**UNITED STATESSECURITIES AND 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   June 30, 2003**                                                                                                                                                                               |
|                                                                                                                                                                                                                                       |
| **OR**                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                       |
| **o**                                                                                                                                                                                                                                      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                       |                                                                                          |
| **For the transition period from                    to                  ** |
|                                                                                                                                                                                                                                       |
| **Commission file number 0-19335**                                                                                                                                                                                                         |

 

**BUILDINGMATERIALS HOLDING CORPORATION**

 

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

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

Yes    ý  No   o

 

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

 
| **Class**                    |   | **Shares  Outstanding as  of August 12, 2003:** |
|------------------------------|--------|-------------------------------------------------|
|                         |   |                                            |
| Common stock $.001 par value |   | 13,308,952                                      |

 

 

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BUILDING MATERIALS HOLDING CORPORATION

 

INDEX

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

 

2

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Item 1

 

BUILDING MATERIALS HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(amounts in thousands, except per share data)

 
|                                                                              |   | **Three  months ended  June 30,** |    | **Six months  ended  June 30,** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|---------|---------------------------------|--------|
|                                                                              |   | **2003**                          |    | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Net sales                                                                         |   | $                                 | 322,266 |                            | $      | 300,528 |   | $ | 598,658 |   | $ | 547,663 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Cost of sales                                                                     |   | 233,675                           |    | 215,028                         |   | 435,636 |   | 390,936 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Gross profit                                                                      |   | 88,591                            |    | 85,500                          |   | 163,022 |   | 156,727 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Selling, general and administrative expense                                       |   | 78,826                            |    | 71,224                          |   | 151,954 |   | 139,277 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Other income, net                                                                 |   | (554                              | )       | —                          |   | (1,422 | ) | (365 | ) |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Income from operations                                                            |   | 10,319                            |    | 14,276                          |   | 12,490 |   | 17,815 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Equity in earnings of an unconsolidated  company                                  |   | 1,063                             |    | —                          |   | 1,822 |   | — |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Interest expense                                                                  |   | 2,365                             |    | 2,421                           |   | 4,418 |   | 4,955 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Income before income taxes, minority  interest and change in accounting principle |   | 9,017                             |    | 11,855                          |   | 9,894 |   | 12,860 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Income taxes                                                                      |   | 3,565                             |    | 4,564                           |   | 3,941 |   | 4,951 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Income before minority interest and change  in accounting principle               |   | 5,452                             |    | 7,291                           |   | 5,953 |   | 7,909 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Minority interest loss                                                            |   | (197                              | )       | —                          |   | (282 | ) | — |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Income before change in accounting  principle                                     |   | 5,649                             |    | 7,291                           |   | 6,235 |   | 7,909 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Change in accounting principle, net of tax  benefit of $6,286                     |   | —                            |    | —                          |   | — |   | (11,650 | ) |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Net income/(loss)                                                                 |   | $                                 | 5,649   |                            | $      | 7,291 |   | $ | 6,235 |   | $ | (3,741 | ) |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Income before change in accounting  principle per common share:                   |   |                              |    |                            |   |   |   |   |   |
| Basic                                                                             |   | $                                 | 0.43    |                            | $      | 0.56 |   | $ | 0.47 |   | $ | 0.61 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Diluted                                                                           |   | $                                 | 0.42    |                            | $      | 0.55 |   | $ | 0.46 |   | $ | 0.60 |   |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Change in accounting principle, net of tax,  per common share:                    |   |                              |    |                            |   |   |   |   |   |
| Basic                                                                             |   | $                                 | —  |                            | $      | — |   | $ | — |   | $ | (0.89 | ) |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Diluted                                                                           |   | $                                 | —  |                            | $      | — |   | $ | — |   | $ | (0.88 | ) |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Net income/(loss) per common share:                                               |   |                              |    |                            |   |   |   |   |   |
| Basic                                                                             |   | $                                 | 0.43    |                            | $      | 0.56 |   | $ | 0.47 |   | $ | (0.29 | ) |
|                                                                              |   |                              |    |                            |   |   |   |   |   |
| Diluted                                                                           |   | $                                 | 0.42    |                            | $      | 0.55 |   | $ | 0.46 |   | $ | (0.28 | ) |

 

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

 

3

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BUILDING MATERIALS HOLDING CORPORATION

CONDENSED CONSOLIDATED BALANCESHEETS

(UNAUDITED)

(amounts in thousands, except share data)

