Building Materials Holding (BLGM) 10-Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2006

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)	(I.R.S. Employer Identification No.)

Four Embarcadero Center, Suite 3200, San Francisco, CA 94111

(415) 627-9100

N/A

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

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

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 Exchange Act).

Yes ¨ No þ

The number of shares outstanding of the registrant’s common stock as of May 4, 2006 was 28,948,472.

BUILDING MATERIALS HOLDING CORPORATION

FORM 10-Q

For the Period Ended March 31, 2006

INDEX

	Page Number
PART I - FINANCIAL INFORMATION	2
Item 1 - Financial Statements (unaudited)	2
Consolidated Statements of Income for the Three Months Ended March 31, 2006 and 2005	2
Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005	3
Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2006 and 2005	4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005	5
Notes to Consolidated Financial Statements	6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	32
Item 4 - Controls and Procedures	33
PART II - OTHER INFORMATION	34
Item 1 - Legal Proceedings	34
Item 1A - Risk Factors	34
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3 - Defaults Upon Senior Securities	34
Item 4 - Submission of Matters to a Vote of Security Holders	34
Item 5 - Other Information	35
Item 6 - Exhibits	35
SIGNATURES	36

-1-

Item 1 - Financial Statements

Building Materials Holding Corporation

Consolidated Statements of Income

(thousands, except per share data)

(unaudited)

	Three Months Ended
	March 31
	2006			2005
Sales
Construction services	$	548,905		$	280,045
Building products		335,652			292,883
Total sales		884,557			572,928
Costs and operating expenses
Cost of goods sold
Construction services		448,300			227,484
Building products		246,792			215,648
Selling, general and administrative expenses		136,866			89,993
Other income, net		(1,787	)		(505	)
Total costs and operating expenses		830,171			532,620
Income from operations		54,386			40,308
Interest expense		5,590			3,198
Income before income taxes and minority interests		48,796			37,110
Income taxes		17,810			12,961
Minority interests income, net of income taxes		(2,917	)		(3,001	)
Net income	$	28,069		$	21,148
Net income per share:
Basic		$0.98			$0.76
Diluted		$0.95			$0.73

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

-2-

Building Materials Holding Corporation

Consolidated Balance Sheets

(thousands, except share data)

(unaudited)

	March 31			December 31					March 31		December 31
	2006			2005					2006		2005
Assets							Liabilities, Minority Interests and Shareholders’ Equity
Cash and cash equivalents	$	30,270		$	30,078
Marketable securities		8,025			3,645			Accounts payable	$	191,189	$	146,627
Receivables, net of								Accrued compensation		51,370		65,928
allowances of $4,534 and $3,756		412,581			363,527			Insurance deductible reserves		24,816		21,872
Inventory		193,663			168,282			Other accrued liabilities		95,458		51,579
Unbilled receivables		86,378			56,128			Billings in excess of costs
Deferred income taxes		7,440			5,768			and estimated earnings		40,454		33,799
Prepaid expenses and other		9,292			6,967			Current portion of long-term debt		11,939		10,131
Total current assets		747,649			634,395			Total current liabilities		415,226		329,936
Property and equipment								Deferred income taxes		8,375		6,911
Land		48,201			47,328			Insurance deductible reserves		25,125		20,753
Buildings and improvements		124,363			118,556			Long-term debt		356,151		278,169
Equipment		176,625			166,633			Other long-term liabilities		34,601		30,689
Construction in progress		10,345			9,485			Total liabilities		839,478		666,458
Accumulated depreciation		(127,606	)		(121,525	)
Marketable securities		24,613			28,875			Minority interests		10,770		14,006
Deferred loan costs		3,408			3,616
Other long-term assets		26,270			20,465			Commitments and contingent liabilities		―		―
Other intangibles, net		78,269			55,227
Goodwill		238,162			187,470			Shareholders’ equity
Total assets	$	1,350,299		$	1,150,525			Common shares, $0.001 par value:
								authorized 50 million
								shares; issued and
								outstanding 28,939,776
								and 28,758,580 shares		29		29
								Additional paid-in capital		145,022		143,780
								Unearned compensation		―		(2,698	)
								Retained earnings		353,638		328,463
								Accumulated other comprehensive income, net		1,362		487
								Total shareholders’ equity		500,051		470,061
								Total liabilities, minority interests and shareholders’ equity	$	1,350,299	$	1,150,525

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

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Building Materials Holding Corporation

Consolidated Statements of Shareholders’ Equity

(thousands)

(unaudited)

														Accumulated Other
														Comprehensive Income (Loss)
														Net Unrealized Gain (Loss) From
														Interest
					Additional									Rate
	Common Shares				Paid-In			Unearned			Retained			Swap			Marketable
	Shares		Amount		Capital			Compensation			Earnings			Contracts			Securities			Total
Balance at December 31, 2004	27,705	$	28	$	124,580		$	(1,383	)	$	205,812		$	(1,362	)	$	3		$	327,678
Net income											21,148									21,148
Unrealized gain														2,394						2,394
Taxes for unrealized gain														(922	)					(922	)
Unrealized loss																	(247	)		(247	)
Tax benefit for unrealized loss																	95			95
Comprehensive income																				22,468
Issuance of restricted shares	114				2,596			(2,596	)											―
Earned compensation expense								254												254
Share options exercised	230				1,451															1,451
Tax benefit for share options exercised					1,387															1,387
Shares issued from Employee Plan	9				182															182
Cash dividends on common shares											(1,122	)								(1,122	)
Balance at March 31, 2005	28,058	$	28	$	130,196		$	(3,725	)	$	225,838		$	110		$	(149	)	$	352,298
Balance at December 31, 2005	28,759	$	29	$	143,780		$	(2,698	)	$	328,463		$	736		$	(249	)	$	470,061
Net income											28,069									28,069
Unrealized gain														1,440						1,440
Taxes for unrealized gain														(554	)					(554	)
Unrealized loss																	(103	)		(103	)
Tax benefit for unrealized loss																	92			92
Comprehensive income																				28,944
Reclassify unearned compensation -restricted shares					(2,698	)		2,698												―
Earned compensation - options					2,198															2,198
Earned compensation - restricted shares					723															723
Issuance of restricted shares	138
Share options exercised	32				291															291
Tax benefit for share options exercised					328															328
Shares issued from Employee Plan	11				400															400
Cash dividends on common shares											(2,894	)								(2,894	)
Balance at March 31, 2006	28,940	$	29	$	145,022		$	―		$	353,638		$	1,622		$	(260	)	$	500,051

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

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Building Materials Holding Corporation

Consolidated Statements of Cash Flows

(thousands)

