10-K 1 v034154_10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2005

OR

¨ 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.



www.bmhc.com

Building Materials Holding Corporation

Delaware
 
91-1834269
(State of incorporation)
 
(IRS Employer Identification No.)

Four Embarcadero Center, Suite 3250, San Francisco, CA 94111
 
(415) 627-9100

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock ($.001 par value)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No þ



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

Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No þ

The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2005 was $864,493,013.  The market value computation excludes 1,754,794 shares of common stock held by affiliates such as directors, officers and holders of more than 5% of the shares outstanding as of June 30, 2005.

The number of shares outstanding of common stock as of February 22, 2006 was 14,458,294.

Documents Incorporated by Reference

(1)
Portions of the Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders on May 2, 2006, are incorporated by reference in Part III of this Form 10-K.






Building Materials Holding Corporation

FORM 10-K

For the Fiscal Year Ended December 31, 2005


PART I
   
       
 
 
 
 
 
 
       
       
PART II
   
       
 
 
 
 
 
 
 
 
       
       
PART III
   
       
 
 
 
 
 
       
       
PART IV
   
       
 
   
 
1

 
Introduction - Risk Factors and Forward-Looking Statements

There are a number of business risks and uncertainties that affect our operations and therefore could cause future results to differ from past financial performance or expected results and ultimately affect the trading price of our common shares.  Information regarding these risks and uncertainties is contained in Item 1A of this Form 10-K under the caption Risk Factors.

Certain statements in this Form 10-K including those related to expectations about homebuilding activity in our markets, demographic trends supporting homebuilding and anticipated sales and operating income are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Statements that are not historical or current facts, including statements about our expectations, anticipated financial results and future business prospects are forward-looking statements.  While these statements represent our current judgment on what the future may hold and we believe these judgments are reasonable, these statements involve risks and uncertainties that are important factors that could cause our actual results to differ materially from those in forward-looking statements.  These factors include, but are not limited to the risks and uncertainties cited in Item 1A of this Form 10-K under the caption Risk Factors.  Undue reliance should not be placed on such forward-looking statements, as such statements speak only as of the date of the filing of our 2005 Annual Report on Form 10-K.  We undertake no obligation to update forward-looking statements.

PART I

General Overview

Building Materials Holding Corporation, a Fortune 1000 company, is one of the largest providers of residential construction services and building products in the United States with annual sales of approximately $3 billion.  We serve the homebuilding industry through two subsidiaries, BMC Construction and BMC West.  BMC Construction provides construction services to high-volume production homebuilders in key growth markets across the country.  With locations in the western and southern states, BMC West distributes building products and manufactures building components for professional builders and contractors.  

As the result of a branding strategy, we changed the name of BMC Construction to SelectBuild Construction.  This change is expected to be formally announced in the first quarter of 2006.

Incorporated in the state of Delaware in 1987, Building Materials Holding Corporation trades on the NASDAQ under the ticker symbol BMHC and is headquartered in San Francisco, California.

Periodic and current reports filed with the Securities and Exchange Commission are available at our website www.bmhc.com.

Industry Overview

The residential construction services and building products industry is dependent on demand for single-family homes.  Housing demand is influenced by many factors including the overall condition of the U.S. economy, mortgage and other interest rates, consumer confidence, job formation and demographic trends as well as other factors.  The National Association of Home Builders reported single-family housing starts at a historic high of 1.7 million units in 2005 and is projecting approximately a 7% decline in housing starts in 2006 to 1.6 million units.  Although the industry remains fragmented, consolidation continues to occur among building material distributors and construction service providers.  The industry is experiencing the emergence of larger scale operations with improved financial strength, negotiating leverage and other resources.  

2

 
At BMC Construction, we offer construction services to high-volume production homebuilders.  Our services include framing, concrete, plumbing, other construction trades, managing labor and construction schedules as well as sourcing materials.  High-volume production homebuilders complete a substantial share of single-family residential construction.  These builders generally outsource framing and other construction services.  

At BMC West, we distribute building materials, manufacture building components and provide construction services to professional builders and contractors.  Products include dimensional lumber, panel products and building materials purchased from manufacturers as well as manufactured building components including millwork, trusses and wall panels.  Construction services include framing and installation of miscellaneous building products.   We compete with local, regional and national building products distributors.  We serve our customers based on a regional market management approach where strategic locations offer our entire breadth of building products, manufactured building components and construction services to a market area.  

Our ability to provide construction services and distribute building products is a competitive advantage to builders seeking full-service providers.  Many businesses lack the advantages we offer such as a proven reputation for providing quality construction services and building products, expertise in sourcing products and labor, sufficient working capital and administrative as well as management support.

Acquisition Strategy

Our acquisition strategy is focused on increasing our construction service offerings and manufactured building components.  The fragmented nature of the existing construction services and building products markets provides us with acquisition opportunities.  We clearly define and thoroughly analyze target markets.  In attractive markets, acquisitions are evaluated based on their anticipated performance, management depth, cultural fit, industry reputation and long-term potential customer base.  We typically enter a market by purchasing all or part of an existing business and seek to rapidly integrate our services and products to capture market share.  We assign experienced due diligence teams to review potential acquisition candidates and develop integration plans once we have agreed in principle to the general terms of an acquisition.

Over the past few years, BMC Construction acquired businesses providing construction services to high-volume production homebuilders.  Specifically, these businesses were as follows:

3

 
2005
·  
framing services in San Diego, California (October)
·  
concrete services in Las Vegas, Nevada and concrete and plumbing services in southern California (September)
·  
additional 20% interest in our existing business providing foundation and shell construction services in Florida (20% August 2005 and 60% January 2003)
·  
51% interest in concrete services in Arizona (July)
·  
73% interest in plumbing services in Phoenix and Tucson, Arizona (60% April and 13% July)
·  
stucco services in Las Vegas, Nevada (June)
·  
51% interest in framing services in Chicago, Illinois (January)

2004
·  
remaining 49% interest in our existing framing services business in northern California (49% July 2004 and 51% July 2002)

2003
·  
67.33% interest in framing services in Delaware, Maryland and Virginia (October)
·  
60% interest in foundation and shell construction services in Florida (January)

In January 2006, we also completed the acquisition of two framing services businesses in northern and southern California as well as Reno, Nevada.  As part of our growth strategy, we continue to evaluate acquisition opportunities that strengthen and broaden our construction trades as well as presence in attractive markets.  

At BMC West, we recently completed the acquisition of three facilities providing building materials distribution and millwork services in Houston, Texas (February 2006).  We continue to pursue other potential candidates and are also expanding our building products, manufactured building components, millwork and construction services to become a full-service provider to homebuilders.

Both of our business segments customize their respective building products and construction services mix to meet customer needs in their respective markets.  Our acquisition and expansion strategy has changed our sales mix as follows:

   
2005
 
2004
 
2003
 
Construction Services
   
54
%
 
43
%
 
35
%
Building Products
   
46
   
57
   
65
 
     
100
%
 
100
%
 
100
%

Our Customers

We build relationships with professional builders engaged in single-family residential construction.  Builders are generally repeat customers, with high-volume material and labor needs that require materials procurement, manufactured building components, construction services and on-time job-site delivery.  These services and products are not typically offered by retailers selling to do-it-yourselfers, home improvement contractors and trades people.

 
4


BMC Construction customers are high-volume production homebuilders.  Our ability to offer multiple trades such as framing, concrete, plumbing and other construction services allows builders to focus on other aspects of their business, including land development and new home sales.  We maintain favorable relationships with our customers due to our:
 
·  
reputation for providing quality construction services
·  
multiple construction trade offerings
·  
timely completion of contracts
·  
competitive pricing

BMC West customers are primarily local and regional professional homebuilders and contractors.  We maintain favorable customer relationships as a result of our:

·  
quality and availability of products
·  
dependability, scope and quality of services
·  
reliable delivery and production schedules
·  
competitive pricing
·  
availability of trade credit

On a consolidated basis, our largest customer accounted for 6.6% of sales in 2005, while the top five customers represented approximately 23% of consolidated sales.  At BMC Construction and BMC West, the top five customers accounted for approximately 33% and 14% of each business segment’s sales, respectively.  

Focus on Service

Our focus on service is a key factor that distinguishes us from competitors.  We employ experienced, service-oriented individuals.  Our construction service skills and product knowledge enable customers to rely on our expertise for project implementation and product recommendations.  Our quality assurance efforts and initiatives limit callbacks on the services and products we provide.  Our dedication to providing superior customer service to builders allows our employees to develop consistent relationships and generate repeat and referral business.

Competition

Our construction services and products compete with similar offerings in the marketplace.  The markets in each of our business segments are fragmented and highly competitive.  Our competitors vary in size, management expertise and capabilities.

BMC Construction provides construction services to high-volume production homebuilders.  Competitors range from single-crew operations to large well-managed organizations spanning multiple markets.  Also, some high-volume production homebuilders perform their own framing and other construction services.  Our multiple trade offerings in certain markets include framing, concrete, plumbing and other construction services and allow homebuilders to secure these construction services with us.  We believe our ability to provide multiple trades such as framing, concrete and plumbing in certain markets is a competitive advantage.  We also compare favorably to competitors in some of our markets as a result of our certifications from the National Association of Home Builders which demonstrates our professional credibility, competence, business integrity and solid record of customer satisfaction.  Additionally, we are recognized in our markets for our reputation, quality and reliability of our services and products as well as capital resources.

