Building Materials Holding (BLGM) 10-Q 2007 Q3 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 September 30, 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 þ No ¨

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

Large accelerated filer ¨ Accelerated filer þ 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 October 30, 2007 was 29,376,950.

BUILDING MATERIALS HOLDING CORPORATION

FORM 10-Q

For the Period Ended September 30, 2007

INDEX

	Page Number
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)	2
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006	2
Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	3
Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2007 and 2006	4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	5
Notes to Consolidated Financial Statements	6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	50
Item 4 - Controls and Procedures	51
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings	52
Item 1A - Risk Factors	53
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3 - Defaults Upon Senior Securities	58
Item 4 - Submission of Matters to a Vote of Security Holders	59
Item 5 - Other Information	60
Item 6 - Exhibits	61
SIGNATURES	62

1

Item 1 - Financial Statements

Building Materials Holding Corporation

Consolidated Statements of Operations

(thousands, except per share data)

(unaudited)

	Three Months Ended September 30						Nine Months Ended September 30
	2007			2006			2007			2006
Sales
Construction services	$	351,738		$	485,790		$	1,076,735		$	1,595,579
Building products		266,542			332,004			789,078			1,010,920
Total sales		618,280			817,794			1,865,813			2,606,499
Costs and operating expenses
Cost of goods sold
Construction services		307,192			400,371			927,459			1,314,028
Building products		193,073			238,676			572,578			737,168
Impairment of assets		—			—			—			2,237
Selling, general and administrative        expenses		109,718			117,790			332,729			377,311
Other income, net		(1,838	)		(1,777	)		(14,189	)		(4,026	)
Total costs and operating expenses		608,145			755,060			1,818,577			2,426,718
Income from operations		10,135			62,734			47,236			179,781
Interest expense		8,751			8,566			26,470			20,621
Income from continuing operations    before income taxes and minority    interests		1,384			54,168			20,766			159,160
Income taxes (benefit)		(148	)		17,370			5,674			55,068
Minority interests income, net of income taxes		(414	)		(2,398	)		(790	)		(8,472	)
Income from continuing operations		1,118			34,400			14,302			95,620
Income from discontinued operations       prior to sale		1,178			1,537			3,220			3,193
Gain on sale of discontinued operations		3,722			—			3,722			—
Income taxes		1,850			589			2,625			1,221
Income from discontinued operations		3,050			948			4,317			1,972
Net income	$	4,168		$	35,348		$	18,619		$	97,592
Net income per share:
Continuing operations		$0.04			$1.20			$0.50			$3.35
Discontinued operations		0.10			0.04			0.15			0.07
Basic		$0.14			$1.24			$0.65			$3.42
Continuing operations		$0.04			$1.17			$0.48			$3.23
Discontinued operations		0.10			0.03			0.15			0.07
Diluted		$0.14			$1.20			$0.63			$3.30

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)

		September 30			December 31				September 30			December 31
		2007			2006				2007			2006
Assets							Liabilities, Minority Interests and Shareholders’ Equity
Cash and cash equivalents	$	33,604		$	74,272
Marketable securities		6,623			4,337		Accounts payable	$	115,432		$	109,129
Receivables, net of allowances							Accrued compensation		42,079			48,180
of $4,968 and $4,487		292,048			276,497		Insurance deductible reserves		28,824			24,931
Inventory		135,954			141,457		Other accrued liabilities		36,419			103,145
Unbilled receivables		54,585			43,527		Billings in excess of costs and estimated
Deferred income taxes		11,456			8,914		earnings		30,412			27,622
Prepaid expenses and other		15,075			11,153		Current portion of long-term debt		4,971			8,143
Assets of discontinued operations		1,560			6,254		Liabilities of discontinued operations		2,348			2,461
Current assets		550,905			566,411		Current liabilities		260,485			323,611
Property and equipment							Deferred income taxes		13,951			9,138
Land		62,736			61,217		Insurance deductible reserves		26,542			25,841
Buildings and improvements		138,095			136,659		Long-term debt		373,885			349,161
Equipment		193,658			186,956		Other long-term liabilities		39,211			41,390
Construction in progress		7,305			8,579
Accumulated depreciation		(154,119	)		(136,020	)	Minority interests		3,028			7,141
Marketable securities		52,192			53,513
Deferred loan costs		4,639			5,481		Commitments and contingent liabilities		—			—
Other long-term assets		31,112			26,975
Other intangibles, net		98,966			108,792		Shareholders’ equity
Goodwill		320,841			308,000		Common shares, $0.001 par value:
Assets of discontinued operations		—			2,348		authorized 50 million; issued
	$	1,306,330		$	1,328,911		and outstanding 29.4 and 29.2
							million shares		29			29
							Additional paid-in capital		161,876			154,405
							Retained earnings		428,752			418,927
							Accumulated other comprehensive  income (loss), net		(1,429	)		(732	)
							Shareholders’ equity		589,228			572,629
								$	1,306,330		$	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)