(unaudited)

	Three Months Ended
	March 31
Operating Activities		2006	2005

Net income	$	28,069		$	21,148
Items in net income not using (providing) cash:
Minority interests, net		2,917			3,001
Share-based compensation		2,980			281
Depreciation and amortization		10,390			5,570
Loss on sale of assets, net		27			81
Deferred income taxes		(208	)		(1,174	)
Tax benefit for share options		―			1,387
Changes in assets and liabilities, net of effects of acquisitions and sales of business units:
Receivables, net		(19,399	)		(20,994	)
Inventory		(15,096	)		(31,956	)
Unbilled receivables		(22,510	)		(6,251	)
Prepaid expenses and other current assets		(2,257	)		3,981
Accounts payable		35,094			22,813
Accrued compensation		(15,745	)		285
Insurance deductible reserves		2,944			5,419
Other accrued liabilities		16,019			6,800
Billings in excess of costs and estimated earnings		(4,425	)		5,003
Other long-term assets and liabilities		(4,068	)		(537	)
Other, net		(370	)		(732	)
Cash flows provided by operating activities		14,362			14,125
Investing Activities
Purchases of property and equipment		(10,409	)		(8,345	)
Acquisitions and investments in businesses, net of cash acquired		(80,005	)		(4,713	)
Proceeds from dispositions of property and equipment		425			68
Purchase of marketable securities		(253	)		(169	)
Other, net		(1,777	)		(1,027	)
Cash flows used by investing activities		(92,019	)		(14,186	)
Financing Activities
Net borrowings under revolver		80,700			13,100
Principal payments on term note		(313	)		(313	)
Net (payments) borrowings on other notes payable		(688	)		458
Increase in book overdrafts		329			718
Proceeds from share options exercised		291			1,451
Tax benefit for share options		328			―
Dividends paid		(2,158	)		(1,108	)
Deferred financing costs		―			(348	)
Distributions to minority interests		(245	)		―
Other, net		(395	)		73
Cash flows provided by financing activities		77,849			14,031
Increase in Cash and Cash Equivalents		192			13,970
Cash and cash equivalents, beginning of year		30,078			19,496
Cash and cash equivalents, end of year	$	30,270		$	33,466
Supplemental Disclosure of Cash Flow Information
Accrued but unpaid dividends	$	2,893		$	1,122
Cash paid for interest	$	4,923		$	2,996
Cash paid for income taxes	$	13,146		$	8,125
Supplemental Disclosure of Non-cash Investing Activities
Fair value of assets acquired	$	133,143		$	17,910
Liabilities assumed	$	53,138		$	13,197
Cash paid for acquisitions and investments in businesses, net of cash acquired	$	80,005		$	4,713

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

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Notes to Consolidated Financial Statements

1.Basis of Presentation

The quarterly consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2005.

The quarterly consolidated financial statements have not been audited by independent registered public accountants. However, in the opinion of management, all adjustments necessary, including those of a normal and recurring nature, to present fairly the results for the periods have been included. The preparation of these consolidated financial statements required estimates and assumptions. Actual results may differ from those estimates.

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

Common Share Split

On February 14, 2006, our Board of Directors approved a two for one split of our outstanding common shares. Shareholders as of February 28, 2006 received a stock dividend of one additional common share for every common share they owned. All share and per share information for all prior periods presented has been retroactively adjusted to reflect this share split.

-6-

2.Net Income Per Share

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

		Three Months Ended
		March 31
		2006		2005
Net income	$	28,069	$	21,148
Weighted average shares used to determine basic net income per share		28,524		27,670
Net effect of dilutive stock options and restricted stock (1)		1,049		1,195
Weighted average shares used to determine diluted net income per share		29,573		28,865
Net income per share:
Basic		$0.98		$0.76
Diluted		$0.95		$0.73
Cash dividends declared per share		$0.10		$0.04

⁽¹⁾ Options to purchase common shares of 407,100 and 416,000 for the first quarter of 2006 and 2005 were not dilutive and therefore excluded from the computation of net income per diluted share. Options were categorized as not dilutive on the basis that the exercise price was greater than the average market value of the common shares in the periods presented.

-7-

3.Accounting for Share-Based Compensation

On January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment. This statement required the measurement and recognition of share-based payments to employees at fair value. Compensation cost is based on the fair value of those shares on the grant date. Compensation cost for share-based awards are recognized as the requisite service is rendered in the same financial statement line as cash compensation. Additionally, tax benefits for share-based compensation payments are reported as a financing activity, rather than as an operating cash flow.

Previously, we did not recognize expense for grants of share options if the exercise price was at least equal to the fair value of the shares on the date of grant. In accordance with the modified prospective method of transition, compensation expense is recognized over the requisite service period for all share-based compensation granted after the date of adoption as well as grants unvested on the date of adoption. Prior periods are not revised for comparative purposes. Share-based compensation expense included restricted shares and share awards and will now include share options.

The fair value of compensation expense recognized for vested options was $1.6 million whereas the compensation expense for non-vested options due to early retirement eligibility was $0.6 million for the period ended March 31, 2006. As this compensation does not require the payment of cash, this is reflected as a non-cash item in the statement of cash flows.

Share-based compensation expense is included in selling, general and administrative since it is incentive compensation issued primarily to our executives. Share-based compensation expense for options, restricted shares and share awards was $2.9 million for the period ended March 31, 2006. Share-based compensation expense for restricted shares and share awards was $0.4 million for the period ended March 31, 2005 and $1.6 million for 2005.

As of March 31, 2006 there was $17.7 million of unrecognized compensation expense related to non-vested share-based compensation arrangements granted under our plans. This expense will be recognized as the requisite services are rendered and is expected to be recognized over the next 5 years.

Pro Forma Information for the Period Prior to January 1, 2006

Financial information for prior periods has not been restated to reflect this change in accounting principle. The following table illustrates the effect on net income and income per share if the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, were applied to share options for the prior period (thousands, except per share data):

		Three Months Ended
		March 31
		2005
Net income, as reported	$	21,148
Add: Share-based employee compensation expense determined under APB 25, net of related tax effects		138
Deduct: Share-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(557	)
Pro forma net income	$	20,729
Diluted net income per share:
As reported		$0.73
Pro forma		$0.72

Our estimate of the fair values of our share-based compensation is 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, dividend yield and risk-free interest rate. These assumptions are based principally on historical experience. The expected term was based on the average of the vesting term and the term of the option. Volatility was based on our daily trading data of our common shares over a term consistent with the term of the option. Expected dividend yield is based on historical dividend payments. Risk free interest rate reflects the yield on the zero coupon U.S. Treasury for the remaining term of the options. 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 period such revisions are determined. Due to uncertainties inherent in these assumptions, it is possible that actual share-based compensation may vary from this estimate.