 
|                                                                                                                                  |   | **June 30,  2003** |    | **December  31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
| ASSETS                                                                                                                                |   |               |    |                    |   |
| Current assets                                                                                                                        |   |               |    |                    |   |
| Cash                                                                                                                                  |   | $                  | 16,629  |                    | $      | 9,217 |   |
| Receivables, net                                                                                                                      |   | 151,153            |    | 132,757                 |   |
| Inventory                                                                                                                             |   | 103,136            |    | 93,748                  |   |
| Deferred income taxes                                                                                                                 |   | 5,879              |    | 5,302                   |   |
| Prepaid expenses and other current assets                                                                                             |   | 3,591              |    | 7,456                   |   |
|                                                                                                                                  |   |               |    |                    |   |
| Total current assets                                                                                                                  |   | 280,388            |    | 248,480                 |   |
|                                                                                                                                  |   |               |    |                    |   |
| Property, plant and equipment, net                                                                                                    |   | 169,083            |    | 178,137                 |   |
| Equity investment in an unconsolidated  company                                                                                       |   | 25,724             |    | —                  |   |
| Goodwill                                                                                                                              |   | 51,049             |    | 52,111                  |   |
| Other intangibles, net                                                                                                                |   | 12,140             |    | 12,950                  |   |
| Deferred loan costs                                                                                                                   |   | 1,984              |    | 2,732                   |   |
| Deferred income taxes                                                                                                                 |   | 762                |    | 529                     |   |
| Other long-term assets                                                                                                                |   | 8,928              |    | 8,135                   |   |
|                                                                                                                                  |   |               |    |                    |   |
| Total assets                                                                                                                          |   | $                  | 550,058 |                    | $      | 503,074 |   |
|                                                                                                                                  |   |               |    |                    |   |
| LIABILITIES, MINORITY INTEREST AND  SHAREHOLDERS’ EQUITY                                                                         |   |               |    |                    |   |
| Current liabilities                                                                                                                   |   |               |    |                    |   |
| Accounts payable and accrued expenses                                                                                                 |   | $                  | 100,814 |                    | $      | 77,988 |   |
|                                                                                                                                  |   |               |    |                    |   |
| Total current liabilities                                                                                                             |   | 100,814            |    | 77,988                  |   |
|                                                                                                                                  |   |               |    |                    |   |
| Long-term debt                                                                                                                        |   | 173,614            |    | 157,375                 |   |
| Other long-term liabilities                                                                                                           |   | 12,644             |    | 11,428                  |   |
|                                                                                                                                  |   |               |    |                    |   |
| Total liabilities                                                                                                                     |   | 287,072            |    | 246,791                 |   |
|                                                                                                                                  |   |               |    |                    |   |
| Minority interest                                                                                                                     |   | 4,701              |    | 4,983                   |   |
|                                                                                                                                  |   |               |    |                    |   |
| Shareholders’ equity                                                                                                             |   |               |    |                    |   |
| Common stock, $0.001 par value, 20,000,000 shares  authorized; 13,305,217 and 13,135,562 shares issued and outstanding,  respectively |   | 13                 |    | 13                      |   |
| Additional paid-in capital                                                                                                            |   | 114,785            |    | 112,709                 |   |
| Retained earnings                                                                                                                     |   | 143,487            |    | 138,578                 |   |
|                                                                                                                                  |   |               |    |                    |   |
| Total shareholders’ equity                                                                                                       |   | 258,285            |    | 251,300                 |   |
|                                                                                                                                  |   |               |    |                    |   |
| Total liabilities, minority interest and  shareholders’ equity                                                                   |   | $                  | 550,058 |                    | $      | 503,074 |   |

 

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

 

4

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BUILDING MATERIALS HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(amounts in thousands)

 
|                                                                                  |   | **Six months  ended  June 30,** |   |
|---------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                  |   | **2003**                        |   | **2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                  |   |                            |   |   |   |
| Net income/(loss)                                                                     |   | $                               | 6,235  |   | $ | (3,741 | ) |
| Adjustments to reconcile net income/(loss)  to cashflows from operating activities    |   |                            |   |   |   |
| Depreciation and amortization                                                         |   | 10,358                          |   | 9,194 |   |
| Deferred income taxes                                                                 |   | (810                            | )      | (68 | ) |
| Net loss/(gain) on sale of assets                                                     |   | (763                            | )      | 643 |   |
| Equity in earnings of an unconsolidated company                                       |   | (1,822                          | )      | — |   |
| Change in accounting principle, net of tax  benefit of $6,286                         |   | —                          |   | 11,650 |   |
| Minority interest loss                                                                |   | (282                            | )      | — |   |
| Changes in assets and liabilities, net of effects of  acquisitions and location sales |   |                            |   |   |   |
| Receivables, net                                                                      |   | (18,396                         | )      | (21,217 | ) |
| Inventory                                                                             |   | (11,337                         | )      | (12,874 | ) |
| Prepaid expenses and other current assets                                             |   | 3,865                           |   | 6,690 |   |
| Accounts payable and accrued expenses                                                 |   | 16,809                          |   | 15,309 |   |
| Other long-term assets and liabilities                                                |   | 3,413                           |   | 1,616 |   |
| Other, net                                                                            |   | 532                             |   | — |   |
|                                                                                  |   |                            |   |   |   |
| Net cash flows from operating activities                                              |   | 7,802                           |   | 7,202 |   |
|                                                                                  |   |                            |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                  |   |                            |   |   |   |
| Purchases of property and equipment                                                   |   | (7,478                          | )      | (9,998 | ) |
| Acquisition of businesses                                                             |   | —                          |   | (1,406 | ) |
| Investment in an unconsolidated company                                               |   | (22,923                         | )      | — |   |
| Proceeds from dispositions of property and  equipment                                 |   | 4,981                           |   | 346 |   |
| Proceeds from sale of business units, net  of cash sold                               |   | 6,591                           |   | 2,750 |   |
| Other, net                                                                            |   | (992                            | )      | (883 | ) |
|                                                                                  |   |                            |   |   |   |
| Net cash flows from investing activities                                              |   | (19,821                         | )      | (9,191 | ) |
|                                                                                  |   |                            |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                  |   |                            |   |   |   |
| Net change under revolving credit  agreements                                         |   | 25,300                          |   | (1,100 | ) |
| Principal payments on term note                                                       |   | (8,800                          | )      | — |   |
| Principal payments on other notes payable                                             |   | —                          |   | (156 | ) |
| Increase/(decrease)in book overdrafts                                                 |   | 3,775                           |   | 3,755 |   |
| Stock options exercised                                                               |   | 747                             |   | 1,036 |   |
| Dividends                                                                             |   | (1,318                          | )      | — |   |
| Other, net                                                                            |   | (273                            | )      | 233 |   |
|                                                                                  |   |                            |   |   |   |
| Net cash flows from financing activities                                              |   | 19,431                          |   | 3,768 |   |
|                                                                                  |   |                            |   |   |   |
| Net change in cash                                                                    |   | 7,412                           |   | 1,779 |   |
| Cash, beginning of period                                                             |   | 9,217                           |   | 5,182 |   |
| Cash, end of period                                                                   |   | $                               | 16,629 |   | $ | 6,961 |   |
|                                                                                  |   |                            |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                                     |   |                            |   |   |   |
| Accrued but unpaid dividends                                                          |   | $                               | 665    |   | $ | — |   |

 

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

 

5

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BUILDING MATERIALS HOLDING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.  BASIS OF PRESENTATION

 

The condensed consolidatedfinancial statements included herein have been prepared by Building MaterialsHolding Corporation (“BMHC” or the “Company”) on a consolidated basis, withoutaudit, pursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in the consolidated financial statementsprepared in accordance with generally accepted accounting principles in theUnited States of America (“GAAP”) have been condensed or omitted pursuant tothe rules and regulations of the Securities and Exchange Commission.  Although the Company believes that thedisclosures are adequate to make the information presented not misleading,these condensed consolidated financial statements should be read in conjunctionwith the Company’s audited consolidated financial statements and notes theretoincluded in the Company’s 2002 Annual Report. In the opinion of management, all adjustments necessary to presentfairly the results for the periods presented have been included.  The adjustments made were of a normal,recurring nature.