5

 
BMC West competes with local, regional and national building products distributors.  Builders generally select suppliers based on competitive pricing, product availability, reliable delivery, service, trade credit and knowledgeable personnel.  Our industry reputation helps us attract experienced and professional product and service personnel.  We also offer training programs to enhance product and service knowledge.  By working closely with our customers and supported by our management information systems, our business units maintain appropriate inventory and staffing levels and are well positioned to deliver quality building products.  We serve our customers based on a regional market management approach where strategic locations offer our entire breadth of building products, manufactured building components and construction services to a market area.  We believe being a full-service provider to many of our customers distinguishes us from our competition and is a competitive advantage.

Sales and Marketing

Our operations are located in many of the largest and most rapidly growing markets for single-family home construction.  Our presence is principally in the single-family home construction markets of California; Las Vegas, Nevada; Phoenix and Tucson, Arizona; Texas; the Intermountain and Northwest states as well as Florida.  Economic strength as well as historical population and migration trends have generally supported the growth of residential construction in our market areas.  According to the United States Census Bureau, housing starts have favored the southern and western regions, contributing over 70% of annual starts over the past three years.  Because of weather conditions in some of our markets, our operating results may be affected by slower construction activity during the first and fourth quarters of the year.  

BMC Construction relies on the value and solid reputation of their integrated construction services model to secure and maintain national and regional relationships with high-volume production homebuilders.  

BMC West attracts customers by consistently providing quality building products and dependable customer service.  Marketing consists of industry-wide brand communications along with an array of regional marketing events and activities to enhance customer relationships.  

 
6


Business Segments

The following information is presented for our BMC Construction and BMC West business segments.  

Sales to external customers by services and products (thousands):

 
2005
 
2004
 
2003
BMC Construction
         
   Construction services
$
1,358,333  
$
744,932  
$
408,167
   Building products
35,553
 
                  8,769
 
                       ―
 
$
1,393,886  
$              
753,701  
$              
408,167
BMC West
         
   Construction services
$
228,176  
$
159,430  
$
89,885
   Building products
1,290,098
 
           1,177,894
 
              917,019
 
$
1,518,274  
$          
 1,337,324  
$           
1,006,904
           
      Total
$
2,912,160  
$          
 2,091,025  
$           
1,415,071

Selected financial information is as follows (thousands):
 
   
Sales
 
Income(1)
(Loss)
Before
Taxes and
 
Equity
in Net Income
 
Depreciation
         
   
Total
 
Inter-
Segment 
 
Trade
 
Minority
Interests
 
of
Affiliates 
 
and
Amortization 
 
Capital(2)
Expenditures
 
Assets
 
Year Ended December 31, 2005 
                         
BMC Construction
 
$
1,395,182
 
$
(1,296
)
$
1,393,886
 
$
160,957
 
$
 
$
12,375
 
$
62,611
 
$
611,067
 
BMC West
   
1,519,903
   
(1,629
)
 
1,518,274
   
151,030
   
   
14,988
   
17,335
   
447,619
 
Corporate
   
   
   
   
(72,631
)
 
   
704
   
   
91,839
 
   
$
2,915,085
 
$
(2,925
)
$
2,912,160
   
239,356
 
$
 
$
28,067
 
$
79,946
 
$
1,150,525
 
Interest Expense
                     
14,420
                         
                     
$
224,936
                         
                                           
Year Ended December 31, 2004
                                     
BMC Construction
 
$
753,956
 
$
(255
)
$
753,701
 
$
59,689
 
$
 
$
8,216
 
$
14,382
 
$
268,498
 
BMC West
   
1,338,470
   
(1,146
)
 
1,337,324
   
96,083
   
   
14,599
   
17,036
   
409,160
 
Corporate
   
   
   
   
(47,664
)
 
   
497
   
   
65,386
 
   
$
2,092,426
 
$
(1,401
)
$
2,091,025
   
108,108
 
$
 
$
23,312
 
$
31,418
 
$
743,044
 
Interest Expense
                     
13,560
                         
                     
$
94,548
                         
                                                   
Year Ended December 31, 2003
                                     
BMC Construction
 
$
408,929
 
$
(762
)
$
408,167
 
$
18,954
 
$
1,431
 
$
4,410
 
$
5,555
 
$
187,479
 
BMC West
   
1,007,373
   
(469
)
 
1,006,904
   
54,826
   
   
15,315
   
12,121
   
390,764
 
Corporate
   
   
   
   
(33,351
)
 
   
1,060
   
   
25,956
 
   
$
1,416,302
 
$
(1,231
)
$
1,415,071
   
40,429
 
$
1,431
 
$
20,785
 
$
17,676
 
$
604,199
 
Interest Expense
                     
9,279
                         
                     
$
31,150
                         
 
(1)  
In 2005, impairments of $1.3 million were recognized for goodwill and certain customer relationships for BMC Construction.  During 2004, impairments of $1.3 million for the carrying amount of certain properties held for sale and $1.0 million in the carrying amount of goodwill resulting from a change in business strategy were recognized for BMC West.  As a result of changes in a specific market, an impairment of $0.8 million in the carrying amount of certain customer relationships was recognized for BMC Construction in 2003.
 
(2)
Property and equipment from acquisitions are included as capital expenditures.

7

 
Operating Strategy

Our business units operate in specific markets and are organized under our business segments, BMC Construction and BMC West.  Each regional manager has substantial autonomy and responsibility to address customer needs specific to their markets.  The reputation of a construction services provider or building products distributor is often determined locally, where service, product suitability and knowledgeable customer service are critical.  Managers are responsible for optimizing business activities in their markets, including the efficient use of personnel, assessing and maintaining working capital and construction labor requirements, identifying potential customers and developing appropriate service and product offerings.  Incentive compensation is based on successful growth and financial returns tied to specific market areas and regions. We focus on improving efficiency and productivity at our business units while giving special attention and support to units that are not meeting strategic objectives.  When a business unit fails to meet performance criteria, alternatives include adjusting the mix of products and services, restructuring management, consolidation or liquidation.

Purchasing

We purchase building products from numerous manufacturers and suppliers.  In 2005, our largest supplier accounted for approximately 9.6% of purchases.  Because commodity wood products are available from several manufacturers and suppliers, we believe the loss of any single supplier would not have a material adverse effect on our financial position, results of operations or cash flows.  

In order to meet market specific needs and maintain appropriate inventory levels, purchasing decisions are made at the business unit level.  Large volume purchases are made under company-wide guidelines.  In addition, we participate in volume rebate programs with our suppliers.

The prices of commodity wood products, concrete, steel and other building products are volatile and may adversely impact financial condition and results of operations when prices rapidly rise or fall.  Our information systems allow business unit managers to closely monitor sales and inventory.  With this supply and demand information, we generally avoid overstocking commodity wood products.  As a result, we turn our commodity wood product inventory on average 12 to 13 times per year.  Such rapid inventory turnover limits our potential exposure to inventory loss from commodity price fluctuations.  

Management Information Systems

We are standardizing software and infrastructure platforms that support the information needs of our organization.  Our standardization effort includes job cost and construction information, estimating, inventory management, reporting, project scheduling and human resource management.
 
8

 
We have developed a project methodology that allows us to efficiently deploy these information systems to our business units and acquisitions.  Most acquisitions are on-line with our corporate infrastructure within 30 days of acquisition, enabling access to our network capabilities.  
 
Our job cost and construction information systems are operating in approximately 80% of our BMC Construction business units with full deployment scheduled by 2007.  We expect our inventory management system to be upgraded by early 2007 and our human resources system to be completed in 2006.  We continue to research, recommend and implement new technology solutions to improve information for decision-making and our efficiencies.

We have also made investments in our infrastructure to improve backup capabilities for our network.  Because of our rapid growth, we are expanding our data center capabilities beyond our facility in Boise, Idaho to also include Phoenix, Arizona.  This will provide redundant services between the two centers and allow for a more seamless disaster recovery capability.  We are also moving to the next generation of wide area network technology to provide a redundant link between our locations and the data centers.  This architecture will also reduce the costs to operate our network and provide us with the capability to rapidly deploy additional bandwidth to meet accelerating business demand.

Safety and Risk Management

Due to our growth in construction services in recent years, the number of employees dedicated to our construction trades has increased.  The construction services industry incurs a higher number of accidents and subsequent costs for workers’ compensation claims than typically experienced at building materials distribution facilities.  Consequently, we have initiated several programs to enhance safety and reduce the risks encountered by our employees.  These programs include instruction and training for truck drivers, fall protection and construction safety as well as on-line training programs about compliance matters and safety hazards in the workplace.  Additionally, our managers are compensated for their effectiveness in reducing the incidence of workers compensation claims.

We maintain comprehensive insurance coverage to mitigate the potential cost of claims.  Our estimated cost for automobile, general liability and workers compensation claims is determined by actuarial methods.  Claims in excess of certain amounts are insured with third-party insurance carriers.  Reserves for claims are recognized based on the estimated costs of these claims as limited by the deductible of the applicable insurance policies.  

Employees

Our success is highly dependent on the quality of our employees.  Due to competition in attracting and retaining qualified employees, we maintain competitive compensation and benefit programs to attract, motivate and retain top-performers.  We also provide extensive product knowledge, customer service and other supervisory/management training programs to achieve our goal of being both the employer and supplier of choice.

We employ approximately 21,000 people.  Specifically, BMC Construction employs 16,000 employees, while BMC West employs 5,000.  Unions represent approximately 1,000 or less than 5% of these employees.  We have not experienced any strikes or other work interruptions and have maintained generally favorable relations with our employees.

