |   | 246                                   |   | 1,102 |   | 1,615 |   |
|                                                                                                                                          |   |                                   |   |                                  |   |   |   |   |   |
| Pro forma net income                                                                                                                          |   | $                                      | 7,616  |                                  | $      | 9,409 |   | $ | 13,264 |   | $ | 5,057 |   |
|                                                                                                                                          |   |                                   |   |                                  |   |   |   |   |   |
| Earnings per share:                                                                                                                           |   |                                   |   |                                  |   |   |   |   |   |
| Basic – as reported                                                                                                                      |   | $                                      | 0.59   |                                  | $      | 0.74 |   | $ | 1.07 |   | $ | 0.46 |   |
| Basic – pro forma                                                                                                                        |   | $                                      | 0.57   |                                  | $      | 0.72 |   | $ | 1.00 |   | $ | 0.39 |   |
|                                                                                                                                          |   |                                   |   |                                  |   |   |   |   |   |
| Diluted – as reported                                                                                                                    |   | $                                      | 0.59   |                                  | $      | 0.73 |   | $ | 1.05 |   | $ | 0.45 |   |
| Diluted – pro forma                                                                                                                      |   | $                                      | 0.57   |                                  | $      | 0.71 |   | $ | 0.99 |   | $ | 0.38 |   |

 

5.                    DEBT

 

At September 30, 2003 andDecember 31, 2002, debt consisted of the following (in thousands):

 
|                                                                                         |   | **September  30,  2003** |    | **December  31,  2002** |   |
|----------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
| Term note                                                                                    |   | $                        | 124,688 |                    | $      | 102,300 |   |
| Revolving credit facility                                                                    |   | 51,500                   |    | 51,200                  |   |
| Non-interest bearing term note, net of  related discounts of $1,223 and $1,339, respectively |   | 3,065                    |    | 2,949                   |   |
| Other                                                                                        |   | 1,760                    |    | 926                     |   |
|                                                                                         |   | $                        | 181,013 |                    | $      | 157,375 |   |

 

7

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During the quarter the Companyentered into a new senior secured credit facility.  The new credit facility replaces the old credit facility, whichwas scheduled to mature in 2004.  Itincludes a term loan of $125 million maturing in seven years, and a revolvingline of credit of $175 million maturing in five years.  In connection with the new senior securedcredit facility, certain previously deferred financing costs of $0.7 millionassociated with the former credit facility were expensed along with new costsof $0.3 million incurred to secure the current credit facility and both areincluded in “Other (Income) Expense, Net,” on the statement of operations.  All other remaining costs associated withthe former and current credit facility are being amortized over the life of thenew loan periods.

 

At September 30, 2003, theCompany’s senior secured credit facility provided for borrowings of up to$299.7 million, including $124.7 million outstanding under the term loan and$175.0 million provided for by the revolving credit facility, $51.5 million ofwhich was outstanding at September 30, 2003. Revolver borrowings can be limited by a borrowing base equal to 60% ofinventory plus 80% of trade accounts receivable.  The borrowing base is calculated monthly and was $181.9 millionat September 30, 2003, but was limited to the cap of $175.0 million.  Revolver availability was $107.0 million,net of $16.5 million in outstanding letters of credit.  Borrowings under the facility bear interestat a rate based on either Prime or LIBOR plus an additional spread based onperformance.  Currently, the revolverrates are Prime plus 1.25% and LIBOR plus 2.50%.  The interest rate on the term loan is based on either Prime orLIBOR plus 3.25%.

 

The terms of the creditagreement permit an increase in the facility of up to $50 million, subject tocertain conditions.  The term loanmatures in 2010 and the revolving loan matures in 2008.  The term loan is payable in quarterlyinstallments over the initial six years in amounts equal to 1% of the initialprincipal amount per year and equal quarterly installments of the remainingprincipal balance during year seven.

 

The term loan and revolvingcredit facility are both collateralized by all tangible and intangible propertyand interest in property and proceeds thereof now owned or hereafter acquiredby the Company and any wholly-owned subsidiary (except BMC Insurance, Inc.).

 

The agreements related to theabove borrowings contain convenants providing for the maintenance of certainfinancial ratios and conditions including

 

8

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consolidated net worth; acoverage ratio which includes earnings before interest, taxes, depreciation andamortization; a ratio of total funded debt to earnings before interest, taxes,depreciation and amortization, and limitations on capital expenditures, amongcertain other restrictions.  AtSeptember 30, 2003, the Company was in compliance with these convenants andconditions.

 

The scheduled principalpayments of debt at September 30, 2003 are $1.0 million in 2003, $2.3 millionin 2004, $1.9 million in 2005, $3.8 million in 2006, $1.2 million in 2007,$52.7 million in 2008 and $118.1 million thereafter.  Principal payments of $2.7 million due within the next twelvemonths are expected to be refinanced through the unused portion of therevolving credit facility.  As a result,this amount has been classified as long-term.

 

As of September 30, 2003 and2002, the Company had $16.5 million and $6.4 million, respectively, in lettersof credit to guarantee performance or payments to third parties.  These letters of credit reduce borrowingavailability under the revolving credit facility.

 

In connection with a 1999acquisition, the Company issued a $5.0 million non-interest bearing term noteto the seller.  Under the terms of thenote, a portion of the payments may be due based on the operating results ofthe acquired business.  The Company’soriginal discount of the note was based on a 15% effective interest rate and estimatesof the operating results of the acquired business.  Due to the uncertain timing of the payout of this term note, thenote represents a form of contingent consideration paid for the acquiredbusiness.  As a result, the Companyadjusted its estimates related to the timing of the payout of the term note,which resulted in recording an additional discount of $0.2 million during thefirst quarter of 2003.

