Building Materials Holding (BLGM) 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2007

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 001-33192

  

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 þNo ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer þAccelerated 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, 2007 was 29,387,326.

BUILDING MATERIALS HOLDING CORPORATION

FORM 10-Q

For the Period Ended March 31, 2007

INDEX

	Page Number
PART I - FINANCIAL INFORMATION	2
Item 1 - Financial Statements (unaudited)	2
Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006	2
Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006	3
Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2007       and 2006	4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006	5
Notes to Consolidated Financial Statements	6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	46
Item 4 - Controls and Procedures	47
PART II - OTHER INFORMATION	48
Item 1 - Legal Proceedings	48
Item 1A - Risk Factors	49
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3 - Defaults Upon Senior Securities	54
Item 4 - Submission of Matters to a Vote of Security Holders	55
Item 5 - Other Information	56
Item 6 - Exhibits	57
SIGNATURES	58

1

Item 1 - Financial Statements

Building Materials Holding Corporation

Consolidated Statements of Operations

(thousands, except per share data)

(unaudited) 

	Three Months Ended March 31
	2007			2006
Sales
Construction services	$	319,008		$	549,058
Building products		250,096			335,499
Total sales		569,104			884,557
Costs and operating expenses
Cost of goods sold
Construction services		275,402			454,131
Building products		181,078			247,226
Selling, general and administrative expenses		113,822			130,601
Other income, net		(2,158	)		(1,787	)
Total costs and operating expenses		568,144			830,171
Income from operations		960			54,386
Interest expense		8,218			5,590
(Loss) income before income taxes    and minority interests		(7,258	)		48,796
Income tax benefit (expense)		2,668			(17,810	)
Minority interests income, net of income taxes		(376	)		(2,917	)
Net (loss) income		$(4,966	)		$28,069
Net (loss) income per share:
Basic		$(0.17	)		$0.98
Diluted		$(0.17	)		$0.95

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

2

Building Materials Holding Corporation

Consolidated Balance Sheets

(thousands, except per share data)

(unaudited)

		March 31		December 31			March 31		December 31
		2007		2006			2007		2006
Assets					Liabilities, Minority Interests and Shareholders’ Equity
Cash and cash equivalents	$	27,901	$	74,272
Marketable securities		5,806		4,337	Accounts payable	$	113,922	$	110,961
Receivables, net of allowances					Accrued compensation		35,080		48,552
of $4,948 and $4,487		288,578		279,829	Insurance deductible reserves		26,731		24,931
Inventory		144,361		144,366	Other accrued liabilities		28,140		103,402
Unbilled receivables		57,331		43,527	Billings in excess of costs and estimated
Deferred income taxes		7,097		8,914	earnings		27,221		27,622
Prepaid expenses and other		18,541		11,166	Current portion of long-term debt		5,072		8,143
Current assets		549,615		566,411	Current liabilities		236,166		323,611
Property and equipment					Deferred income taxes		8,591		9,138
Land		67,539		62,367	Insurance deductible reserves		27,139		25,841
Buildings and improvements		143,410		139,602	Long-term debt		427,009		349,161
Equipment		189,538		188,285	Other long-term liabilities		36,015		41,390
Construction in progress		4,420		8,579
Accumulated depreciation		(145,394)		(139,342)	Minority interests		7,004		7,141
Marketable securities		51,863		53,513
Deferred loan costs		5,200		5,481	Commitments and contingent liabilities		—		—
Other long-term assets		30,539		27,223
Other intangibles, net		105,447		108,792	Shareholders’ equity
Goodwill		306,479		308,000	Common shares, $0.001 par value:
	$	1,308,656	$	1,328,911	authorized 50 million; issued and
					outstanding 29.3 and 29.2 million
					shares		29		29
					Additional paid-in capital		156,794		154,405
					Retained earnings		411,043		418,927
					Accumulated other comprehensive loss, net		(1,134)		(732)
					Shareholders’ equity		566,732		572,629
						$	1,308,656	$	1,328,911

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

3

Building Materials Holding Corporation

Consolidated Statements of Shareholders’ Equity

(thousands)

														Accumulated Other Comprehensive Income (Loss)
														Net Unrealized Gain (Loss) From
	Common Shares				Additional									Interest Rate
	Shares		Amount		Paid-In Capital			Unearned Compensation			Retained Earnings			Swap Contracts			Marketable Securities			Total
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
Balance at December 31, 2006	29,153	$	29	$	154,405		$	—		$	418,927		$	(548	)	$	(184	)	$	572,629
Net loss	—		—		—			—			(4,966	)		—			—			(4,966	)
Unrealized loss	—		—		—			—			—			(851	)		—			(851	)
Tax benefit for unrealized loss	—		—		—			—			—			321			—			321
Unrealized gain	—		—		—			—			—			—			193			193
Taxes for unrealized gain	—		—		—			—			—			—			(65	)		(65	)
Comprehensive loss																				(5,368	)
Earned compensation - options	—		—		1,254			—			—			—			—			1,254
Earned compensation - restricted shares	—		—		796			—			—			—			—			796
Issuance of restricted shares	110		—		—			—			—			—			—			—
Share options exercised	5		—		35			—			—			—			—			35
Tax benefit for share options exercised	—		—		28			—			—			—			—			28
Shares issued from Employee Plan	13		—		276			—			—			—			—			276
Cash dividends on common shares	—		—		—			—			(2,918	)		—			—			(2,918	)
Balance at March 31, 2007	29,281	$	29	$	156,794		$	—		$	411,043		$	(1,078	)	$	(56	)	$	566,732

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

4

Building Materials Holding Corporation

Consolidated Statements of Cash Flows

(thousands)

		Three Months Ended March 31
Operating Activities		2007			2006
Net (loss) income	$	(4,966	)	$	28,069
Items in net (loss) income not using (providing) cash:
Minority interests, net		376			2,917
Depreciation and amortization		12,747			10,182
Deferred loan cost amortization		281			208
Share-based compensation		2,113			2,980
(Gain) loss on sale of assets, net		(363	)		27
Realized gain on marketable securities		(11	)		—
Deferred income taxes		2,443			(208	)
Changes in assets and liabilities, net of effects of acquisitions of business units:
Receivables, net		(8,749	)		(19,399	)
Inventory		5			(15,096	)
Unbilled receivables		(13,804	)		(22,510	)
Prepaid expenses and other current assets		(7,386	)		(2,257	)
Accounts payable		15,831			35,094
Accrued compensation		(13,494	)		(15,745	)
Insurance deductible reserves		1,800			2,944
Other accrued liabilities		(14,675	)		16,019
Billings in excess of costs and estimated earnings		(401	)		(4,425	)
Other long-term assets and liabilities		(10,057	)		(4,068	)
Other, net		256			(370	)
Cash flows (used) provided by operating activities		(38,054	)		14,362
Investing Activities
Purchases of property and equipment		(8,651	)		(10,409	)
Acquisitions and investments in businesses, net of cash acquired		(61,596	)		(80,005	)
Proceeds from dispositions of property and equipment		1,187			425
Purchase of marketable securities		(8,739	)		(834	)
Proceeds from sales of marketable securities		9,150			581
Other, net		(463	)		(1,777	)
Cash flows used by investing activities		(69,112	)		(92,019	)
Financing Activities
Net borrowings under revolver		79,200			80,700
Principal payments on term notes		(875	)		(313	)
Net payments on other notes		(3,548	)		(688	)
(Decrease) increase in book overdrafts		(10,359	)		329
Proceeds from share options exercised		35			291
Tax benefit for share options		28			328
Dividends paid		(2,915	)		(2,158	)
Distributions to minority interests		(1,003	)		(245	)
Other, net		232			(395	)
Cash flows provided by financing activities		60,795			77,849
(Decrease) Increase in Cash and Cash Equivalents		(46,371	)		192
Cash and cash equivalents, beginning of period		74,272			30,078
Cash and cash equivalents, end of period	$	27,901		$	30,270
Supplemental Disclosure of Cash Flow Information
Accrued but unpaid dividends	$	2,918		$	2,894
Cash paid for interest	$	7,819		$	4,923
Cash paid for income taxes	$	1,820		$	13,146
Supplemental Disclosure of Investing Activities
Fair value of assets acquired	$	715		$	131,312
Liabilities assumed	$	100		$	62,637
Cash paid for acquisitions made this period	$	615		$	68,675
Cash paid for acquisitions made in prior period	$	60,981		$	11,330

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

5

Notes to Consolidated Financial Statements

1.Summary of Significant Accounting Policies

Basis of Presentation

These 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 most recent Annual Report on Form 10-K.

