**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 
| **ý**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                               |
| **For the quarterly  period ended March 31, 2004**                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                               |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                               |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                               |
| **For the transition  period from                                     to                                   ** |

 

**Commissionfile number 0-19335**

 

**BUILDINGMATERIALS HOLDING CORPORATION**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                    |   | **91-1834269**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |

 

**FourEmbarcadero Center, Suite 3250, San Francisco, CA  94111**

(Address of principle executive offices,including zip code)

 

**(415)627-9100**

(Registrant’s telephone number, includingarea code)

 

**N/A**

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 
|   | Yes ý | No o |
|--------|------------|------|

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 
|   | Yes ý | No o |
|--------|------------|------|

 

The number of shares outstanding of the registrant’s common stock as ofMay 3, 2004 was 13,401,516.

 

----

 

**BUILDINGMATERIALS HOLDING CORPORATION**

 

**INDEX**

 
| **PART I – FINANCIAL  INFORMATION** |                                                                                                          |
|------------------------------------------|---------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                          |
|                                     | **Item 1 – Financial Statements (unaudited)**                                                            |   |
|                                     |                                                                                                          |
|                                     | Consolidated Statements of Income for the  three months ended March 31, 2004 and 2003                    |   |
|                                     |                                                                                                          |
|                                     | Consolidated Balance Sheets as of March 31, 2004 and  December 31, 2003                             |   |
|                                     |                                                                                                          |
|                                     | Consolidated Statements of Cash Flows for  the three months ended March 31, 2004 and 2003                |   |
|                                     |                                                                                                          |
|                                     | Notes to Consolidated Financial Statements                                                                    |   |
|                                     |                                                                                                          |
|                                     | **Item 2 – Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |   |
|                                     |                                                                                                          |
|                                     | **Item 3 – Quantitative and Qualitative Disclosures about  Market Risk**                                 |   |
|                                     |                                                                                                          |
|                                     | **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

 

**BuildingMaterials Holding Corporation**

**Consolidated Statements of Income**

**(thousands,except per share data)**

**(unaudited)**

 
|                                                                |   | **Three  Months Ended March 31,** |    |
|---------------------------------------------------------------------|--------|----------------------------------------|---------|
|                                                                |   | **2004**                               |    | **2003** |   |
| **Sales**                                                           |   |                                   |    |   |   |
| Building products                                                   |   | $                                      | 248,735 |   | $ | 187,794 |   |
| Construction services                                               |   | 168,108                                |    | 88,598 |   |
|                                                                |   |                                   |    |   |   |
| Total sales                                                         |   | 416,843                                |    | 276,392 |   |
|                                                                |   |                                   |    |   |   |
| **Costs and operating  expenses**                                   |   |                                   |    |   |   |
| Cost of goods sold                                                  |   |                                   |    |   |   |
| Building products                                                   |   | 186,951                                |    | 140,652 |   |
| Construction services                                               |   | 147,849                                |    | 76,442 |   |
| Impairment of assets                                                |   | 1,273                                  |    | — |   |
| Selling, general and administrative expense                         |   | 70,626                                 |    | 57,995 |   |
| Other income, net                                                   |   | 507                                    |    | 868 |   |
|                                                                |   |                                   |    |   |   |
| Total costs and operating expenses                                  |   | 406,192                                |    | 274,221 |   |
|                                                                |   |                                   |    |   |   |
| **Income from  operations**                                         |   | 10,651                                 |    | 2,171 |   |
|                                                                |   |                                   |    |   |   |
| Interest expense                                                    |   | 2,754                                  |    | 2,053 |   |
|                                                                |   |                                   |    |   |   |
| Income before income taxes, minority  interests and equity earnings |   | 7,897                                  |    | 118 |   |
|                                                                |   |                                   |    |   |   |
| Income taxes                                                        |   | 2,734                                  |    | 79 |   |
|                                                                |   |                                   |    |   |   |
| Minority interests (income) loss, net                               |   | (975                                   | )       | 85 |   |
|                                                                |   |                                   |    |   |   |
| Equity earnings, net of tax of $297                                 |   | —                                 |    | 462 |   |
|                                                                |   |                                   |    |   |   |
| **Net income**                                                      |   | $                                      | 4,188   |   | $ | 586 |   |
|                                                                |   |                                   |    |   |   |
| **Net income per  share:**                                          |   |                                   |    |   |   |
|                                                                |   |                                   |    |   |   |
| Basic                                                               |   | $                                      | 0.31    |   | $ | 0.04 |   |
|                                                                |   |                                   |    |   |   |
| Diluted                                                             |   | $                                      | 0.31    |   | $ | 0.04 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

3

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**BuildingMaterials Holding Corporation**

**Consolidated Balance Sheets**

**(thousands,except per share data)**

**(unaudited)**

 
|                                                                                                                                  |   | **March 31,  2004** |    | **December 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
| **ASSETS**                                                                                                                            |   |                     |    |                        |   |
| Cash                                                                                                                                  |   | $                        | 25,945  |                        | $      | 19,506 |   |
| Receivables, net                                                                                                                      |   | 198,836                  |    | 187,790                     |   |
| Inventory                                                                                                                             |   | 141,694                  |    | 111,146                     |   |
| Costs in excess of billings                                                                                                           |   | 12,726                   |    | 8,625                       |   |
| Deferred income taxes                                                                                                                 |   | 10,796                   |    | 8,629                       |   |
| Prepaid expenses and other current assets                                                                                             |   | 3,507                    |    | 5,243                       |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Total current assets                                                                                                                  |   | 393,504                  |    | 340,939                     |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Property and equipment, net                                                                                                           |   | 164,576                  |    | 165,400                     |   |
| Other long-term assets                                                                                                                |   | 12,737                   |    | 10,692                      |   |
| Deferred loan costs                                                                                                                   |   | 2,287                    |    | 2,406                       |   |
| Other intangibles, net                                                                                                                |   | 11,128                   |    | 12,017                      |   |
| Goodwill                                                                                                                              |   | 72,745                   |    | 72,745                      |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Total assets                                                                                                                          |   | $                        | 656,977 |                        | $      | 604,199 |   |
|                                                                                                                                  |   |                     |    |                        |   |
| **LIABILITIES,  MINORITY INTERESTS AND SHAREHOLDERS’ EQUITY**                                                                    |   |                     |    |                        |   |
| Accounts payable and accrued expenses                                                                                                 |   | $                        | 133,140 |                        | $      | 109,067 |   |
| Billings in excess of costs and estimated  earnings                                                                                   |   | 13,750                   |    | 12,069                      |   |
| Current portion of long-term debt                                                                                                     |   | 2,794                    |    | 2,905                       |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Total current liabilities                                                                                                             |   | 149,684                  |    | 124,041                     |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Deferred income taxes                                                                                                                 |   | 5,426                    |    | 5,354                       |   |
| Long-term debt                                                                                                                        |   | 209,517                  |    | 186,773                     |   |
| Other long-term liabilities                                                                                                           |   | 12,654                   |    | 13,276                      |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Total liabilities                                                                                                                     |   | 377,281                  |    | 329,444                     |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Minority interests                                                                                                                    |   | 4,654                    |    | 3,745                       |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Shareholders’ equity                                                                                                             |   |                     |    |                        |   |
| Common stock, $0.001 par value, 20,000,000  shares authorized; 13,393,541 and 13,333,711 shares issued and outstanding,  respectively |   | 13                       |    | 13                          |   |
| Additional paid-in capital                                                                                                            |   | 115,929                  |    | 115,282                     |   |
| Retained earnings                                                                                                                     |   | 159,100                  |    | 155,715                     |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Total shareholders’ equity                                                                                                       |   | 275,042                  |    | 271,010                     |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Total liabilities, minority interests and  shareholders’ equity                                                                  |   | $                        | 656,977 |                        | $      | 604,199 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