9

 
Executive Officers

 
Name
 
Age
 
Position and Business Experience
     
Robert E. Mellor
62
Chairman of the Board, President and Chief Executive Officer
Mr. Mellor became Chairman of the Board of Directors in 2002 and has been President and Chief Executive Officer since 1997. He has been a director since 1991. He was previously Of Counsel with the law firm of Gibson, Dunn & Crutcher LLP from 1990 to 1997. He is a director for Coeur d’Alene Mines Corporation, The Ryland Group, Monro Muffler Brake and the California Chamber of Commerce. He is also on the board of councilors of Save-the-Redwoods League. He does not serve on the audit committee of any of these boards. Mr. Mellor intends to remove himself as a director from one of these boards in 2006.
     
 
William M. Smartt
 
63
 
Senior Vice President and Chief Financial Officer
Mr. Smartt has been a Senior Vice President and Chief Financial Officer since April 2004.  Prior to joining the Company, he was an independent consultant from August 2001 to March 2004.  From 1992 to 2001, he was Executive Vice President, Chief Financial and Administrative Officer of DHL Express, a leader in international air express service.  His previous experience as a Chief Financial Officer included ten years with Di Giorgio Corporation, a Fortune 500 Company, whose product lines included the distribution of building materials, prefabricated components and framing services.
     
 
Michael D. Mahre
 
46
 
Senior Vice President - Corporate Development, President and Chief Executive Officer - BMC Construction
Mr. Mahre was elected a Senior Vice President in 2003.  He was elected Vice President of Corporate Development in 2001 and Chief Executive Officer of BMC Construction in 2002.  He joined the Company in 1999 as Director of Financial Planning and Analysis. Mr. Mahre was a principal of The Cambria Group, a private equity investment firm, from 1997 to 1998.
     
 
Stanley M. Wilson
 
61
 
Senior Vice President, President and Chief Executive Officer - BMC West
Mr. Wilson was elected President and CEO of BMC West in 2004 and was appointed Senior Vice President in 2003.  He was elected Vice President in 2000 and was General Manager of the Pacific Division of BMC West from 1993 to 2003.  Mr. Wilson has been with the company since its beginning in 1987.  His previous experience includes 20 years with the building materials distribution business of Boise Cascade Corporation.  
 
10

     
 
Eric R. Beem
 
36
 
Vice President and Controller
Mr. Beem was appointed Vice President in January 2006 and Controller in April 2005.  He joined the Company as Accounting Manager in 1996.  Mr. Beem is a Certified Public Accountant and his experience includes three years with an international public accounting firm.  
     
 
John D. Fa
 
35
 
Vice President, Real Estate
Mr. Fa joined the company as Vice President, Real Estate in December 2005.  He previously served from 1999 to 2005 as Associate Director for Development at Presidio Trust in San Francisco.  
     
 
Mark R. Kailer
 
52
 
Vice President, Treasurer and Investor Relations
Mr. Kailer has been Vice President and Treasurer since 2003.  He joined the company in 2000 as Assistant Treasurer.  He was previously Senior Manager of Treasury Services at Circle International Group, a publicly-traded global logistics company based in San Francisco, from 1997 to 2000.
     
 
Jeffrey F. Lucchesi
 
52
 
Senior Vice President, Chief Information Officer
Mr. Lucchesi joined the company in August 2004 as Senior Vice President and Chief Information Officer. From 2000 to 2004, he was Senior Vice President of Worldwide Operations for Corio, Inc., an enterprise application service provider.  Mr. Lucchesi also served from 1994 to 2000 as Vice President and Chief Information Officer for DHL Express, a leader in international air express services.
     
 
Steven H. Pearson
 
58
 
Senior Vice President - Human Resources
Mr. Pearson has been Senior Vice President of Human Resources since 2001.  From 1987 through 2001 he served as Vice President of Human Resources.  Mr. Pearson has been with the Company since its beginning in 1987.  His previous experience also includes 18 years in the human resource function of Boise Cascade Corporation.  
     
 
Paul S. Street
 
57
 
Senior Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary
Mr. Street joined the Company in 1999 as Senior Vice President, General Counsel and Corporate Secretary and has been Chief Administrative Officer since 2001.  He previously served as our outside General Counsel & Secretary while a partner of the law firm of Moffatt, Thomas, Barrett, Rock & Fields.


 
11



Risks Related to Our Business
There are a number of business risks and uncertainties that affect our operations and therefore could cause future results to differ from past performance or expected results.  These risks or uncertainties may include, but are not limited to the following factors:

Our business is dependent on demand for single-family homes which is influenced by changes in the overall condition of the U.S. economy, including interest rates, job formation, consumer confidence and other important factors.
The residential construction services and building products industry is highly dependent on demand for single-family homes which is influenced by several factors.  These factors include economic changes nationally and locally, mortgage and other interest rates, job formation, consumer confidence, demographic trends, inflation and building permit activity as well as other factors.  The construction of new homes may also experience declines due to the availability and affordability of land in attractive metropolitan areas, shortages of qualified trades people, material shortages and regulations that impose restrictive zoning and density requirements.  All of these factors could limit demand for home construction and may adversely impact our financial condition, results of operations or cash flows.

There are risks associated with changes to our business model.
Our business model seeks the strategic growth of construction services and distribution of building products in an effort to provide a comprehensive solution to high-volume production and other homebuilders.  Providing these services and products include the risks of availability and cost of qualified labor and claims for construction defects, product liability and workers compensation as well as the timely sourcing and availability of building products.  Additionally, there is no guarantee that our efforts to offer these comprehensive solutions will continue to be accepted by the marketplace.

The integration of acquired businesses may not result in anticipated cost savings and revenue synergies being fully realized or may take longer to realize than expected.
Our growth over the past several years has been largely due to acquisitions and we intend to continue this strategy.  The integration of acquired businesses may not result in anticipated cost savings and revenue synergies being fully realized or may take longer to realize than expected.  The management and acquisition of businesses involves substantial risks including:

·  
the uncertainty that an acquired business will achieve anticipated operating results;
·  
significant expenses to integrate;
·  
diversion of management attention;
·  
departure of key personnel from the acquired business;
·  
effectively managing entrepreneurial spirit and decision-making;
·  
integration of different information systems;
·  
managing new construction service trades;
·  
unanticipated costs and exposure to unforeseen liabilities and;
·  
impairment of assets.
 
12

 
Our growth is dependent upon our ability to identify suitable acquisition candidates.
Our growth over the past several years has been largely due to acquisitions and we intend to continue this strategy.  Failure to identify and acquire suitable acquisition candidates could have a material adverse effect on our growth.  Also, the increasing level of consolidation occurring in the building products distribution and construction services industry may limit the availability and suitability of acquisition candidates.

Our success is dependent upon the availability of and our ability to attract, train and retain qualified individuals.
Competition for employees is especially intense in both construction services and building products distribution.  In markets with strong housing demand, we may experience shortages in qualified labor and key personnel, which may limit our ability to complete contracts as well as obtain additional contracts with builders.  Changes to immigration policies could also limit the availability of qualified labor.  We have been successful in recruiting and retaining qualified employees, however we cannot guarantee that we will continue to be successful in the future.

An inability to implement and maintain cost structures that align with revenue growth may have an adverse impact on our operating results.
When we experience slower periods of homebuilding activity, acquire new businesses or expand existing operations, we may experience inefficiencies in our cost structures.  Our evaluation and changes to fixed and variable expenses in response to declining sales may not occur in a timely manner, leading to higher costs and lower returns on sales.

Changes in the business models of customers may limit our ability to provide construction services and building products required by our customers.
As the business models of our customers evolve, our existing construction service and building product offerings may not meet the needs of certain homebuilders.  Homebuilders may decide to no longer outsource construction services.  Also, changes to housing patterns may occur, such as urban living rather than single-family suburban neighborhoods.  If we do not timely assess shifts in customer expectations, preferences and demands, our financial condition, results of operations or cash flows could be adversely affected.

Our operating results are affected by fluctuations in our costs and the availability of sourcing channels for commodity wood products, concrete, steel and other building materials.
Prices of commodity wood products, concrete, steel and other building products are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations and periodic delays in delivery.  Rapid and significant changes in product prices may affect sales as well as margins due to a limited ability to pass on short-term price changes.  We do not use derivative financial instruments to hedge commodity price changes.  

Generally, our products are obtainable from various sources and in sufficient quantities.  However, we may experience shortages of building products as a result of unexpected demand or production difficulties as well as transportation limitations.  Any disruption in our sources of supply for key building products could negatively impact our financial condition, results of operations or cash flows.
 
13

 
Our business is subject to intense competition.
We experience competition across all markets for our construction services and building products.  Recently, there has been increased consolidation within the building materials distribution and construction services industry.  Also, other building materials distributors, including large retail distributors focused on consumers, may more aggressively pursue our target market of professional homebuilders.  These competitive pressures may lead to decreases in sales, margin reductions and increases in operating costs and may limit acquisition opportunities.  Loss of significant market share due to competition could result in the closure of facilities.

Weather conditions, including natural catastrophic events, may cause our operating results to fluctuate each quarter.
Our first and fourth quarters historically have been, and are expected to continue to be, adversely affected by weather conditions in some of our markets, causing decreases in operating results due to slower homebuilding activity.  In addition, natural catastrophic events may cause our operating results to fluctuate.

The nature of our business exposes us to construction defect and product liability claims as well as other legal proceedings.
We are involved in construction defect and product liability claims relating to our various construction trades and the products we distribute and manufacture.  Although we believe we maintain adequate insurance, we may not be able to maintain such insurance on acceptable terms or such insurance may not provide adequate protection against potential liabilities.  Current or future claims may adversely affect our financial condition, results of operations or cash flows.