 

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

 

2.  NET SALES BY PRODUCT (in thousands)

 
|                               |   | **Three months  ended June 30,** |    | **Six months  ended June 30,** |   |
|------------------------------------|--------|----------------------------------|---------|--------------------------------|--------|
|                               |   | **2003**                         |    | **2002**                       |   | **2003** |   | **2002** |   |
| Lumber products                    |   | $                                | 90,187  |                           | 28.0   | % | $ | 102,140 |   | 34.0 | % | $ | 164,547 |   | 27.5 | % | $ | 180,625 |   | 33.0 | % |
| Services and manufactured products |   | 180,366                          |    | 56.0                           |   | 152,604 |   | 50.8 |   | 342,664 |   | 57.2 |   | 286,088 |   | 52.2 |   |
| Building materials and other       |   | 51,713                           |    | 16.0                           |   | 45,784 |   | 15.2 |   | 91,447 |   | 15.3 |   | 80,950 |   | 14.8 |   |
|                               |   | $                                | 322,266 |                           | 100.0  | % | $ | 300,528 |   | 100.0 | % | $ | 598,658 |   | 100.0 | % | $ | 547,663 |   | 100.0 | % |

 

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

 

6

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insulation and steel products),and other products (paint, hardware, tools, electrical and plumbing).

 

3.  NET INCOME PER COMMON SHARE

 

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

 
|                                                                           |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                           |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                           |   |                              |   |                            |   |   |   |   |   |
| Income before change in accounting  principle                                  |   | $                                 | 5,649  |                            | $      | 7,291 |   | $ | 6,235 |   | $ | 7,909 |   |
|                                                                           |   |                              |   |                            |   |   |   |   |   |
| Weighted average shares used to determine  basic net income per common share   |   | 13,282                            |   | 13,073                          |   | 13,241 |   | 13,037 |   |
| Net effect of dilutive stock options (1)                                       |   | 154                               |   | 203                             |   | 171 |   | 190 |   |
|                                                                           |   |                              |   |                            |   |   |   |   |   |
| Weighted average shares used to determine  diluted net income per common share |   | 13,436                            |   | 13,276                          |   | 13,412 |   | 13,227 |   |
|                                                                           |   |                              |   |                            |   |   |   |   |   |
| Net income per common share:                                                   |   |                              |   |                            |   |   |   |   |   |
|                                                                           |   |                              |   |                            |   |   |   |   |   |
| Basic                                                                          |   | $                                 | 0.43   |                            | $      | 0.56 |   | $ | 0.47 |   | $ | 0.61 |   |
| Diluted                                                                        |   | $                                 | 0.42   |                            | $      | 0.55 |   | $ | 0.46 |   | $ | 0.60 |   |
|                                                                           |   |                              |   |                            |   |   |   |   |   |
| Cash dividends per share (2)                                                   |   | $                                 | 0.05   |                            | $      | — |   | $ | 0.10 |   | $ | — |   |

 

(1)  Stock options of 578,229 and 128,035 for the second quarter 2003and 2002, respectively, and stock options of 256,979 and 128,035 for the sixmonths ended June 30, 2003 and 2002, respectively, were not included in thecomputation because to do so would have been anti-dilutive.

(2)  Cash dividends attributable to the second quarter of 2003 and forthe six months ended June 30, 2003 were $665 and $1,326, respectively.

 

4.  DEBT

 

At June 30, 2003 and December31, 2002, debt consisted of the following (in thousands):

 
|                                                                                          |   | **June 30,  2003** |    | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
| Term  note                                                                                    |   | $                  | 93,500  |                   | $      | 102,300 |   |
| Revolving  credit facility                                                                    |   | 76,500             |    | 51,200                 |   |
| Non-interest  bearing term note, net of related discounts of $1,335 and $1,339,  respectively |   | 2,953              |    | 2,949                  |   |
| Capital  leases                                                                               |   | 661                |    | 926                    |   |
|                                                                                          |   | $                  | 173,614 |                   | $      | 157,375 |   |

 

7

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

 

Refer to Note 10 for adiscussion on the Company’s new senior secured credit facility.

 

5.  ACQUISITIONS AND EQUITY INVESTMENT

 

Effective January 1, 2003, theCompany purchased a 60% interest in a newly formed limited liability company,WBC Construction, LLC (“WBC”), for approximately $22.9 million in cash, net ofpost closing adjustments and the issuance of 70,053 shares of BMHC commonstock.  The other 40% interest is ownedby Willard Brothers Construction, Inc. and its owners, A. Bruce Willard andDanny L. Willard.  WBC contracts withresidential production builders in Florida to construct the slab and structuralshell of homes.

 

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

 

The Company has accounted forits investment in WBC using the equity method of accounting because theminority owners have certain approval and

 

8

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other rights that precludeconsolidation.  Refer to the Note 10discussion regarding the amendment to the operating agreement in the thirdquarter of 2003, eliminating approval and other such rights.