 

6.                    ACQUISITIONSAND EQUITY INVESTMENT

 

Effective January 1, 2003, theCompany purchased a 60% interest in a newly formed limited liability company,WBC Construction, LLC (“WBC”), for approximately $22.9 million in cash and theissuance of 70,053 shares of BMHC common stock.  The other 40% interest is owned by Willard Brothers Construction,Inc. and its owners, A. Bruce Willard and Danny L. Willard.  WBC contracts with residential productionbuilders in Florida to construct the slab and structural shell of homes.

 

9

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Under the purchase agreement,BMHC will have the option to purchase the remaining 40% interest in WBC fromJanuary 16, 2006 through January 16, 2009 and the principals of WillardBrothers Construction, Inc. have the option to require BMHC to purchase theremaining 40% of WBC from January 16, 2007 through January 16, 2009.  The purchase price for the remaining 40%will generally be based on a multiple of historical earnings.  If the fair value of the net assets to beacquired is less than the amount payable under the required purchase option, theCompany would record a loss.

 

When purchased, the Companyaccounted for its investment in WBC using the equity method of accountingbecause the minority owners had certain approval and other rights thatprecluded consolidation.  On August 11, 2003, WBC’s operating agreementwas amended to eliminate certain approval and other rights of the minorityinterest shareholder.  As a result, the Company ceased using the equitymethod of accounting and the results of WBC’s operations have been included inthe consolidated financial statements effective August 12, 2003. The impact ofthe 40% ownership interest by Willard Brothers Construction, Inc., is beingreported as minority interest.  The August 12, 2003 consolidation of WBCresulted in an increase in assets of $56.4 million, an increase in liabilitiesof $12.7 million, an increase in minority interest of $17.5 million and adecrease in equity investments in an unconsolidated company of $26.2 million. These amounts are considered non-cash items in the condensed consolidatedstatement of cash flows.

 

Financial information for theCompany’s equity investment in WBC is as follows (in thousands):

 
|                                           |   | **July 1,  2003  through  August 11, 2003****(1)** |   | **Year to  date  period ending  August 11, 2003****(1)** |   |
|------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                           |   |                                               |   |                                                     |   |
| Net sales                                      |   | $                                                  | 24,886 |                                                     | $      | 97,717 |   |
|                                           |   |                                               |   |                                                     |   |
| Income from operations                         |   | $                                                  | 2,317  |                                                     | $      | 10,418 |   |
|                                           |   |                                               |   |                                                     |   |
| Net income                                     |   | $                                                  | 987    |                                                     | $      | 4,511 |   |
|                                           |   |                                               |   |                                                     |   |
| Company's share of net income                  |   | $                                                  | 592    |                                                     | $      | 2,706 |   |
|                                           |   |                                               |   |                                                     |   |
| Amortization of intangibles                    |   | (65                                                | )      | (357                                                     | )      |
|                                           |   |                                               |   |                                                     |   |
| Company’s equity in earnings before taxes |   | $                                                  | 527    |                                                     | $      | 2,349 |   |

 

 
| Financial position as of September 30, 2003 |   |   |   |
|---------------------------------------------|--------|--------|--------|
| Current assets                              |   | $      | — |   |
| Non-current assets                          |   | — |   |
| Current liabilities                         |   | — |   |
| Non-current liabilities                     |   | $      | — |   |

 

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(1)          In August 2003, theCompany modified WBC’s operating agreement and as a result ceased using the equitymethod of accounting.  The 2003 incomestatement information reflects equity method accounting through August 11,2003.

 

10

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On July 1, 2002, the Companypurchased a 51% interest in a newly formed partnership, KBI Norcal, forapproximately $5.8 million in cash, $0.8 million of assumed debt and theissuance of 34,364 shares of BMHC common stock.  The other 49% interest is owned by RJ Norcal, LLC, a limitedliability company owned by Robert Garcia and John Volkman.  KBI Norcal provides turnkey framing servicesin Northern California.

 

Under the purchase agreement,BMHC will have the option to purchase the remaining 49% interest in KBI Norcalfrom July 1, 2004 through June 30, 2008 and the principals of RJ Norcal, LLChave the option to require BMHC to purchase the remaining 49% of KBI Norcalfrom July 1, 2006 through June 30, 2008. The purchase price for the remaining 49% will generally be based on amultiple of historical earnings.  If thefair value of the net assets to be acquired is less than the amount payableunder the required purchase option, the Company would record a loss.  As of September 30, 2003, the purchase pricewould be approximately $7.5 million and no loss was required to be reported.

 

KBI Norcal’s operating resultshave been included in the consolidated financial statements since July 1,2002.  The impact of the 49% ownershipinterest of RJ Norcal, LLC is included in minority interest.

 

For the nine month periodending September 30, 2003 and the twelve month period ending December 31, 2002,the Company made other acquisitions or entered into joint-venture agreementsfor aggregate consideration of approximately $1.5 and $2.3 million,respectively.