These 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.

Nature of Operations

Building Materials Holding Corporation (BMHC) provides construction services and building products to professional homebuilders and contractors in western and southern regions of the United States. We operate through two separately managed and reportable business segments: SelectBuild and BMC West. SelectBuild provides framing and other construction services to high-volume homebuilders in 16 of the top 25 single-family construction markets. BMC West distributes building materials, manufactures building components (millwork, floor and roof trusses and wall panels) and provides construction services to professional builders and contractors through a network of 41 distribution facilities and 60 manufacturing facilities.

Principles of Consolidation

The consolidated financial statements include the accounts of BMHC and its subsidiaries. All significant intercompany balances and transactions are eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements as well as the reported amounts of sales and expenses during the reporting period. Actual amounts may differ materially from those estimates. The following critical accounting estimates require our subjective and complex judgment often as a result of the need to estimate matters that are inherently uncertain:

·Revenue Recognition for Construction Services

The percentage-of-completion method is used to recognize revenue for construction services. This method requires the use of various estimates, including among others, the extent of progress towards completion, contract revenues and contract completion costs. 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. 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 recognized in the period such revisions are known.

6

·     Estimated Losses on Uncompleted Contracts and Changes in Contract Estimates

Estimated losses on uncompleted contracts and changes in contract estimates are established by assessing estimated costs to complete, change orders and claims for uncompleted contracts. Revisions of estimated losses are recognized in the period such revisions are known.

·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.

·     Insurance Deductible Reserves

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

·Warranties

The estimated cost of warranties for certain construction services is based on the nature and frequency of claims, anticipated claims and cost per claim. Claims in excess of insurance deductibles are insured with third-party insurance carriers. Estimated costs for warranties are recognized when the revenue associated with the service is recognized. Revisions of estimated warranties are recognized in the period such revisions are known.

·Share-based Compensation

Our estimates of the fair values of our share-based payment transactions are based on the modified Black-Scholes-Merton model. 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 recognized in the period such revisions are known. Due to uncertainties inherent in these assumptions, it is possible that actual share-based compensation may vary from this estimate.

7

Cash and Cash Equivalents

Cash and cash equivalents consist of short-term investments that have a maturity of 3 months or less at the date of purchase. Cash and cash equivalents were $27.9 million at March 31, 2007 and $74.3 million at December 31, 2006.

Receivables

Receivables consist primarily of amounts due from customers and are net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience and other available evidence.

Inventory Valuation

Inventory consists principally of building materials purchased for resale and is valued at the lower of average cost or market. We participate in vendor rebate programs under which rebates are earned by attaining certain purchase volumes. Volume rebates are accrued as earned. These volume rebates are recorded as a reduction in inventory and recognized in cost of goods sold when the related product is sold.

Unbilled Receivables and Billings in Excess of Costs and Estimated Earnings

The percentage-of-completion method results in recognizing costs incurred and estimated revenues on uncompleted contracts. Unbilled receivables represent revenues recognized for construction services performed, however not yet billed. Billings in excess of costs and estimated earnings represent billings made in excess of estimated revenues recognized. These billings are deferred until the actual progress towards completion indicates recognition is appropriate. Costs include direct labor and materials as well as equipment costs related to contract performance.

Property and Equipment

Property and equipment are recorded at cost. Cost includes expenditures for major improvements and replacements that extend useful life. Certain costs of software are capitalized provided those costs are not research and development and certain other criteria are met. Capitalized interest was not significant. Expenditures for other maintenance and repairs are expensed as incurred. Gains and losses from sales and retirements are included in income as they occur. Depreciation is calculated using the straight-line method over the economic useful lives of the assets. The estimated useful lives of depreciable assets are generally:

·10 to 30 years for buildings and improvements

·7 to 10 years for machinery and fixtures

·3 to 10 years for handling and delivery equipment

·3 to 10 years for software development costs

In order to improve financial returns, we periodically evaluate our investments in property and equipment. As a result, property and equipment may be consolidated, leased or sold. We recognized a gain of $0.4 million for the period ended March 31, 2007, a loss of less than $0.1 million for the period ended March 31, 2006 and a loss of $0.2 million in 2006 from the sales of property and equipment.

In April 2007, BMC West sold certain real estate as a result of a relocation of our building materials operation in Austin, Texas. The sale is expected to result in a gain after tax of approximately $5.5 million in the second quarter.

Long-lived Assets

Long-lived assets such as property, equipment and intangibles with useful lives are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment is recognized if the carrying amount exceeds its fair value and when the carrying amount is not recoverable based on the estimated future operating cash flows on an undiscounted basis.

8

Revenue Recognition

The percentage-of-completion method is used to recognize revenue for construction services. Revenues for building products are recognized when title to the goods and risk of loss pass to the buyer, which is at the time of delivery. Taxes assessed by governmental authorities that are directly imposed on our revenue-producing transactions are excluded from sales.

Shipping and Handling

Shipping and handling costs for manufactured building components and construction services are included as a component of cost of goods sold. Shipping and handling costs for building products are included as a component of selling, general and administrative expenses and were $17.7 million for the period ended March 31, 2007, $18.2 million for the period ended March 31, 2006 and $78.8 million in 2006.

Reclassifications

SelectBuild identified certain costs of sourcing materials and reclassified these costs to cost of goods sold from selling, general and administrative expenses. Costs reclassified to cost of goods sold from selling, general and administrative expenses were $6.3 million for the period ended March 31, 2006 and $29.1 million for 2006. These reclassifications, none of which affected previously reported consolidated results of operations, cash flows or shareholders’ equity, have been made to amounts reported in prior periods to conform to the current year presentation.

Recent Accounting Principles

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. This accounting principle expands the use of fair value accounting. Entities may elect to measure eligible items at fair value at specified election dates, however the fair value election is irrevocable and made on an instrument-by-instrument basis. Eligible items include financial assets and liabilities, firm commitments for financial instruments, loan commitments, nonfinancial insurance contracts and warranties (goods or services settled by a third party) and host financial instruments. Upon adoption, unrealized gains and losses for existing items measured at fair value are recorded as a cumulative adjustment to beginning retained earnings and subsequent changes are recognized in earnings at each reporting date. We elected to not adopt the fair value measurement option for eligible items. This accounting principle was adopted January 2007 and had no impact on consolidated financial position, results of operations or cash flows.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements. This accounting principle simplifies existing accounting literature by providing a single definition of fair value, a framework for measuring fair value and expanded disclosures about fair value. This accounting principle emphasized that fair value is a market-based measurement of the amount that would be received upon the sale of an asset or paid to transfer a liability (an exit price) and not the price that would be paid to acquire the asset or received to assume the liability (entry price). This accounting principle did not expand the use of fair value. This accounting principle was adopted January 2007 and had no impact on consolidated financial position, results of operations or cash flows.

9

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes. This accounting principle provides specific guidance for measurement, recognition and disclosure of uncertain tax positions. This accounting principle was adopted January 2007 and had no impact on consolidated financial position, results of operations or cash flows.

10

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
		2007			2006		2006
Net (loss) income	$	(4,966	)	$	28,069	$	102,074
Weighted average shares used to determine basic net income per share		28,768			28,524		28,603
Net effect of dilutive stock options and restricted stock		—			1,049		986
Weighted average shares used to determine diluted net income per share		28,768			29,573		29,589
Net (loss) income per share:
Basic		$(0.17	)		$0.98		$3.57
Diluted		$(0.17	)		$0.95		$3.45
Cash dividends declared per share		$0.10			$0.10		$0.40

Share options considered not dilutive are those with exercise prices greater than the average market value of the common shares in the periods presented. Share options that are not dilutive and therefore excluded from the computation of diluted net income per share were as follows:

·   819,098 shares for the period ended March 31, 2007,

·   407,100 shares for the period ended March 31, 2006, and

·   403,100 shares in 2006.