 

Condensed income statement andfinancial position information for the Company’s equity investment in WBC is asfollows (in thousands):

 
|                                   |   | **Three  months  ended June 30,  2003** |   | **Six months  ended June 30,  2003** |   |
|----------------------------------------|--------|-----------------------------------------|--------|--------------------------------------|--------|
|                                   |   |                                    |   |                                 |   |
| Net sales                              |   | $                                       | 43,646 |                                 | $      | 72,831 |   |
|                                   |   |                                    |   |                                 |   |
| Income from operations                 |   | $                                       | 4,538  |                                 | $      | 8,101 |   |
|                                   |   |                                    |   |                                 |   |
| Net income                             |   | $                                       | 2,015  |                                 | $      | 3,524 |   |
|                                   |   |                                    |   |                                 |   |
| Company share of net income            |   | $                                       | 1,209  |                                 | $      | 2,114 |   |
|                                   |   |                                    |   |                                 |   |
| Amortization of intangibles            |   | (146                                    | )      | (292                                 | )      |
|                                   |   |                                    |   |                                 |   |
| Company’s equity in earnings      |   | $                                       | 1,063  |                                 | $      | 1,822 |   |
|                                   |   |                                    |   |                                 |   |
| Financial position as of June 30, 2003 |   |                                    |   |                                 |   |
|                                   |   |                                    |   |                                 |   |
| Current assets                         |   | $                                       | 23,777 |                                 |   |   |
| Non-current assets                     |   | 655                                     |   |                                 |   |
| Current liabilities                    |   | 14,489                                  |   |                                 |   |
| Non-current liabilities                |   | $                                       | 5,129  |                                 |   |   |

 

As of June 30, 2003, theCompany’s investment in WBC exceeded its pro-rata share of net assets byapproximately $22.6 million.  Under theequity method of accounting, the Company allocated the excess of its investmentover its proportionate ownership interest in the net assets of WBC to theassets and liabilities of WBC based on their estimated fair values at the dateof the investment.  The excess of thisinvestment over the estimated fair value of the net assets of WBC owned by theCompany was considered goodwill and other intangible assets.  In accordance with SFAS No. 142, “Goodwilland Other Intangible Assets,” goodwill is not subject to amortization.  Other intangible assets with a finite life,specifically customer relationships of approximately $5.8 million, are beingamortized over a ten year period.

 

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

 

9

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owned by Robert Garcia and JohnVolkman.  KBI Norcal provides turnkeyframing services in Northern California.

 

Under the purchase agreement,BMHC will have the option to purchase the remaining 49% interest in KBI Norcalfrom July 1, 2004 through June 30, 2008 and the principals of RJ Norcal, LLChave the option to require BMHC to purchase the remaining 49% of KBI Norcalfrom July 1, 2006 through June 30, 2008. The purchase price for the remaining 49% will generally be based on amultiple of historical earnings.  If thefair value of the net assets to be acquired is less than the amount payableunder the required purchase option, the Company would record a loss.  As of June 30, 2003, the purchase pricewould be approximately $7.5 million and no loss was required to bereported.  Refer to Note 9 for adiscussion of the impact of a new accounting pronouncement on the minorityinterest of KBI Norcal.

 

KBI Norcal’s operating results havebeen included in the consolidated financial statements since July 1, 2002.  The impact of the 49% ownership interest ofRJ Norcal, LLC is included in minority interest.

 

During the year ended December31, 2002, the Company made four other acquisitions for aggregate considerationof approximately $2.3 million.

 

6.  GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 
|                          |   | **June 30,  2003**          |   |
|-------------------------------|--------|-----------------------------|--------|
|                          |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
| Amortized intangible assets   |   |                        |   |   |   |   |   |
| Covenants not to compete      |   | $                           | 1,901  |   | $ | (1,344 | ) | $ | 557 |   |
| Customer relationships        |   | 4,922                       |   | (579 | ) | 4,343 |   |
| Other amortized intangibles   |   | 500                         |   | (420 | ) | 80 |   |
|                          |   |                        |   |   |   |   |   |
| Unamortized intangible assets |   |                        |   |   |   |   |   |
| Customer relationships        |   | 7,160                       |   | — |   | 7,160 |   |
|                          |   | $                           | 14,483 |   | $ | (2,343 | ) | $ | 12,140 |   |

 

10

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

 

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

 

Aggregate amortization expense for intangible assets was $0.5 millionfor the three months ended June 30, 2003 and $0.8 million for the six monthsended June 30, 2003.  Estimatedamortization expense for intangible assets is $1.0 million for the remainder of2003, $1.7 million in 2004, $0.4 million in 2005, $0.3 million in 2006, $0.3million in 2007, $0.3 million in 2008 and $1.0 million thereafter.

 

The changes in the carrying amount of goodwill for the six months endedJune 30, 2003 are as follows (in thousands):

 
| Balance as of January  1, 2003       |   | $      | 52,111 |   |
|--------------------------------------|--------|--------|--------|--------|
| Goodwill acquired  during the period |   | 21     |   |
| Goodwill disposed  during the period |   | (1,083 | )      |
| Balance as of June 30,  2003         |   | $      | 51,049 |   |

 

7.  CHANGE IN ACCOUNTING PRINCIPLE

 

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

 

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

 

In the case of each ReportingUnit (as defined by SFAS 142), fair value was estimated using the present valueof expected future cash flows. Management’s estimate of future cash flows used in the present value analysisresulted in estimated fair market value being less than the recorded value oftangible and intangible assets for the Reporting Units listed above. Adivestiture of any individual business unit that comprises a Reporting Unitcould result in a loss.  Afterconsidering the estimated fair market value of tangible assets, including land,an impairment of recorded goodwill occurred. Possible reasons for the impairment could include increased competition,a reduction in residential construction within the geographic markets thatthese Reporting Units serve, or management issues.  The Company is required to test acquired goodwill and otherindefinite-lived intangible assets for impairment at least on an annual basis orwhen an event occurs or circumstances change that would more likely than notreduce the fair value of a reporting unit below its carrying amount.  This annual test takes place during thefourth quarter each year.

 

8.  STOCK-BASED COMPENSATION

 

At June 30, 2003, BMHC had fivestock-based employee compensation plans, which are described more fully in Note12 of the Company’s Annual Report on Form 10-K.  The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofSFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-basedemployee compensation (in thousands, except per share data):

 