 

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7.                    GOODWILL AND OTHER INTANGIBLE ASSETS

 

As of September 30, 2003 and December 31,2002, intangible assets consisted of the following (in thousands):

 
|                           |   | **September  30, 2003**     |   |
|--------------------------------|--------|-----------------------------|--------|
|                           |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
| Amortized intangible assets:   |   |                        |   |   |   |   |   |
| Covenants not to compete       |   | $                           | 2,516  |   | $ | (1,069 | ) | $ | 1,447 |   |
| Customer relationships         |   | 14,654                      |   | (1,670 | ) | 12,984 |   |
| Other amortized intangibles    |   | 500                         |   | (454 | ) | 46 |   |
|                           |   |                        |   |   |   |   |   |
| Unamortized intangible assets: |   |                        |   |   |   |   |   |
| Customer relationships         |   | 7,160                       |   | — |   | 7,160 |   |
|                           |   | $                           | 24,830 |   | $ | (3,193 | ) | $ | 21,637 |   |

 
|                           |   | **December  31, 2002**      |   |
|--------------------------------|--------|-----------------------------|--------|
|                           |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
| Amortized intangible assets:   |   |                        |   |   |   |   |   |
| Covenants not to compete       |   | $                           | 2,004  |   | $ | (1,139 | ) | $ | 865 |   |
| Customer relationships         |   | 2,902                       |   | (145 | ) | 2,757 |   |
| Other amortized intangibles    |   | 500                         |   | (352 | ) | 148 |   |
|                           |   |                        |   |   |   |   |   |
| Unamortized intangible assets: |   |                        |   |   |   |   |   |
| Customer relationships         |   | 9,180                       |   | — |   | 9,180 |   |
|                           |   | $                           | 14,586 |   | $ | (1,636 | ) | $ | 12,950 |   |

 

The Company evaluates thepropriety of not amortizing customer relationships to determine whether eventsand circumstances warrant amortization on a prospective basis.  In April 2003, the Company determined that$2.0 million of a previously unamortized customer relationship should beamortized over the succeeding twenty-one months.

 

Aggregate amortization expense for intangible assets was approximately$0.6 million for the three months ended September 30, 2003 and $1.4 million forthe nine months ended September 30, 2003. Estimated amortization expense for intangible assets is $0.8 million forthe remainder of 2003, $2.8 million in 2004, $1.4 million in 2005, $1.3 millionin 2006, $1.3 million in 2007, $1.3 million in 2008 and $5.6 millionthereafter.

 

The changes in the carrying amount ofgoodwill for the nine months ended September 30, 2003 are as follows (inthousands):

 
| Balance as of January  1, 2003       |   | $      | 52,111 |   |
|--------------------------------------|--------|--------|--------|--------|
| Goodwill acquired  during the period |   | 30,316 |   |
| Goodwill disposed  during the period |   | (1,083 | )      |
| Balance as of  September 30, 2003    |   | $      | 81,344 |   |

 

12

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8.                    CHANGE INACCOUNTING PRINCIPLE

 

The Company adopted Statementof Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and OtherIntangible Assets” in the first quarter of 2002.  The provisions of SFAS No. 142 eliminate the amortization ofgoodwill and other indefinite lived intangible assets on a prospective basisbeginning with acquisitions completed after June 30, 2001, or January 1, 2002for those completed prior to June 30, 2001. This standard required the Company to complete a transitional impairmentanalysis of its recorded goodwill and indefinite lived intangible assets and torecord any impairment charge as a change in accounting principle.  The Company completed the transitionalimpairment analysis in the first quarter of 2002, which resulted in thefollowing impaired amounts of goodwill as of January 1, 2002 (in thousands):

 
| **Reporting Unit**   |   | **Goodwill  Impairment** |   | **Goodwill  Impairment,  Net of Tax** |   |
|----------------------|--------|--------------------------|--------|---------------------------------------|--------|
| Northern Nevada      |   | $                        | 2,257  |                                  | $      | 1,388 |   |
| Utah                 |   | 1,397                    |   | 859                                   |   |
| Spokane              |   | 41                       |   | 25                                    |   |
| San Antonio / Austin |   | 2,194                    |   | 1,969                                 |   |
| Royal Door           |   | 2,975                    |   | 1,830                                 |   |
| Dallas / Fort Worth  |   | 1,403                    |   | 863                                   |   |
| Puget Sound          |   | 6,253                    |   | 3,846                                 |   |
| Portland             |   | 1,416                    |   | 870                                   |   |
| Total                |   | $                        | 17,936 |                                  | $      | 11,650 |   |

 

In the case of each reportingunit (as defined by SFAS No. 142), fair value was estimated using the presentvalue of expected future cash flows. Management’s estimate of future cash flows used in the present value analysisresulted in estimated fair market value being less than the recorded value oftangible and intangible assets for the reporting units listed above. Adivestiture of any individual business unit that comprises a reporting unitcould result in a loss.  Afterconsidering the estimated fair market value of tangible assets, including land,an impairment of recorded goodwill occurred. The reasons for the impairment included increased competition, areduction in residential construction within the geographic markets that thesereporting units serve, and management execution issues.  The Company is required to test goodwill andother indefinite-lived intangible assets for impairment at least on an annualbasis or when an event occurs or circumstances change that would more likelythan not reduce the fair value of a reporting unit below its carryingamount.  This annual test takes placeduring the fourth quarter each year.

 

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9.                    RECENTACCOUNTING PRONOUNCEMENTS

 

In May 2003, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of Both Liabilities andEquity.”  This statement establishesstandards for how an issuer classifies and measures certain financial arrangementswith characteristics of both liabilities and equity.  It requires that an issuer classify a financial arrangement thatis within its scope as a liability (or an asset in some circumstances).  The provisions of this statement areeffective for financial arrangements entered into or modified after May 31,2003, and otherwise are effective at the beginning of the first interim periodbeginning after June 15, 2003.  Certainprovisions of this statement have been deferred for an indefinite period.  The Company continues to monitor FASB

 

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deliberations on SFAS No. 150to determine the ultimate impact on the Company’s financial position, resultsof operations or cash flows.

 

The Company issued an earningsrelease on October 28, 2003 announcing its financial results for the thirdquarter ended September 30, 2003, which gave affect to the adoption of SFAS No.150.  This 10-Q filing gives affect tothe issuance on November 7, 2003 of SFAS No. 150-3, which defers certainprovisions of SFAS No. 150, and results in a reduction in net income ofapproximately $47,000 compared to net income reported in the earnings release.