-8-

4.Impairment of Assets

Long-lived assets such as property, equipment and intangibles are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment for these assets is recognized if the carrying amount is more than the estimated future operating cash flows on an undiscounted basis. Similarly, goodwill is evaluated for impairment in the fourth quarter and whenever events and circumstances indicate the carrying amount may not be recoverable. An impairment for goodwill is recognized if the carrying amount is more than the estimated future operating cash flows as measured by fair value techniques.

As a result of changes in specific markets, impairments of $0.8 million for the carrying amount of goodwill and $0.5 million for the carrying amount of certain customer relationships were recognized for BMC Construction in 2005.

-9-

5.Acquisitions and Minority Interests

Acquisitions are accounted for under the purchase method of accounting. The purchase price is allocated to the assets acquired, including intangible assets, and liabilities assumed based on their estimated fair values at the date of acquisition. Subsequent to the initial allocation of purchase price, adjustments may be made to reflect the fair value of working capital and tangible assets. Any excess of the purchase price over the estimated fair value of the identifiable assets and liabilities acquired is recorded as goodwill. Operating results of acquired businesses are included in the consolidated statements of income from the date of acquisition.

· In February 2006, BMC West acquired three facilities providing building materials distribution and millwork services in Houston, Texas for approximately $20.8 million in cash of which $0.4 million has been retained for the settlement period. This purchase price is subject to working capital adjustment. Information required to complete the purchase price allocation is not yet available. Final allocation of the purchase price will be completed as soon as this information is available.

· In January 2006, BMC Construction acquired framing businesses in Palm Springs, California and Reno, Nevada for approximately $57.7 million in cash of which $12.1 million has been retained for the settlement period. This purchase price is subject to working capital adjustment. An additional cash payment may be required based on operating performance through December 2009. Information required to complete the purchase price allocation is not yet available. Final allocation of the purchase price will be completed as soon as this information is available.

· In October 2005, BMC Construction acquired a framing services business in San Diego, California for approximately $72.6 million in cash of which $7.7 million has been retained for the settlement period and operating performance. This purchase price is subject to working capital adjustment. An additional cash payment may be required based on operating performance through September 2009. Information required to complete the purchase price allocation is not yet available. Final allocation of the purchase price will be completed as soon as this information is available.

· In September 2005, BMC Construction acquired a concrete and plumbing services business in Las Vegas, Nevada and Southern California for $85.6 million in cash.

· In September 2005, BMC West acquired a truss manufacturing business in McCall, Idaho for $1.3 million in cash.

· In June 2005, BMC Construction acquired a stucco business in Las Vegas, Nevada for $5.9 million in cash.

Minority interest reflects the other owners’ proportionate share in the assets and liabilities of business ventures as of the date of purchase, adjusted by the proportionate share of post-acquisition income or loss. As the operating results of entities with minority interest are consolidated, minority interests income represents the income or loss attributable to the other owners.

· In January 2006, BMC Construction acquired the remaining 20% interest in WBC Construction, LLC for $27.0 million in cash of which $24.4 million is payable in December 2006. An additional cash payment may be required based on operating performance through December 2006. Information required to complete the purchase price allocation is not yet available. Final allocation of the purchase price will be completed as soon as this information is available.

-10-

In August 2005, BMC Construction acquired an additional 20% interest in WBC Construction, LLC for $24.8 million in cash. WBC Construction provides concrete block masonry and concrete services to high-volume production homebuilders in Florida.

· In July 2005, BMC Construction acquired a 51% interest in BBP Companies for $9.4 million in cash and 16,836 common shares. The remaining 49% is owned by BBP Concrete and is recognized as minority interest. BBP Companies provide concrete services to high-volume production homebuilders in Arizona.

· In July 2005, BMC Construction acquired an additional 13% interest in Riggs Plumbing, LLC (Riggs Plumbing) for $1.4 million in cash. In April 2005, we acquired an initial 60% interest for $17.8 million in cash. The remaining 27% is owned by Riggs & Associates, LLC and is recognized as minority interest. Riggs Plumbing provides plumbing services to high-volume production builders in the Phoenix and Tucson markets.

· In January 2005, BMC Construction acquired a 51% interest in RCI Construction, LLC (RCI Construction) for $4.9 million in cash. The remaining 49% is owned by Residential Carpentry, Inc. and is recognized as minority interest. RCI Construction provides framing services to high-volume production builders in the greater Chicago area.

Assets and liabilities acquired in these acquisitions included (thousands):

	March 31		December 31				March 31			December 31
	2006		2005				2006			2005
Cash and cash equivalents	$	―	$	1,644		Accounts payable	$	9,918		$	46,078
Receivables		29,655		106,407		Accrued compensation		1,187			7,385
Inventory		10,286		11,559		Insurance deductible reserves		―			3,192
Unbilled receivables		7,740		30,554		Other accrued liabilities		27,860			30,014
Deferred income taxes		―		(6,527	)	Billings in excess of costs
Prepaid expenses and other		36		4,057		and estimated earnings		11,080			24,436
						Current portion of long-term debt		―			5,605
Total current assets		47,717		147,694		Total current liabilities		50,045			116,710
Property and equipment		8,606		33,406		Deferred income taxes		―			8,528
Other long-term assets		13		18		Long-term debt		―			10,048
Other intangibles, net		26,111		46,824		Other long-term liabilities		9,000			―
Goodwill		50,696		109,982		Total liabilities		59,045			135,286
						Minority interests		(5,907	)		(3,172	)
Total assets	$	133,143	$	337,924		Total liabilities and minority interests	$	53,138		$	132,114

-11-

The following summarizes pro forma results of operations assuming the acquisitions occurred as of the beginning of 2005. Due to uncertainties in these assumptions, the pro forma data does not purport to be indicative of the results of operations that would have resulted had the acquisitions been consummated at the beginning of the period presented, or that may occur in the future (thousands, except per share data):

	Three Months Ended
	March 31
	2006		2005
Sales
As reported	$	884,557	$	572,928
Pro forma	$	899,251	$	788,019
Net income
As reported	$	28,069	$	21,148
Pro forma	$	28,979	$	28,133
Diluted net income per share:
As reported		$0.95		$0.73
Pro forma		$0.98		$0.97

Subsequent to March 31, 2006

· In April 2006, BMC Construction acquired a concrete services business in Northern Arizona for approximately $1.5 million in cash.

· In April 2006, BMC Construction acquired a wall panel and truss manufacturing business in Palm Springs, California for approximately $6.7 million in cash.