4

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**BuildingMaterials Holding Corporation**

**Consolidated Statements of Cash Flows**

**(thousands)**

**(unaudited)**

 
|                                                                                            |   | **Three  Months Ended March 31,** |   |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                            |   | **2004**                               |   | **2003** |   |
| **Operating  Activities**                                                                       |   |                                   |   |   |   |
| Net income                                                                                      |   | $                                      | 4,188  |   | $ | 586 |   |
| Items in net income not using (providing)  cash:                                                |   |                                   |   |   |   |
| Depreciation and amortization                                                                   |   | 5,531                                  |   | 5,007 |   |
| Deferred income taxes                                                                           |   | (2,095                                 | )      | (1,062 | ) |
| Net loss (gain) on sale of assets                                                               |   | 191                                    |   | (792 | ) |
| Equity earnings, net of amortization and  before taxes                                          |   | —                                 |   | (759 | ) |
| Minority interests income (loss), net                                                           |   | 975                                    |   | (85 | ) |
| Changes in assets and liabilities, net of  effects of acquisitions and sales of business units: |   |                                   |   |   |   |
| Receivables, net                                                                                |   | (9,739                                 | )      | 1,455 |   |
| Inventory                                                                                       |   | (29,874                                | )      | (10,066 | ) |
| Costs in excess of billings                                                                     |   | (4,101                                 | )      | 1,321 |   |
| Prepaid expenses and other current assets                                                       |   | 1,736                                  |   | 2,985 |   |
| Accounts payable and accrued expenses                                                           |   | 24,246                                 |   | 1,208 |   |
| Billings in excess of costs and estimated  earnings                                             |   | 1,681                                  |   | (226 | ) |
| Other long-term assets and liabilities                                                          |   | 767                                    |   | 2,928 |   |
| Other, net                                                                                      |   | (1,298                                 | )      | 381 |   |
| Cash flows (used for) provided by operating  activities                                         |   | (7,792                                 | )      | 2,881 |   |
|                                                                                            |   |                                   |   |   |   |
| **Investing  Activities**                                                                       |   |                                   |   |   |   |
| Purchases of property and equipment                                                             |   | (5,000                                 | )      | (2,905 | ) |
| Acquisitions and investments in businesses,  net of cash acquired                               |   | (3,974                                 | )      | (23,296 | ) |
| Proceeds from dispositions of property and  equipment                                           |   | 3,388                                  |   | 3,583 |   |
| Proceeds from sales of business units, net  of cash sold                                        |   | —                                 |   | 6,591 |   |
| Other, net                                                                                      |   | (714                                   | )      | (706 | ) |
| Cash flows used for investing activities                                                        |   | (6,300                                 | )      | (16,733 | ) |
|                                                                                            |   |                                   |   |   |   |
| **Financing  Activities**                                                                       |   |                                   |   |   |   |
| Net borrowings under revolving credit  agreements                                               |   | 23,500                                 |   | 26,100 |   |
| Principal payments on term note                                                                 |   | (313                                   | )      | (4,400 | ) |
| Principal payments on other notes payable                                                       |   | (500                                   | )      | — |   |
| Decrease in book overdrafts                                                                     |   | (1,847                                 | )      | (1,258 | ) |
| Stock options exercised                                                                         |   | 647                                    |   | 311 |   |
| Dividends                                                                                       |   | (800                                   | )      | (657 | ) |
| Other, net                                                                                      |   | (156                                   | )      | (138 | ) |
| Cash flows provided by financing activities                                                     |   | 20,531                                 |   | 19,958 |   |
|                                                                                            |   |                                   |   |   |   |
| **Net change in cash**                                                                          |   | 6,439                                  |   | 6,106 |   |
| Cash, beginning of period                                                                       |   | 19,506                                 |   | 9,217 |   |
| Cash, end of period                                                                             |   | $                                      | 25,945 |   | $ | 15,323 |   |
|                                                                                            |   |                                   |   |   |   |
| **Supplemental Disclosure of Cash Flow  Information**                                           |   |                                   |   |   |   |
| Accrued but unpaid dividends                                                                    |   | $                                      | 803    |   | $ | 661 |   |
| Cash paid for interest                                                                          |   | $                                      | 2,747  |   | $ | 2,005 |   |
| Cash paid for taxes                                                                             |   | $                                      | 5,131  |   | $ | 113 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

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***NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)***

 

***1.  BASIS OF PRESENTATION***

 

The quarterly consolidated financial statements have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information anddisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted pursuant to those rules and regulations.  These consolidated financial statementsshould be read in conjunction with the consolidated financial statements andthe accompanying notes included in our Annual Report on Form 10-K for the yearended December 31, 2003.

 

The quarterly consolidated financial statements have not been auditedby independent accountants.  However, inthe opinion of management, all adjustments necessary to present fairly theresults for the period have been included. The preparation of these consolidated financial statements requiredestimates and assumptions.  Actualresults may differ from those estimates.

 

Certain reclassifications have been made to amounts reported in theprior periods, none of which affected financial position, results of operationsor cash flows.

 

***2.  NET INCOME PER SHARE***

 

Net income per share was determined using the following information(thousands, except per share data):

 
|                                                                    |   | **Three  Months  Ended March 31,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                    |   | **2004**                                |   | **2003** |   |
| Net income                                                              |   | $                                       | 4,188  |   | $ | 586 |   |
|                                                                    |   |                                    |   |   |   |
| Weighted average shares used to determine  basic net income per share   |   | 13,352                                  |   | 13,199 |   |
| Net effect of dilutive stock options (1)                                |   | 255                                     |   | 189 |   |
| Weighted average shares used to determine  diluted net income per share |   | 13,607                                  |   | 13,388 |   |
|                                                                    |   |                                    |   |   |   |
| Net income per share:                                                   |   |                                    |   |   |   |
| Basic                                                                   |   | $                                       | 0.31   |   | $ | 0.04 |   |
| Diluted                                                                 |   | $                                       | 0.31   |   | $ | 0.04 |   |
|                                                                    |   |                                    |   |   |   |
| Cash dividends per share (2)                                            |   | $                                       | 0.06   |   | $ | 0.05 |   |

 

----

(1)          Stock options topurchase 96,494 and 163,784 shares for the first quarter of 2004 and 2003,respectively, were not dilutive and therefore excluded in the computations ofdiluted income per share.  Stock optionscategorized as not dilutive were defined on the basis of the exercise pricebeing greater than the average market value of the shares of common stock inthe periods presented.