 

In March 2003, the consensus ofEmerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer(including a Reseller) for Cash Consideration Received from a Vendor,” waspublished.  EITF Issue No. 02-16addresses how a reseller of a vendor’s products should account for cashconsideration received from a vendor. The provisions of EITF Issue No. 02-16 were effective for newarrangements transacted after December 31, 2002.  The Company’s adoption of EITF 02-16 did not have a significantimpact on the Company’s financial position, results of operations or cashflows.

 

In March 2003, the consensus ofEITF Issue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables,” was published.  EITFIssue No. 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which it will perform multiple revenue-generatingactivities.  Specifically, EITF IssueNo. 00-21 addresses how to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting.  The provisions of EITF Issue No. 00-21 waseffective in fiscal periods beginning after June 15, 2003.  The Company’s adoption of EITF 00-21 did nothave a significant impact on the Company’s financial position, results ofoperations or cash flows.

 

In January 2003, FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities – anInterpretation of ARB No. 51.”  Theinterpretation clarifies the application of Accounting Research Bulletin No.51, “Consolidated Financial Statements,” to certain entities in which equity investorsdo not have the characteristics of a controlling financial interest or do nothave sufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties.  The provisions of this interpretation areeffective for all enterprises with variable interest entities created afterJanuary 31, 2003 or July 1, 2003 for enterprises with variable interest createdbefore February 1, 2003.  The Company’sadoption of this interpretation did not have a significant impact on theCompany’s financial position, results of operations or cash flows.

 

In December 2002, the FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure.”  This statement amends SFASNo. 123, “Accounting for Stock-Based Compensation,” to provide alternativemethods

 

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of transition for an entitythat voluntarily changes to the fair value-based method of accounting forstock-based employee compensation.  Italso amends the disclosure provisions of that statement to require prominentdisclosure about the effects on reported net income of an entity’s accountingpolicy decisions with respect to stock-based employee compensation.  This statement also amends APB Opinion No.28, “Interim Financial Reporting,” to require disclosure about those effects ininterim financial information.  Theprovisions of this statement were effective for financial statements of interimor annual periods ending after December 15, 2002.  The Company has continued to use the intrinsic value method ofaccounting for stock-based compensation in 2003 in accordance with APB OpinionNo. 25.  The Company has adopted thedisclosure provisions of SFAS No. 148 as presented in Note 4, “Stock-BasedCompensation,” of these condensed consolidated financial statements.

 

In June 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  This statement requires that thefair value of a liability for an asset retirement obligation be recognized inthe period in which it is incurred if a reasonable estimate of fair value canbe made.  The associated assetretirement costs are capitalized as part of the carrying amount of thelong-lived asset.  All provisions ofthis statement were effective as of the beginning of 2003.  The Company’s adoption of this statement didnot have a significant impact on the Company’s financial position, results ofoperations or cash flows.

 

10.              SUBSEQUENT EVENTS

 

On October 3, the Companypurchased a 67.33% interest in a newly formed joint venture constructionbusiness, WBC–Mid Atlantic LLC., for approximately $5.3 million consisting ofcash and 15,059 shares of BMHC common stock. The other 32.67% interest is owned by Alan and Enid Mendleson,principals of ANM Carpentry, Inc.(“ANM”), a privately held firm based inStafford, Virginia.  The new businessventure will serve high-volume production homebuilders in Virginia, Marylandand Delaware.

 

Under the purchase agreement,BMHC will have the option to purchase the remaining 32.67% of WBC-Mid Atlanticprior to October 1, 2010 subject to certain limitations or prior to October 1,2006 contingent on the written consent of ANM or if certain other conditionsare met.  The principals of ANM

 

16

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have the option to require BMHCto purchase the remaining 32.67% interest from October 1, 2008 through October1, 2010.  The purchase price for theremaining interest will generally be based on a multiple of historicalearnings.  If the fair value of the netassets to be acquired is less than the amount payable under the requiredpurchase option, the Company would record a loss.

 

17

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| Item 2 | BUILDING MATERIALS HOLDING CORPORATION                           |
|--------|------------------------------------------------------------------|
|   | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
|   | AND RESULTS OF OPERATIONS                                        |

 

FORWARD-LOOKINGSTATEMENTS AND CRITICAL ACCOUNTING ESTIMATES

Certain statements made in thisForm 10-Q may constitute “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995.  Such forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause our actual results, performanceor achievements, or industry results, to be materially different from anyfuture results, performance or achievements expressed or implied by suchforward-looking statements.  Suchfactors are discussed in detail in BMHC’s Form 10-K for the fiscal year endedDecember 31, 2002.  Given theseuncertainties, investors are cautioned not to place undue reliance on suchforward-looking statements.  We disclaimany obligation to update any such factors or to announce publicly the resultsof any revisions to any of the forward-looking statements contained in theAnnual Report on Form 10-K or this Form 10-Q except as required by law.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our Annual Report toShareholders for information regarding our critical accounting estimates.