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|                                                                                                                                          |   | **Three  months  ended June 30,** |   | **Six months  ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|
|                                                                                                                                          |   | **2003**                          |   | **2002**                       |   | **2003** |   | **2002** |   |
| Net income/(loss), as reported                                                                                                                |   | $                                 | 5,649  |                           | $      | 7,291 |   | $ | 6,235 |   | $ | (3,741 | ) |
| Add: Total stock-based employee  compensation expense determined under APB 25, net of related tax effects                                     |   | 226                               |   | 212                            |   | 221 |   | 758 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | 573                               |   | 507                            |   | 808 |   | 1,369 |   |
|                                                                                                                                          |   |                              |   |                           |   |   |   |   |   |
| Pro forma net income/(loss)                                                                                                                   |   | $                                 | 5,302  |                           | $      | 6,996 |   | $ | 5,648 |   | $ | (4,352 | ) |
|                                                                                                                                          |   |                              |   |                           |   |   |   |   |   |
| Earnings/(loss) per share:                                                                                                                    |   |                              |   |                           |   |   |   |   |   |
| Basic - as reported                                                                                                                           |   | $                                 | 0.43   |                           | $      | 0.56 |   | $ | 0.47 |   | $ | (0.29 | ) |
| Basic - pro forma                                                                                                                             |   | $                                 | 0.40   |                           | $      | 0.54 |   | $ | 0.43 |   | $ | (0.33 | ) |
|                                                                                                                                          |   |                              |   |                           |   |   |   |   |   |
| Diluted - as reported                                                                                                                         |   | $                                 | 0.42   |                           | $      | 0.55 |   | $ | 0.46 |   | $ | (0.28 | ) |
| Diluted - pro forma                                                                                                                           |   | $                                 | 0.39   |                           | $      | 0.53 |   | $ | 0.42 |   | $ | (0.33 | ) |

 

9.  RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2003, the FinancialAccounting Standards Board (FASB) issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities andEquity.”  This statement establishesstandards for how an issuer classifies and measures certain financialarrangements with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial arrangement that is within its scope as a liability (or an asset insome circumstances).  The provisions ofthis statement are effective for financial arrangements entered into ormodified after May 31, 2003, and otherwise are effective at the beginning ofthe first interim period beginning after June 15, 2003.  The KBI Norcal shareholder agreement (Note5) includes a provision requiring the Company to redeem the shares held by theminority shareholders in the event of their death.  SFAS No. 150 would consider the shares held by the minorityinterest to be recorded as a liability at fair value because of thisprovision.  The estimated fair value ofthe liability exceeds the minority interest recorded amount at June 30, 2003.Upon adoption, the difference between the estimated fair value of the liabilityand the stated amount of minority interest would be expensed as a non-cashcharge and is estimated to be approximately $1.8 million, net of tax. EffectiveJuly 1, 2003, the KBI Norcal shareholder agreement was amended whereby theprovision obligating the Company to redeem the shares held by the minorityinterest was eliminated. For accounting purposes, the amendment of theshareholder agreement would be considered a sale of 49% of the shares of aconsolidated subsidiary and will result in an alteration of equity interestnon-cash gain which is estimated to be equal to the non-cash expense amountfrom adoption of SFAS No. 150. The FASB is studying the implementation issuesrelated to SFAS No. 150 and will provide interpretative guidance related toSFAS No. 150 which may affect the accounting for, and financial statementpresentation of, these transactions. The Company is monitoring these FASBdeliberations in order to determine the ultimate amount of the expense recordedupon adoption and the gain from the accounting basis sale of the 49% interestin KBI Norcal and the related financial presentation in the statement ofincome.

 

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

 

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

 

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

 

In December 2002, the FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure.”  This statement amends SFASNo. 123, “Accounting for Stock-Based Compensation,” to provide alternativemethods of transition for an entity that voluntarily changes to the fairvalue-based method of accounting for stock-based employee compensation.  It also amends the disclosure provisions ofthat statement to require prominent disclosure about the effects on reportednet income of an entity’s accounting policy

 

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decisions with respect tostock-based employee compensation.  Thisstatement also amends APB Opinion No. 28, “Interim Financial Reporting,” torequire disclosure about those effects in interim financial information.  The provisions of this statement wereeffective for financial statements of interim or annual periods ending afterDecember 15, 2002.  The Company hascontinued to use the intrinsic value method of accounting for stock-basedcompensation in 2003 in accordance with APB Opinion No. 25.  The Company has adopted the disclosureprovisions of SFAS No. 148 as presented in Note 8, “Stock-Based Compensation,”of these condensed consolidated financial statements.

 

In June 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  This statement requires that thefair value of a liability for an asset retirement obligation be recognized inthe period in which it is incurred if a reasonable estimate of fair value canbe made.  The associated asset retirementcosts are capitalized as part of the carrying amount of the long-livedasset.  All provisions of this statementwere effective as of the beginning of 2003. The adoption of this statement has not had a significant impact on theCompany’s financial results of operations and financial position.

 

10.  SUBSEQUENT EVENTS

 

As of the period ending June30, 2003, WBC earnings were accounted for under the equity method ofaccounting.  During the third quarter of2003, WBC’s operating agreement was amended to eliminate the approval and othersuch rights of the minority interest which previously precludedconsolidation.  As a consequence, WBCwill be consolidated rather than accounted for under the equity methodeffective during the third quarter of 2003. The impact of the 40% ownership interest of Willard BrothersConstruction, Inc, will be included in minority interest.

 

As of August 13, 2003, theCompany has entered into agreements providing for a new senior secured creditfacility.  The new credit facility issubject to customary closing conditions. The new credit facility is similar to the existing line of credit,providing for a term loan of $125 million maturing in seven years, and arevolving line of credit of $175 million maturing in five

 

15

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years, based upon a borrowingbase similar to the existing line of credit. In connection with the anticipated closing of the new credit facilityduring the third quarter of 2003, the Company estimates it will write off existingand new deferred loan costs associated with the term loan of approximately $0.6million, net of tax, or $0.04 per diluted share.

 

 

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Item 2

 

BUILDING MATERIALS HOLDING CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

 

FORWARD-LOOKING STATEMENTS AND CRITICAL ACCOUNTINGESTIMATES

 

Certainstatements made in this Form 10-Q may constitute “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors that may cause our actualresults, performance or achievements, or industry results, to be materiallydifferent from any future results, performance or achievements expressed orimplied by such forward-looking statements. Such factors are discussed in detail in BMHC’s Form 10-K for the fiscalyear ended December 31, 2002.  Given theseuncertainties, investors are cautioned not to place undue reliance on such forward-lookingstatements.  We disclaim any obligationto update any such factors or to announce publicly the results of any revisionsto any of the forward-looking statements contained in the Annual Report on Form10-K or this Form 10-Q except as required by law.  See “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in our Annual Report to Shareholders for informationregarding our critical accounting estimates.