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

	Call Options	Put Options
BBP Companies	July 2008 through June 2015	July 2008 through June 2015
Riggs Plumbing	April 2008 through March 2013	April 2008 through March 2013
RCI Construction	January 2008 through January 2012	January 2008 through January 2012
A-1 Truss	September 2004 through August 2014	September 2009 through August 2014
WBC Mid-Atlantic	October 2003 through September 2010	December 2006 through December 2008

-12-

6.Marketable Securities

Investments in marketable securities consist of debt securities held by our captive insurance subsidiary and are considered available-for-sale and recorded at fair values. Unrealized gains and losses are recorded as a component of accumulated other comprehensive income, net, a component of shareholders’ equity. There were no significant unrealized losses.

The fair value of these marketable securities were as follows (thousands):

	March 31,		December 31,
	2006		2005
Money market funds	$	782	$	415
U.S. government and agencies		7,794		7,838
Asset backed securities		13,313		13,391
Corporate securities		10,749		10,876
	$	32,638	$	32,520

Contractual maturities were as follows (thousands):

	March 31,		December 31,
	2006		2005
Less than one year	$	8,025	$	3,645
One to two years		6,516		9,893
Two to five years		17,496		18,982
More than five years		601		―
	$	32,638	$	32,520

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7.Intangible Assets and Goodwill

Intangible assets represent the values assigned to customer relationships, covenants not to compete and trade names. Intangible assets are amortized on a straight-line basis over their expected useful lives. Customer relationships are amortized over three to seventeen years, covenants not to compete over two to five years and trade names over three years. Intangible amortization expense was $3.1 million for the period ended March 31, 2006 and $4.7 million in 2005. Intangible assets consist of the following (thousands):

	March 31, 2006
	Gross
	Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Customer relationships	$	84,035	$	(12,285	)	$	71,750
Covenants not to compete		9,183		(2,870	)		6,313
Trade names		204		(108	)		96
Other		146		(36	)		110
	$	93,568	$	(15,299	)	$	78,269

	December 31, 2005
	Gross
	Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Customer relationships	$	58,926	$	(9,165	)	$	49,761
Covenants not to compete		7,541		(2,307	)		5,234
Trade names		204		(91	)		113
Other		146		(27	)		119
	$	66,817	$	(11,590	)	$	55,227

Estimated amortization expense for intangible assets is $9.2 million for the remainder of 2006, $11.5 million for 2007, $10.1 million for 2008, $10.0 million for 2009, $9.1 million for 2010 and $28.4 million thereafter.

Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Adjustments to amounts previously reported as goodwill occur as a result of completing the purchase price allocation to the assets acquired, including intangible assets, and liabilities assumed based on their estimated fair values at the date of acquisition.

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 at the reporting unit if the carrying amount is more than the estimated future operating cash flows as measured by fair value techniques.

Changes in the carrying amount of goodwill by business segment were as follows (thousands):

	BMC West		BMC Construction		Total
Balance at December 31, 2005	$	20,202	$	167,268	$	187,470
Purchase price adjustment		―		1,903		1,903
Goodwill acquired		116		48,673		48,789
Balance at March 31, 2006	$	20,318	$	217,844	$	238,162

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8.Debt

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

As of March 31, 2006			Stated Interest Rate	Notional Amount of Interest Rate Swaps		Effective Interest Rate
	Balance					Average for Quarter	As of March 31
Revolving credit facility	$	158,200	LIBOR plus 0.75% or Prime plus 0.00%	$	―	6.13%	5.94%
Term note		75,000	LIBOR plus 0.75% or Prime plus 0.00%		―	5.29%	5.73%
Term note		121,563	LIBOR plus 1.75%		100,000	6.17%	6.25%
Other		13,327	Various		―	―	―
		368,090		$	100,000
Less:  Current portion		11,939
	$	356,151

As of December 31, 2005			Stated Interest Rate	Notional Amount of Interest Rate Swaps		Effective Interest Rate
	Balance					Average for Year	As of December 31
Revolving credit facility	$	77,500	LIBOR plus 0.75% or Prime plus 0.00%	$	―	5.37%	6.08%
Term note		75,000	LIBOR plus 0.75% or Prime plus 0.00%		―	4.52%	5.28%
Term note		121,875	LIBOR plus 1.75%		100,000	6.23%	6.17%
Other		13,925	Various		―	―	―
		288,300		$	100,000
Less:  Current portion		10,131
	$	278,169

Revolver

In June 2005, we entered into an amended $300 million revolver with a group of lenders. In April 2006, we exercised an existing option to add another $150 million in borrowing capacity to our revolver which increased our borrowing capacity under the revolver to $450 million. 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 0.00% to 0.75%. Interest is paid quarterly. As of March 31, 2006, $158.2 million was outstanding under the revolver.

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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 0.00% to 0.75%. Interest is paid quarterly. As of March 31, 2006, $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 interest rate for the term note is LIBOR plus 1.75%, or Prime plus 1.00%. Interest is paid quarterly. As of March 31, 2006, $121.6 million was outstanding under this term note.

Other

Other long-term debt of $13.3 million consists of term notes, equipment notes and capital leases for equipment. Interest rates vary and dates of maturity are through March 2013.

Covenants and Maturities

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 March 31, 2006, we were in compliance with these covenants and conditions.

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

2006	$	9,180
2007		13,946
2008		14,081
2009		77,777
2010		252,550
Thereafter		556
	$	368,090

As of March 31, 2006 and December 31, 2005 there were $75.9 million of letters of credit outstanding that guaranteed performance or payment to third parties. These letters of credit reduce borrowing availability under the revolver.

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 $121.6 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 March 31, 2006 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 $121.6 million floating rate borrowings outstanding at March 31, 2006 was fixed at an average rate of 6.14%. After giving effect to the interest rate swap contracts, total borrowings were 31% fixed and 69% 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 $2.6 million as of March 31, 2006. The effective portion was recorded in 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 $1.0 million was also recorded in accumulated other comprehensive income, net of the income tax related to the estimated fair value 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 March 31, 2006 was not significant. Management may choose not to swap floating debt to a fixed rate or may terminate a previously executed swap if the floating rate positions are more beneficial.

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9.Shareholders’ Equity

Preferred Shares

We are authorized to issue 2 million preferred shares, however none of these shares are issued. Under the terms of our Restated Articles of Incorporation, the Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of the preferred shares.

Common Shares

Our common shares have a par value of $0.001. We have 50 million shares authorized of which 28.9 million are issued and outstanding as of March 31, 2006.