 

The following table sets forthfor the periods indicated the percentage relationship to net sales of certainitems presented on our statements of operations.  The table and subsequent discussion should be read in conjunctionwith the consolidated financial statements and the notes thereto appearingelsewhere herein and in the Company’s Annual Report on Form 10-K for the yearended December 31, 2002.

 
|                                             |   | **For the  three months ended  September 30,** |   | **For the  nine months ended  September 30,** |   |
|--------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                             |   | **2003**                                       |   | **2002**                                      |   | **2003** |   | **2002** |   |
| Net sales                                        |   | 100.0                                          | %      | 100.0                                         | %      | 100.0 | % | 100.0 | % |
| Gross profit                                     |   | 25.7                                           |   | 28.4                                          |   | 26.6 |   | 28.5 |   |
| Selling, general and administrative expense      |   | 21.5                                           |   | 22.6                                          |   | 23.8 |   | 24.4 |   |
| Income from operations                           |   | 4.2                                            |   | 5.8                                           |   | 2.8 |   | 4.1 |   |
| Other (income) expense, net                      |   | 0.3                                            |   | (0.1                                          | )      | — |   | (0.1 | ) |
| Interest expense                                 |   | 0.6                                            |   | 0.8                                           |   | 0.7 |   | 0.9 |   |
| Income taxes                                     |   | 1.2                                            |   | 1.9                                           |   | 0.8 |   | 1.3 |   |
| Minority interest                                |   | 0.1                                            |   | 0.1                                           |   | — |   | — |   |
| Equity in earnings of an unconsolidated  company |   | —                                         |   | —                                        |   | 0.1 |   | — |   |
| Income before change in accounting  principle    |   | 2.0                                            | %      | 3.1                                           | %      | 1.4 | % | 2.0 | % |

 

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### THIRDQUARTER OF 2003 COMPARED TO THE THIRD QUARTER OF 2002

 

Net sales for the three monthsended September 30, 2003 were $396.3 million, an increase of 25.1% from thethird quarter of 2002 when sales were $316.9 million.  Construction services and manufactured building componentsaccounted for $227.8 million, or 57.5% of net sales for the third quarter of2003, an increase of 35.2% from $168.5 million, or 53.2% of net sales for thethird quarter of 2002. The growth in net sales for the third quarter of 2003was attributable to the consolidation of WBC Construction, LLC (“WBC”), whichadded $30.9 million in sales and was formerly accounted for under the equitymethod of accounting, an increase in comparable sales primarily at KBI and KBINorcal of $24.2 million, and inflation in commodity wood product prices.

 

Gross profit as a percentage of sales decreased to 25.7% in the thirdquarter of 2003 from 28.4% in the third quarter of 2002. The decrease isattributable primarily to the rapid increases in commodity wood product priceswhich limited the Company’s ability to pass along increased prices due toexisting customer sales commitments and the competitive environment.  Additionally, the consolidation of WBC,which has lower gross profit margins compared to BMHC’s other framingbusinesses, impacted gross profit.

 

Selling, general and administrative expense (“SG&A”) was $85.1million, or 21.5% of net sales in the third quarter of 2003 as compared to$71.5 million, or 22.6% of net sales in the third quarter of 2002.  The Company attributes most of this dollarincrease to the consolidation of WBC which added approximately $4.3 million inexpenses as well as improved sales volume at KBI Norcal and KBI resulting inadditional costs of $3.5 million and $2.1 million, respectively.

 

Other (income) expense, net, was$1.0 million for the period compared to ($0.2) million for the third quarter of2002 and includes the write-off of $0.7 million in deferred loan costs and $0.3million in related new expenses associated with the refinance of the seniorcredit facility in the third quarter of 2003.

 

Equity in earnings of anunconsolidated company in the third quarter of 2003 included income of $0.3million, net of tax, from the Company’s 60% equity interest in WBC, whoseequity earnings through August 11, 2003, were included in the Company’sresults.  Effective August 12, 2003,WBC’s financial results were consolidated rather than accounted for under theequity method of accounting as discussed in Note 6 of the financial statements.

 

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Interest expense of $2.4million was slightly lower than the $2.6 million for the same period last year.The weighted average interest rate dropped from 4.9% for the third quarter of2002 to 4.2% for the current period. The impact of the reduced interest rate was substantially offset by anincrease in the weighted average debt outstanding to $188.5 million during the third quarter of 2003 from$167.7 million during the same period of 2002. The increase in the average debt outstanding is primarily due to cashused in the acquisition of WBC.

 

Net income for the thirdquarter of 2003 was $7.9 million, or $0.59 per diluted share, compared to $9.7million, or $0.73 per diluted share, in the third quarter of 2002. The decreasein net income for the third quarter of 2003 compared to the same period in theprior year was primarily attributable to the decline in gross profit margins asdiscussed in further detail above.

 

### FIRSTNINE MONTHS OF 2003 COMPARED TO THE FIRST NINE MONTHS OF 2002

 

Net sales for the nine monthsended September 30, 2003 were $995.0 million, an increase of 15.1% from thefirst nine months of 2002 when sales were $864.6 million.  Construction services and manufacturedbuilding components accounted for $570.5 million, or 57.3% of net sales for thefirst nine months of 2003, an increase from $454.6 million, or 52.6% of netsales for the first nine months of 2002. The increase in net sales isattributable to the acquisition of KBI Norcal which added $65.1 million insales and was not included in BMHC’s results for the first half of 2002, theconsolidation of WBC in the third quarter of 2003 which contributed $30.9million in sales and was formerly accounted for under the equity method ofaccounting, and inflation of commodity wood product prices.

 

Gross profit as a percentage of sales decreased to 26.6% in the firstnine months of 2003 from 28.5% in the first nine months of 2002, mainly as aresult of competitive pressures on overall business unit gross profit marginsas well as the short term impact from the occurrence of rapid increases inmaterial costs coupled with the Company’s limited ability to raise prices dueto existing sales contracts.

 

SG&A expense was $237.1 million, or 23.8% of net sales in the firstnine months of 2003 ascompared to $210.8 million, or 24.4% of net sales in the first ninemonths of 2002.  The Company attributes most of this dollarincrease to costs of $12.4 million resulting from the acquisition of KBINorcal which was not included in BMHC’s results for the first half of 2002,

 

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improved sales volume at KBIwhich led to additional expenses of $4.6 million, and the consolidation of WBCin the third quarter of 2003 which contributed expenses of $4.3 million.