 

(2)          Cash dividends accrued in the first quarterof 2004 and 2003 were $0.8 million and $0.7 million, respectively.  In the fourth quarter of 2003, the quarterlydividend was increased to $0.06 per share.

 

***3.  STOCK-BASED COMPENSATION***

 

As of March 31, 2004, there were five stock-based employeecompensation plans.  These plans aremore fully described in Note 13 of the Annual Report on Form 10-K.  As permitted by Statement of FinancialAccounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,as amended by SFAS No. 148, the stock compensation measurement principles ofAccounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issuedto Employees, and its related interpretations were retained.  Under APB Opinion No. 25, compensationexpense is recognized based upon the difference, if any, at the measurementdate between the market value of stock and the option exercise price.  The

 

6

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measurement date is the date at which both the number of options andthe exercise price for each option are known. The following table illustrates the effect on net income and net incomeper share if the fair value recognition provisions of SFAS No. 123 were applied(thousands, except per share data):

 
|                                                                                                                                                |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                                                                |   | **2004**                                |   | **2003** |   |
|                                                                                                                                                |   |                                    |   |   |   |
| Net income                                                                                                                                          |   | $                                       | 4,188  |   | $ | 586 |   |
| Add (Deduct): Total stock-based employee  compensation expense determined under intrinsic value method, net of related  tax effects                 |   | 321                                     |   | (372 | ) |
|                                                                                                                                                |   |                                    |   |   |   |
| Add (Deduct): Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (718                                    | )      | 126 |   |
| Pro forma net income                                                                                                                                |   | $                                       | 3,791  |   | $ | 340 |   |
|                                                                                                                                                |   |                                    |   |   |   |
| Net income per share:                                                                                                                               |   |                                    |   |   |   |
| Basic – as reported                                                                                                                            |   | $                                       | 0.31   |   | $ | 0.04 |   |
| Basic – pro forma                                                                                                                              |   | $                                       | 0.28   |   | $ | 0.03 |   |
|                                                                                                                                                |   |                                    |   |   |   |
| Diluted – as reported                                                                                                                          |   | $                                       | 0.31   |   | $ | 0.04 |   |
| Diluted – pro forma                                                                                                                            |   | $                                       | 0.28   |   | $ | 0.03 |   |

 

***4.  MINORITY INTERESTS AND EQUITY EARNINGS***

 

Acquisitions of minority interest are accounted for under the purchasemethod of accounting.  The purchaseprice is allocated to the assets acquired, including intangible assets, andliabilities assumed based on their estimated fair values at the date ofacquisition.  Any excess of the purchaseprice over the estimated fair value of the identifiable assets and liabilitiesacquired is recorded as goodwill. Minority interest reflects the proportionate share in the fair value ofthe identifiable assets and liabilities acquired as of the date of purchaseadjusted by the proportionate share of post-acquisition income or loss of thesubsidiary.  As the operating results ofentities with minority interest are consolidated, minority interest (income)loss represents the income or loss attributable to the other owners.  Operating results of the acquired businessesare included in the consolidated statements of income from the date ofacquisition.

 

***WBC Mid-Atlantic***

InOctober of 2003, a 67.33% interest in a newly formed constructionbusiness, WBC Mid-Atlantic LLC, was acquired for approximately $5.1 million incash and the issuance of 15,059 shares of common stock.  The remaining 32.67% interest is owned bythe principals of ANM Carpentry, Inc. (ANM), a privately held firm based inFredericksburg, Virginia, and is recognized as minority interest.  The business venture provides framingservices for high-volume production homebuilders in Virginia, Maryland, theDistrict of Columbia and Delaware.

 

Under the purchase agreement, the Company has the option to purchasethe remaining 32.67% of WBC Mid-Atlantic prior to October 1, 2010 subjectto certain limitations or prior to October 1, 2006 contingent on thewritten consent of ANM or if certain other conditions are met.  The principals of ANM have the option torequire the Company to purchase the remaining 32.67% interest fromOctober 1, 2008 through October 1, 2010.  The purchase price for the remaining interest will generally bebased on a multiple of historical earnings.

 

***WBC Construction***

In January of 2003, a 60% interest in a newly formed constructionbusiness, WBC Construction, LLC (WBC), was acquired for approximately $22.9million in cash and the issuance of 70,053 shares of common stock.  The remaining 40% interest is owned byWillard Brothers Construction, Inc., a privately held firm based in Sunrise,Florida.  WBC contracts with high-volumeproduction homebuilders in Florida to construct the slab and structural shellof homes.

 

7

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Under the purchase agreement, the Company has the option to purchasethe remaining 40% interest in WBC from January 16, 2006 throughJanuary 16, 2009 and the principals of Willard Brothers Construction, Inc.have the option to require the Company to purchase the remaining 40% of WBCfrom January 16, 2007 through January 16, 2009.  The purchase price for the remaining 40%will generally be based on a multiple of historical earnings.

 

When purchased, the investment in WBC was accounted for using theequity method of accounting because the minority owners had certain approvaland other rights that precluded consolidation.  On August 11, 2003,WBC’s operating agreement was amended to eliminate certain approval and otherrights of the minority interest shareholder.  As a result, the equitymethod of accounting was ceased and the results of WBC’s operations have beenincluded in the consolidated financial statements effective August 12,2003.  The 40% ownership interest ofWillard Brothers Construction, Inc. is recognized as minority interest. The consolidation of WBC resulted in an increase in assets of $41.2million, an increase in liabilities of $12.7 million, an increase in minorityinterest of $2.3 million and a decrease in equity investments in anunconsolidated company of $26.2 million.

 

While accounted for under the equity method prior to August 12,2003, the condensed income statement and financial position for WBC was asfollows (thousands):

 
|                                           |   | **Three  Months Ended  March 31, 2003** |   |
|------------------------------------------------|--------|----------------------------------------------|--------|
|                                           |   |                                         |   |
| Sales                                          |   | $                                            | 29,184 |   |
| Income from operations                         |   | 3,563                                        |   |
| Net income                                     |   | 1,506                                        |   |
|                                           |   |                                         |   |
| Company’s share of net income             |   | 904                                          |   |
| Amortization of intangibles                    |   | (145                                         | )      |
| Company’s equity in earnings before taxes |   | $                                            | 759    |   |

 
|                    |   | **March 31,  2003** |   |
|-------------------------|--------|--------------------------|--------|
|                    |   |                     |   |
| Current assets          |   | $                        | 15,686 |   |
| Non-current assets      |   | 657                      |   |
| Current liabilities     |   | 7,451                    |   |
| Non-current liabilities |   | $                        | 4,702  |   |

 

***KBI Norcal***

InJuly 2002, a 51% interest in a newly formed partnership, KBI Norcal, wasacquired for approximately $5.8 million in cash, $0.8 million of assumed debtand the issuance of 34,364 shares of common stock.  The remaining 49% interest is owned by RJ Norcal, LLC, aprivately held firm in Dixon, California, and is recognized as minorityinterest.  KBI Norcal provides turnkeyframing services in northern California.