11

3.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 exceeds its fair value and when the carrying amount is not  recoverable based on 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, SelectBuild recognized the following impairments during 2006:

·   $1.8 million for the carrying amount of goodwill in the second quarter and

·   $0.4 million for the carrying amount of certain customer relationships in the second quarter.

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4.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 March 2007, SelectBuild acquired the assets of a concrete services business in Fresno, California for approximately $0.7 million in cash of which $0.1 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 December 2006, SelectBuild acquired a distribution services business in Southern California for approximately $1.6 million in cash of which $0.1 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 August 2006, SelectBuild acquired a window installation business in Arizona for approximately $13.9 million in cash.

·   In July 2006, SelectBuild acquired a framing services business in Southern California for approximately $78.6 million in cash. Additional cash payments may be required based on operating performance through June 2009.

·   In June 2006, BMC West acquired a building materials distribution and truss manufacturing business in Eastern Idaho for approximately $5.1 million in cash.

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

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

·   In February 2006, BMC West acquired 3 facilities providing building materials distribution and millwork services in Houston, Texas for $20.6 million in cash.

·   In January 2006, SelectBuild acquired framing businesses in Palm Springs, California and Reno, Nevada for $57.1 million in cash. Additional cash payments may be required based on operating performance through December 2009.

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.

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·   In April 2007, SelectBuild acquired the remaining 27% interest in Riggs Plumbing for $10.5 million in cash. In July 2005, SelectBuild acquired an additional 13% interest for $1.4 million in cash and in April 2005, acquired an initial 60% interest for $17.8 million in cash. 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. Riggs Plumbing provides plumbing services to high-volume production builders in the Phoenix and Tucson markets. 

·   In November 2006, SelectBuild acquired the remaining 49% interest in BBP Companies for $22.8 million in cash. In July 2005, SelectBuild acquired an initial 51% interest for $9.4 million in cash and $1.0 million of our common shares. BBP Companies provide concrete services to high-volume production homebuilders in Arizona.

·   In January 2006, SelectBuild acquired the remaining 20% interest in WBC Construction, LLC for $36.0 million in cash. In August 2005, SelectBuild acquired an additional 20% interest for $24.8 million in cash and in January 2003, acquired an initial 60% interest for $22.9 million in cash and $1.0 million of our common shares. 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. WBC provides concrete block masonry and concrete services to high-volume homebuilders in Florida.

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

	March 31		December 31			March 31		December 31
	2007		2006			2007		2006
Cash and cash equivalents	$	—	$	—	Accounts payable	$	—	$	10,376
Receivables		—		44,683	Accrued compensation		—		1,447
Inventory		—		19,957	Insurance deductible reserves		—		—
Unbilled receivables		—		10,101	Other accrued liabilities		(60,587)		50,340
Deferred income taxes		—		—	Billings in excess of
Prepaid expenses and other		15		263	costs  and estimated earnings		—		23,557
					Current portion of long-term debt		—		—
Current assets		15		75,004	Current liabilities		(60,587)		85,720
Property and equipment		216		19,845	Deferred income taxes		(917)		937
Other long-term assets		—		42	Long-term debt		—		—
Other intangibles, net		1,382		68,692	Other long-term liabilities		—		8,173
Goodwill		(1,521)		122,374
					Minority interests		—		(10,627)
	$	92	$	285,957		$	(61,504)	$	84,203

The following summarizes pro forma results of operations assuming the acquisitions for 2007 and 2006 occurred as of the beginning of 2006. 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):

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		Three Months Ended March 31
		2007			2006		2006
Sales - as reported	$	569,104		$	884,557	$	3,245,169
Pro forma Sales	$	569,868		$	931,467	$	3,325,314
Net (loss) income - as reported	$	(4,966	)	$	28,069	$	102,074
Pro forma Net (loss) income	$	(3,976	)	$	30,061	$	102,017
Net (loss) income per share:
Diluted - as reported		$(0.17	)		$0.95		$3.45
Pro forma Diluted		$(0.14	)		$1.02		$3.45

We have call rights and put obligations associated with the interests in RCI Construction, A-1 Truss and WBC Mid-Atlantic that we do not currently own. 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 the timing of these call and put obligations:

	Call Options	Put Options
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

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5.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 value. Fair value is based on market quotes. Unrealized gains and losses, net of deferred taxes, are recorded as a component of accumulated other comprehensive (loss) 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 2007		December 31 2006
U.S. government and agencies	$	22,159	$	25,661
Asset backed securities		20,339		18,278
Corporate securities		15,171		13,911
	$	57,669	$	57,850

Contractual maturities were as follows (thousands):

		March 31 2007		December 31 2006
Less than 1 year	$	5,806	$	4,337
Due in 1 to 2 years		15,453		16,648
Due in 2 to 5 years		36,410		36,865
	$	57,669	$	57,850

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6.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 3 to 17 years, covenants not to compete over 2 to 5 years and trade names over 3 years. Amortization expense for intangible assets was $4.7 million for the period ended March 31, 2007, $3.1 million for the period ended March 31, 2006 and $14.7 million in 2006. Intangible assets consist of the following (thousands):

		March 31, 2007
		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	123,845	$	(25,771	)	$	98,074
Covenants not to compete		12,095		(5,308	)		6,787
Trade names		204		(176	)		28
Other		657		(99	)		558
	$	136,801	$	(31,354	)	$	105,447

		December 31, 2006
		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	122,498	$	(22,125	)	$	100,373
Covenants not to compete		13,094		(4,802	)		8,292
Trade names		204		(159	)		45
Other		146		(64	)		82
	$	135,942	$	(27,150	)	$	108,792

Estimated amortization expense for intangible assets is $12.9 million for the remainder of 2007, $15.6 million for 2008, $15.2 million for 2009, $14.3 million for 2010, $13.0 million for 2011 and $34.4 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): 

		SelectBuild			BMC West		Total
Balance at December 31, 2006	$	287,123		$	20,877	$	308,000
Purchase Price Adjustment		(1,521	)		—		(1,521	)
Balance at March 31, 2007	$	285,602		$	20,877	$	306,479

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While goodwill is tested for impairment annually and not amortized for financial statement proposes, goodwill may be deductible for income tax purposes. Certain goodwill is non-deductible. Changes to non-deductible goodwill were as follows (thousands):

		SelectBuild		BMC West		Total
Balance at December 31, 2006	$	33,939	$	7,423	$	41,362
Purchase Price Adjustment		1,512		—		1,512
Balance at March 31, 2007	$	35,451	$	7,423	$	42,874

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8.Debt

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

					Notional Amount	Effective Interest Rate
As of March 31, 2007		Balance	Stated Interest Rate		of Interest Rate Swaps	Average for Quarter		As of March 31
Revolver	$	79,200	LIBOR plus 1.25% or Prime plus 0.00%	$	—	10.6	%	8.3	%
Term note		348,250	LIBOR plus 2.50% or Prime plus 1.25%		200,000	7.7	%	7.7	%
Other		4,631	Various		—
		432,081		$	200,000
Less:  Current portion		5,072
	$	427,009

					Notional Amount of Interest	Effective Interest Rate
As of December 31, 2006		Balance	Stated Interest Rate		Rate Swaps	Average for Year		As of December 31
Revolver	$	—	LIBOR plus 1.25% or Prime plus 0.00%	$	―	6.5	%	n/a
Term note		349,125	LIBOR plus 2.50% or Prime plus 1.25%		200,000	6.7	%	7.0	%
Other		8,179	Various		—	—		—
		357,304		$	200,000
Less:  Current portion		8,143
	$	349,161

Revolver

In November 2006, we entered into an amended $500 million revolver with a group of lenders. The revolver matures in November 2011. The revolver consists of both LIBOR and Prime based borrowings. These variable interest rates are subject to quarterly adjustment based on operating performance and range from LIBOR plus 1.00% to 2.00%, or Prime plus 0.00% to 0.75%. Interest is paid quarterly. As of March 31, 2007, $79.2 million was outstanding under the revolver.