 

Other (income) expense, net, for the first nine months of 2003 was($0.4) million compared to ($0.6) million for the first nine months of 2002 andincludes the write-off of $0.7 million in deferred loan costs and$0.3 million in related new expenses associated with the refinance of thesenior credit facility in the third quarter of 2003.  Other income for the first nine months of 2003 also includes $0.8million from the sale of various non-strategic assets related to the Company’sconsolidation activities.

 

Equity in earnings of anunconsolidated company for the first nine months of 2003 included income of$1.4 million, net of tax, from the Company’s 60% equity interest in WBC, whoseequity earnings were included in the Company’s results through August 11, 2003.  Effective August 12, 2003, WBC’s financialresults were consolidated rather than accounted for under the equity method ofaccounting as discussed in Note 6 of the financial statements.  There were no comparable equity earnings forthe first nine months of 2002.

 

Interest expense decreased to$6.8 million from $7.6 million during the first nine months of 2003 and 2002,respectively, primarily due to a reduction in the weighted average interestrate to 4.0% from 4.9% between the two periods.  The impact of the reduced interest rate was partially offset byan increase in the weighted average debt outstanding to $186.7 million duringthe first nine months of 2003 from $169.6 million during the same period of2002.  The increase in the average debtoutstanding is primarily due to cash used in the acquisition of WBC and workingcapital needs at KBI Norcal.

 

Net income for the first ninemonths of 2003 was $14.2 million, or $1.05 per diluted share, compared to netincome of $6.0 million, or $0.45 per diluted share in the prior year period.For the nine month period of 2002, a charge of $11.6 million, or $0.88 perdiluted share was incurred upon adoption of SFAS No. 142, “Goodwill and OtherIntangible Assets”. Net income before the change in accounting principle forthe first nine months of 2003 was $14.2 million, or $1.05 per diluted sharecompared to $17.6 million, or $1.33 per diluted share.  Net income for the nine month period of 2003includes the write-off of deferred loan costs and the expensing of new costsassociated with the refinancing of the senior credit facility of $0.6 million,net of tax, or $0.5 per diluted share. The overall decline in net income for the comparative

 

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periods is attributable to competitivepressure on gross margins.

 

LIQUIDITY ANDCAPITAL RESOURCES

 

The Company’s primary need forcapital resources is to fund future growth, capital expenditures, andacquisitions, as well as to finance working capital needs, which have beenincreasing as the Company has grown in recent years.  Capital resources have primarily consisted of cash flows fromoperations and the incurrence of debt.

 

## *Operations*

In the first nine months of2003 and 2002, net cash provided by operations was $11.8 million and $28.5million, respectively.  The decrease incash provided by operations was primarily due to increases in accountsreceivable and inventory, partially offset by decreases in accounts payable andaccrued expenses.  The growth inaccounts receivable and inventory balances and subsequent decrease in cashprovided by operations is attributable largely to the increased sales volume atKBI Norcal as well as the impact of inflation. Working capital increased to $203.0 million at September 30, 2003 from$174.7 million at September 30, 2002. 

 

## *Capital investment and acquisitions*

Net cash used for investingactivities was $23.7 million and $20.4 million in the first nine months of 2003and 2002, respectively.  The acquisitionin January 2003 of WBC, accounted for $22.9 million (net of post closingadjustments) in invested capital. Capital expenditures were $11.0 million in the first nine months of 2003and were incurred to acquire additional property as well as expand and remodelexisting facilities.**** Proceeds from the sale of a non-strategicbusiness unit, Great Falls, Montana were $6.6 million.  Proceeds from dispositions of other propertyand equipment were $6.0 million and include $4.5 million in the sale of surplusreal estate at Emmett, and Pocatello, Idaho, as well as Denver, Colorado duringthe first nine months of 2003.

 

*Financing*

Net cash provided/(used) byfinancing activities was $22.5 million and ($2.8) million in the first ninemonths of 2003 and 2002, respectively. The increase in cash provided by financingactivities was primarily due to additional borrowings on the term notepartially offset by principal payments.

 

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During the quarter the Companyentered into a new senior secured credit facility.  The new credit facility replaces the old credit facility, whichwas scheduled to mature in 2004.  Itincludes a term loan of $125 million maturing in seven years, and a revolvingline of credit of $175 million maturing in five years.  In connection with the new senior securedcredit facility, certain previously deferred financing costs of $0.7 millionassociated with the former credit facility were expensed along with new costsof $0.3 million incurred to secure the current credit facility and both areincluded in “Other (Income) Expense, Net,” on the statement of operations.  All other remaining costs associated withthe former and current credit facility are being amortized over the life of thenew loan periods.

 

At September 30, 2003, theCompany’s senior secured credit facility provided for borrowings of up to$299.7 million, including $124.7 million outstanding under the term loan and$175.0 million provided for by the revolving credit facility, $51.5 million ofwhich was outstanding at September 30, 2003. Revolver borrowings can be limited by a borrowing base equal to 60% ofinventory plus 80% of trade accounts receivable.  The borrowing base is calculated monthly and was $181.9 millionat September 30, 2003, but was limited to the cap of $175.0 million.  Revolver availability was $107.0 million, netof $16.5 million in outstanding letters of credit.  Borrowings under the facility bear interest at a rate based oneither Prime or LIBOR plus an additional spread based on performance.  Currently, the revolver rates are Prime plus1.25% and LIBOR plus 2.50%.  Theinterest rate on the term loan is based on either Prime or LIBOR plus 3.25%.

 

The terms of the creditagreement permit an increase in the facility of up to $50 million, subject tocertain conditions.  The term loanmatures in 2010 and the revolving loan matures in 2008.  The term loan is payable in quarterlyinstallments over the initial six years in amounts equal to 1% of the initialprincipal amount per year and equal quarterly installments of the remainingprincipal balance during year seven.