 

Under the purchase agreement, the Company has the option to purchasethe remaining 49% interest in KBI Norcal from July 1, 2004 throughJune 30, 2008 and the principals of RJ Norcal, LLC have the option torequire the Company to purchase the remaining 49% of KBI Norcal fromJuly 1, 2006 through June 30, 2008. The purchase price for the remaining 49% will generally be based on amultiple of historical earnings or the contractual minimum of $7.5million.  On a quarterly basis, anassessment of the fair value of the assets to be acquired is performed.  If the fair value of the net assets to beacquired is less than the amount payable under the contractual minimum, animpairment would be recognized.  As ofMarch 31, 2004, the purchase price would be approximately $7.5 million andno impairment was recognized. Additionally, contractual minimum purchase prices have not beenstructured in subsequent acquisitions, nor does management intend to in futureacquisitions.

 

8

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***5.  ACQUISITIONS***

 

Acquisitions are accounted for under thepurchase method of accounting.  Thepurchase price is allocated to the assets acquired, including intangiblesassets, and liabilities assumed based on their estimated fair values at thedate of acquisition.  Any excess of thepurchase price over the estimated fair value of the identifiable assets andliabilities acquired is recorded as goodwill.

 

In March 2004, BMC Construction acquireda building materials distribution business in Tucson, Arizona for $4.0 millionin cash.  Assets acquired includedaccounts receivable of $1.3 million, inventory of $0.7 million, property and equipmentof $2.3 million and liabilities of $0.3 million.  Information required to complete the purchase price allocationfor certain tangible property is not yet available.  Final allocation of the purchase price will be completed as soonas this information is available.  Hadthis acquisition taken place as of the beginning of 2003, pro forma results ofoperations would not have been significantly different from reported amounts.

 

***6.  INTANGIBLE ASSETS AND GOODWILL***

 

Intangibleassets represent the values assigned to customer relationships and covenantsnot to compete.  Intangible assets areamortized on a straight-line basis over their expected useful lives.  Customer relationships are amortized overtwo to seventeen years and covenants not to compete over three to fiveyears.  Intangible assets consist of thefollowing (thousands):

 
|                     |   | **March 31,  2004** |   |
|--------------------------|--------|--------------------------|--------|
|                     |   | **Carrying  Amount**     |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
| Customer relationships   |   | $                        | 12,600 |   | $ | (2,540 | ) | $ | 10,060 |   |
| Covenants not to compete |   | 2,320                    |   | (1,252 | ) | 1,068 |   |
| Other                    |   | 500                      |   | (500 | ) | — |   |
|                     |   | $                        | 15,420 |   | $ | (4,292 | ) | $ | 11,128 |   |

 
|                     |   | **December 31,  2003** |   |
|--------------------------|--------|-----------------------------|--------|
|                     |   | **Carrying  Amount**        |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
| Customer relationships   |   | $                           | 12,600 |   | $ | (1,793 | ) | $ | 10,807 |   |
| Covenants not to compete |   | 2,320                       |   | (1,121 | ) | 1,199 |   |
| Other                    |   | 500                         |   | (489 | ) | 11 |   |
|                     |   | $                           | 15,420 |   | $ | (3,403 | ) | $ | 12,017 |   |

 

There are no intangible assets withindefinite useful lives.  Estimatedamortization expense for intangible assets with definite useful lives is $2.5million for the remainder of 2004, $1.7 million for 2005, $1.5 million for2006, $1.0 million for 2007, $0.5 million for 2008 and $3.9 million thereafter.

 

Goodwillrepresents the excess of purchase price over the fair value of net tangible andidentifiable intangible assets of acquired businesses.  Goodwill is assessed annually for impairmentand whenever events and circumstances indicate the carrying amount may not berecoverable.  An impairment isrecognized if the carrying amount is more than the estimated future operatingcash flows as measured by fair value techniques.

 

Changes in thecarrying amount of goodwill by business segment are as follows (thousands):

 
|                            |   | **BMC West** |   | **BMC  Construction** |   | **Total** |   |
|---------------------------------|--------|--------------|--------|-----------------------|--------|-----------|--------|
| Balance, December 31, 2003 |   | $            | 20,830 |                  | $      | 51,915    |   | $ | 72,745 |   |
| Goodwill acquired               |   | —       |   | —                |   | —    |   |
| Balance, March 31, 2004    |   | $            | 20,830 |                  | $      | 51,915    |   | $ | 72,745 |   |

 

9

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***7.  DEBT***

 

Long-term debt consists of the following (thousands):

 
|                      |       | **March 31,  2004** |    |
|---------------------------|------------|--------------------------|---------|
|                      |       | **Balance**              |    | **Stated  Interest Rate** | ** ** | **Effective  Interest Rate** | ** ** |
| **Average**               | ** ** | **March 31**        |
| Revolving credit facility |       | $                        | 83,900  |   | Prime plus 1.75% and LIBOR plus 3.00% |   | 4.35% |   | 4.89% |   |
|                      |       |                     |    |   |   |   |   |   |   |
| Term note                 |       | 124,063                  |    | Prime plus 2.50% or LIBOR plus 3.25% |   | 4.49% |   | 4.38% |   |
|                      |       |                     |    |   |   |   |   |   |   |
| Other                     |       | 4,348                    |    | various |   | — |   | — |   |
|                      |       | 212,311                  |    |   |   |   |   |   |   |
|                      |       |                     |    |   |   |   |   |   |   |
| Less: Current portion     |       | 2,794                    |    |   |   |   |   |   |   |
|                      |       |                     |    |   |   |   |   |   |   |
|                      |       | $                        | 209,517 |   |   |   |   |   |   |   |

 
|                      |       | **December 31,  2003** |       |
|---------------------------|------------|-----------------------------|------------|
|                      |       | **Balance**                 | ** ** | **Stated  Interest Rate** | ** ** | **Effective  Interest Rate** | ** ** |
| **Average**               | ** ** | **December 31**        |
| Revolving credit facility |       | $                           | 60,400     |   | Prime plus 1.25% and LIBOR plus 2.50% |   | 4.14% |   | 4.35% |   |
|                      |       |                        |       |   |   |   |   |   |   |
| Term note                 |       | 124,375                     |       | Prime plus 2.50% or LIBOR plus 3.25% |   | 4.54% |   | 4.44% |   |
|                      |       |                        |       |   |   |   |   |   |   |
| Other                     |       | 4,903                       |       | various |   | — |   | — |   |
|                      |       | 189,678                     |       |   |   |   |   |   |   |
|                      |       |                        |       |   |   |   |   |   |   |
| Less: Current portion     |       | 2,905                       |       |   |   |   |   |   |   |
|                      |       |                        |       |   |   |   |   |   |   |
|                      |       | $                           | 186,773    |   |   |   |   |   |   |   |

 

***Revolving Credit Facility***

InAugust 2003, the Company entered into a $175 million revolving creditfacility with a group of lenders. Borrowings under the revolving credit facility are limited to 60% ofinventory plus 80% of trade receivables. The borrowing base is calculated monthly and limited to $175million.  The revolving credit facilitymatures in August 2008.