Of the unissued shares, 874,497 shares were reserved for the following:

	Unissued Shares
Employee Stock Purchase Plan		128,431
2004 Incentive and Performance Plan		746,066

Shareholders’ Rights Plan

In September 1997, our Board of Directors adopted a shareholder rights plan. If a person acquires 15% or more of our common shares or makes a tender offer or other offer to do so without the approval of the Board of Directors, our shareholders would have the right to purchase our common shares or the shares of the acquiring company at a significant discount. The Board of Directors has the right to redeem these rights for a nominal amount, to extend the period before the rights may be exercised or to take other actions as defined. The plan is intended to encourage any person seeking to acquire us to negotiate with the Board of Directors. The plan expires in September 2007.

Dividends

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 was payable on March 24, 2006 to shareholders of record.

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10.Employee Benefit Plans

Retirement Plans

We provide a savings and retirement plan for salaried and certain hourly employees whereby eligible employees may contribute a percentage of their earnings to a trust. Matching contributions of $1.5 million for the period ended March 31, 2006, $1.1 million for the period ended March 31, 2005 and $3.9 million for 2005 were made to the trusts based on a percentage of the contributions made by the participating employees.

Additionally, there is a supplemental retirement plan for eligible participants. Contributions are based on achieving certain operating performance and certain participants receive a guaranteed return ranging from zero to 9% based on years of service. Contributions were $1.8 million for the period ended March 31, 2006, $1.3 million for the period ended March 31, 2005 and $7.5 million in 2005. The plan’s investments are principally company-owned life insurance policies. Payments are made to the participants or their beneficiaries over a 5, 10 or 15-year period.

Cash Equity Plan

In April 1999, our Board of Directors adopted the Cash Equity Plan. Employees were eligible to receive awards at the discretion of the Compensation Committee of the Board of Directors. Awards are common share equivalent units that may be exchanged for the market value of those shares. The number of units available for grant, including those units outstanding and unexercised, cannot exceed two percent of the common shares outstanding at any given time. The awards vest after three years from the date of grant and expire after five years. No units have been awarded since February 2002. Compensation expense is recognized based on changes in the market value of the common shares. The related compensation expense for this plan was insignificant for the period ended March 31, 2006, $0.1 million for the period ended March 31, 2005 and $0.3 million in 2005. At March 31, 2006, units of 7,770 remain outstanding and unexercised. No further grants or awards will be made under this plan.

Employee Stock Purchase Plan

In September 2000, our Board of Directors adopted the Employee Stock Purchase Plan, which our shareholders approved in May 2001. The plan permits eligible employees to purchase common shares through payroll deductions of up to 10% of an employee’s compensation limited to $25,000 each year. The purchase price of the shares is 85% of the market price on the last day of each month. There were 400,000 common shares authorized under this plan and there were 128,431 shares available for future purchase as of March 31, 2006. Compensation expense recognized was $0.1 million for the period ended March 31, 2006, insignificant for the period ended March 31, 2005 and $0.2 million in 2005. 

2004 Incentive and Performance Plan

In February 2004, our Board of Directors adopted the 2004 Incentive and Performance Plan, which our shareholders approved in May 2004. A total of 2.4 million shares are reserved for issuance under the plan. Employees and non-employee directors are eligible to receive awards at the discretion of the Compensation Committee. Options, appreciation rights, restricted shares, other share-based awards and non-discretionary awards may be granted under this plan.

Options

· In the period ended March 31, 2006, we granted 407,100 options to employees. These options vest ratably over three years from the date of grant and expire after seven years if unexercised. These options were awarded with exercise prices equal to the fair value of the shares on the date of grant.

· In 2005, we granted 424,000 options to employees. These options vest ratably over three years from the date of grant and expire after seven years if unexercised. These options were awarded with exercise prices equal to the fair value of the shares on the date of grant.

· In 2004, we granted 402,000 options to employees. These options vest ratably over three years from the date of grant and expire after seven years if unexercised. These options were awarded with exercise prices equal to the fair value of the shares on the date of grant.

In 2004, we granted 207,000 options to employees. These options vest ratably over three years from the date of grant and expire after seven years if unexercised. These options were awarded with exercise prices above the fair value of the shares on the date of grant.

In February 1997, the Board of Directors authorized issuance of 100,000 options as an additional incentive to attract a member of senior management. These options vested in February 2002 and expire after ten years if unexercised. These options were awarded with exercise prices equal to the fair value of the shares on the date of grant.

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The following table summarizes information regarding options outstanding at March 31, 2006:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Options Outstanding		Weighted Average Contractual Life (Years)		Weighted Average Exercise Price		Options Exercisable		Weighted Average Exercise Price
$4.84 to $5.97		555,000		4.21		$4.94		555,000		$4.94
$6.00 to $6.97		459,154		5.43		$6.77		371,030		$6.72
$7.00 to $7.88		479,312		6.63		$7.37		375,816		$7.23
$8.70 to $9.75		350,876		5.01		$8.72		98,884		$8.76
$22.77 to $28.36		417,332		5.88		$22.88		134,678		$22.77
$37.93 to $38.16		407,100		6.80		$37.93		―		―
$4.84 to $38.16		2,668,774		5.62		$14.03		1,535,408		$7.74

As a result of the adoption of Statement of Financial Accounting Standard No. 123 (Revised 2004), Share-Based Payment, compensation expense is recognized over the requisite service period for all share-based compensation granted after as well as unvested on January 1, 2006. No expense is recognized for awards vested in periods prior to January 1, 2006. The fair value of compensation expense recognized for vested options was $1.6 million whereas the compensation expense for non-vested options due to early retirement eligibility was $0.6 million for the period ended March 31, 2006. Options are not included in the calculation of basic income per share, however options are included in the calculation of diluted income per share.

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following key assumptions:

Grant Year	Grant Date		Expected Term (Years)		Expected Volatility			Expected Dividend Yield			Risk Free Interest Rate			Grant Date Fair Value
2006		January 2006		5.94		48.58	%		0.70	%		3.77	%		$37.93
2005		May 2005		7.0		54.16	%		0.10	%		4.29	%		$28.36
2005		February 2005		7.33		54.16	%		0.08	%		4.10	%		$22.77
2004		May 2004		7.0		54.25	%		1.45	%		4.56	%		$8.50
2004		February 2004		7.88		54.68	%		0.06	%		4.09	%		$7.88
2003		April 2003		8.53		55.42	%		1.33	%		3.94	%		$6.97

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 period such revisions are determined. Due to uncertainties inherent in these assumptions, it is possible that actual share-based compensation may vary from the estimate of the fair value of these options.

As of March 31, 2006,  there was $10.5 million of unrecognized compensation expense related to these options. This is recognized as the requisite services are rendered and is expected to be recognized over the next 3 years.