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Term Note

In November 2006, we entered into a $350 million term note with a group of lenders. The term note matures in November 2013 and is payable in quarterly installments for the first 7 years in amounts equal to 1% of the initial principal per year and the remaining principal due November 2013. The variable interest rate for the term note is LIBOR plus 2.50%, or Prime plus 1.25%. Interest is paid quarterly. As of March 31, 2007, $348.3 million was outstanding under this term note.

Other

Other long-term debt of $4.6 million consists of term notes, equipment notes and capital leases for equipment. Interest rates vary and dates of maturity are through March 2021.

Expansion of Credit Facility, Covenants and Maturities

The credit facility consists of the revolver and term note. The credit facility may be increased an aggregate amount of up to $250 million. The credit facility is collateralized by tangible and intangible property of our wholly-owned subsidiaries, except the assets of our captive insurance subsidiary. The credit facility contains covenants and conditions requiring the maintenance of certain financial ratios. At March 31, 2007, we were in compliance with these covenants and conditions.

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

2007	$	3,937
2008		4,826
2009		4,140
2010		3,824
2011		82,909
Thereafter		332,445
	$	432,081

As of March 31, 2007 and December 31, 2006 there were $97.2 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 November 2006, we entered into interest rate swap contracts that effectively convert $200 million of the variable rate borrowings of the $348.3 million term note to a fixed interest rate of 7.59% through November 2012, thus reducing the impact of increases in interest rates on future interest expense. Approximately 57% of the outstanding variable rate borrowings of the term note as of March 31, 2007 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 were 47% fixed and 53% variable.

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 liability of $1.7 million as of March 31, 2007. The effective portion was recorded in accumulated other comprehensive loss, 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 asset of $0.7 million was also recorded in accumulated other comprehensive loss, net for 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. Management may choose not to swap variable rates to fixed rates or may terminate a previously executed swap if the variable rate positions are more beneficial.

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In June 2004, we entered into interest rate swap contracts that effectively converted $100 million of variable rate borrowings to a fixed interest rate. These swaps were settled in November 2006 and the $1.5 million gain recognized for this settlement was reclassified to other income, net from accumulated other comprehensive income, net.

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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 Certificate 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 approximately 29.3 million are issued and outstanding as of March 31, 2007.

Of the unissued shares, 322,928 shares were reserved for the following:

Employee Stock Purchase Plan	50,262
2004 Incentive and Performance Plan	272,666

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

Cash dividends per common share were as follows:

	2007	2006
First quarter	$0.10	$0.10
Second quarter	—	0.10
Third quarter	—	0.10
Fourth quarter	—	0.10
	$0.10	$0.40

On May 1, 2007, our Board of Directors approved a 2007 second quarter cash dividend of $0.10 per common share. The dividend was payable to shareholders of record as of June 22, 2007 and will be paid on or about July 13, 2007.

Repurchase Program

In March 2007, our Board of Directors authorized the repurchase of up to $25 million of our common shares through March 2008. No common shares were repurchased in the period ended March 31, 2007.

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10.   Employee Benefit Plans

Retirement Plans

·Savings and Retirement Plan

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. Participants may defer 1% to 50% of their eligible compensation (base salary, annual incentive and long-term incentives) subject to the limitations imposed under the Internal Revenue Code. Vesting in matching contributions and related earnings/losses occurs at the rate of 20% per year of service or upon reaching age 65, death or disability.

Our matching contributions range from 50% of the first 6% to 25% of the first 4% of the participant’s contribution. Matching contributions are established at the discretion of the Compensation Committee of our Board of Directors in February. Matching contributions of $1.4 million for the period ended March 31, 2007, $1.5 million for the period ended March 31, 2006 and $4.5 million in 2006 were made to the trusts based on a percentage of the contributions made by participants.

Participants may direct their contributions and matching contributions through any of the investment options offered, including self-directed brokerage accounts. Investment options are reviewed and revised quarterly by an Investment Committee comprised of management and advised by consultants.

·Executive Deferred Compensation

We provide a deferred compensation plan for executives and key employees. The objective of the plan is to provide executives and key employees with an additional opportunity to save for their retirement. Participants may defer up to 80% of their eligible compensation (base salary, annual incentive and long-term incentives). Matching contributions mirror the savings and retirement plan matching contribution percentage. Matching contributions are established at the discretion of the Compensation Committee of our Board of Directors in February.

There are no minimum or guaranteed returns. Participants may elect distribution upon reaching a specific age, number of years or separation of service. Distributions may be a lump sum payment or monthly installment over 5 to 10 years.

Matching contributions mirror the savings and retirement plan matching contribution percentage. Matching contributions are established at the discretion of the Compensation Committee of our Board of Directors in February. Matching contributions of $0.2 million for the period ended March 31, 2007, $0.3 million for the period ended March 31, 2006 and $0.4 million for 2006 were made to the trust based on a percentage of the contributions made by participants.

Participants may direct their contributions and matching contributions through any of the investment options offered, including our common shares. Investment options are reviewed and revised quarterly by an Investment Committee comprised of management and advised by consultants.

·Supplemental Retirement

Additionally, there is a supplemental retirement plan for executives and key employees. The objective of the plan is to provide a meaningful supplemental retirement benefit that enables participants to retire at age 65 with 30 years of service at an income level of at least 60% of pre-retirement base salary after considering deferred compensation, predecessor retirement and social security benefits.

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Active participants receive a guaranteed return of 7% and inactive participants receive a guaranteed return of 0% to 9% based on their years of service and payment elections. Contributions and the guaranteed return are established at the discretion of the Compensation Committee of our Board of Directors in February. Participants are immediately vested in the contribution.

In 2006, contributions were 3.6% of net income and were allocated proportionately to participants based on their base salaries. Contributions were $0.6 million for the period ended March 31, 2007, $1.8 million for the period ended March 31, 2006 and $7.5 million in 2006.

Contributions for the obligation are invested in company-owned life insurance policies. The cash surrender value of these policies approximates the obligation, however the guaranteed returns, if any, are not fully funded as these returns are dependent upon years of service and payment elections. These life insurance policies fund the obligation to the participants or their beneficiaries over a 5, 10 or 15-year period.

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 50,262 shares available for future purchase as of March 31, 2007. Compensation expense recognized was $0.1 million for the period ended March 31, 2007, $0.1 million for the period ended March 31, 2006 and $0.3 million in 2006.

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

·   Grants of options under the 2004 Incentive and Performance Plan vest ratably over 3 to 4 years from the date of grant and expire after 7 years if unexercised. Options were awarded with exercise prices equal to the fair value of the shares on the date of grant.

·   In February 2000, our Board of Directors adopted the 2000 Stock Incentive Plan which our shareholders approved in May 2000. Grants of options under the 2000 Stock Incentive Plan vest ratably through the end of the fourth year from the date of grant and expire after 10 years if unexercised. Options were awarded with exercise prices equal to the fair value of the shares on the date of grant. No further grants are made under this plan.

With the adoption of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, in 2006, compensation expense is recognized over the requisite service period for all share-based awards granted after the date of adoption as well as awards unvested on the date of adoption. Prior periods are not revised for comparative purposes. Share-based compensation expense previously included restricted shares and share awards and will now include the fair value of share options.

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Compensation expense is recognized over the requisite service period. The fair value of compensation expense recognized for options for the requisite service period was $1.3 million for the period ended March 31, 2007, $2.2 million for the period ended March 31, 2006 and $5.1 million, including $0.3 million for options vested due to early retirement eligibility, for 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 modified Black-Scholes-Merton model. Significant awards of options and their key assumptions are as follows:

Grant Year	Grant Month	Grant Date Fair Value of Options		Exercise Price	Risk Free Interest Rate			Expected Volatility			Expected Dividend Yield			Expected Term (years)
2007	March		$8.21	$18.28		4.53	%		54.53	%		2.03	%		5.19
2006	September		$12.74	$28.01		4.51	%		55.58	%		1.59	%		4.72
2006	January		$17.59	$37.93		3.77	%		48.58	%		0.70	%		5.60
2005	May		$15.79	$28.36		4.29	%		54.16	%		0.68	%		7.00
2005	February		$12.31	$22.77		4.10	%		54.16	%		0.84	%		6.84
2004	May		$4.39	$8.50		4.56	%		54.25	%		1.45	%		7.00
2004	February		$4.16	$7.88		4.09	%		54.68	%		1.45	%		7.50

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.