We may be adversely affected by disruptions in our information systems.
Our operations are dependent upon information for decision-making and the related information systems.  A substantial disruption in our information systems for a prolonged period could result in delays in our services and products and adversely affect our ability to complete contracts and fulfill customer demands.  Such delays, problems or costs may have an adverse effect on our financial condition, results of operations or cash flows.

Actual and perceived vulnerabilities as a result of terrorist activities and armed conflict may adversely impact consumer confidence and our business.
Instability in the economy and financial markets as a result of terrorism or war may impact consumer confidence and result in a decrease in homebuilding in our markets.  Terrorist attacks may also directly impact our ability to maintain operations and services and may have a material adverse effect on our business.

Numerous other matters of a local and regional scale, including those of a political, economic, business, competitive or regulatory nature may have an adverse impact on our business.
Many factors shape the homebuilding industry.  In addition to the factors previously cited, there are other matters of a local and regional scale, including those of a political, economic, business, competitive or regulatory nature which may have a material adverse effect on our business.

 
14


Risks Related to Our Shares
Risks related to our shares include, however are not limited to:  
 
Our share price may fluctuate significantly, which may make it difficult for shareholders to sell our shares when desired or at attractive prices.
The market price of our shares is subject to significant changes as a result of our operating performance and the other factors discussed above as well as perceptions and events that are beyond our control.  Price and trading volume fluctuations for our shares may be unrelated or disproportionate to our operating performance.  Additionally, our share price could fluctuate based on the expectations and performance of other publicly traded companies in the construction services and building products distribution industry.  

Anti-takeover defenses in our governing documents and certain provisions under Delaware law could prevent an acquisition of our company or limit the price that investors might be willing to pay for our shares. 
Our governing documents and certain provisions of Delaware law that apply to us could make it difficult for another company to acquire control of our company.  For example, we have a rights plan, commonly known as a “poison pill,” which would make it difficult for someone to acquire our company without the approval of our Board of Directors.  Also, our certificate of incorporation allows our Board of Directors to issue, at any time and without shareholder approval, preferred shares with such terms as it may determine.  These provisions and others could delay, prevent or allow our Board of Directors to resist an acquisition of our company, even if a majority of our shareholders favored the proposed transaction.


We have no unresolved comments from the Securities and Exchange Commission.

 
15



We lease our headquarters in San Francisco, California and our administrative service center in Boise, Idaho.  Principal properties include distribution centers for building products, millwork fabrication and distribution sites, truss manufacturing plants, sales and administrative offices.  Properties are located in growing metropolitan areas and emerging housing markets.  Substantially all of the properties for BMC Construction are leased while at BMC West approximately 63% are owned and 37% are leased.  Our properties provide adequate capacity to meet the needs of our customers and are in good operating condition.  Locations operate under the trade names BMHC, BMC Construction and BMC West, as well as other brand names or trademarks.  Properties by business segment are as follows:

BMC Construction
 
BMC West
 
Location
Number of
Properties
 
Location
Number of
Properties
Arizona
11
 
Arizona
1
California
17
 
California
7
Florida
12 
 
Colorado
18 
Illinois
1
 
Idaho
8
Nevada
9
 
Montana
8
Virginia
1
 
Nevada
3
     
Oregon
2
 
 
 
Texas
27 
     
Utah
7
     
Washington
5


We are involved in litigation and other legal matters arising in the normal course of business.  In the opinion of management, the recovery or liability, if any, under any of these matters will not have a material effect on our financial position, results of operations or cash flows.


There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year.


 
16


PART II

ITEM 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common shares are traded on the NASDAQ market under the symbol BMHC.  The high and low share prices as well as cash dividends for each period were as follows:

 
2005
 
2004
 
 
High
 
 
Low
 
Cash Dividends
Declared
 
 
High
 
Low
 
Cash
Dividends
Declared
                       
First quarter
$49.73  
 
$34.00  
 
$0.08  
 
$18.33  
 
$14.90  
 
$0.06  
Second quarter
$72.26  
 
$44.00  
 
$0.10  
 
$19.28  
 
$15.70  
 
$0.06  
Third quarter
$97.31  
 
$69.36  
 
$0.15  
 
$27.65  
 
$16.97  
 
$0.08  
Fourth quarter
$96.22  
 
$68.21  
 
$0.15  
 
$38.94  
 
$25.62  
 
$0.08  

At the annual meeting of shareholders on May 3, 2005, our shareholders voted to increase the number of authorized common shares to 50 million from 20 million.  

On February 14, 2006, our Board of Directors approved a two for one split of our outstanding common shares.  Shareholders of record as of February 28, 2006 will receive a stock dividend of one additional common share for every common share they own.  The additional shares will be distributed on March 14, 2006. 
 
The information throughout this Form 10-K is presented as of December 31, 2005 and before the two for one split of our common shares which is effective February 28, 2006.
 
On February 14, 2006, our Board of Directors approved a quarterly cash dividend of $0.10 per share for common shares outstanding after the share split.  The dividend is payable on March 24, 2006 to shareholders of record.  

Dividends are paid at the discretion of the Board of Directors and we expect to continue these payments.  The continuation of dividend payments (cash or shares) depends on many factors, including financial position, results of operations or cash flows.  

As of February 22, 2006, there were approximately 9,858 shareholders of record and the closing price of our shares was $74.18.


 
17



The following selected financial data should be read in conjunction with Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as Item 8 - Financial Statements and Supplementary Data.  These resources provide further information to understand the comparability of selected financial data.

Selected Financial Data
(thousands, except share data)

 
 
Year Ended December 31 
 
   
2005
 
2004
 
2003
 
2002
 
2001
 
Sales(1)
                               
Construction services
 
$
1,586,509
 
$
904,362
 
$
498,052
 
$
293,063
 
$
147,363
 
Building products
   
1,325,651
   
1,186,663
   
917,019
   
868,431
   
945,504
 
Total sales
 
$
2,912,160
 
$
2,091,025
 
$
1,415,071
 
$
1,161,494
 
$
1,092,867
 
                                 
Income from operations(2)
 
$
239,356
 
$
108,108
 
$
40,429
 
$
39,121
 
$
42,629
 
                                 
Net income(3)
 
$
129,507
 
$
53,910
(4)
$
19,929
 
$
7,015
(5)
$
20,844
 
                                 
Net income per share:
                               
Basic
 
$
9.22
 
$
4.00
 
$
1.50
 
$
0.54
 
$
1.61
 
Diluted
 
$
8.82
 
$
3.87
 
$
1.48
 
$
0.53
 
$
1.60
 
                                 
Annual cash dividends declared per share(6)
 
$
0.48
 
$
0.28
 
$
0.21
 
$
0.05
 
$
 
                                 
Working capital
 
$
304,459
 
$
284,173
 
$
216,898
 
$
170,492
 
$
160,904
 
Total assets
 
$
1,150,525
 
$
743,044
 
$
604,199
 
$
503,074
 
$
485,742
 
Long-term debt, net of current portion
 
$
278,169
 
$
206,419
 
$
186,773
 
$
157,375
 
$
167,417
 
Shareholders’ equity
 
$
470,061
 
$
327,678
 
$
271,010
 
$
251,300
 
$
242,894
 
                                 
Cash flows provided by operations
 
$
199,280
 
$
33,677
 
$
12,479
 
$
35,726
 
$
63,687
 

 
(1)
Acquisitions provided sales of $403.9 million in 2005; $221.4 million in 2004; $155.2 million in 2003; $117.4 million in 2002 and $100.5 million in 2001.
 
(2)
Acquisitions provided income (loss) from operations of $31.6 million in 2005; $2.8 million in 2004; ($3.6) million in 2003; $9.8 million in 2002 and $7.7 million in 2001.
 
(3)
Impairments of assets net of tax were $0.8 million in 2005; $1.4 million in 2004; $0.5 million in 2003; $4.1 million in 2002 and $1.1 million in 2001.
 
(4)
Includes a reduction of expenses for lower than expected insurance costs of $3.8 million net of tax.
 
(5)
The transitional impairment analysis of goodwill resulted in an impairment of $11.7 million net of tax.
 
(6)
In February 2006, our Board of Directors approved a two for one split of our outstanding common shares and first quarter cash dividend. The first quarter cash dividend will be $0.10 per share after the split or $0.20 per share prior to the split of our common shares. The cash dividend was initiated in the fourth quarter of 2002.  


 
18



The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes that appear in Item 8 of Form 10-K as well as the caption under this item entitled Business Risks and Forward-Looking Statements.

OVERVIEW
 
Homebuilding Industry

The residential construction services and building products industry experienced another strong year in 2005.  Factors that influence the demand for single-family homes such as economic conditions, mortgage interest rates, job formation and consumer confidence were generally favorable.  Consequently, the National Association of Home Builders reported an increase of 7.2% in single-family housing starts to a historic high of 1.7 million units in 2005.  The forecast for 2006 projects a decline of approximately 7% in single-family housing starts to 1.6 million units.

Our operations are located in attractive metropolitan areas that have generally outpaced U.S. averages for residential building permit activity.  With construction services and building product offerings in California; Las Vegas, Nevada; Phoenix and Tucson, Arizona; Texas; the Intermountain and Northwest states as well as Florida, we believe we are in homebuilding markets supported by positive demographic trends.  We are optimistic about the industry trends that support our business and therefore remain confident in our long-term growth.
 
Our Strategy

We grow our business through acquisitions as well as strategically expanding the breadth of our construction services and building products offered to professional builders and contractors.  In particular, we believe high-volume production homebuilders are seeking quality, reliable and cost effective solutions to meet their construction services needs.  In 2005, we completed several acquisitions to expand the trades offered to homebuilders.  Our services include framing, concrete, plumbing and other construction services as well as building product distribution and manufactured building components including trusses, millwork and wall panels.