Restricted Shares

· In the period ended March 31, 2006, we issued 138,400 restricted shares to employees. The weighted-average fair value of the restricted shares granted was $37.88 per share.

· In 2005, we issued 118,000 restricted shares to employees. The weighted-average fair value of the restricted shares granted was $23.19 per share.

· In 2004, we issued 149,000 restricted shares to employees. The weighted-average fair value of the restricted shares granted was $10.89 per share.

These restricted shares vest over periods throughout 2011, however under certain circumstances some or all of the restricted shares may vest earlier. There were no forfeitures of restricted shares for the period ended March 31, 2006 and March 31, 2005, however 9,500 restricted shares were forfeited in 2005. Compensation expense is recognized over the vesting period. Compensation expense recognized was $0.7 million for the period ended March 31, 2006, $0.3 million for the period ended March 31, 2005 and $1.3 million in 2005.

As of March 31, 2006, there was $7.2 million of unrecognized compensation expense related to these restricted shares. This is recognized as the requisite services are rendered and is expected to be recognized over the next 5 years. Restricted shares are not included in the calculation of basic income per share, however restricted shares are included in the calculation of diluted income per share.

Shares

· In 2005, we issued 14,000 shares to non-employee directors and recognized compensation expense of $0.4 million. These shares vest immediately, however trading is restricted for one year from the date of grant.

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The following table summarizes activity for share-based awards:

	March 31					December 31
	2006					2005
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at beginning of the period		2,557,412			$8.75		2,904,796			$6.11
Granted		545,500			$28.31		542,000			$17.90
Exercised		(31,572	)		$9.22		(861,384	)		$5.70
Forfeited		(6,666	)		$14.33		(28,000	)		$5.56
Outstanding at end of the period		3,064,674			$12.21		2,557,412			$8.75
Options exercisable at end of the period		1,535,408			$7.74		1,425,300			$6.32
Weighted average fair value of options granted at fair value for the period		$37.93					$22.88

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The following table summarizes equity compensation information as of March 31, 2006:

	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders		2,964,674		$12.42		746,066
Equity compensation plans not approved by security holders		100,000		$6.25		―
Total		3,064,674		$12.21		746,066

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11.Legal Proceedings

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 consolidated financial position, results of operations or cash flows.

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12.Segment Information

The consolidated financial statements include operations from two reportable segments: BMC Construction and BMC West. These segments represent businesses that are managed separately. Each of these businesses requires distinct marketing and operating strategies. Management reviews financial performance based on these operating segments.

BMC Construction provides construction services to high-volume homebuilders. These services include wood framing or concrete block masonry, concrete services, plumbing and other services. Construction services include managing labor and construction schedules as well as sourcing materials.

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 second quarter of 2006.

BMC West markets and sells building products, manufactures building components and provides construction services. Products include structural lumber and building materials purchased from other manufacturers as well as manufactured building components including millwork, trusses and wall panels. Construction services include framing and installation of miscellaneous building products. Building products and construction services are sold principally to professional builders and contractors.

The financial performance for these reporting segments is based on income from operations before interest expense, income taxes and minority interests. These segments follow the accounting principles described in the Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2005. Sales between segments are recognized at market prices and no single customer accounts for more than 10% of sales.

Selected financial information by segment is as follows (thousands):

								Income (Loss)
								Before
								Taxes and			Depreciation
	Sales							Minority			and		Capital (1)
	Total		Inter-Segment			Trade		Interests			Amortization		Expenditures		Assets
Three Months Ended March 31, 2006
BMC Construction	$	498,330	$	(32	)	$	498,298	$	46,075		$	5,901	$	14,232	$	757,769
BMC West		386,876		(617	)		386,259		30,546			4,281		4,123		493,011
Corporate		―		―			―		(22,235	)		208		660		99,519
	$	885,206	$	(649	)	$	884,557		54,386		$	10,390	$	19,015	$	1,350,299
Interest expense									5,590
								$	48,796
Three Months Ended March 31, 2005
BMC Construction	$	242,501	$	(259	)	$	242,242	$	28,532		$	2,041	$	1,847	$	307,655
BMC West		330,819		(133	)		330,686		28,875			3,392		6,985		462,099
Corporate		―		―			―		(17,099	)		137				69,377
	$	573,320	$	(392	)	$	572,928		40,308		$	5,570	$	8,832	$	839,131
Interest expense									3,198
								$	37,110

(1) Property and equipment from acquisitions are included as capital expenditures.

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Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Environment and Executive Overview

BMHC is one of the largest providers of residential construction services and building materials in the United States. 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. BMC West distributes building materials and manufactures building components for professional builders and contractors in the western and southern states.

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.

The key fundamentals that influence the single-family homebuilding industry remained favorable for the first quarter of 2006. Job formation, consumer confidence and broader general economic indicators were generally positive. Although rising, interest rates remain at historically low levels.

Recent data released from the U.S. Census Bureau indicate a 12% drop in single-family home starts to an annual rate of 1.6 million units. This pace is consistent with the forecast from the National Association of Homebuilders of a 6% decline in starts in 2006 compared to the historic high of 1.7 million units in 2005. The homebuilding market appears to be slowing to a more sustainable pace as evidenced by slowing demand, price concessions offered by large builders and higher inventories of new homes.

Contract starts for construction services are softening in some of our markets and building permits are also mixed relative to the prior year. However, we believe our broadening scope of constructions services, manufactured components and building product offerings as well as our diverse geographic presence in key homebuilding markets are a competitive advantage. As the principle factors influencing homebuilding remain positive, we remain optimistic about our future performance and opportunities for long-term growth.

Recent acquisitions include the following:

· framing services in Palm Springs, California and Reno, Nevada (January 2006)

· remaining 20% interest in our existing business providing concrete block masonry and concrete services in Florida (effective January 2006)

· building material distribution and millwork services in Houston, Texas (February 2006)

· concrete services business in Northern Arizona (April 2006)

· wall panel and truss manufacturing business in Palm Springs, California (April 2006)

We evaluate our results of operations including and excluding acquisitions. We believe a presentation of sales and income from operations excluding acquisitions not present in comparable periods enhances an understanding of the acquisitions as well as comparable operations for the respective periods. In the discussion of the three months ended March 31, 2006 and 2005, a reconciliation of sales and income from operations excluding acquisitions has been provided.