Activity for option awards was as follows (thousands, except per share data):

	Three Months Ended March 31 2007						Three Months Ended March 31 2006			2006
	Shares		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term (years)		Intrinsic Value	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Outstanding at beginning of the period	2,521		$14.41	5.1			2,300		$9.73	2,300		$9.73
Granted	354		$18.28				407		$37.93	409		$37.88
Exercised	(5	)	$6.97				(31	)	$9.22	(176	)	$7.34
Forfeited	(1	)	$6.25				(7	)	$14.33	(12	)	$21.98
Outstanding at end of the period	2,869		$14.90	5.1			2,669		$14.03	2,521		$14.41
Exercisable at end of the period	1,924		$11.27	4.6			1,535		$8.09	1,658		$8.20
In-the-money:
Outstanding	1,696		$6.76		$	19,244	2,662		$9.72	2,108		$9.84
Exercisable	1,518		$6.56		$	17,530	1,525		$7.74	1,656		$7.85
Weighted average fair value of options granted at fair value			$8.21						$17.59			$17.56

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The intrinsic value or the difference between our share price and the exercise price, for in-the-money options represents the value that would have been received by option holders had they exercised their options. These values change based on the fair market value of our shares. The intrinsic value was:

·$19.2 million for options outstanding

·$17.5 million for options exercisable (vested)

The intrinsic value for options exercised was $0.1 million for the period ended March 31, 2007, $0.9 million for the period ended March 31, 2006 and $3.8 million in 2006.

As of March 31, 2007, option awards outstanding and exercisable were as follows (thousands, except per share data):

	Options Outstanding			Options Exercisable
Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price	Shares Exercisable	Weighted Average Exercise Price
$4.84 to $5.97	555	3.2	$4.94	555	$4.94
$6.19 to $6.97	336	5.9	$6.96	336	$6.96
$7.00 to $7.88	467	5.7	$7.38	415	$7.31
$8.70	338	4.1	$8.70	212	$8.70
$18.28	354	7.0	$18.28	15	$18.28
$22.77 to $28.36	416	4.9	$22.90	272	$22.83
$37.93 to $38.16	403	5.8	$37.93	146	$37.93
$4.84 to $38.16	2,869	5.1	$14.90	1,951	$11.27

As of March 31, 2007, there was $8.9 million of unrecognized compensation expense related to these options. This is recognized as the requisite services are rendered and is expected to be recognized ratably through March 2011. The total fair value of options vested and unexercised was $4.0 million for the period ended March 2007, $1.7 million for the period ended March 2006 and $2.7 million in 2006.

Restricted Shares

Grants of restricted shares vest 3 years from the date of grant. Under certain circumstances some or all of the restricted shares may vest earlier. Compensation expense is recognized over the vesting period. Compensation expense recognized was $0.8 million for the period ended March 31, 2007, $0.7 million for the period ended March 31, 2006 and $3.1 million in 2006.

Activity for nonvested restricted share awards was as follows (thousands, except per share data):

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	Three Months Ended March 31 2007		Three Months Ended March 31 2006		2006
	Shares	Weighted Average Grant Date Fair Value	Shares	Weighted Average Grant Date Fair Value	Shares		Weighted Average Grant Date Fair Value
Nonvested at beginning of the period	396	$23.91	258	$16.46	258		$16.46
Granted	109	$18.28	138	$37.88	139		$37.83
Vested	—	—	—	—	—		—
Forfeited	—	—	—	—	(1	)	$37.93
Nonvested at end of the period	505	$22.69	396	$23.95	396		$23.91

As of March 31, 2007, there was $0.6 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 ratably through March 2010. 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

We issue shares to non-employee directors of our Board of Directors for their services. These shares vest immediately, however trading is restricted for 1 year from the date of grant. We issued 12,000 shares in May 2006 and 14,000 shares in May 2005 and recognized compensation expense of $0.1 million for the period ended March 31, 2007, $0.1 million for the period ended March 31, 2006 and $0.4 million in 2006.

The following table summarizes equity compensation information as of March 31, 2007 (thousands, except per share data):

	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		3,374		$12.67		273
Equity compensation plans not approved by security holders		—		—		—
Total		3,374		$12.67		273

Share-based compensation expense is included in selling, general and administrative expenses since it is incentive compensation issued primarily to our executives and senior management. Share-based compensation expense for options, restricted shares and share awards was $2.1 million for the period ended March 31, 2007, $3.0 million for the period ended March 31, 2006 and $8.5 million for 2006.

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11.Income Taxes

The asset and liability method is used to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for tax credits and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.

Our income tax compliance is periodically examined by various taxing authorities. Our tax returns for 2006 through 2002 are either under examination or open for future examination. We believe the ultimate results of examinations, if any, will not have an adverse affect on our financial condition, results of operations or cash flows. Revisions of estimated tax liabilities are reflected in the period such revisions are known.

In November 2006, SelectBuild acquired the remaining 49% interest in BBP Companies. Prior to the acquisition, income taxes associated with the other owner’s proportionate interest were $0.8 million for the period ended March 31, 2006 and $1.7 million in 2006. We were required to recognize income taxes for all of the earnings due to its C Corporation status. While these income taxes were recognized in income tax expense, the portion of income taxes associated with the other owner’s proportionate share of earnings was eliminated through minority interest. 

The tax benefit associated with options exercised by employees under the various share plans reduced taxes payable an insignificant amount for the period ended March 31, 2007, $0.3 million for the period ended March 31, 2006 and $1.5 million in 2006. These tax benefits are recognized in additional paid-in capital, a component of shareholders’ equity.

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12.Financial Instruments

The estimated fair values of cash and cash equivalents, receivables, unbilled receivables, accounts payable and accruals are the same as their carrying amounts due to their short-term nature. After giving effect to the interest rate swap contracts, the interest for our debt is 47% fixed and 53% variable. The estimated market value of our debt, based on current interest rates for similar obligations with like maturities, was:

·   $0.9 million more than the amount of debt reported on the consolidated balance sheet at March 31, 2007 and

·   $0.2 million less than the amount of debt reported on the consolidated balance sheet at December 31, 2006.

Changes in interest rates expose us to financial market risk. We currently utilize interest rate swap contracts to hedge interest exposure on our term note. The interest rate swap contracts effectively convert $200 million of the term note to a fixed interest rate of 7.59% through November 2012. Changes in the fair value of the interest rate swap contracts are recorded as accumulated other comprehensive loss, net, a separate component of shareholders’ equity, and are subsequently reclassified into interest expense as interest expense is recognized on the term note.

Derivative financial instruments are not utilized to hedge other risks or for speculative or trading purposes.

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13.Commitments and Contingencies

Warranties

We provide limited warranties for certain construction services. Specific terms and conditions for warranties vary from 1 year to 10 years and are based on geographic market and state regulations. Factors for determining estimates of warranties include the nature and frequency of claims, anticipated claims and cost per claim. Estimated costs for warranties are recognized when the revenue associated with the service is recognized. Revisions of estimated warranties are reflected in the period such revisions are determined. Warranty activity is as follows (thousands):

		Three Month Ended March 31
		2007			2006			2006
Balance at beginning of the period	$	7,155		$	5,404		$	5,404
Provision for warranties		113			1,438			3,009
Provision for warranties from acquisitions		—			95			117
Warranty charges		(201	)		(119	)		(1,375	)
Balance at end of the period	$	7,067		$	6,818		$	7,155

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 financial position, results of operations or cash flows.

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14.Segment Information

The consolidated financial statements include operations from our two reportable segments, SelectBuild 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.

SelectBuild

SelectBuild 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.

BMC West

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.