 

The following table sets forthfor the periods indicated the percentage relationship to net sales of certaincosts, expenses and income items.  Thetable and subsequent discussion should be read in conjunction with theconsolidated financial statements and the notes thereto appearing elsewhereherein and in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

 

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|                                             |   | **For the  three months ended** |   | **For the  six months ended** |   |
|--------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                             |   | **June 30,**                    |   | **June 30,**                  |   |
|                                             |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| Net sales                                        |   | 100.0                           | %      | 100.0                         | %      | 100.0 | % | 100.0 | % |
| Gross profit                                     |   | 27.5                            |   | 28.4                          |   | 27.2 |   | 28.6 |   |
| Selling, general and  administrative expense     |   | 24.5                            |   | 23.7                          |   | 25.3 |   | 25.4 |   |
| Other income, net                                |   | (0.2                            | )      | —                        |   | (0.2 | ) | — |   |
| Income from operations                           |   | 3.2                             |   | 4.7                           |   | 2.1 |   | 3.2 |   |
| Equity in earnings of an unconsolidated  company |   | 0.3                             |   | —                        |   | 0.3 |   | — |   |
| Interest expense                                 |   | 0.7                             |   | 0.8                           |   | 0.7 |   | 0.9 |   |
| Income taxes                                     |   | 1.1                             |   | 1.5                           |   | 0.7 |   | 0.9 |   |
| Minority interest loss                           |   | (0.1                            | )      | —                        |   | 0.0 |   | — |   |
| Income before change in accounting  principle    |   | 1.8                             |   | 2.4                           |   | 1.0 |   | 1.4 |   |
|                                                  |        |                                 |        |                               |        |  |  |  |  |  |  |  |  |

 

### SECOND QUARTER OF 2003COMPARED TO THE SECOND QUARTER OF 2002

 

Net sales for the three monthsended June 30, 2003 were $322.3 million, an increase of 7.2% from the secondquarter of 2002 when sales were $300.5 million.  Construction services and manufactured building componentsaccounted for $180.4 million, or 56.0% of net sales for the second quarter of2003, an increase of 18.2% from $152.6 million, or 50.8% of net sales for thesecond quarter of 2002. The growth in net sales resulted primarily from theconsolidation of KBI Norcal, which was acquired in July 2002 and was notincluded in BMHC’s results for the second quarter of 2002.  

 

Gross profit as a percentage of sales decreased to 27.5% in the secondquarter of 2003 from 28.4% in the second quarter of 2002. The decrease isattributable primarily to lower gross profit margins in the market area servedby KBI Norcal compared to BMHC’s established businesses.

 

Selling, general and administrative (SG&A) expense was $78.8million, or 24.5% of net sales in the second quarter of 2003 as compared to$71.2 million, or 23.7% of net sales in the second quarter of 2002.  The Company attributes most of this dollarincrease to the consolidation of KBI Norcal. Additionally, higher general insurance expense as well as added expensesassociated with improved sales volume at the KBI business unit contributed tothe variance. In an effort to reduce the impact of rising general insurancecosts and better manage our underwriting risks, the Company has recently formeda wholly-owned captive insurance company, BMC Insurance, Inc.  Other income was $0.6 million 

 

18

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for the period compared to zeroother income for the second quarter of 2002 and included a gain of $0.2 millionfrom the sale of various non-strategic assets related to the Company’sconsolidation activities.

 

Equity in earnings of anunconsolidated company in the second quarter of 2003 included income of $1.1million from the Company’s 60% equity interest in WBC, whose earnings areincluded in the Company’s results effective January 1.  There were no comparable equity earnings inthe second quarter of 2002.

 

Interest expense of $2.4million remained constant relative to the same period last year. The weightedaverage interest rate dropped from 4.7% for the second quarter of 2002 to 3.9%for the current period.  The impact ofthe reduced interest rate was partially offset by an increase in the weightedaverage debt outstanding to $187.4 million during the second quarter of 2003 from$171.9 million during the same period of 2002. The increase in the average debt outstanding is primarily due to cashused in the acquisition of WBC and working capital needs at KBI Norcal.

 

Net income for the secondquarter of 2003 was $5.6 million, or $0.42 per diluted share, compared to $7.3million, or $0.55 per diluted share, in the second quarter of 2002. Results inthe second quarter of 2003 reflect the impact of weak housing and economictrends specific to the Company’s operations in Colorado and Texas, which led tolower than expected sales and earnings. Additionally, the consolidation of three facilities into one newlocation in Houston, coupled with the installation of new information andoperational systems, resulted in a temporary slowdown of production and higherexpenses at this business unit during the quarter.  Net income also reflects a small operating loss for the secondquarter at KBI Norcal due to rapid revenue growth and integration of trussmanufacturing and lumber distribution which resulted in increasedexpenses.  Despite the loss at KBINorcal, improved operational efficiencies are beginning to be realized at thisbusiness unit.

 

### FIRST SIX MONTHS OF 2003COMPARED TO THE FIRST SIX MONTHS OF 2002

 

 

Net sales for the six months endedJune 30, 2003 were $598.7 million, an increase of 9.3% from the first sixmonths of 2002 when sales were $547.7 million. Construction services and manufactured building components accounted for$342.7 million, or 57.2% of net sales for the first six months of 2003, anincrease from $286.1 million, or 52.2% of net sales for the first six months of2002. The increase in net sales resulted primarily from the consolidation ofKBI Norcal which was not included in BMHC’s results for the first six months of2002.

 

19

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Gross profit as a percentage of sales decreased to 27.2% in the firsthalf of 2003 from 28.6% in the first six months of 2002, primarily as a resultof reduced margins at KBI Norcal, which had lower margins than the Company’sestablished businesses.

 

SG&A expense was $152.0 million, or 25.3% of net sales in the firstsix months of 2003 ascompared to $139.3 million, or 25.4% of net sales in the first sixmonths of 2002.  The Company attributes most of this dollarincrease to the consolidation of KBI Norcal as well as higher general lines ofinsurance cost and added expenses associated with improved sales volume at theKBI business unit. Other income for the first half of 2003 was $1.4 million comparedto $0.4 million for the first six months of 2002 and included gains of $0.8million from the sale of various non-strategic assets related to the Company’sconsolidation activities.