 

The term loan and revolvingcredit facility are both collateralized by all tangible and intangible propertyand interest in property and proceeds thereof now owned or hereafter acquiredby the Company and any wholly-owned subsidiary (except BMC Insurance, Inc.).

 

The agreements related to theabove borrowings contain convenants providing for the maintenance of certainfinancial ratios and conditions including

 

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consolidated net worth; acoverage ratio which includes earnings before interest, taxes, depreciation andamortization; a ratio of total funded debt to earnings before interest, taxes,depreciation and amortization, and limitations on capital expenditures, amongcertain other restrictions.  AtSeptember 30, 2003, the Company was in compliance with these convenants andconditions.

 

The scheduled principalpayments of debt at September 30, 2003 are $1.0 million in 2003, $2.3 millionin 2004, $1.9 million in 2005, $3.8 million in 2006, $1.2 million in 2007,$52.7 million in 2008 and $118.1 million thereafter.  Principal payments of $2.7 million due within the next twelvemonths are expected to be refinanced through the unused portion of therevolving credit facility.  As a result,this amount has been classified as long-term.

 

As of September 30, 2003 and2002, the Company had $16.5 million and $6.4 million, respectively, in lettersof credit to guarantee performance or payments to third parties.  These letters of credit reduce borrowingavailability under the revolving credit facility.

 

In the third quarter of 1998, ashelf registration was filed with the Securities and Exchange Commission toregister 2,000,000 shares of common stock. The Company may issue these shares from time to time in connection withfuture business combinations, mergers and/or acquisitions.   This shelf registration has been impactedby the Company’s issuance of shares of stock as partial payment for thefollowing acquisitions:

 
| **Acquisition**         |   | **Date**       |   | **Issued  Shares** |   |
|-------------------------|--------|----------------|--------|--------------------|--------|
| WBC (see Note 6)        |   | January,  2003 |   | 70,053             |   |
| KBI Norcal (see Note 6) |   | July, 2002     |   | 34,364             |   |

 

Based on the Company’s abilityto generate cash flows from operations, its borrowing capacity under therevolver and its access to debt and equity markets, the Company believes itwill have sufficient capital to meet its anticipated needs.

 

## *Disclosures of Certain Market Risks*

The Company experiences changesin interest expense when market interest rates change or changes are made toits debt structure.  The Company hasmanaged its exposure to market interest rate changes through periodicrefinancing of its

 

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variable rate debt with fixedrate term debt obligations.  Based ondebt outstanding at September 30, 2003, a 25 basis point increase in interestrates would result in approximately $440,000 of additional annual interestcosts.

 

Prices of commodity woodproducts, which are subject to significant volatility, directly affect netsales and cost of sales and could affect net income in 2003.  The Company does not utilize any derivativefinancial instruments to hedge commodity price movements.

 

The Company has a cash equityincentive plan that is partially based on changes in the Company’s stockprice.  Under the plan, a $1.00 increaseor decrease in the Company’s stock price after September 30, 2003 would resultin an increase or decrease in compensation expense of approximately $103,000.

 

*Quarterly Results and Seasonality*

The Company’s first and fourthquarters historically have been, and are expected to continue to be, adverselyaffected by weather patterns in some of the Company’s markets which causesdecreases in levels of residential construction activity.

 

*New Accounting Standards*

In May 2003, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of Both Liabilities andEquity.”  This statement establishesstandards for how an issuer classifies and measures certain financialarrangements with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial arrangement that is within its scope as a liability (or an asset insome circumstances).  The provisions ofthis statement are effective for financial arrangements entered into ormodified after May 31, 2003, and otherwise are effective at the beginning ofthe first interim period beginning after June 15, 2003.  Certain provisions of this statement havebeen deferred for an indefinite period. The Company continues to monitor FASB deliberations on SFAS No. 150 todetermine the ultimate impact on the Company’s financial position, results ofoperations or cash flows.

 

The Company issued an earningsrelease on October 28, 2003 announcing its financial results for the thirdquarter ended September 30, 2003, which gave affect to the adoption of SFAS No.150.  This 10-Q filing gives affect tothe issuance on November 7, 2003 of SFAS No. 150-3, which defers certainprovisions of SFAS No. 150, and results in a reduction in net income ofapproximately $47,000 compared to net income reported in the earnings release.

 

In March 2003, the consensus ofEmerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer(including a Reseller) for Cash Consideration Received from a Vendor,” waspublished.  EITF Issue No. 02-16addresses how a reseller of a vendor’s products should account for cashconsideration received from a vendor. The provisions of EITF Issue No. 02-16 were effective for new

 

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arrangements transacted afterDecember 31, 2002.  The Company’sadoption of EITF 02-16 did not have a significant impact on the Company’sfinancial position, results of operations or cash flows.

 

In March 2003, the consensus ofEITF Issue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables,” was published.  EITFIssue No. 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which it will perform multiple revenue-generatingactivities.  Specifically, EITF IssueNo. 00-21 addresses how to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting.  The provisions of EITF Issue No. 00-21 waseffective in fiscal periods beginning after June 15, 2003.  The Company’s adoption of EITF 00-21 did nothave a significant impact on the Company’s financial position, results ofoperations or cash flows.

 

In January 2003, FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities — anInterpretation of ARB No. 51.”  Theinterpretation clarifies the application of Accounting Research Bulletin No.51, “Consolidated Financial Statements,” to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  The provisions of thisinterpretation are effective for all enterprises with variable interestentities created after January 31, 2003 or July 1, 2003 for enterprises withvariable interest created before February 1, 2003.  The Company’s adoption of this interpretation did not have asignificant impact on the Company’s financial position, results of operationsor cash flows.