Corporate

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

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 most recent Annual Report on Form 10-K. 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):

		Sales							Income (Loss) Before Taxes and			Depreciation
		Total		Inter- Segment			Trade		Minority Interests			and Amortization		Capital (1) Expenditures		Assets
Three Months Ended March 31, 2007
SelectBuild	$	282,531	$	(60	)	$	282,471	$	2,586		$	8,626	$	5,893	$	730,724
BMC West		286,755		(122	)		286,633		11,431			3,155		1,971		444,465
Corporate		—		—			—		(13,057	)		966		1,003		133,467
	$	569,286	$	(182	)	$	569,104		960		$	12,747	$	8,867	$	1,308,656
Interest Expense									8,218
								$	(7,258	)
Three Months Ended March 31, 2006
SelectBuild	$	498,330	$	(32	)	$	498,298	$	46,075		$	6,627	$	14,232	$	770,685
BMC West		386,876		(617	)		386,259		30,546			2,895		4,123		493,042
Corporate		—		—			—		(22,235	)		660		660		86,572
	$	885,206	$	(649	)	$	884,557		54,386		$	10,182	$	19,015	$	1,350,299
Interest Expense									5,590
								$	48,796
Year Ended December 31, 2006
SelectBuild	$	1,744,092	$	(12,278	)	$	1,731,814	$	148,416		$	30,002	$	33,409	$	722,328
BMC West		1,515,121		(1,766	)		1,513,355		124,523			12,178		33,135		487,703
Corporate		—		—			—		(75,484	)		3,104		6,174		118,880
	$	3,259,213	$	(14,044	)	$	3,245,169		197,455		$	45,284	$	72,718	$	1,328,911
Interest Expense									29,082
								$	168,373

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

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15.Quarterly Results of Operations

Operating results by quarter for 2007 and 2006 were as follows (thousands, except per share data): 

	First			Second			Third		Fourth
2007
Sales	$	569,104			—			—		—
Income from operations	$	960			—			—		—
Net loss	$	(4,966	)		—			—		—
Net income per diluted common share		$(0.17	)		—			—		—
Common share prices:
High		$24.93			—			—		—
Low		$18.11			—			—		—
2006
Sales	$	884,557		$	921,992		$	830,599	$	608,021
Income from operations	$	54,386		$	64,317		$	64,271	$	14,481
Net income	$	28,069		$	34,175	(1)	$	35,348	$	4,482
Net income per diluted common share		$0.95			$1.16			$1.20		$0.15
Common share prices:
High		$40.32			$38.29			$28.01		$27.72
Low		$32.27			$25.36			$20.84		$23.95

⁽¹⁾ Includes impairments of $1.1 million net of tax for goodwill and $0.3 million net of tax for certain customer relationships of SelectBuild.

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

Business Environment and Executive Overview

We are one of the largest providers of residential construction services and building products in the United States, with a focus in the western and southern states. We provide construction services and building products in 16 of the top 25 single-family residential construction markets through our two subsidiaries, SelectBuild and BMC West. SelectBuild provides construction services to high-volume homebuilders in key growth markets. BMC West markets and sells building products, manufactures building components and provides construction services to professional builders and contractors through a network of 41 distribution facilities and 60 manufacturing facilities.

The national homebuilding market continues to experience a significant downturn in construction activity. Through the first quarter of 2007, the U.S. Census Bureau reported a drop in the estimate of single-family building permits of 28% relative to the prior year and an annual pace of homebuilding of 1.2 million units compared to 1.6 million units in the prior year. We have experienced a similar slowdown in contract starts and building permits in our markets and are confronting the challenge of adjusting our cost structures to accommodate this slower pace of homebuilding. We do not anticipate a rebound in new home construction until excess unsold home inventory has adjusted to levels consistent with current demand which we believe will occur on a market by market basis.

As part of our growth strategy, we evaluate acquisition opportunities that strengthen and broaden our construction services and building products as well as our presence in attractive markets. In particular, we believe high-volume homebuilders are seeking quality, reliable and cost effective solutions to meet their construction services needs. 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. As we focus on managing our business through the current industry downturn, future acquisition initiatives will remain measured and strategic.

Acquisition History

SelectBuild acquired businesses providing construction services to high-volume homebuilders. Specifically, these businesses were as follows:

2007

·   remaining 27% interest in our existing plumbing services business in Phoenix and Tucson, Arizona (April)

·   concrete services in Fresno, California (March)

2006

·   distribution services in Southern California (December)

·   remaining 49% interest in our existing concrete services business in Arizona (November)

·   window installation services in Phoenix, Arizona (August)

·   framing services in Southern California (July)

·   concrete services in Northern Arizona (April)

·   wall panel and truss manufacturer in Palm Springs, California (April)

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

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

At BMC West, we are expanding our building products, manufactured building components, millwork and construction services to become a full-service provider to homebuilders. To facilitate this expansion in products and services, BMC West acquired:

2006

·   building materials distribution and truss manufacturing in Eastern Idaho (June)

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

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. A reconciliation of sales and income from operations excluding acquisitions has been provided for the three months ended March 31, 2007 and 2006.

The following tables and subsequent discussions 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.

RESULTS OF OPERATIONS

2007 COMPARED WITH 2006

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

		Three Months Ended March 31
		2007					2006
Sales
Construction services	$	319		56.1	%	$	549		62.0	%
Building products		250		43.9			336		38.0
Total sales		569		100.0			885		100.0
Costs and operating expenses
Cost of goods sold
Construction services		275		86.2			454		82.7
Building products		181		72.4			247		73.5
Selling, general and administrative expenses		114		20.0			131		14.8
Other income, net		(2	)	(0.3	)		(1	)	(0.1	)
Total costs and operating expenses		568		99.8			831		93.9
Income from operations		1		0.2			54		6.1
Interest expense		8		1.4			6		0.7
Income tax benefit (expense)		2		0.3			(17	)	(1.9	)
Minority interests income, net of income taxes		—		—			(3	)	(0.3	)
Net (loss) income	$	(5	)	(0.9	)%	$	28		3.2	%
Net (loss) income per diluted share		$(0.17	)				$0.95

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Consolidated Financial Results

Selected financial results are as follows (millions):

  

		2007		2006		$ Change		% Change
Sales
Construction services	$	319	$	549	$	(230	)	(42	)%
Building products		250		336		(86	)	(26	)%
	$	569	$	885	$	(316	)	(36	)%
Income from operations	$	1	$	54	$	(53	)	(98	)%

Sales of $569 million decreased $316 million or 36% from the same quarter a year ago. Sales of construction services were particularly lower and reflected the decline in contract starts and building permits across all our markets. According to the U.S. Census Bureau, single-family permits in our markets were down 37% for the three months ended February 2007, while the U.S. overall was down 31%. Sales were also impacted by lower commodity wood product prices and the seasonal slowdown in construction activity.

Income from operations of $1 million decreased $53 million or 98% from the prior year quarter. The decrease in income from operations was due to a decline in gross margin from lower volume. Gross margin was 19.8% for the quarter compared to 20.7% in the same quarter a year ago. Margins were lower for construction services due to competitive pricing. Building product margins improved 1.3% and represented a higher portion of the sales mix, partially offsetting lower margins for construction services.

Selling, general and administrative expenses were down $16.8 million from reductions in payroll including incentive compensation. Selling, general and administrative expenses as a percent of sales increased to 20.0% from 14.8% due to:

·   lower sales volume,

·   the fixed portion of certain selling, general and administrative expenses and

·   a shift in sales mix to a higher portion of building products which carry higher expenses than construction services.

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Interest Expense

Interest expense of $8 million was up $2 million from the same quarter a year ago. The increase was due to higher average interest rates of 6.6% compared to 5.0% in 2006 and higher average borrowings of $377 million compared to $332 million in the same quarter of the prior year. Borrowings were higher to complete payments for acquisitions made in 2006.

Business Segments

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

		2007					2006
		Sales		Income from Operations			Sales		Income from Operations
SelectBuild	$	282	$	3		$	499	$	46
BMC West		287		11			386		30
Corporate		—		(13	)		―		(22	)
	$	569	$	1		$	885	$	54

SelectBuild

Selected financial results are as follows (millions):

		2007			2006		$ Change		% Change
Sales	$	282		$	499	$	(217	)	(44	)%
Less: Acquisitions		(27	)		—		(27	)	—
	$	255		$	499	$	(244	)	(49	)%
Income from operations	$	3		$	46	$	(43	)	(93	)%
Less: Acquisitions		(3	)		—		(3	)	—
	$	—		$	46	$	(46	)	(100	)%

Sales decreased 44% to $282 million from $499 million in the same quarter a year ago. Sales from comparable operations were 49% or $244 million lower. Sales from acquisitions not present in the same quarter of 2006 were 10% of sales or $27 million. The decline in sales volume was pervasive across all our regions and reflected a 43% decrease in single-family building permits in our markets. High-volume homebuilders sharply reduced production of new homes to balance supply with demand.