Business Segments

We compete in the homebuilding industry through two business segments:  BMC Construction and BMC West.  BMC Construction offers construction services to high-volume production homebuilders through operations in key growth markets across the country.  With locations in the western and southern states, BMC West distributes building products and manufactures building components for professional builders and contractors.  These two business segments are subsidiaries of our holding company - Building Materials Holding Corporation.

As the result of a branding strategy, we changed the name of BMC Construction to SelectBuild Construction.  This change is expected to be formally announced in the first quarter of 2006.

 
19


Acquisition History

Over the past few years, BMC Construction acquired businesses providing construction services to high-volume production homebuilders.  Specifically, these businesses were as follows:

2005
·  
framing services in San Diego, California (October)
·  
concrete services in Las Vegas, Nevada and concrete and plumbing services in southern California (September)
·  
additional 20% interest in our existing business providing foundation and shell construction services in Florida (20% August 2005 and 60% January 2003)
·  
51% interest in concrete services in Arizona (July)
·  
73% interest in plumbing services in Phoenix and Tucson, Arizona (60% April and 13% July)
·  
stucco services in Las Vegas, Nevada (June)
·  
51% interest in framing services in Chicago, Illinois (January)

2004
·  
remaining 49% interest in our existing framing services business in northern California (49% July 2004 and 51% July 2002)

2003
·  
67.33% interest in framing services in Delaware, Maryland and Virginia (October)
·  
60% interest in foundation and shell construction services in Florida (January)

In January 2006, we acquired framing businesses in Palm Springs, California and Reno, Nevada.  As part of our growth strategy, we continue to evaluate acquisition opportunities that strengthen and broaden our construction trades as well as presence in attractive markets.

At BMC West, we recently acquired three facilities providing building materials distribution and millwork services in Houston, Texas (February 2006).  We continue to pursue other potential candidates and are also expanding and integrating our building products, manufactured building components, millwork and construction services to become a full-service provider to homebuilders.

Performance Measurements

We measure our operating performance and financial condition based on several factors including:
 
● Sales
● Management of working capital
● Income from operations
● Return on investment

We evaluate our results of operations including and excluding acquisitions not present in comparable periods.  We believe this approach enhances an understanding of our acquisitions and operating results for the respective reporting periods.

 
20


The discussion of our results of operations and financial condition provides information to assist the reader in understanding our financial statements, changes in key items in those financial statements and the primary factors that accounted for those changes.  The discussion of our consolidated financial results is followed by a more detailed review of our business segments.

RESULTS OF OPERATIONS

2005 COMPARED WITH 2004

The following table sets forth the amounts and percentage relationship to sales of certain costs, expenses and income items (millions):

   
Year Ended December 31
 
   
2005
 
2004
 
Sales
                 
Construction services
 
$
1,586.5
   
54.5
%
$
904.3
   
43.2
%
Building products
   
1,325.7
   
45.5
   
1,186.7
   
56.8
 
Total sales
   
2,912.2
   
100.0
   
2,091.0
   
100.0
 
                           
Costs and operating expenses
                         
Cost of goods sold
                         
Construction services
   
1,285.9
   
81.1
   
768.4
   
85.0
 
Building products
   
967.9
   
73.0
   
897.7
   
75.6
 
Total cost of goods sold
   
2,253.8
   
77.4
   
1,666.1
   
79.7
 
Impairment of assets
   
1.3
   
   
2.3
   
0.1
 
Selling, general and administrative expenses
   
420.9
   
14.5
   
317.0
   
15.2
 
Other income, net
   
(3.2
)
 
(0.1
)
 
(2.5
)
 
(0.1
)
Total costs and operating expenses
   
2,672.8
   
91.8
   
1,982.9
   
94.9
 
Income from operations
   
239.4
   
8.2
   
108.1
   
5.1
 
                           
Net income
 
$
129.5
   
4.4
%
$
53.9
   
2.6
%
                           
Earnings per diluted share
 
$
8.82
       
$
3.87
       
 
Consolidated Financial Results
Selected financial results are as follows (millions):
 
     
2005
   
2004
   
$ Δ
   
% Δ
 
Sales
                         
   Construction services
 
$
1,586
 
$
904
 
$
682
   
75
%
   Building products
   
1,326
   
1,187
   
139
   
12
%
   
$
2,912
 
$
2,091
 
$
821
   
39
%
                           
Income from operations
 
$
239
 
$
108
 
$
131
   
121
%
 
A key element of our business strategy for the past several years entails shifting our product and service mix from commodity lumber to value added manufactured building components and construction services.  More recently, in the periods presented in this Form 10-K, we have aggressively pursued this shift in emphasis to meet the demands of the market.  

21

 
Sales increased $821 million to $2.9 billion due to an increase in construction services and the acquisition of construction services businesses.  Sales from acquisitions not present in comparable periods were $404 million or approximately half of the increase.  Strong homebuilding activity was prevalent in most of our markets, particularly the Southwest region.  Building permits and housing starts were also higher in most of our markets relative to the prior year.

Income from operations for 2005 increased 121% to $239 million from $108 million in the prior year.  Improved margins, particularly from demand for our construction services, were a key factor.  Margins as a percent of sales for construction services were up 3.9% while building products also improved 2.7% compared to the prior year.  Selling, general and administrative expenses were 14.5% of sales and improved by 70 basis points.  These expenses were lower as a percent of sales due to better leveraging of these expenses at our building products operations.


Business Segments

Sales and operating income by business segment are as follows (millions):

   
2005
 
2004
 
   
 
Sales
 
Income from
Operations
 
 
Sales
 
Income from
Operations
 
BMC Construction
 
$
1,394
 
$
161
 
$
754
 
$
60
 
BMC West
   
1,518
   
151
   
1,337
   
96
 
Corporate
   
   
(73
)
 
   
(48
)
   
$
2,912
 
$
239
 
$
2,091
 
$
108
 


BMC Construction
Selected financial results are as follows (millions):

   
2005
 
2004
 
$ Δ
 
% Δ
 
Sales
 
$
1,394
 
$
754
 
$
640
   
85
%
   Less: Acquisitions
   
(385
)
 
   
(385
)
 
 
   
$
1,009
 
$
754
 
$
255
   
34
%
           
             
Income from operations
 
$
161
 
$
60
 
$
101
   
168
%
   Less: Acquisitions
   
(31
)
 
   
(31
)
 
 
   
$
130
 
$
60
 
$
70
   
117
%

Sales increased $640 million in 2005.  Acquisitions of construction services businesses not present in the same periods represented 60% of this increase.  Home construction activity was strong in Las Vegas and Phoenix as well as most of our other markets.  In addition, housing starts in our markets compared favorably to the prior year.

 
22


Income from operations for 2005 improved over $100 million compared to the prior year.  Margin improvement was a key factor, improving 4.6% as a percent of sales to 19.3% compared to 14.7% in the prior year.  Further market acceptance of the value of our construction services, particularly in the Las Vegas and Phoenix markets as well as improved management of contracts, most notably in our Florida operations, contributed to the improvement.  Acquisitions also contributed approximately 30% or $31 million to the increase in operating income.  Selling, general and administrative expenses specific to the business segment were $56 million higher with more than half of the increase due to acquisitions completed during the year.  As a percent of sales, these expenses were 7.7% compared to 6.8% in the prior year.

BMC West
Selected financial results are as follows (millions):

   
2005
 
2004
 
$ Δ
 
% Δ
 
Sales
 
$
1,518
 
$
1,337
 
$
181
   
14
%
   Less: Acquisitions
   
(19
)
 
   
(19
)
 
 
   
$
1,499
 
$
1,337
 
$
162
   
12
%
                           
Income from operations
 
$
151
 
$
96
 
$
55
   
57
%
   Less: Acquisitions
   
   
   
   
 
   
$
151
 
$
96
 
$
55
   
57
%

Sales increased $181 million in 2005 as we experienced strong housing construction across all our regions.  Building permit activity for single-family homes in our markets was up 13% and compares favorably to the U.S. average of 4%.  In particular, our Texas, Northwest and Intermountain regions reported strong increases in sales compared to a year ago.  Our continued focus on a regional business model that provides customers with expanded choices for building products and services from multiple locations also contributed to our sales growth.

Income from operations for 2005 increased $55 million due to improved margins.  Margins as a percent of sales were 2.1% higher and were 25.7% compared to 23.6% in the prior year.  Inventory was effectively managed despite fluctuations during the year in commodity wood product prices.  Selling, general and administrative expenses specific to the business segment were approximately $21 million higher than the preceding year.  However, these expenses were effectively leveraged as they represented 15.9% of sales compared to 16.5% in the prior year.

Corporate
Corporate represents expenses to support the operations of our business segments, BMC Construction and BMC West.  These costs include management, information systems, administrative functions for reporting, accounts payable and human resources, professional fees for regulatory compliance as well as incentive compensation.  These costs are not allocated to our business segments.

 
23


Selected financial results are as follows (millions):

 
2005
 
2004
 
$ Δ
 
% Δ
Operating expenses
$73
 
$48
 
$25
 
  52%

Corporate and other expenses were $25 million higher in 2005 due to incentive compensation from improved operating performance, professional fees for regulatory compliance and additional personnel to support our expanding business.  These expenses were 2.5% of sales compared to 2.3% in 2004.