(unaudited)

														Accumulated Other Comprehensive Income (Loss)
														Net Unrealized Gain (Loss) From
					Additional									Interest
	Common Shares				Paid-In			Unearned			Retained			Rate Swap			Marketable
	Shares		Amount		Capital			Compensation			Earnings			Contracts			Securities			Total
Balance at December 31, 2005		28,759	$	29	$	143,780		$	(2,698	)	$	328,463		$	736		$	(249	)	$	470,061
Net income		—		—		—			—			97,592			—			—			97,592
Unrealized gain		—		—		—			—			—			478			281			759
Taxes for unrealized gain		—		—		—			—			—			(184	)		(108	)		(292	)
Comprehensive income																					98,059
Reclassify unearned compensation - restricted shares		—		—		(2,698	)		2,698			—			—			—			—
Earned compensation - options		—		—		3,900			—			—			—			—			3,900
Earned compensation - restricted shares		—		—		2,310			—			—			—			—			2,310
Issuance of restricted shares		138		—		—			—			—			—			—			—
Share options exercised		75		—		663			—			—			—			—			663
Tax benefit for share options exercised		—		—		707			—			—			—			—			707
Shares issued from Director Plan		12		—		415			—			—			—			—			415
Shares issued from Employee Plan		51		—		1,511			—			—			—			—			1,511
Cash dividends on common shares		—		—		—			—			(8,696	)		—			—			(8,696	)
Balance at September 30, 2006		29,035	$	29	$	150,588		$	—		$	417,359		$	1,030		$	(76	)	$	568,930
Balance at December 31, 2006		29,153	$	29	$	154,405		$	—		$	418,927		$	(548	)	$	(184	)	$	572,629
Net income		—		—		—			—			18,619			—			—			18,619
Unrealized loss		—		—		—			—			—			(1,797	)		—			(1,797	)
Tax benefit for unrealized loss		—		—		—			—			—			678			—			678
Unrealized gain		—		—		—			—			—			—			639			639
Taxes for unrealized gain		—		—		—			—			—			—			(217	)		(217	)
Comprehensive income																					17,922
Earned compensation - options		—		—		3,928			—			—			—			—			3,928
Earned compensation - restricted shares		—		—		2,445			—			—			—			—			2,445
Tax benefit for vested restricted shares		—		—		167			—			—			—			—			167
Issuance of restricted shares		158		—		—			—			—			—			—			—
Share options exercised		27		—		167			—			—			—			—			167
Tax benefit for share options exercised		—		—		82			—			—			—			—			82
Shares issued from Director Plan		27		—		405			—			—			—			—			405
Shares issued from Employee Plan		12		—		277			—			—			—			—			277
Cash dividends on common shares		—		—		—			—			(8,794	)		—			—			(8,794	)
Balance at September 30, 2007		29,377	$	29	$	161,876		$	—		$	428,752		$	(1,667	)	$	238		$	589,228