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RESULTS OF OPERATIONS

The following table and subsequent discussion should be read in conjunction with the consolidated financial statements and the related notes in this Form 10-Q and our most recent Annual Report on Form 10-K. The table sets forth the amounts and percentage relationship to sales of certain costs, expenses and income items (millions):

	Three Months Ended
	March 31
	2006					2005
Sales
Construction services	$	548.9		62.1	%	$	280.0		48.9	%
Building products		335.7		37.9			292.9		51.1
Total sales		884.6		100.0			572.9		100.0
Costs and operating expenses
Cost of goods sold
Construction services		448.3		81.7			227.5		81.3
Building products		246.8		73.5			215.6		73.6
Total cost of goods sold		695.1		78.6			443.1		77.3
Selling, general and administrative expenses		136.9		15.5			90.0		15.7
Other income, net		(1.8	)	(0.2	)		(0.5	)	―
Total costs and operating expenses		830.2		93.9			532.6		93.0
Income from operations		54.4		6.1			40.3		7.0
Net income	$	28.1		3.2	%	$	21.1		3.7	%
Income per diluted share		$0.95					$0.73

First Quarter of 2006 Compared to 2005

Consolidated Financial Results

Selected financial results are as follows (millions):

	2006		2005		$ Δ		% Δ
Sales
Construction services	$	549	$	280	$	269		96	%
Building products		336		293		43		15	%
	$	885	$	573	$	312		54	%
Income from operations	$	54	$	40	$	14		35	%

Sales increased $312 million to $885 million principally due to the acquisition of construction service businesses not present in the first quarter of 2005. Sales from acquisitions were $232 million and represented 74% of the increase. Excluding acquisitions, comparable sales for construction services were up 16% and building products were 12% higher. Although single-family building permits were mixed, homebuilding activity remained strong in most of our markets.

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Income from operations for 2006 increased to $54 million from $40 million in the prior year. Margins were 21.4%, down from 22.7% reported in the first quarter of 2005. This decline reflects the impact of lower margins on construction services due to changes in the mix of trades offered and the impact of recent acquisitions that have not yet been fully integrated.

Selling, general and administrative expenses improved to 15.5% of sales from 15.7% in the first quarter of last year. Although these expenses were higher principally from recent acquisitions and related integration costs, these expenses were lower as a percent of sales due to a shift in sales mix to construction services.

Business Segments

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

	2006					2005
	Sales		Income from Operations			Sales		Income from Operations
BMC Construction	$	499	$	46		$	242	$	28
BMC West		386		30			331		29
Corporate		―		(22	)		―		(17	)
	$	885	$	54		$	573	$	40

BMC Construction

Selected financial results are as follows (millions):

	2006			2005		$ Δ			% Δ
Sales	$	499		$	242	$	257			106	%
Less: Acquisitions		(224	)		―		(224	)		―
	$	275		$	242	$	33			14	%
Income from operations	$	46		$	28	$	18			64	%
Less: Acquisitions		(18	)		―		(18	)		―
	$	28		$	28	$	―			―

Sales reached $499 million and were more than twice the $242 million reported in the same quarter a year ago. Acquisitions of construction service businesses not present in the first quarter of 2005 were principally responsible for the increase. Sales from comparable operations were also 14% higher for the quarter and were particularly strong in the Southwest region. Comparable sales were higher despite lower contract starts and building permits in some of our markets compared to the same quarter a year ago.

Income from operations increased to $46 million from $28 million in the same quarter of the prior year. Acquisitions not present in the first quarter of 2005 accounted for the increase. Margin percentages overall decreased due to a change in the mix of trades recently acquired. However, margin percentages for comparable operations improved compared to the first quarter a year ago. These margin increases from comparable operations were offset by additional costs to support our expanding operations and incentive compensation.

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BMC West

Selected financial results are as follows (millions):

	2006			2005		$ Δ			% Δ
Sales	$	386		$	331	$	55			17	%
Less: Acquisitions		(8	)		―		(8	)		―
	$	378		$	331	$	47			14	%
Income from operations	$	30		$	29	$	1			3	%
Less: Acquisitions		―			―		―			―
	$	30		$	29	$	1			3	%

Sales increased to $386 million from $331 million in the same quarter a year ago, as sales from comparable operations were up 14% for the quarter. Sales of building products and manufactured components were strong in Texas as well as the Intermountain and Northwest regions. Although single-family building permits declined compared to last year in California and Colorado, permit activity in our markets was up 8.5% overall.

Income from operations increased to $30 million from $29 million in the same quarter a year ago. Despite lower prices for commodity wood products and a competitive pricing environment, margins for building products were down only slightly from the same quarter last year. The increase in operating income was partially offset by competitive pressures on margins for the segment’s construction service offerings as well as compensation costs for additional employees.

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):

	2006		2005		$ Δ		% Δ
Corporate general and administrative expenses	$	22	$	17	$	5		29	%

Corporate expenses were $5 million higher than the same quarter a year ago. The increase included the non-cash impact of $2.2 million of share-based compensation expense as a result of adopting a new accounting principle, various integration expenses related to recent acquisitions and increased incentive compensation. Although higher, these expenses were 2.5% of sales compared to 3.0% in the same period a year ago.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

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 three months ended March 31, 2006, cash was borrowed and provided by operations to purchase acquisitions and fund working capital.

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Operations

Cash provided by operating activities was $14.4 million compared to $14.1 million in the same period a year ago. Cash from operating activities increased $13.9 million due to acquisitions not present in the first quarter of 2005. However, working capital requirements were $10.5 million more than the same period a year ago as improvements in inventory turns and days payable were offset by cash uses for unbilled receivables, compensation costs for additional employees and the timing of insurance premiums.

Capital Investments and Acquisitions

Cash used in investing activities was $92.0 million or $77.8 million more than $14.2 million for the same period a year ago. Cash use included $80.0 million for the acquisition of businesses providing framing services in Palm Springs, California and Reno, Nevada, the remaining 20% interest in WBC Construction, LLC and three facilities providing building materials distribution and millwork services in Houston, Texas. Net cash used for investing activities was $77.8 million higher than the same period a year ago when $14.2 million was used primarily for the purchase of property and equipment and the acquisition of a business providing framing services in Chicago, Illinois.

Financing

Cash provided by financing activities was $77.8 million compared to $14.0 million in the same period a year ago. Debt was borrowed to finance three acquisitions, the remaining portion of a minority interest, increases in working capital requirements and purchases of property and equipment whereas debt was borrowed to finance a smaller increase in working capital and one acquisition in the same period a year ago.