 

As ofMarch 31, 2004, the revolver base was limited to the maximum of $175.0million, $83.9 million of which was outstanding.  Revolver availability was $64.6 million, net of $26.5 million inoutstanding letters of credit.

 

***Term Note***

InAugust 2003, the Company entered into a $125 million term note with agroup of lenders.  The term note maturesin August 2010 and is payable in quarterly installments for the first sixyears in amounts equal to 1% of the initial principal amount per year and equalquarterly installments for the remaining principal balance during year seven.

 

The revolvingcredit facility and term note are collateralized by all tangible and intangibleproperty, except BMC Insurance, Inc. Under certain conditions, the revolving credit facility or term note maybe increased $50 million in aggregate. The interest rates for the revolving credit facility and term note arePrime or LIBOR, plus a spread adjusted quarterly based on operatingperformance.  The revolving creditfacility and term note contain covenants and conditions requiring themaintenance of certain financial ratios. The Company is in compliance with these covenants and conditions.

 

10

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***Other***

Other long term debt consists of a term note,equipment notes and capital leases for equipment and software.  Interest rates are various and dates ofmaturity are through April 2006.

 

Scheduledmaturities of long-term debt are as follows (thousands):

 
| 2004       |   | $       | 2,457   |   |
|------------|--------|---------|---------|--------|
| 2005       |   | 2,101   |    |
| 2006       |   | 3,228   |    |
| 2007       |   | 1,250   |    |
| 2008       |   | 85,150  |    |
| Thereafter |   | 118,125 |    |
|       |   | $       | 212,311 |   |

 

As ofMarch 31, 2004 and December 31, 2003, there were $26.5 million ofletters of credit that guaranteed performance or payment to third parties.  These letters of credit reduce borrowingavailability under the revolving credit facility.

 

***8.  RECENT ACCOUNTING PRINCIPLES***

 

In January 2003, the FinancialAccounting Standards Board issued Interpretation No. 46 (FIN 46), Consolidationof Variable Interest Entities, an interpretation of ARB No. 51, which wasfurther revised in December 2003. FIN 46 required consolidation of entities in which there is acontrolling interest or insufficient equity to finance their activities withoutadditional subordinated financial support. FIN 46 also required disclosure of significant interests in theseentities if not consolidated.  Weadopted the revised provisions of FIN 46 in the first quarter of 2004.  This adoption had no impact on theconsolidated financial position, results of operations or cash flows.

 

In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of BothLiabilities and Equity.  The statementestablishes standards for how an issuer classifies and measures certainfinancial arrangements with characteristics of both liabilities andequity.  It requires that an issuerclassify a financial arrangement that is within its scope as a liability or anasset in some circumstances.  We adoptedthis statement on July 1, 2003.  Thisadoption had no impact on the consolidated financial position, results ofoperations or cash flows.  Also, certainprovisions of this statement were deferred for an indefinite period.  We continue to monitor the deliberations onSFAS No. 150 for its impact, if any, on the consolidated financial position,results of operations or cash flows.

 

***9.  SEGMENT INFORMATION***

 

Theconsolidated financial statements include operations from two reportablesegments:  BMC West and BMCConstruction.  These segments representdistinct businesses that are managed separately due to differing products and services.  Each of these businesses requires distinctoperating and marketing strategies. Management reviews the financial performance of the Company based onthese operating segments.

 

BMC Westmarkets and sells building products, manufactures building components andprovides construction services. Products include structural lumber and building supplies purchased fromother manufacturers and manufactured building components for construction.  Construction services principally includeframing and installation of miscellaneous building materials.  Most products and construction services aresold to custom and low-volume production homebuilders and contractors.

 

BMCConstruction provides turnkey framing, shell construction and otherconstruction services to high-volume production builders.

 

The financialperformance for these reporting segments is based on operating income beforeinterest expense, income taxes, minority interests and equity earnings.  The segments follow the accounting

 

11

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principlesdescribed in the Summary of Significant Accounting Policies included in theAnnual Report on Form 10-K for the year ended December 31, 2003.  Selected financial information by segment isas follows (thousands):

 
|                                        |   | **Sales** |    | **Income  (Loss)  Before Taxes  and Minority  Interests** |   |
|---------------------------------------------|--------|-----------|---------|-----------------------------------------------------------|--------|
|                                        |   | **Trade** |    | **Inter-  Segment**                                       |   | **Total** |   |   |
| **Three Months Ended  March 31, 2004** |   |      |    |                                                      |   |   |   |   |   |
| BMC West                                    |   | $         | 276,125 |                                                      | $      | — |   | $ | 276,125 |   | $ | 14,182 |   |
| BMC Construction                            |   | 141,418   |    | —                                                    |   | 141,418 |   | 6,729 |   |
| Corporate and other                         |   | —    |    | (700                                                      | )      | (700 | ) | (10,260 | ) |
|                                        |   | 417,543   |    | (700                                                      | )      | 416,843 |   | 10,651 |   |
| Interest expense                            |   | —    |    | —                                                    |   | — |   | 2,754 |   |
|                                        |   | $         | 417,543 |                                                      | $      | (700 | ) | $ | 416,843 |   | $ | 7,897 |   |
|                                        |   |      |    |                                                      |   |   |   |   |   |
| **Three Months Ended  March 31, 2003** |   |      |    |                                                      |   |   |   |   |   |
| BMC West                                    |   | $         | 207,993 |                                                      | $      | — |   | $ | 207,993 |   | $ | 7,600 |   |
| BMC Construction                            |   | 68,568    |    | —                                                    |   | 68,568 |   | 2,539 |   |
| Corporate and other                         |   | —    |    | (169                                                      | )      | (169 | ) | (7,968 | ) |
|                                        |   | 276,561   |    | (169                                                      | )      | 276,392 |   | 2,171 |   |
| Interest expense                            |   | —    |    | —                                                    |   | — |   | 2,053 |   |
|                                        |   | $         | 276,561 |                                                      | $      | (169 | ) | $ | 276,392 |   | $ | 118 |   |

 

***10.  LEGAL PROCEEDINGS***

 

The Company is involved in litigation and other legal matters arisingin the normal course of business.  Inthe opinion of management, the recovery or liability, if any, under any ofthese matters will not have a material adverse effect on the consolidatedfinancial position, results of operations or cash flows.