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

4

Building Materials Holding Corporation

Consolidated Statements of Cash Flows

(thousands)

(unaudited)

	Nine Months Ended September 30
Operating Activities	2007			2006
Net income	$	18,619		$	97,592
Items in net income not using (providing) cash:
Minority interests, net		790			8,472
Depreciation and amortization		36,509			33,277
Deferred loan cost amortization		842			685
Impairment of assets		—			2,237
Share-based compensation		6,722			6,851
Gain on sale of discontinued operations		(3,722	)		—
Gain on sale of assets, net		(8,738	)		(126	)
Realized loss on marketable securities		15			231
Deferred income taxes		3,649			2,509
Changes in assets and liabilities, net of effects of acquisitions and  divestitures of business units:
Receivables, net		(14,498	)		31,834
Inventory		5,482			11,751
Unbilled receivables		(11,058	)		2,323
Prepaid expenses and other current assets		(3,946	)		(2,745	)
Accounts payable		9,543			(13,899	)
Accrued compensation		(6,173	)		(5,033	)
Insurance deductible reserves		3,893			2,243
Other accrued liabilities		(10,294	)		15,608
Billings in excess of costs and estimated earnings		2,790			(6,787	)
Other long-term assets and liabilities		(10,595	)		(8	)
Other, net		461			(19	)
Cash flows provided by operating activities		20,291			186,996
Investing Activities
Purchases of property and equipment		(21,771	)		(47,805	)
Acquisitions and investments in businesses, net of cash acquired		(76,440	)		(200,725	)
Proceeds from dispositions of property and equipment		16,325			1,823
Proceeds from sale of discontinued operations		9,592			—
Purchase of marketable securities		(26,447	)		(38,492	)
Proceeds from sales of marketable securities		26,161			20,540
Other, net		(290	)		(3,188	)
Cash flows used by investing activities		(72,870	)		(267,847	)
Financing Activities
Net borrowings under revolver		28,700			110,700
Principal payments on term notes		(2,625	)		(2,813	)
Net payments on other notes		(4,523	)		(984	)
(Decrease) Increase in book overdrafts		(275	)		1,793
Proceeds from share options exercised		167			663
Tax benefit for share-based payments		249			707
Dividends paid		(8,771	)		(7,951	)
Deferred financing costs		—			(583	)
Distributions to minority interests		(1,223	)		(3,980	)
Other, net		212			540
Cash flows provided by financing activities		11,911			98,092
(Decrease) Increase in Cash and Cash Equivalents		(40,668	)		17,241
Cash and cash equivalents, beginning of period		74,272			30,078
Cash and cash equivalents, end of period	$	33,604		$	47,319
Supplemental Disclosure of Cash Flow Information
Accrued but unpaid dividends	$	2,938		$	2,903
Cash paid for interest	$	25,595		$	18,905
Cash paid for income taxes	$	7,569		$	60,505
Supplemental Disclosure of Investing Activities
Fair value of assets acquired	$	12,999		$	262,755
Liabilities assumed	$	840		$	62,030
Cash paid for acquisitions made this period	$	12,159		$	181,664
Cash paid for acquisitions made in prior period	$	64,281		$	19,061

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.

In September 2007, BMC West completed the sale of three building materials distribution operations in Western Colorado. As a result of this transaction:

· the operating results of these operations are presented separately from continuing operations within the caption of discontinued operations and

· related assets and liabilities are separately classified in the consolidated balance sheet.

These consolidated financial statements refer to three months as a quarter and nine months as a period.

These consolidated financial statements have not been audited by independent registered public accountants. However, in the opinion of management, all adjustments, including those of a normal and recurring nature, necessary 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 production 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 61 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:

6

· 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.

· 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.

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 $8.7 million for the period ended September 30, 2007, a gain of $0.1 million for the period ended September 30, 2006 and a loss of $0.2 million for 2006 from sales of property and equipment.

8

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.

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 $54.8 million for the period ended September 30, 2007, $59.2 million for the period ended September 30, 2006 and $78.8 million for 2006.