 

Equity in earnings of anunconsolidated company for the first six months of 2003 included income of $1.8million from the Company’s 60% equity interest in WBC Construction, whoseearnings are included in the Company’s results effective January 1.  There were no comparable equity earnings forthe first six months of 2002.

 

Interest expense decreased to$4.4 million from $5.0 million during the first six months of 2003 and 2002,respectively, primarily due to a reduction in the weighted average interestrate to 3.9% from 4.9% between the two periods.  The impact of the reduced interest rate was partially offset byan increase in the weighted average debt outstanding to $185.8 million duringthe first six months of 2003 from $170.6 million during the same period of2002.  The increase in the average debtoutstanding is primarily due to cash used in the acquisition of WBC and workingcapital needs at KBI Norcal.

 

Net income for the first sixmonths of 2003 was $6.2 million, or $0.46 per diluted share, compared to $0.60per diluted share in 2002, excluding a first quarter charge for change inaccounting principle of $11.6 million, net of tax, or $0.88 per diluted shareas a change in accounting principle, in accordance with Statement of FinancialAccounting Standards No. 142 “Goodwill and Other Intangible Assets.”

 

 

LIQUIDITY ANDCAPITAL RESOURCES

 

The Company’s primary need forcapital resources is to fund future growth, capital expenditures, andacquisitions, as well as to finance working capital 

 

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needs, which have beenincreasing as the Company has grown in recent years.  Capital resources have primarily consisted of cash flows fromoperations and the incurrence of debt.

 

## *Operations*

In the first six months of 2003and 2002, net cash provided by operations was $7.8 million and $7.2 million,respectively.  The increase in cashprovided by operations was primarily due to increases in accounts payable andaccrued expenses offset by increases in receivables and inventory.  Working capital increased to $179.6 millionat June 30, 2003 from $170.0 million at June 30, 2002. 

 

*Capital investment and acquisitions*

Net cash used for investingactivities was $19.8 million and $9.2 million in the first six months of 2003and 2002, respectively.  The acquisitionin January 2003 of WBC, accounted for $22.9 million (net of post closingadjustments) in invested capital. Capital expenditures were $7.5 million in the first six months of2003.  Capital expenditures were incurredto acquire additional property and expand and remodel existing facilities.**** Proceeds from the sale of a non-strategic business unit, GreatFalls, Montana were $6.6 million. Proceeds from dispositions of other property and equipment were $5.0million and include $4.5 million in the sale of surplus real estate at Emmett,Idaho, Pocatello, Idaho, and Denver, Colorado during the first six months of2003.

 

*Financing*

Netcash provided by financing activities was $19.4 million and $3.8 million in thefirst six months of 2003 and 2002, respectively. The increase in cash providedby financing activities was primarily due to additional borrowings under therevolving credit agreements during the first quarter of 2003, largelynecessitated by the acquisition of WBC and partially offset by payments on theterm debt.

 

AtJune 30, 2003 the Company’s existing senior secured credit facility providedfor borrowings of up to $283.5 million, including $93.5 million provided for bythe term loan, all of which was outstanding at June 30, 2003, and $190.0million provided for by the revolving credit facility, $76.5 million of whichwas outstanding at June 30, 2003. Revolver borrowings are 

 

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limitedby a borrowing base equal to 60% of inventory plus 80% of trade accountsreceivable.  The borrowing base iscalculated monthly and was $175.9 million at June 30, 2003, resulting inadditional revolver availability of $84.5 million, net of $14.9 million inoutstanding letters of credit. Borrowings under the facility bear interest at prime plus 0.50% to1.50%, or Offshore Rate plus 2.0% to 3.0%. The agreement expires on December 1, 2004.

 

Asof June 30, 2003, the Company did not meet one of the financial convenantsgoverning its senior secured credit facility which includes a term loan andrevolving credit agreement.  The bankhas subsequently issued an amendment which modifies the agreement in effect asof June 30, 2003, thereby granting a waiver to BMHC with respect to thisparticular financial convenant. Specifically, the financial convenant described as the “fixed coverageratio” required a calculated ratio of no less than 1.20 to 1.0 and due to theCompany’s lower than expected earnings for the quarter, the resulting ratio was1.14 to 1.0.  As of August 13, 2003, theCompany has entered into agreements providing for a new senior secured creditfacility.  The new credit facility issubject to customary closing conditions. The new credit facility is similar to the existing line of credit,providing for a term loan of $125 million, and a revolving line of credit of$175 million, based upon a borrowing base similar to the existing line ofcredit.  The new term loan has a 7 yearmaturity and the revolving loan has a 5 year maturity.  The term loan is payable in quarterlyinstallments over the initial six years in amounts equal to 1% of the initialprincipal amount per year and equal quarterly installments of the remainingprincipal balance during year seven. Borrowings under the new revolving facility will bear interest at eithera base rate or LIBOR plus an additional percentage depending onperformance.  The initial revolver ratewill be LIBOR plus 2.50%.  The interestrate on the term loan is the offshore rate plus 3.25%.  The credit facility includes certainfinancial covenants.  The Companypresently is in compliance with the covenants in the new credit facility.  The credit facility permits an increase inthe facility of up to $50 million, subject to certain conditions.  In connection with the anticipated closingof the new senior credit facility during the third quarter of 2003, the Companyestimates it will write off existing and new deferred loan costs associatedwith the term loan of approximately $0.6 million, net of tax, or $0.04 perdiluted share.

 

In the third quarter of 1998, a shelfregistration was filed with the Securities and Exchange Commission to register2,000,000 shares of common stock.  TheCompany may issue these shares from time to time in connection 

 

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with future business combinations, mergersand/or acquisitions.  As part of the WBCacquisition in January 2003, the Company issued 70,053 shares of BMHC commonstock from this registration (see Note 5). The Company also issued 34,364 shares of stock from this registrationwith the acquisition of KBI Norcal on July 1, 2002 (see Note 5).