 

12

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**Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

FORWARD-LOOKINGSTATEMENTS AND CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Certain statements made in this Form 10-Q may constitute“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Suchforward-looking statements involve known and unknown risks, uncertainties andother factors that may cause actual results, performance or achievements, orindustry results, to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements.  Such factors are discussedin detail in Form 10-K for the fiscal year ended December 31, 2003.  Given these uncertainties, investors arecautioned not to place undue reliance on such forward-looking statements.  We disclaim any obligation to update any suchfactors or to announce publicly the results of any revisions to any of theforward-looking statements contained in the Annual Report on Form 10-K or thisForm 10-Q except as required by law. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in our Annual Report to Shareholders for informationregarding our critical accounting policies and estimates.

 

The following table sets forth for the periods indicated the percentagerelationship to sales of certain costs, expenses and income items.  The table and subsequent discussion shouldbe read in conjunction with the consolidated financial statements and therelated notes appearing elsewhere in this document and in the Annual Report onForm 10-K for the year ended December 31, 2003.

 
|                                        |   | **Three  months ended March 31,** |   |
|---------------------------------------------|--------|----------------------------------------|--------|
|                                        |   | **2004**                               |   | **2003** |   |
| **Sales**                                   |   |                                   |   |   |   |
| Building products                           |   | 59.6                                   | %      | 67.9 | % |
| Construction services                       |   | 40.4                                   |   | 32.1 |   |
| Total sales                                 |   | 100.0                                  |   | 100.0 |   |
|                                        |   |                                   |   |   |   |
| **Costs and operating  expenses**           |   |                                   |   |   |   |
| Cost of goods sold                          |   |                                   |   |   |   |
| Building products (1)                       |   | 75.1                                   |   | 74.9 |   |
| Construction services (2)                   |   | 88.0                                   |   | 86.2 |   |
| Total cost of goods sold                    |   | 80.3                                   |   | 78.5 |   |
|                                        |   |                                   |   |   |   |
| Impairment of assets                        |   |   0.3                             |   | — |   |
| Selling, general and administrative expense |   | 16.9                                   |   | 21.0 |   |
| Other income, net                           |   |   0.1                             |   |   0.3 |   |
|                                        |   |                                   |   |   |   |
| **Income from  operations**                 |   |   2.6                             |   |   0.8 |   |
|                                        |   |                                   |   |   |   |
| Interest expense                            |   |   0.7                             |   |   0.8 |   |
| Income taxes                                |   |   0.7                             |   | — |   |
| Minority interests (income) loss, net       |   |   0.2                             |   | — |   |
| Equity earnings, net of tax                 |   | —                                 |   |   0.2 |   |
|                                        |   |                                   |   |   |   |
| **Net income**                              |   |   1.0                             | %      |   0.2 | % |

 

----

(1) As a percentage ofbuilding products sales

(2) As a percentage ofconstruction services sales

 

13

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# **OVERVIEW**

# ** **

The consolidatedfinancial statements include operations from two business segments: BMC Westand BMC Construction.  Sales and incomeare derived from providing building products and construction services tohomebuilders and contractors at the local, regional and national levels.  BMC West markets building products andconstruction services primarily to custom and low-volume productionhomebuilders and contractors, while BMC Construction provides constructionservices to high-volume production homebuilders.

 

The home constructionindustry continues to benefit from a stable economy with historically lowinterest rates enabling many people to become first time home buyers or move upto larger homes.  BMHC, with itspresence in growing geographic markets throughout the nation, has been able totake advantage of this healthy economy and positive homebuilding trend.  Building permit activity for single-familyresidences in the markets served by the Company continues to show favorablecomparisons against prior year.

 

Currently, the home construction industry appears to be benefiting frombuyers’ expectations that mortgage interest rates will be rising in the nearfuture.  Given this apparent trend, itis uncertain whether the increased level of building activity fueled byconcerns over rising interest rates will be sustained for the remainder of theyear.

 

The first quarter of 2004 experienced unexpected increases in commoditywood product prices which contributed to higher sales at BMC West and BMCConstruction.  Assuming continuedstrength in the home-building marketplace, commodity wood product prices maysustain their current levels or even rise further.  However, commodity wood product prices have historically beensubject to significant volatility and as such, cannot be predicted in the shortor long term.

 

Throughout the followingdiscussion, financial measures are used which are not in accordance withgenerally accepted accounting principles in the United States (GAAP).  These measures exclude the impact ofacquisitions when analyzing sales as well as the charge for impairment of assetswhich affects operating income.  Webelieve these measures provide meaningful information regarding operatingperformance and facilitate improved comparability and greatertransparency.  Wherever non-GAAPfinancial measures have been used, they are reconciled to their GAAPcounterparts.  These non-GAAP financialmeasures may be different from non-GAAP financial measures used by othercompanies.  Non-GAAP financial measuresshould not be considered as a substitute for, or superior to, measures of financialperformance prepared in accordance with GAAP.

 

### **FIRSTQUARTER OF 2004 COMPARED TO THE FIRST QUARTER OF 2003**

###  

##### ***Consolidated Sales***

##### * *

The following table shows consolidated and business segment salesadjusted for the impact of acquisitions for the periods ended March 31,2004 and 2003 (millions):

 
|              |   | **BMC West** |   | **BMC  Construction** |   | **Inter-segment  Eliminations** |   | **Total** |   |
|-------------------|--------|--------------|--------|-----------------------|--------|---------------------------------|--------|-----------|--------|
|              |   | **2004**     |   | **2003**              |   | **2004**                        |   | **2003**  |   | **2004** |   | **2003** |   | **2004** |   | **2003** |   |
| Sales             |   | $            | 276.1  |                  | $      | 208.0                           |   | $         | 141.4  |   | $ | 68.6 |   | $ | (0.7 | ) | $ | (0.2 | ) | $ | 416.8 |   | $ | 276.4 |   |
| Less acquisitions |   | (3.2         | )      | —                |   | (61.6                           | )      | —    |   | — |   | — |   | (64.8 | ) | — |   |
|              |   |         |   |                  |   |                            |   |      |   |   |   |   |   |   |   |   |   |
| Adjusted sales    |   | $            | 272.9  |                  | $      | 208.0                           |   | $         | 79.8   |   | $ | 68.6 |   | $ | (0.7 | ) | $ | (0.2 | ) | $ | 352.0 |   | $ | 276.4 |   |

 

Consolidated sales for the first quarter of 2004 were $416.8 million, a50.8% increase over sales of $276.4 million for the same period in 2003.  Almost half of the increase in sales was dueto acquisitions that were not present or consolidated in the first quarter of2003.  After removing the impact ofacquisitions, adjusted sales were $352.0 million, a 27.4% increase over salesof $276.4 million.  The increase was dueto rising commodity wood product prices and growth in comparable business unitsales at BMC West and BMC Construction.