Reclassifications

Certain 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 period presentation.

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 $8.5 million for the quarter ended September 30, 2006, $21.9 million for the period ended September 30, 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 period 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 and related disclosures were adopted effective 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.

9

2.Discontinued Operations

The results of operations and financial position of discontinued operations are separately reported for all periods presented.

· In September 2007, BMC West sold three building materials distribution businesses in Western Colorado for $11.4 million consisting of $9.6 million cash and a $1.8 million note receivable. As a result, we recognized an initial gain of $3.7 million. These business units were previously reported as a component of BMC West and were approximately 3% of sales.

Assets, liabilities, sales and income for these operations are separately reported from continuing operations and were as follows (thousands): 

	September 30
	2007		2006		2006
Assets	$	1,560	$	9,683	$	8,602
Liabilities	$	2,348	$	3,219	$	2,461

 

	Three Months Ended September 30				Nine Months Ended September 30
	2007		2006		2007		2006		2006
Sales
Building Products	$	11,093	$	12,805	$	29,691	$	30,649	$	41,903
Income from discontinued    operations	$	3,050	$	948	$	4,317	$	1,972	$	2,971

Assets of discontinued operations at September 2007 includes $1.3 million of real estate related to one of these operations and is expected to be sold.

10

3.Net Income Per Share

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

	Three Months Ended September 30				Nine Months Ended September 30
	2007		2006		2007		2006		2006
Income from continuing    operations	$	1,118	$	34,400	$	14,302	$	95,620	$	99,103
Income from discontinued    operations		3,050		948		4,317		1,972		2,971
Net income	$	4,168	$	35,348	$	18,619	$	97,592	$	102,074
Weighted average       shares - basic		28,945		28,617		28,800		28,573		28,603
Effect of dilutive:
Share options		512		776		598		846		830
Restricted shares		99		159		142		150		156
Weighted average       shares - assuming       dilution		29,556		29,552		29,540		29,569		29,589
Net income per share:
Continuing operations		$0.04		$1.20		$0.50		$3.35		$3.47
Discontinued operations		0.10		0.04		0.15		0.07		0.10
Basic		$0.14		$1.24		$0.65		$3.42		$3.57
Continuing operations		$0.04		$1.17		$0.48		$3.23		$3.35
Discontinued operations		0.10		0.03		0.15		0.07		0.10
Diluted		$0.14		$1.20		$0.63		$3.30		$3.45
Cash dividends declared    per share		$0.10		$0.10		$0.30		$0.30		$0.40

Certain share options and restricted shares are excluded from the computation of diluted earnings per share for:

· options with exercise prices greater than the average market value of the common shares (options out-of-the-money) and

· unrecognized compensation expense for restricted shares with after-tax proceeds greater than the average market value of the common shares

Options and restricted shares excluded from the computation of diluted net income per share will change based on additional grants as well as the average market value of the common shares for the period. These options and restricted shares that are not dilutive and therefore excluded from the computation of diluted net income per share were as follows (thousands, except share data):

	Three Months Ended September 30				Nine Months Ended September 30
	2007		2006		2007		2006		2006
Average market value of shares		$13		$25		$17		$31		$30
Share options:
Exercise price range		$15 to $38		$23 to $38		$15 to $38		$23 to $38		$23 to $38
Not dilutive		1,328		819		1,328		819		819
Restricted shares:
Grant price range		$18 to $42		$34 to $42		$34		$—		$—
Not dilutive		299		139		2		—		—

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4.Impairment of Assets

Long-lived assets such as property, equipment and intangibles are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment for these assets is recognized if the carrying amount 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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5.Acquisitions and Minority Interests

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

· In March 2007, SelectBuild acquired a concrete services business in Fresno, California for approximately $0.7 million in cash.

· In December 2006, SelectBuild acquired a distribution services business in Southern California for $1.6 million in cash.