 

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

 

## *Disclosuresof Certain Market Risks*

The Company experiences changesin interest expense when market interest rates change or changes are made toits debt structure.  The Company hasmanaged its exposure to market interest rate changes through periodicrefinancing of its variable rate debt with fixed rate term debtobligations.  Based on debt outstandingat June 30, 2003, a 25 basis point increase in interest rates would result inapproximately $425,000 of additional annual interest costs.

 

Prices of commodity woodproducts, which are subject to significant volatility, directly affect netsales and cost of sales and could affect net income.  The Company does not utilize any derivative financial instrumentsto hedge commodity price movements, however it does intend to begin usinginterest rate swap contracts to fix long-term interest rates on up to $100million of its floating rate debt.

 

The Company has a cash equityincentive plan that is partially based on changes in the Company’s stockprice.  Under the plan, a $1.00 increaseor decrease in the Company’s stock price after June 30, 2003 would result in anincrease or decrease in compensation expense of approximately $114,235.

 

*Quarterly Results and Seasonality*

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

 

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*New Accounting Standards*

In May 2003, the FinancialAccounting Standards Board (FASB) issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities andEquity.”  This statement establishesstandards for how an issuer classifies and measures certain financialarrangements with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial arrangement that is within its scope as a liability (or an asset insome circumstances).  The provisions ofthis statement are effective for financial arrangements entered into ormodified after May 31, 2003, and otherwise are effective at the beginning ofthe first interim period beginning after June 15, 2003.  The KBI Norcal shareholder agreement (Note5) includes a provision requiring the Company to redeem the shares held by theminority shareholders in the event of their death.  SFAS No. 150 would consider the shares held by the minorityinterest to be recorded as a liability at fair value because of thisprovision.  The estimated fair value ofthe liability exceeds the minority interest recorded amount at June 30, 2003.Upon adoption, the difference between the estimated fair value of the liabilityand the stated amount of minority interest would be expensed as a non-cashcharge and is estimated to be approximately $1.8 million, net of tax. EffectiveJuly 1, 2003, the KBI Norcal shareholder agreement was amended whereby theprovision obligating the Company to redeem the shares held by the minorityinterest was eliminated. For accounting purposes, the amendment of theshareholder agreement would be considered a sale of 49% of the shares of aconsolidated subsidiary and will result in an alteration of equity interestnon-cash gain which is estimated to be equal to the non-cash expense amountfrom adoption of SFAS No. 150. The FASB is studying the implementation issuesrelated to SFAS No. 150 and will provide interpretative guidance related toSFAS No. 150 which may affect the accounting for, and financial statementpresentation of, these transactions. The Company is monitoring these FASBdeliberations in order to determine the ultimate amount of the expense recordedupon adoption and the gain from the accounting basis sale of the 49% interestin KBI Norcal and the related financial presentation in the statement ofincome.

 

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

 

In March 2003, the consensus ofEITF Issue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables,” was published.  EITFIssue No. 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which it will perform multiple revenue-generatingactivities.  Specifically, EITF IssueNo. 00-21 addresses how to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting.  The provisions of EITF Issue No. 00-21 willbe effective in fiscal periods beginning after June 15, 2003.  The Company is in the process of determining

 

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the impact of EITF Issue No.00-21 on the Company’s financial results of operations and financial positionwhen effective.

 

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

 

In December 2002, the FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure.”  This statement amends SFASNo. 123, “Accounting for Stock-Based Compensation,” to provide alternativemethods of transition for an entity that voluntarily changes to the fairvalue-based method of accounting for stock-based employee compensation.  It also amends the disclosure provisions ofthat statement to require prominent disclosure about the effects on reportednet income of an entity’s accounting policy decisions with respect tostock-based employee compensation.  Thisstatement also amends APB Opinion No. 28, “Interim Financial Reporting,” torequire disclosure about those effects in interim financial information.  The provisions of this statement wereeffective for financial statements of interim or annual periods ending afterDecember 15, 2002.  The Company hascontinued to use the intrinsic value method of accounting for stock-basedcompensation in 2003 in accordance with APB Opinion No. 25.  The Company has adopted the disclosureprovisions of SFAS No. 148 as presented in Note 8, “Stock-Based Compensation,”of these condensed consolidated financial statements.

 

In June 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  This statement requires that the

 

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fair value of a liability foran asset retirement obligation be recognized in the period in which it isincurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset.  All provisions of this statement wereeffective as of the beginning of 2003. The adoption of this statement has not had a significant impact on theCompany’s financial results of operations and financial position.

 

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## *Item 4*     Controls and Procedures

## * *

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

 

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

 

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

 

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

 

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internal audit department, inconnection with their audit and review activities.

 

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

 

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

 

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PART II — OTHER INFORMATION

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

 

 
| Item 6 | Exhibits  and Reports on Form 8-K |
|--------|-----------------------------------|
| (a)    | Exhibits                          |
|   |                              |
|        |                                   |  |

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

 
| (b)                                                                                                                                                                                                        | Reports on  Form 8-K

On April 29,  2003, Building Materials Holding Corporation, Registrant, filed a Form 8-K  with the Securities and Exchange Commission reporting its sales and  preliminary earnings for the first quarter ended March 31, 2003. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| On May 16,  2003, Building Materials Holding Corporation, Registrant, filed a Form 8-K  with the Securities and Exchange Commission reporting its financial results  for the quarter ended March 31, 2003. |

 

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SIGNATURES

 

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

 
|                        |   | BUILDING  MATERIALS HOLDING CORPORATION                                                                            |
|-----------------------------|--------|--------------------------------------------------------------------------------------------------------------------|
|                        |   |                                                                                                               |
|                        |   |                                                                                                               |
| Date:  August 14, 2003 |   | /s/ Robert  E. Mellor                                                                                              |
|                        |   | Robert E.  Mellor

Chairman of  the Board, President and

Chief  Executive Officer

(Principal  Executive Officer) |
|                        |   |                                                                                                               |
|                        |   |                                                                                                               |
| Date:  August 14, 2003 |   | /s/ Ellis C.  Goebel                                                                                               |
|                        |   | Ellis C.  Goebel

Senior Vice  President – Finance

(Principal  Financial Officer)                            |

 

 

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