Credit Facility

Revolver

In June 2005, we entered into an amended $300 million revolver with a group of lenders. In April 2006, we exercised an existing option to add another $150 million in borrowing capacity to our revolver which increased our borrowing capacity under the revolver to $450 million. 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 0.00% to 0.75%. Interest is paid quarterly. As of March 31, 2006, $158.2 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 0.00% to 0.75%. Interest is paid quarterly. As of March 31, 2006, $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 interest rate for the term note is LIBOR plus 1.75%, or Prime plus 1.00%. Interest is paid quarterly. As of March 31, 2006, $121.6 million was outstanding under this term note.

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Other

Other long-term debt of $13.3 million consists of term notes, equipment notes and capital leases for equipment. Interest rates vary and dates of maturity are through March 2013.

Covenants and Maturities

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 March 31, 2006, we were in compliance with these covenants and conditions.

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

2006	$	9,180
2007		13,946
2008		14,081
2009		77,777
2010		252,550
Thereafter		556
	$	368,090

As of March 31, 2006 and December 31, 2005 there were $75.9 million of letters of credit outstanding that guaranteed performance or payment to third parties. These letters of credit reduce borrowing availability under the revolver.

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 $121.6 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 March 31, 2006 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 $121.6 million floating rate borrowings outstanding at March 31, 2006 was fixed at an average rate of 6.14%. After giving effect to the interest rate swap contracts, total borrowings were 31% fixed and 69% 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 $2.6 million as of March 31, 2006. The effective portion was recorded in 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 $1.0 million was also recorded in accumulated other comprehensive income, net of the income tax related to the estimated fair value 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 March 31, 2006 was not significant. Management may choose not to swap floating debt to a fixed rate or may terminate a previously executed swap if the floating rate positions are more beneficial.

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Equity

Preferred Shares

We are authorized to issue 2 million preferred shares, however none of these shares are issued. Under the terms of our Restated Articles of Incorporation, the Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of the authorized but unissued shares of preferred stock.  

Common Shares

Our common shares have a par value of $0.001. We have 50 million shares authorized of which 28.9 million are issued and outstanding as of March 31, 2006.

On February 14, 2006, our Board of Directors approved a two for one split of our outstanding common shares. Shareholders as of February 28, 2006 received a stock dividend of one additional common share for every common share they owned. All share and per share information for all periods presented has been retroactively adjusted to reflect this share split.

Shelf Registration

In the third quarter of 1998, a shelf registration was filed with the Securities and Exchange Commission to register 4 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 3.7 million shares remaining and available under this shelf registration.

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 March 31, 2006, we are not involved in any transactions with unconsolidated entities.

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 that 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. Our critical accounting estimates are:

· revenue recognition for construction services

· estimated losses on uncompleted contracts and changes in contract estimates

· goodwill

· insurance deductible reserves

· share-based compensation

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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. There have been no significant changes during the three months ended March 31, 2006 to the critical accounting estimates disclosed in Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2005.

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 our most recent Form 10-K. These risks and uncertainties may include, however are not limited to:

· demand for homebuilding 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 in our business model;

· 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;

· implementation of cost structures that align with revenue growth;

· changes in the business models of 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;

· 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:

· share price fluctuations and

· potential share price limitations due to anti-takeover defenses in our governing documents and certain provisions under Delaware law.

Certain statements made in this Form 10-Q constitute 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 could cause our actual results to differ materially from those in forward-looking statements. These factors include, however 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 this Form 10-Q. We undertake no obligation to update forward-looking statements.

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Item 3 -Quantitative and Qualitative Disclosures about Market Risk

Commodity 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. The frequency at which inventory is sold and the short-term duration of our construction contracts reduces the risk of gross margin erosion caused by rapid changes in commodity wood product prices. 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. Changes in the carrying amount of debt could also increase interest rate risks. Interest rate swap contracts are currently utilized to hedge interest rate risks. Approximately 82% of the outstanding floating rate borrowings of the $121.6 million term note as of March 31, 2006 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 31% fixed and 69% floating. Based on debt outstanding as of March 31, 2006, a 0.25% increase in interest rates would result in approximately $0.6 million of additional interest expense annually.

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Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the design and operation of our disclosure controls and procedures. This evaluation was conducted to determine whether the disclosure controls and procedures were effective and timely in bringing material information to the attention of senior management and are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements in accordance with generally accepted accounting principles. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring material information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

Our disclosure controls and procedures and internal controls over financial reporting are routinely evaluated and tested for effectiveness. These evaluations are discussed with management and the Audit Committee. As a result of these evaluations, revisions and corrective actions are made to ensure the effectiveness of our disclosure controls and procedures and internal controls over financial reporting. During the quarterly period covered by this report, we identified deficiencies in the design or operation of our internal controls, however revisions and corrective actions are being made to ensure the effectiveness of our disclosure controls and procedures and internal controls over financial reporting. None of these deficiencies have been considered a material weakness and there were no significant changes in the design or operation of our internal controls over financial reporting that could materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

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 consolidated financial position, results of operations or cash flows.

Item 1A - Risk Factors

None.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Submission of Matters to a Vote of Security Holders

Election of Board of Directors

Our annual meeting of shareholders was held on May 2, 2006. A total of 14,464,233 common shares were outstanding at the date of record and entitled to vote at the meeting. Of the total outstanding, 11,885,349 shares were represented at the meeting, while 2,578,884 were not voted.

In accordance with Delaware corporate law and our bylaws, directors are elected by a plurality of the votes, with the nominees receiving the highest number of affirmative votes being elected as directors.  As there were no votes cast for other candidates, each of the nominees below were elected as directors with terms expiring in 2007.

	For		Withheld
Robert E. Mellor		11,747,168		138,181
Sara L. Beckman		11,864,380		20,969
Eric S. Belsky		11,862,236		23,113
James K. Jennings, Jr.		11,865,029		20,320
Norman J. Metcalfe		11,861,271		24,078
David M. Moffett		11,858,421		26,928
R. Scott Morrison, Jr.		11,860,184		25,165
Peter S. O’Neill		11,612,598		272,751
Richard G. Reiten		11,668,145		217,204

Ratification of Independent Registered Public Accountants

Our shareholders ratified the selection of KPMG LLP as our independent registered public accountants at the annual meeting and votes were cast as follows:

For	Withheld	Abstain	Not Voted
11,834,032	34,646	16,671	—

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Item 5 - Other Information

None.

Item 6 - Exhibits

(a)	Exhibits
	Number	Description
	11.0	Statement regarding computation of earnings per share (see Note 2)
	31.1	Section 302 Certification
	31.2	Section 302 Certification
	32.0	Section 906 Certifications

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SIGNATURES

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

	BUILDING MATERIALS HOLDING CORPORATION
Date: May 8, 2006	/s/ Robert E. Mellor
	Robert E. Mellor Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
Date: May 8, 2006	/s/ William M. Smartt
	William M. Smartt Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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