Income from operations for the quarter decreased 93% to $3 million from $46 million in the same quarter of 2006. Income from comparable operations was a loss of $0.3 million.

Income from operations was adversely impacted by lower gross margins due to a sharp drop in volume. Gross margins of 13.3% declined 4% from the same quarter in 2006 due to competitive pricing for fewer job starts in our markets.

Selling, general and administrative expenses were higher as a percent of sales relative to the prior year quarter due to:

·   a decline in sales volume,

·   integration expenses including compensation to support a regional operating infrastructure and

·   non-cash and operating expenses associated with recent acquisitions.

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BMC West

Selected financial results are as follows (millions):

		2007			2006		$ Change		% Change
Sales	$	287		$	386	$	(99	)	(26	)%
Less: Acquisitions		(9	)		—		(9	)	—
	$	278		$	386	$	(108	)	(28	)%
Income from operations	$	11		$	30	$	(19	)	(63	)%
Less: Acquisitions		—			―		—		—
	$	11		$	30	$	(19	)	(63	)%

Sales decreased 26% to $287 million from $386 million in the same quarter a year ago. Sales were lower due to a 29% decrease in single-family building permits in our markets and lower commodity wood product prices. The decline in sales occurred in all our markets, particularly Colorado.

Income from operations for the quarter decreased 63% to $11 million from $30 million in the same quarter of 2006. Despite a 1.1% improvement in gross margins to 25.9% of sales, operating income was lower due to the decline in sales.

Selling, general and administrative expenses increased to 22.2% of sales from 17.0% in the same quarter a year ago. As a percent of sales, the increase was due to compensation and fixed occupancy expenses relative to lower sales volume.

Corporate

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

Selected financial results are as follows (millions):

	2007		2006		$ Change			% Change
Operating expenses	$	13	$	22	$	(9	)		(41	)%

Corporate expenses decreased 41% to $13 million from $22 million in the same period of 2006. The decrease was due to lower incentive compensation expenses. Corporate expenses were 2.3% of sales compared to 2.5% for the same period a year ago.

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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. We expect to fund these requirements through a combination of cash flow from operations and seasonal borrowings under our credit facility.

For the first quarter of 2007, cash was used by operations and borrowed to complete payments for acquisitions made in the prior year as well as complete capital expenditures. The sections that follow discuss in more detail our operating, investing and financing activities as well as our financing arrangements.

Operations

Cash used by operating activities was $38.1 million compared to $14.4 million provided from operations for the same period a year ago. Net income adjusted for non-cash items decreased $31.6 million due to slower construction activity as homebuilders curtailed production in an effort to align home inventory with demand. In addition, working capital requirements were $15.5 million more than the same quarter a year ago. Cash was used to reduce other accrued liabilities and accrued compensation and increases in unbilled receivables, receivables and prepaid expenses were partially offset by an increase in accounts payable.

Capital Investment and Acquisitions

Cash used in investing activities was $69.1 million or $22.9 million less than $92.0 million in the same quarter a year ago. Cash use included $61.6 million for:

·   2006 acquisition of the remaining interests in a concrete block masonry and concrete services business and a concrete services business and

·   purchase price retained for the settlement period for 4 businesses.

Cash used for investing activities also included capital expenditures of $8.7 million or $1.7 million less than $10.4 million for the same quarter a year ago. Capital expenditures were principally for expansion of construction service facilities in California and Florida as well as routine replacement of operating equipment.

Financing

Cash provided by financing activities was $60.8 million or $17.0 million less than $77.8 million for the same quarter a year ago. As operating cash flows were weak and working capital requirements were higher, debt was borrowed to complete payments for the remaining interests in two concrete services businesses and the purchase price retained for the settlement period for 4 businesses as well as expand our construction service facilities and replace operating equipment.

Financing Arrangements

Our debt structure consists of a revolver, term note and other borrowings.

Revolver

In November 2006, we entered into an amended $500 million revolver with a group of lenders. The revolver matures in November 2011. The revolver consists of both LIBOR and Prime based borrowings. These variable interest rates are subject to quarterly adjustment based on operating performance and range from LIBOR plus 1.00% to 2.00%, or Prime plus 0.00% to 0.75%. Interest is paid quarterly. As of March 31, 2007, $79.2 million was outstanding under the revolver.

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Term Note

In November 2006, we entered into a $350 million term note with a group of lenders. The term note matures in November 2013 and is payable in quarterly installments for the first 7 years in amounts equal to 1% of the initial principal per year and the remaining principal due November 2013. The variable interest rate for the term note is LIBOR plus 2.50%, or Prime plus 1.25%. Interest is paid quarterly. As of March 31, 2007, $348.3 million was outstanding under this term note.

Other

Other long-term debt of $4.6 million consists of term notes, equipment notes and capital leases for equipment. Interest rates vary and dates of maturity are through March 2021.

Expansion of Credit Facility, Covenants and Maturities

The credit facility consists of the revolver and term note. The credit facility may be increased an aggregate amount of up to $250 million. The credit facility is collateralized by tangible and intangible property of our wholly-owned subsidiaries, except the assets of our captive insurance subsidiary. The credit facility contains covenants and conditions requiring the maintenance of certain financial ratios. At March 31, 2007, we were in compliance with these covenants and conditions.

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

2007	$	3,937
2008		4,826
2009		4,140
2010		3,824
2011		82,909
Thereafter		332,445
	$	432,081

As of March 31, 2007 and December 31, 2006 there were $97.2 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 November 2006, we entered into interest rate swap contracts that effectively convert $200 million of the variable rate borrowings of the $348.3 million term note to a fixed interest rate of 7.59% through November 2012, thus reducing the impact of increases in interest rates on future interest expense. Approximately 57% of the outstanding variable rate borrowings of the term note as of March 31, 2007 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 were 47% fixed and 53% variable.

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 liability of $1.7 million as of March 31, 2007. The effective portion was recorded in accumulated other comprehensive loss, 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 asset of $0.7 million was also recorded in accumulated other comprehensive loss, net for 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. Management may choose not to swap variable rates to fixed rates or may terminate a previously executed swap if the variable rate positions are more beneficial.

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In June 2004, we entered into interest rate swap contracts that effectively converted $100 million of variable rate borrowings to a fixed interest rate. These swaps were settled in November 2006 and the $1.5 million gain recognized for this settlement was reclassified to other income, net from accumulated other comprehensive income, net.

Equity

Repurchase Program

In March 2007, our Board of Directors authorized the repurchase of up to $25 million of our common shares through March 2008. No common shares were repurchased in the period ended March 31, 2007.

Common Shares

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 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 adjusted to reflect this share split.

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.

In the third quarter of 1998, we filed a shelf registration 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.

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OFF-BALANCE SHEET ARRANGEMENTS

As part of our ongoing 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, 2007, we are not involved in any transactions with unconsolidated entities.

DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

Accelerated repayment of our revolver and term note may occur if certain financial conditions or warranties and representations are not met. The credit facility consists of the revolver and term note. 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, 2007, we were in compliance with these covenants and conditions.

We have potential put obligations and call rights associated with the interests in RCI Construction, A-1 Truss and WBC Mid-Atlantic that we do not currently own. 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 periods. The purchase price for the remaining portions will be based generally on a multiple of historical earnings.

As part of our revolver, we have $97.2 million of 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.

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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.  This method requires the use of various estimates, including among others, the extent of progress towards completion, contract revenues and contract completion costs. 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. 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 recognized in the period such revisions are known.

·     Estimated Losses on Uncompleted Contracts and Changes in Contract Estimates

Estimated losses on uncompleted contracts and changes in contract estimates are established by assessing estimated costs to complete, change orders and claims for uncompleted contracts. Revisions of estimated losses are recognized in the period such revisions are known.

At March 31, 2007, the reserve for these estimated losses was $0.2 million for SelectBuild 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.

·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.