 

In December 2002, the FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition andDisclosure.”  This statement amends SFASNo. 123, “Accounting for Stock-Based Compensation,” to provide alternativemethods of transition for an entity that voluntarily changes to the fairvalue-based method of accounting for stock-based employee compensation.  It also amends the disclosure provisions ofthat statement to require prominent disclosure about the effects on reportednet income of an entity’s accounting policy decisions with respect tostock-based employee compensation.  Thisstatement also amends APB Opinion No. 28, “Interim Financial Reporting,” torequire disclosure about those effects in interim financial information.  The provisions of this statement wereeffective for financial statements of

 

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interim or annual periodsending after December 15, 2002.  The Companyhas continued to use the intrinsic value method of accounting for stock-basedcompensation in 2003 in accordance with APB Opinion No. 25.  The Company has adopted the disclosureprovisions of SFAS No. 148 as presented in Note 4, “Stock-Based Compensation,”of these condensed consolidated financial statements.

 

In June 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  This statement requires that thefair value of a liability for an asset retirement obligation be recognized inthe period in which it is incurred if a reasonable estimate of fair value canbe made.  The associated assetretirement costs are capitalized as part of the carrying amount of thelong-lived asset.  All provisions ofthis statement were effective as of the beginning of 2003.  The Company’s adoption of this statement didnot have a significant impact on the Company’s financial position, results ofoperations or cash flows.

 

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| Item 4 | Controls and Procedures |
|--------|-------------------------|

 

As of the end of the period covered by thisreport, the Company carried out an evaluation, under the supervision and withthe participation of the Company’s management, including the Company’s ChiefExecutive Officer and Senior Vice President - Finance, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedurespursuant to Exchange Act Rule 13a-14.

 

Disclosure controls areprocedures designed with the objective of ensuring that information we arerequired to disclose in our periodic reports filed with the Securities andExchange Commission (“SEC”) is recorded, processed, summarized and reportedtimely.  Disclosure controls also aredesigned with the objective of ensuring that such information is communicatedto our management, as appropriate, to allow timely judgments concerningrequired disclosure.  Internal controlsare procedures designed with the objective of providing reasonable assurancethat (i) transactions are properly authorized; (ii) assets are safeguardedagainst unauthorized or improper use and (iii) transactions are properly recordedand reported, in order to permit the preparation of our financial statements inaccordance with generally accepted accounting principles in the United Statesof America.

 

A control system, even if wellconceived and implemented can only provide reasonable assurance rather thanabsolute assurance that the goals of the control system are met.  There are inherent limitations in allcontrol systems due to resource constraints and other factors, such asassumptions regarding the likelihood of future events and new businessconditions, the fact that judgments may, with the benefit of hindsight, proveto be incorrect, and the fact that breakdowns can occur because of a simpleerror or mistake, as well as a result of fraudulent activity.  As a result of these limitations, it is notpossible to ensure that misstatements due to error or fraud will not occur andbe detected.

 

The evaluation of ourdisclosure controls and internal controls included a review of the design,objectives and implementation throughout the Company.  Management seeks to identify errors, control problems orinstances of fraud and to confirm that appropriate corrective action isimplemented as appropriate.  Internalcontrols are also reviewed on an ongoing basis by our internal audit department,in connection with their audit and review activities.

 

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In accordance with SECrequirements, the Chief Executive Officer and the Senior Vice President -Finance advised the Company that, since the date of their evaluation, therehave been no significant changes in internal controls or other factors thatcould significantly affect the internal controls.

 

Based on their evaluation, theChief Executive Officer and Senior Vice President - Finance have concludedthat, subject to the above limitations, the Company’s disclosure controls areeffective to ensure that material information relating to the Company and itssubsidiaries is communicated to management, and that the Company’s internalcontrols are effective to provide reasonable assurance that our financialstatements are fairly presented in accordance with generally acceptedaccounting principles in the United States of America.

 

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PART II — OTHER INFORMATION

 
| Item 1 | Legal Proceedings                                                                                                                                                                                                                                                                                                                           |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | The Company  is involved in litigation and other legal matters arising in the normal  course of business.  In the opinion of  management, the Company’s recovery or liability, if any, under any of these  matters will not have a material effect on the Company’s financial position,  liquidity or results of operations. |

 
| Item 6 | Exhibits and  Reports on Form 8-K |
|--------|-----------------------------------|

 

(a)                        Exhibits

 
| **Exhibit #** |   | **Description**                                                                                                                                         |
|---------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| 11.0          |   | Statement  regarding computation of earnings per share (see Note 3)                                                                                     |
| 31.1          |   | Section 302  Certification                                                                                                                              |
| 31.2          |   | Section 302  Certification                                                                                                                              |
| 32.1          |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     |
| 32.2          |   | Certification  of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

(b)                       Reports on Form 8-K

 

On July 29, 2003, Building Materials Holding Corporation, Registrant,filed a Form 8-K with the Securities and Exchange Commission reporting itsfinancial results for the quarter ended June 30, 2003.

 

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SIGNATURES

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|                                      | BUILDING  MATERIALS HOLDING CORPORATION |
|-------------------------------------------|-----------------------------------------|
|                                      |                                    |
|                                      |                                    |
| Date:   November  14, 2003 | /s/ Robert E. Mellor                    |
|                                      | Robert E. Mellor                        |
|                                      | Chairman of the Board, President and    |
|                                      | Chief Executive Officer                 |
|                                      | (Principal Executive Officer)           |
|                                      |                                    |
|                                      |                                    |
| Date:   November  14, 2003 | /s/ Ellis C. Goebel                     |
|                                      | Ellis C. Goebel                         |
|                                      | Senior Vice President - Finance         |
|                                      | (Principal Financial Officer)           |

 

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