2004 COMPARED WITH 2003

The following table sets forth the amounts and percentage relationship to sales of certain costs, expenses and income items (millions):

   
Year Ended December 31
 
   
2004
 
2003
 
Sales
                 
Construction services
 
$
904.3
   
43.2
%
$
498.1
   
35.2
%
Building products
   
1,186.7
   
56.8
   
917.0
   
64.8
 
Total sales
   
2,091.0
   
100.0
   
1,415.1
   
100.0
 
                           
Costs and operating expenses
                         
Cost of goods sold
                         
Construction services
   
768.4
   
85.0
   
436.9
   
87.7
 
Building products
   
897.7
   
75.6
   
688.4
   
75.1
 
Total cost of goods sold
   
1,666.1
   
79.7
   
1,125.3
   
79.5
 
Impairment of assets
   
2.3
   
0.1
   
0.8
   
0.1
 
Selling, general and administrative expenses
   
317.0
   
15.2
   
250.3
   
17.6
 
Other income, net
   
(2.5
)
 
(0.1
)
 
(1.7
)
 
(0.1
)
Total costs and operating expenses
   
1,982.9
   
94.9
   
1,374.7
   
97.1
 
Income from operations
   
108.1
   
5.1
   
40.4
   
2.9
 
                           
Net income
 
$
53.9
   
2.6
%
$
19.9
   
1.4
%
                           
Earnings per diluted share
 
$
3.87
       
$
1.48
       
 
 
Consolidated Financial Results
Selected financial results are as follows (millions):

   
2004
 
2003
 
$ Δ
 
% Δ
 
Sales
                 
   Construction services
 
$
904
 
$
498
 
$
406
   
82
%
   Building products
   
1,187
   
917
   
270
   
29
%
   
$
2,091
 
$
1,415
 
$
676
   
48
%
                           
Income from operations
 
$
108
 
$
40
 
$
68
   
170
%

Sales exceeded $2 billion in 2004, an increase of $676 million over the prior year.  Existing operations accounted for 67% or $455 million of the increase and acquisitions of construction services businesses not present in comparable periods represented the remaining $221 million.  Construction services continue to increase as a result of our strategy to offer more construction services and value-added building products to homebuilders.
 
24

 
Income from operations for 2004 increased to $108 million from $40 million in the prior year.  Margins as a percent of sales were 20.3% and approximately the same as the prior year of 20.5%.  Margins for building products were 0.6% lower, while margins for construction services improved 2.7%. Selling, general and administrative expenses were 15.2% of sales compared to 17.7% in 2003 as a result of improved leveraging of these expenses at our building products operations and maintaining these expenses as a percent of sales at our construction services operations and corporate functions.  


Business Segments

Sales and operating income by business segment are as follows (millions):

   
2004
 
2003
 
   
 
Sales
 
Income from
Operations
 
 
Sales
 
Income from
Operations
 
BMC Construction
 
$
754
 
$
60
 
$
408
 
$
19
 
BMC West
   
1,337
   
96
   
1,007
   
55
 
Corporate
   
   
(48
)
 
   
(34
)
   
$
2,091
 
$
108
 
$
1,415
 
$
40
 


BMC Construction
Selected financial results are as follows (millions):

   
2004
 
2003
 
$ Δ
 
% Δ
 
Sales
 
$
754
 
$
408
 
$
346
   
85
%
   Less: Acquisitions
   
(185
)
 
   
(185
)
 
 
   
$
569
 
$
408
 
$
161
   
39
%
                           
Income from operations
 
$
60
 
$
19
 
$
41
   
216
%
   Less: Acquisitions
   
(6
)
 
   
(6
)
 
 
   
$
54
 
$
19
 
$
35
   
184
%

Sales of $754 million in 2004 increased 85% over the prior year.  Acquisitions of construction services businesses not present in comparable periods accounted for $185 million or 53% of the increase with the remaining $161 million from existing operations.  Higher sales were due to robust home construction in Las Vegas, Phoenix and northern California as well as contract increases from rising labor and material costs.

Income from operations for 2004 was $60 million, up significantly from $19 million in the prior year.  Margins as a percent of sales were a driving factor, improving 3.3% over the prior year.  The improvement was primarily due to the increased value assigned to our construction services in strong housing markets as well as integration efficiencies from recent acquisitions.  Although selling, general and administrative expenses specific to the business segment were approximately $24 million higher than the prior year, these expenses were 6.8% of sales and consistent with the prior year.
 
25

 
BMC West
Selected financial results are as follows (millions):

   
2004
 
2003
 
$ Δ
 
% Δ
 
Sales
 
$
1,337
 
$
1,007
 
$
330
   
33
%
   Less: Acquisitions
   
(36
)
 
   
(36
)
 
 
   
$
1,301
 
$
1,007
 
$
294
   
29
%
                       
 
Income from operations
 
$
96
 
$
55
 
$
41
   
75
%
   Less: Acquisitions
   
3
   
   
3
   
 
   
$
99
 
$
55
 
$
44
   
80
%

Sales of $1.3 billion in 2004 were 33% higher than the prior year.  The increase was due to both growth in sales at existing business units and the impact of higher commodity wood product prices relative to the prior year.  In addition to the benefit of commodity prices, higher sales were due to strong housing demand as building permits in our markets were up 14% compared to the prior year.

Income from operations for 2004 was $96 million, up from $55 million in the prior year.  Despite rising commodity wood product prices, margins remained at approximately 24% as a percent of sales, reflective of our effective management of inventory.  Selling, general and administrative expenses specific to the business segment were up $29 million or 15% compared to the prior year primarily due to variable compensation expenses.  However, these expenses were leveraged against higher sales as they decreased 2.5% to 16.5% of sales compared to the prior year.

Corporate
Corporate represents expenses to support the operations of our business segments, BMC Construction and BMC West.  These costs include management, information systems, administrative functions for reporting, accounts payable and human resources, professional fees for regulatory compliance as well as incentive compensation.  These costs are not allocated to our business segments.

Selected financial results are as follows (millions):

   
2004
  
2003
  
$ Δ
  
% Δ
 
Operating expenses
 
$
48
 
$
34
 
$
14
   
41%
 

Although corporate and other expenses were $14 million higher in 2004 due to compensation expenses from improved operating performance, these expenses remained essentially the same at 2.3% of consolidated sales in both years.

LIQUIDITY AND CAPITAL RESOURCES

Our primary need for capital resources is to fund working capital and acquisitions as well as finance capital expenditures.  Capital resources have primarily consisted of cash flows from operations and additional debt.  For the year ended December 31, 2005, $199.3 million of cash was provided by operations and funded capital expenditures and the majority of our acquisitions as additional debt borrowed was $78.5 million.

 
26


Operations
In 2005, cash provided by operating activities was $199.3 million, up significantly from $33.7 million in 2004.  Strong home construction activity and improved margins in both our construction services and building products segments resulted in higher net income, providing $75.6 million of additional operating cash flow over the prior year.  Also, working capital requirements were lower than the prior year due to lower commodity wood product prices as well as improved inventory turns and days sales outstanding.  This improved management of working capital resulted in cash used of $0.8 million compared to $61.3 million of cash used in the prior year.  

Cash provided from operating activities was $33.7 million in 2004 up significantly from $12.5 million in 2003.  Strong home construction activity and our strategy to provide additional construction services resulted in higher net income or $34.0 million of additional operating cash flow over the prior year.  Changes in working capital requirements used $28.8 million of this cash flow.

Capital Investment and Acquisitions
In 2005, cash used in investing activities was $261.6 million compared to $58.0 million for the same period a year ago.  Cash use included $203.2 million for the acquisition of three businesses providing framing, concrete and stucco services, a truss manufacturing facility and partial acquisition of four businesses providing concrete, plumbing and framing services.  Cash used for investing activities also included $46.5 million for purchase of property and equipment and $14.1 million for the purchase of marketable securities.  Cash used in investing activities was $203.6 million higher than the prior year when $58.0 million was used for the purchase of property and equipment, acquisition of three businesses providing distribution, windows installation and framing and the partial acquisition of a truss manufacturing facility as well as the purchase of marketable securities at our captive insurance subsidiary.  

Cash used in investing activities was $58.0 million in 2004 compared to $30.5 million in 2003.  Cash use included $27.7 million for property and equipment, $22.7 million for the acquisition of three businesses and partial acquisition of another business as well as $19.0 million invested in marketable securities at our captive insurance subsidiary.  The cash use was partially offset by proceeds of $12.3 million from the disposition of property in Montana, Texas and Utah.

Financing
In 2005, cash provided by financing activities was $72.9 million compared to $24.3 million in the prior year.  Coupled with strong operating cash flows, funds were borrowed to finance acquisitions and purchase property and equipment whereas funds were borrowed to finance working capital requirements and purchase property and equipment in 2004.  

Cash provided by financing activities was $24.3 million in 2004 compared to $28.3 million in the prior year.  The primary sources of cash were $20.8 million of net borrowings from the revolver and an increase in book overdrafts and stock options exercised net of tax benefit.  Cash from the net borrowings of the revolver, book overdrafts and stock options exercised were used to make payments on the term note, other notes and dividends.

 
27


Revolver
In June 2005, we entered into an amended $300 million revolver with a group of lenders.  The revolver matures in June 2010.  The revolver consists of both LIBOR and Prime based borrowings.  Interest rates are subject to quarterly adjustment based on operating performance and range from LIBOR plus 0.75% to 2.00%, or Prime plus 0.0% to 0.75%.  Interest is paid quarterly.  As of December 31, 2005, $77.5 million was outstanding under the revolver.

Term Notes
In June 2005, we also entered into a $75 million term note with a group of lenders.  The term note matures in June 2010 with 10% of the initial principal payable for each of the two years commencing September 2006, 20% of the initial principal payable for one year commencing September 2008 and the remaining principal balance due June 2010.  Interest rates are subject to quarterly adjustment based on operating performance and range from LIBOR plus 0.75% to 2.00%, or Prime plus 0.0% to 0.75%.  Interest is paid quarterly.  As of December 31, 2005, $75 million was outstanding under this term note.