 

14

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##### ***BMC West***

Sales at BMC West were $276.1 million in the first quarter of 2004, anincrease of 32.7% compared to $208.0 million for the comparable period in2003.  The higher sales relative toprior year were primarily due a significant rise in commodity wood productprices as well as growth in comparable business unit sales.  Building permit activity, which precedes theactual start of home construction activity, was favorable in the markets servedby BMC West, rising 12.6% for single-family residences compared to the sameperiod in the preceding year.

 

##### ***BMC Construction***

Sales at BMC Construction were $141.4 million for the first quarter of2004, an increase of 106.1% compared to $68.6 million for the same period in2003.  After adjusting for the impact ofacquisitions which were not present or consolidated in the first quarter of2003, sales were $79.8 million, an increase of 16.3% compared to $68.6 millionin 2003.  Unit volume as measured by thenumber of housing units started and including BMC Construction’s investment ina Florida construction services company not consolidated in the first quarterof 2003, increased 30.5% to 5,670 starts compared to 4,344 starts in 2003.  Unit volume was favorable due to strongconstruction activity in the geographic markets served by BMCConstruction.  Sales per start,including the Florida construction company, were $24,942, up 13.9% compared to$21,892 per start for the comparable period in 2003.  Sales per start benefited from rising commodity wood productprices and a higher proportion of larger homes being constructed within theoverall sales mix.

 

***Income fromOperations***

The following table provides operating income by business segmentadjusted for the impact of asset impairments for the periods endedMarch 31, 2004 and 2003 (millions):

 
|                      |   | **BMC West** |   | **BMC Construction** |   | **Corporate  & Other** |   | **Total** |   |
|---------------------------|--------|--------------|--------|----------------------|--------|----------------------------|--------|-----------|--------|
|                      |   | **2004**     |   | **2003**             |   | **2004**                   |   | **2003**  |   | **2004** |   | **2003** |   | **2004** |   | **2003** |   |
| Operating income          |   | $            | 14.2   |                 | $      | 7.6                        |   | $         | 6.7    |   | $ | 2.5 |   | $ | (10.2 | ) | $ | (7.9 | ) | $ | 10.7 |   | $ | 2.2 |   |
| Asset impairment          |   | 1.3          |   | —               |   | —                     |   | —    |   | — |   | — |   | 1.3 |   | — |   |
|                      |   |         |   |                 |   |                       |   |      |   |   |   |   |   |   |   |   |   |
| Adjusted operating income |   | $            | 15.5   |                 | $      | 7.6                        |   | $         | 6.7    |   | $ | 2.5 |   | $ | (10.2 | ) | $ | (7.9 | ) | $ | 12.0 |   | $ | 2.2 |   |

 

Consolidated operating income rose to $10.7 million for the first threemonths of 2004 compared to $2.2 million for the first quarter of 2003.  Corporate and other costs were higher in thefirst quarter of 2004 compared to the prior period due mainly to increases incompensation related expenses.  Thefollowing analysis of income from operations at the business segment levelprovides further explanation of the quarter over quarter comparisons.

 

##### ***BMC West***

Income from operations at BMC West rose to $14.2 million for the firstthree months of 2004 compared to $7.6 million in 2003.  Despite property impairments of $1.3 millionrelated to surplus real estate as well as an operating loss at a constructionservices operating unit, the strong increase in sales contributed to enhancedoperating results compared to the prior year. Buyer demand strengthened during a typically slower homebuilding quarterof the construction season.  The impactof rising commodity wood product prices, which may have an adverse effect ongross margins, were mitigated due to effective inventory management.  Additionally, operating income benefitedfrom the effective monitoring of operating expenses which were lower as apercentage of sales compared to the same period in 2003.

 

##### ***BMC Construction***

Income from operations at BMC Construction increased 168.0% to $6.7million for the first three months of 2004 compared to $2.5 million for thesame period in 2003.  Operations innorthern California, which reported a loss in the first quarter of 2003,rebounded with a strong contribution to operating income largely due toimprovements in operating efficiencies related to the integration of lumber andtruss operations with framing operations. The remainder of the increase was primarily attributable to volumeincreases at operations in the Southwest and the change from the equity methodof accounting to consolidation of a construction services company in Florida.

 

15

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**LIQUIDITY AND CAPITALRESOURCES**

 

The primary need for capital resources is to fund working capital andacquisitions, as well as finance capital expenditures.  Capital resources have primarily consistedof cash flows from operations and the incurrence of debt.

 

***Operations***

As of March 31, 2004, net cash used for operating activities was$7.8 million compared to $2.9 million provided in the same quarter lastyear.  Improved sales in the currentquarter generated net income, while working capital requirementsincreased.  The cash outflow wasprincipally due to increases in accounts receivable as a result of highersales.

 

***Capital Investments and Acquisitions***

In the current quarter, $6.3 million was used for investingactivities.  These investing activitiesincluded the acquisition of a building materials distribution yard for $4.0million and $1.6 million for the acquisition of capital assets, net of cashprovided from dispositions.  The totalcash used was $10.4 million lower than the same quarter last year when $23.3million, before post-closing adjustments, was invested in a Floridaconstruction services company and $6.6 million was received for the sale of abusiness unit in Great Falls, Montana.

 

***Financing***

Net cash provided by financing activities was $20.5 million in thefirst quarter of 2004, compared to $20.0 million in 2003.  The primary source of cash from financingactivities during the quarter ended March 31, 2004 was $23.5 million innet borrowings from the revolving credit facility.

 

***Revolving Credit Facility***

In August 2003, theCompany entered into a $175 million revolving credit facility with a group oflenders.  Borrowings under the revolvingcredit facility are limited to 60% of inventory plus 80% of tradereceivables.  The borrowing base iscalculated monthly and limited to $175 million.  The revolving credit facility matures in August 2008.

 

As ofMarch 31, 2004, the revolver base was limited to the maximum of $175.0million, $83.9 million of which was outstanding.  Revolver availability was $64.6 million, net of $26.5 million inoutstanding letters of credit.  Theinterest rate for the revolving credit facility is Prime plus 1.75% and LIBORplus 3.00% and is subject to change quarterly based on operating performance.

 

***Term Note***

In August 2003, the Company entered into a $125 million term notewith a group of lenders.  The term notematures in August 2010 and is payable in quarterly installments for thefirst six years in amounts equal to 1% of the initial principal amount per yearand equal quarterly installments for the remaining principal balance duringyear seven.

 

As of March 31, 2004, $124.1 million was outstanding under theterm loan.  The interest rate for theterm loan is Prime plus 2.50% or LIBOR plus 3.25% and is subject to changequarterly based on operating performance.