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At March 31, 2007, goodwill was $285.6 million for SelectBuild and $20.9 million for 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 workers’ compensation, general liability and automobile claims is determined by actuarial methods. Claims in excess of insurance deductibles are insured with third-party insurance carriers. Reserves for deductible amounts are recognized based on the estimated costs of these claims as limited by the provisions of the applicable insurance policies. Revisions of estimated claims are recognized in the period such revisions are known.

At March 31, 2007, the reserve for automobile, general liability and workers’ compensation claims was $53.9 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.

·Warranties

The estimated cost of warranties for certain construction services is based on the nature and frequency of claims, anticipated claims and cost per claim. Claims in excess of insurance deductibles are insured with third-party insurance carriers. Estimated costs for warranties are recognized when the revenue associated with the service is recognized. Revisions of estimated warranties are recognized in the period such revisions are known.

At March 31, 2007, the reserve for warranties was $7.1 million. Specific terms and conditions for warranties vary from 1 year to 10 years and are based on geographic market and state regulations. The reserve for these claims is susceptible to change based on the estimated cost of the claim. We have a history of making reasonable estimates of warranties. However, due to uncertainties inherent in the estimation process, it is possible that actual warranty costs may vary from estimates. Revisions of estimated warranties are recognized in the period such revisions are known.

·Share-based Compensation

Our estimates of the fair values of our share-based payment transactions are based on the modified Black-Scholes-Merton model. 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 recognized in the periods such revisions are known. Due to uncertainties inherent in these assumptions, it is possible that actual share-based compensation may vary from this estimate.

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RECENT ACCOUNTING PRINCIPLES

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. This accounting principle expands the use of fair value accounting. Entities may elect to measure eligible items at fair value at specified election dates, however the fair value election is irrevocable and made on an instrument-by-instrument basis. Eligible items include financial assets and liabilities, firm commitments for financial instruments, loan commitments, nonfinancial insurance contracts and warranties (goods or services settled by a third party) and host financial instruments. Upon adoption, unrealized gains and losses for existing items measured at fair value are recorded as a cumulative adjustment to beginning retained earnings and subsequent changes are recognized in earnings at each reporting date. We elected to not adopt the fair value measurement option for eligible items. This accounting principle was adopted January 2007 and had no impact on consolidated financial position, results of operations or cash flows.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements. This accounting principle simplifies existing accounting literature by providing a single definition of fair value, a framework for measuring fair value and expanded disclosures about fair value. This accounting principle emphasized that fair value is a market-based measurement of the amount that would be received upon the sale of an asset or paid to transfer a liability (an exit price) and not the price that would be paid to acquire the asset or received to assume the liability (entry price). This accounting principle did not expand the use of fair value. This accounting principle was adopted January 2007 and had no impact on consolidated financial position, results of operations or cash flows.

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes. This accounting principle provides specific guidance for measurement, recognition and disclosure of uncertain tax positions. This accounting principle was adopted January 2007 and had no impact on consolidated financial position, results of operations or cash flows.

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 Part II Item 1A of this Form 10-Q. These risks and uncertainties may include, however are not limited to:

·   demand for and supply of 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;

·   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;

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·   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;

·   costs and/or restrictions associated with federal, state and other regulations; 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 may 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 this Form 10-Q, 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, 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 the filing 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 amount of debt could also increase interest rate risks. Interest rate swap contracts are currently utilized to hedge interest rate risks. Approximately 57% of the outstanding floating rate borrowings of the $348.3 million term note as of March 31, 2007 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 47% fixed and 53% floating. Based on debt outstanding as of March 31, 2007, 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 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 of the Board of Directors. As a result of these evaluations, revisions and corrective actions are made to ensure the continuing effectiveness of our disclosure controls and procedures and internal controls over financial reporting.

During the 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 changes in the design or operation of our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls 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.

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Item 1A - Risk Factors

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 and supply of 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 experience decline due to home inventory levels, the availability and affordability of land in attractive metropolitan areas, shortages of qualified trades people, shortages of materials and regulations that impose restrictive zoning and density requirements. Also, changes to housing patterns may occur, such as an increase in consumer demand for urban living rather than single-family suburban neighborhoods. 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 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 and other homebuilders. Providing these services and products includes 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.

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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 an adverse effect on our growth. Also, the increasing level of consolidation occurring in the construction services and building products distribution 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. Additional and perceived enforcement of as well as changes to immigration policies could also limit the availability of qualified labor. We cannot guarantee that we will be successful in recruiting and retaining qualified employees 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 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 or may purchase construction services and building products from separate suppliers. If we do not timely assess shifts in customer expectations, preferences and demands in a timely manner, 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.

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.

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 construction services and building materials distribution industry. As the industry consolidates, other building materials distributors, including large retail distributors focused on consumers, may aggressively pursue our target market of high-volume homebuilders and other professional builders and contractors. These competitive factors may lead to pricing pressures and cause reductions in sales or margins, increases in operating costs and may limit acquisition opportunities. Loss of significant market share due to competition could result in the closure of facilities.

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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. We also operate a large fleet of trucks and other vehicles and therefore face some risk of accidents. 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 an adverse effect on our business.

Federal, state and other regulations could impose substantial costs and/or restrictions on our business.

We are subject to various federal, state, local and other regulations, including among other things, work safety regulations promulgated by the Department of Labor’s Occupational Safety and Health Administration, transportation regulations promulgated by the Department of Transportation, employment regulations promulgated by the United States Equal Employment Opportunity Commission and state and local zoning restrictions and building codes. More burdensome regulatory requirements in these or other areas may increase our costs and have an adverse effect on our financial condition, results of operations or cash flows.

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 and our business. 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 that may have an adverse effect on our business.

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Risks Related to Our Shares

Risks related to our shares may include, however are not limited to:

Our share price may fluctuate significantly, which may make it difficult for shareholders to tradeour 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 couldprevent 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 shareholder 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.

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

In March 2007, our Board of Directors authorized the repurchase of up to $25 million of our common shares through March 2008. No common shares were repurchased in the period ended March 31, 2007.

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Item 3 - Defaults Upon Senior Securities

None.

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

Our annual meeting of shareholders was held on May 1, 2007. A total of 29,170,793 common shares were outstanding at the date of record and entitled to vote at the meeting. Of the total outstanding, 26,473,771 shares were represented at the meeting, while 2,697,022 were not voted.

Election of Board of Directors

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 2008.

	For	Withheld
Robert E. Mellor	23,494,156	2,979,615
Sara L. Beckman	23,816,770	2,657,001
Eric S. Belsky	23,863,120	2,610,651
James K. Jennings, Jr.	23,864,141	2,609,630
Norman J. Metcalfe	23,867,893	2,605,878
David M. Moffett	23,820,330	2,653,441
R. Scott Morrison, Jr.	23,819,160	2,654,611
Peter S. O’Neill	23,617,952	2,855,819
Richard G. Reiten	23,865,891	2,607,880
Norman R. Walker	23,854,845	2,618,926

Amended 2004 Incentive and Performance Plan

Our shareholders approved the following changes to the 2004 Incentive and Performance Plan:

·   increase limitation on annual incentive compensation to $5 million from $1.5 million,

·   eliminate 200% base salary limitation for annual incentive compensation and

·   clarify $5 million annual incentive compensation limitation does not include options or share appreciation rights.

Shareholder votes were cast as follows:

For	Withheld	Abstain	Not Voted
16,500,930	1,646,601	52,634	8,273,606

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
26,280,668	146,674	46,429	0

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Item 5 - Other Information

None.

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Item 6 - Exhibits

(a)	Exhibits
	Number		Description
		10.25	Building Materials Holding Corporation Amended 2004 Incentive and Performance Plan
		10.40	Building Materials Holding Corporation 2007 Annual Incentive Program for Certain Employees of BMHC and SelectBuild
		10.41	Building Materials Holding Corporation 2007 Annual Incentive Program for BMC West Officers and Key Staff
		10.45.1	Building Materials Holding Corporation 2005 Deferred Compensation Plan for Executives Amendment #1
		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 4, 2007		/s/ Robert E. Mellor
		Robert E. Mellor Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

Date: May 4, 2007	/s/ William M. Smartt
	William M. Smartt Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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