In August 2003, we entered into a $125 million term note with a group of lenders.  The term note matures in June 2010 and is payable in quarterly installments for the first six years in amounts equal to 1% of the initial principal amount per year and equal quarterly installments for the remaining principal balance during year seven.  The term note was amended in March 2005 to reduce interest rates by 0.75% and in June 2005 to reduce interest rates another 0.25%.  The interest rate for the term note is LIBOR plus 1.75% or Prime plus 1.00%.  Interest is paid quarterly.  As of December 31, 2005, $121.9 million was outstanding under this term note.

Other
Other long-term debt of $13.9 million consists of term notes, equipment notes and capital leases for equipment.  Interest rates vary and dates of maturity are through March 2013.

Expansion of Credit Facility, Covenants and Maturities
The credit facility consists of the revolver and term notes.  The credit facility may be increased an aggregate amount of up to $150 million.  The credit facility is collateralized by all tangible and intangible property, except assets of the captive insurance subsidiary.  The credit facility contains covenants and conditions requiring the maintenance of certain financial ratios.  At December 31, 2005, we were in compliance with these covenants and conditions.  

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

2006
$
10,131
2007
 
13,914
2008
 
14,073
2009
 
77,775
2010
 
171,851
Thereafter
 
556
 
$
288,300

As of December 31, 2005 and December 31, 2004, there were $75.9 million and $41.2 million, respectively of letters of credit outstanding that guaranteed performance or payment to third parties.  These letters of credit reduce borrowing availability under the revolver.  

28

 
Hedging Activities
Derivative and hedging activities are recorded on the balance sheet at their fair values.  In June 2004, we entered into interest rate swap contracts that effectively convert a portion of the floating rate borrowings of the $121.9 million term note to a fixed interest rate through June 2009, thus reducing the impact of increases in interest rates on future interest expense.  Approximately 82% of the outstanding floating rate borrowings of the term note as of December 31, 2005 have been hedged through the designation of interest rate swap contracts accounted for as cash flow hedges.  As a result, the interest rate on $100 million of the $121.9 million floating rate borrowings outstanding at December 31, 2005 was fixed at an average rate of 6.14%.  After giving effect to the interest rate swap contracts, total borrowings are 40% fixed and 60% floating.

The fair value of derivative instruments is based on pricing models using current market rates.  The fair value of the interest rate swap contracts was a long-term asset of $1.2 million as of December 31, 2005.  The effective portion was recorded as accumulated other comprehensive income, net, a separate component of shareholders’ equity, and is subsequently reclassified into earnings in the same financial statement line item, interest expense, in the same period during which the hedged transaction is recognized in earnings.  A corresponding deferred tax liability of $0.5 million was also recorded in accumulated other comprehensive income, net for the income tax expense related to the estimated asset of the interest rate swap contracts.  The ineffective portion of the change in the value of the interest rate swap contracts is immediately recognized as a component of interest expense.  Hedge ineffectiveness for the period ended December 31, 2005 was not significant.  Management may choose not to swap floating rate debt to a fixed rate or may terminate a previously executed swap if the floating rate positions are more beneficial.

Equity
At the annual meeting of shareholders on May 3, 2005, our shareholders voted to increase the number of authorized common shares to 50 million from 20 million.  These additional shares may be issued for reasons including but not limited to stock splits, financing acquisitions, establishing strategic relationships with corporate partners and providing equity incentives.

On February 14, 2006, our Board of Directors approved a two for one split of our outstanding common shares.  Shareholders of record as of February 28, 2006 will receive a stock dividend of one additional common share for every common share they own.  The additional shares will be distributed on March 14, 2006.  
 
The information throughout these financial statements is presented as of December 31, 2005 and before the two for one split of our common shares which is effective February 28, 2006.
 
In the third quarter of 1998, we filed a shelf registration with the Securities and Exchange Commission to register two million common shares.  We may issue these shares in connection with future business acquisitions, combinations or mergers.  Shares have been issued from this registration statement for a portion of the purchase price for acquisitions.  There are approximately 1.9 million shares remaining and available under this shelf registration.

29

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

OFF-BALANCE SHEET ARRANGEMENTS

As part of our on-going business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships often referred to as structured finance or special purpose entities which might be established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.  As of December 31, 2005, we are not involved in any transactions with unconsolidated entities.

DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

Contractual obligations as of December 31, 2005 (millions):

   
Payments Due by Period
     
Contractual Obligations
 
Less than
1 Year
 
1-3
Years
 
3-5
Years
 
More than
5 Years
 
Total
 
Fair Value
 
Long-term debt
 
$
9.9
 
$
27.4
 
$
249.6
 
$
0.6
 
$
287.5
 
 
$286.0
 
Capital lease obligations
   
0.3
   
0.5
   
   
   
0.8
   
0.7
 
Operating leases
   
19.1
   
30.6
   
19.9
   
7.6
   
77.2
   
77.2
 
Unconditional purchase obligations
   
   
   
   
   
   
 
Other long-term commitments
   
   
   
   
   
   
 
   
$
29.3
 
$
58.5
 
$
269.5
 
$
8.2
 
$
365.5
 
 
$363.9
 
                                       
Interest rate swap contracts
                                     
Notional principal amount of interest rate exchange agreements maturing
                                     
Variable to fixed
   
   
   
   
 
$
100.0
 
(1.2)
 
Average pay rate
   
   
   
   
   
4.39
%
   
Average receive rate
   
   
   
   
   
3.30
%
     
                                 
 
$362.7
 

Accelerated repayment of our revolver and term notes may occur if certain financial conditions or warranties and representations are not met.  The credit facility consists of the revolver and term notes.  The credit facility is collateralized by all tangible and intangible property, except assets of the captive insurance subsidiary.  The credit facility contains covenants and conditions requiring the maintenance of certain financial ratios.  At December 31, 2005, we were in compliance with these covenants and conditions.  

We have potential put and call obligations associated with our interests in BBP Companies, Riggs Plumbing, RCI Construction, A-1 Truss, WBC Mid-Atlantic and WBC Construction.  Under the purchase agreements, we have the right to purchase the remaining portions during certain periods or if certain conditions are met.  Likewise, the other owners have the option to require us to purchase the remaining portions during certain dates.  The purchase price for the remaining portions will be based generally on a multiple of historical earnings.

30

 
As part of our revolver, we have $75.9 million in letters of credit outstanding principally for the deductible portion of automobile, general liability and workers’ compensation claims.  These obligations are not required to be recorded on our balance sheet and renew automatically on their various anniversary dates or until released by their respective beneficiaries.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Prices of commodity wood products, which are subject to significant volatility, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time.  We do not use derivative financial instruments to hedge commodity wood product prices.

Changes in interest expense occur when market interest rates change.  Changes in the carrying amount of debt could also increase these interest rate risks.  We use interest rate swap contracts to hedge interest rate risks.  Approximately 82% of the outstanding floating rate borrowings of the term notes as of December 31, 2005 have been hedged through the designation of interest rate swap contracts accounted for as cash flow hedges.  After giving effect to the interest rate swap contracts, total borrowings are 40% fixed and 60% floating.  Based on debt outstanding as of December 31, 2005, a 0.25% increase in interest rates would result in approximately $0.4 million of additional interest expense annually.

CRITICAL ACCOUNTING ESTIMATES 

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  These estimates and assumptions include critical accounting estimates which are defined by the Securities and Exchange Commission as those that are the most important to the portrayal of our financial condition, results of operations or cash flows.  These estimates require management’s subjective and complex judgments often as a result of the need to estimate matters that are inherently uncertain.  We review the development, selection and disclosure of these estimates with our Audit Committee.  Management believes the estimates utilized are reasonable under the circumstances, however actual results could differ from these estimates and may require adjustment in future periods.  Our critical accounting estimates are:

Revenue Recognition for Construction Services
The percentage-of-completion method is used to recognize revenue for construction services.  Periodic estimates of our progress towards completion are made based on a comparison of labor costs incurred to date with total estimated contract costs for labor.  The percentage-of-completion method requires the use of various estimates, including among others, the extent of progress towards completion, contract revenues and contract completion costs.  Contract revenues and contract costs to be recognized are dependent on the accuracy of estimates, including quantities of materials, labor productivity and other cost estimates.  We have a history of making reasonable estimates of the extent of progress towards completion, contract revenues and contract completion costs.  However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates.  Revisions of contract revenues and cost estimates as well as provisions for estimated losses on uncompleted contracts are reflected in the period such revisions are determined.  

31

 
Estimated Losses on Uncompleted Contracts and Changes in Contract Estimates
Estimated losses on uncompleted contracts and changes in contract estimates are reflected in the period such revisions are determined.  These reserves are established by assessing estimated costs to complete, change orders and claims for uncompleted contracts.

At December 31, 2005, the reserve for these estimated losses was $0.5 million for BMC Construction and less than $0.1 million for BMC West.  These reserves are established by assessing estimated costs to complete, change orders and claims.  Assumptions for estimated costs to complete include material prices, labor costs, labor productivity and contract claims.  Such estimates are inherently uncertain and therefore it is possible that actual completion costs may vary from these estimates.  We have a history of making reasonable estimates of the extent of progress towards completion, contract revenue and contract completion costs.  However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates.  Revisions of estimated losses on uncompleted contracts are reflected in the period such revisions are determined.