 

The revolving credit facility and term note are collateralized by alltangible and intangible property, except BMC Insurance, Inc.  Under certain conditions, the revolvingcredit facility or term note may be increased $50 million in aggregate.  The revolving credit facility and term notecontain covenants and conditions requiring the maintenance of certain financialratios.  The Company is in compliancewith these covenants and conditions.

 

***Equity***

In the third quarter of 1998, a shelf registration was filed with theSecurities and Exchange Commission to register 2,000,000 shares of commonstock.  The Company may issue theseshares from time to time in connection with future business combinations,mergers and/or acquisitions.  As part ofthe acquisition of WBC Mid-Atlantic in October 2003, WBC inJanuary 2003 and KBI Norcal in July 2002, shares of common stock of15,059, 70,053 and 34,364 respectively, were issued from this registration (SeeNote 4).

 

16

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Based on the historical ability to generate cash flows from operations,borrowing capacity under the revolving credit facility and access to debt andequity markets, management believes it will have sufficient capital to meet itsanticipated needs.

 

***New AccountingStandards***

Refer to Note 8 of the consolidated financialstatements for a full description of recent accounting pronouncements includingthe expected dates of adoption and effects on the consolidated financialposition, results of operations or cash flows.

 

17

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**Item 3**–****Quantitative andQualitative Disclosures about Market Risk**

 

Changes in interest expense occur when market interestrates change.  Changes in the carryingamount of debt could also increase these risks.  Based on debt outstanding at March 31, 2004, a 25 basispoint increase in interest rates would result in approximately $520,000 ofadditional interest costs annually. Derivative financial instruments are not currently utilized to hedgeinterest rate risks.

 

Prices of commodity wood products, which are subjectto significant volatility, adversely impact operating income when pricesrapidly rise or fall within a relatively short period of time.  Derivative financial instruments are notutilized to hedge commodity wood product prices.

 

The cash equity incentive plan is partially based on changes in thestock price.  Under the plan, a $1.00increase or decrease in the stock price after March 31, 2004 would resultin a change in compensation expense of approximately $43,000.

 

Home mortgage interest rates are an important factor influencing thehomebuilding industry.  The currenteconomic environment is characterized by interest rates that are athistorically low levels.  As interestrates rise, the level of residential homebuilding activity may be adverselyimpacted.

 

***Quarterly Resultsand Seasonality***

The first and fourth quarters historically have been,and are expected to continue to be, adversely affected by weather patterns insome markets, causing decreases in levels of residential constructionactivity.  In addition, quarterlyresults historically have reflected, and are expected to continue to reflect,fluctuations from period to period from various other factors, includinggeneral economic conditions, commodity wood prices, interest rates, buildingpermit activity, single-family housing starts, employment levels, consumerconfidence and the availability of credit to professional homebuilders andcontractors.

 

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## ***Item 4***–**Controls andProcedures**

## * *

As of the end of the period covered by thisreport, management carried out an evaluation, under the supervision and withthe participation of the Chief Executive Office and Chief Financial Officer, ofthe design and operation of our disclosure controls and procedures, as definedin Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934.  This evaluation was conducted to determinewhether the disclosure controls and procedures were effective and timely inbringing material information to the attention of senior management.  Based on that evaluation, the ChiefExecutive Office and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective in ensuring material information requiredto be disclosed in reports filed under the Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and is accumulated and communicated toour Chief Executive Officer and Chief Financial Officer to allow timelydecision regarding required disclosure.

 

We have enhanced internal controls related tothe availability of loss data and actuarial information for insurancedeductibles and our routine assessment for the potential impairment ofintangible assets and goodwill.  We alsoenhanced internal controls related to the assimilation and integration ofacquired businesses and our internal communications regarding compensationmatters.  We monitor the effectivenessof our internal controls on a continuous basis in order to preserve our abilityto record, process, summarize, report and disclose accurate and timely informationfor decision-making and financial reporting purposes.

 

Our disclosure controls and procedures andinternal controls over financial reporting are routinely evaluated and testedfor effectiveness.  These evaluationsare discussed with management and the Audit Committee.  As a result of these evaluations, revisionsand corrective actions are made to ensure the effectiveness of our disclosurecontrols and procedures and internal controls over financial reporting.  During the quarterly period covered by thisreport, there were no other significant changes in the design or operation ofour internal controls over financial reporting that could materially affect, orare reasonably likely to materially affect, the internal controls overfinancial reporting.

 

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**PART II – OTHER INFORMATION**

 

Item 1                LegalProceedings

 

The Company is involved in litigation and other legal matters arisingin the normal course of business.  Inthe opinion of management the recovery or liability, if any, under any of thesematters will not have a material adverse effect on the consolidated financialposition, results of operations or cash flows.

 

Item 6                Exhibits and Reports on Form 8-K

 
| (a) |   | Exhibits |   |   |
|-----|--------|----------|--------|--------|

 
|   |   | **Exhibit #**       |   | **Description**                                                                                                                                                                                                                                                                                               |
|--------|--------|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 11.0                |   | Statement regarding computation of earnings per share (See Note 2)                                                                                                                                                                                                                                            |
|   |   |                |   |                                                                                                                                                                                                                                                                                                          |
|   |   | 31.1                |   | Section 302 Certification                                                                                                                                                                                                                                                                                |
|   |   |                |   |                                                                                                                                                                                                                                                                                                          |
|   |   | 31.2                |   | Section 302 Certification                                                                                                                                                                                                                                                                                |
|   |   |                |   |                                                                                                                                                                                                                                                                                                          |
|   |   | 32.0                |   | Section 906 Certifications                                                                                                                                                                                                                                                                               |
|   |   |                |   |                                                                                                                                                                                                                                                                                                          |
| (b)    |   | Reports on Form 8-K |   | On February 27, 2004, Building Materials Holding Corporation,  Registrant, filed a Form 8-K with the Securities and Exchange Commission  reporting its fourth quarter and full year 2003 financial results.                                                                                              |
|   |   |                |   |                                                                                                                                                                                                                                                                                                          |
|   |   |                |   | On March 18, 2004, Building Materials Holding Corporation,  Registrant, filed a Form 8-K/A with the Securities and Exchange Commission  announcing the dismissal of PricewaterhouseCoopers LLP as its independent  accountants and engaging KPMG LLP as the Company’s new independent  accountants. |

 

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**SIGNATURES**

 

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

 
|              | BUILDING MATERIALS HOLDING CORPORATION                       |
|-------------------|--------------------------------------------------------------|
|              |                                                         |
|              |                                                         |
| Date: May 4, 2004 | */s/ Robert E.  Mellor*                                      |   |
|              | Robert E. Mellor                                             |
|              | Chairman of the Board, President and Chief Executive Officer |
|              | (Principal Executive Officer)                                |
|              |                                                         |
|              |                                                         |
| Date: May 4, 2004 | */s/ William M.  Smartt*                                     |   |
|              | William M. Smartt                                            |
|              | Senior Vice President and Chief Financial Officer            |
|              | (Principal Financial Officer)                                |

 

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