Goodwill
Goodwill represents the excess of purchase price over the fair values of net tangible and identifiable intangible assets of acquired businesses.  An annual assessment for impairment is completed in the fourth quarter and whenever events and circumstances indicate the carrying amount may not be recoverable.  An impairment is recognized if the carrying amount is more than the estimated future operating cash flows as measured by fair value techniques.

At December 31, 2005, goodwill was $167.3 million for BMC Construction and $20.2 million for BMC West.  Our fourth quarter assessment concluded with an impairment of $0.8 million related to goodwill due to changes in a specific market at BMC Construction and no impairment for goodwill at BMC West.  The impairment assessment includes determining the estimated fair value of reporting units based on discounting the future operating cash flows using a discount rate reflecting our estimated average cost of funds.  Future operating cash flows are derived from our budget information, which includes assumptions of future volumes, pricing of commodity products and labor costs.  Prices for commodity products are inherently volatile.  

Due to the variables associated with prices of commodity products and the effects of changes in circumstances, both the precision and reliability of the estimates of future operating cash flows are subject to uncertainty.  As additional information becomes known, we may change our estimates.

Insurance Deductible Reserves
The estimated cost of automobile liability, general liability and workers’ compensation claims is determined by actuarial methods.  Claims in excess of insurance deductibles are insured with third-party insurance carriers.  Reserves for claims are recognized based on the estimated costs of these claims as limited by deductibles of the applicable insurance policies.  

32

 
At December 31, 2005, the reserve for automobile, general liability and workers’ compensation claims was $42.6 million.  The actuarial assessment includes determining the estimated cost of claims.  The reserve for these claims is susceptible to change based on the estimated cost of the claims.  Actual loss experience substantially different than the actuarial assumptions may occur.  Future reserves are subject to the nature and frequency of claims, medical cost inflation and changes in the insurance deductibles of the applicable insurance policies.
 
Share-based Compensation
Our estimate of the fair values of our share-based payment transactions are based on the modified Black-Scholes-Merton model.  In order to meet the fair value measurement objective, we are required to develop estimates regarding expected exercise patterns, share price volatility, forfeiture rates, risk-free interest rate and dividend yield.  These assumptions are based principally on historical experience.  When circumstances indicate the availability of new or different information that would be useful in estimating these assumptions, revisions will be made and reflected in the periods such revisions are determined.  Due to uncertainties inherent in these assumptions, it is possible that actual share-based compensation may vary from this estimate.  

RECENT ACCOUNTING PRINCIPLES

In December 2004, the Financial Accounting Standards Board (FASB) revised Statement of Financial Accounting Standards No. 123, Share-Based Payment, and superseded Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.  This statement requires the measurement and recognition of liabilities incurred to employees in share-based payment transactions at fair value.  Compensation cost for share-based awards and the related tax effects are recognized in the same financial statement line as cash compensation as the requisite service is rendered.  Compensation cost is based on the fair value of those awards on the grant date.  This statement is effective for the first quarter of 2006.  As a result, we expect to recognize compensation cost for share-based awards of $4.5 million in 2006, $4.6 million in 2007 and $3.1 million in 2008. These estimates may change based on additional share-based awards as well as actual forfeiture and vesting experience.  Additionally, tax benefits for share-based compensation will be reported as a financing activity, rather than as an operating cash flow.  

BUSINESS RISKS AND FORWARD-LOOKING STATEMENTS

There are a number of business risks and uncertainties that affect our operations and therefore could cause future results to differ from past performance or expected results.  Additional information regarding business risks and uncertainties is contained in Item 1A of this Form 10-K.  These risks and uncertainties may include, however are not limited to:

33

 
·  
demand for single-family homes which is influenced by changes in the overall condition of the U.S. economy, including interest rates, job formation, consumer confidence and other important factors;
·  
changes to our business model;
·  
the integration of acquired businesses may not result in anticipated cost savings and revenue synergies being fully realized or may take longer to realize than expected;
·  
our ability to identify suitable acquisition candidates;
·  
availability of and our ability to attract, train and retain qualified individuals;
·  
our ability to implement and maintain cost structures that align with revenue growth;
·  
changes in the business models of our customers may limit our ability to provide construction services and building products required by our customers;
·  
fluctuations in our costs and availability of sourcing channels for commodity wood products, concrete, steel and other building materials;
·  
intense competition;
·  
weather conditions including natural catastrophic events;
·  
exposure to construction defect and product liability claims as well as other legal proceedings;
·  
disruptions in our information systems;
·  
actual and perceived vulnerabilities as a result of terrorist activities and armed conflict; and
·  
numerous other matters of a local and regional scale, including those of a political, economic, business, competitive or regulatory nature.

Risks related to our shares include, however are not limited to:  
·  
price for our shares may fluctuate significantly; and
·  
anti-takeover defenses and certain provisions could prevent an acquisition of our company or limit share price.

Certain statements in the Annual Report to Shareholders including those related to expectations about homebuilding activity in our markets, demographic trends supporting homebuilding and anticipated sales and operating income are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Statements that are not historical or current facts, including statements about our expectations, anticipated financial results and future business prospects are forward-looking statements.  While these statements represent our current judgment on what the future may hold and we believe these judgments are reasonable, these statements involve risks and uncertainties that are important factors that could cause our actual results to differ materially from those in forward-looking statements.  These factors include, but are not limited to the risks and uncertainties cited in the above paragraph.  Undue reliance should not be placed on such forward-looking statements, as such statements speak only as of the date of the filing of this Form 10-K.  We undertake no obligation to update forward-looking statements.


 
34

 

Inventory Price Risk
Prices of commodity wood products, which are subject to significant volatility, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time.  We do not use derivative financial instruments to hedge commodity wood product prices.

Interest Rate Risk
Changes in interest expense occur when market interest rates change.  Interest rate swap contracts are currently utilized to hedge interest rate risks.  Approximately 82% of the outstanding floating rate borrowings of the $121.9 million term note as of December 31, 2005 have been hedged through the designation of interest rate swap contracts accounted for as cash flow hedges.  After giving effect to the interest rate swap contracts, total borrowings are 40% fixed and 60% floating.  Based on debt outstanding as of December 31, 2005, a 0.25% increase in interest rates would result in approximately $0.4 million of additional interest expense annually.

35



Building Materials Holding Corporation
Consolidated Statements of Income
(thousands, except per share data)
 
   
Year Ended December 31 
 
 
 
2005
 
 2004
 
 2003
 
Sales
               
   Construction services
 
$
1,586,509
 
$
904,362
 
$
498,052
 
   Building products
   
1,325,651
   
1,186,663
   
917,019
 
      Total sales
   
2,912,160
   
2,091,025
   
1,415,071
 
                     
Costs and operating expenses
                   
   Cost of goods sold
                   
      Construction services
   
1,285,949
   
768,407
   
436,908
 
      Building products
   
967,877
   
897,725
   
688,354
 
   Impairment of assets
   
1,320
   
2,274
   
829
 
   Selling, general and administrative expenses
   
420,862
   
317,002
   
250,319
 
   Other income, net
   
(3,204
)
 
(2,491
)
 
(1,768
)
      Total costs and operating expenses
   
2,672,804
   
1,982,917
   
1,374,642
 
 
                   
Income from operations
   
239,356
   
108,108
   
40,429
 
 
                   
Interest expense
   
14,420
   
13,560
   
9,279
 
 
                   
Income before income taxes, minority interests and equity earnings
   
224,936
   
94,548
   
31,150
 
 
                   
Income taxes
   
79,915
   
35,198
   
11,402
 
 
                   
Minority interests income
   
(15,514
)
 
(5,440
)
 
(1,250
)
 
                   
Equity earnings, net of tax of $918
   
   
   
1,431
 
                     
Net income
 
$
129,507
 
$
53,910
 
$
19,929
 
                     
                     
                     
Net income per share:
                   
   Basic
 
 
$9.22
 
 
$4.00
 
 
$1.50
 
   Diluted
 
$8.82
 
 
$3.87
 
 
$1.48
 

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


 
36

Building Materials Holding Corporation 
Consolidated Balance Sheets
(thousands, except share data)


   
December 31
     
December 31
   
2005
2004
     
2005
2004
ASSETS
           
LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS’ EQUITY
         
Cash and cash equivalents
$
30,078 
 
$
19,496 
             
Marketable securities
 
3,645 
   
2,216 
 
Accounts payable
$
146,627 
 
$
77,591 
Receivables, net of allowances
 
         
Accrued compensation
 
65,928 
   
34,078 
   of $3,756 and $4,367
 
363,527 
 
 
238,071 
 
Insurance deductible reserves
 
21,872 
   
12,903 
Inventory
 
168,282 
 
 
153,391 
 
Other accrued liabilities
 
51,579 
   
26,177 
Unbilled receivables
 
56,128 
 
 
17,196 
 
Billings in excess of costs and estimated earnings
 
33,799 
   
11,274 
Deferred income taxes
 
5,768 
 
 
11,913 
 
 
   
 
Prepaid expenses and other
 
6,967 
 
 
7,317 
 
Current portion of long-term debt
 
10,131 
 
 
3,404 
   Total current assets
 
634,395 
 
 
449,600 
 
   Total current liabilities
 
329,936 
 
 
165,427 
 
 
   
 
               
Property and equipment
 
         
Deferred income taxes
 
6,911 
 
 
297 
   Land
 
47,328 
   
37,036 
 
Insurance deductible reserves
 
20,753 
   
13,736 
   Buildings and improvements
 
118,556 
   
102,321 
 
Long-term debt
 
278,169 
 
 
206,419 
   Equipment
 
166,633 
   
124,451 
 
Other long-term liabilities
 
30,689 
 
 
23,162 
   Construction in progress
 
9,485 
   
4,956