· In August 2006, SelectBuild acquired a window installation business in Arizona for $13.9 million in cash.

· In July 2006, SelectBuild acquired a framing services business in Southern California for $78.6 million in cash. Additional consideration of $3.1 million was paid in the third quarter of 2007 for operating performance through June 2007. 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 $5.1 million in cash.

· In April 2006, SelectBuild acquired a concrete services business in Northern Arizona for $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 interests reflects the other owners’ proportionate share in the assets and liabilities of business ventures as of the date of purchase, adjusted by the proportionate share of post-acquisition income or loss. As the operating results of entities with minority interest are consolidated, minority interests income represents the income or loss attributable to the other owners.

· In September 2007, SelectBuild acquired the remaining 49% interest in SelectBuild Trim for $0.5 million in cash which is payable in the fourth quarter. In January 2007, SelectBuild formed this venture for an initial 51% interest for $0.5 million in cash. SelectBuild Trim provides door and molding installation services in Las Vegas, Nevada.

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· In September 2007, SelectBuild acquired the remaining 49% interest in A-1 Building Components, LLC (A-1 Truss) for $5.0 million in cash of which $4.0 million is payable in the fourth quarter. Information required to complete the purchase price allocation is not yet available. Final allocation of the purchase price will be completed as soon as this information is available. In September 2004, SelectBuild acquired an initial 51% interest for $2.3 million in cash. A-1 Truss manufactures trusses in Fort Pierce, Florida.

· In May 2007, SelectBuild acquired the remaining 33% interest in SelectBuild Mid-Atlantic (WBC Mid-Atlantic) for no consideration pursuant to the operating agreement. In October 2003, SelectBuild acquired an initial 67% interest for $5.1 million in cash and $0.2 million of our common shares. SelectBuild Mid-Atlantic provides framing services to production homebuilders in Delaware, Maryland and Virginia.

· 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. Riggs Plumbing provides plumbing services to production homebuilders 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 production homebuilders in Arizona.

· In January 2006, SelectBuild acquired the remaining 20% interest in SelectBuild Florida (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. SelectBuild Florida provides concrete block masonry and concrete service to production homebuilders in Florida.

Assets and liabilities acquired in acquisitions made in 2007 and 2006, including payments of amounts retained for settlement periods, were as follows (thousands):

	September 30		December 31			September 30			December 31
	2007		2006			2007			2006
Receivables	$	—	$	44,683	Accounts payable	$	—		$	10,376
Inventory		—		19,957	Accrued compensation		—			1,447
Unbilled receivables		—		10,101	Other accrued liabilities		(56,266	)		50,340
Prepaid expenses and other		18		263	Billings in excess of costs and
					estimated earnings		—			23,557
Current assets		18		75,004	Current liabilities		(56,266	)		85,720
Property and equipment		216		19,845	Deferred income taxes		(917	)		937
Other long-term assets		—		42	Other long-term liabilities		—			8,173
Other intangibles, net		2,502		68,692	Minority interests		(3,680	)		(10,627	)
Goodwill		12,841		122,374
	$	15,577	$	285,957		$	(60,863	)	$	84,203

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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):

	Three Months Ended September 30				Nine Months Ended September 30
	2007		2006		2007		2006
Sales - as reported	$	618,280	$	817,794	$	1,865,813	$	2,606,499
Pro forma Sales	$	618,280	$	820,035	$	1,866,577	$	2,685,880
Income from continuing    operations - as reported	$	1,118	$	34,400	$	14,302	$	95,620
Pro forma Income from    continuing operations	$	1,476	$	34,537	$	15,090	$	100,451
Income from continuing    operations per share:
Diluted - as reported		$0.04		$1.17		$0.48		$3.23
Pro forma Diluted		$0.05		$1.17		$0.51		$3.40

We have call rights and put obligations associated with the interests in SelectBuild Mechanical (KBI Mechanical) and SelectBuild Illinois (RCI Construction) 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
SelectBuild Mechanical	December 2009 through December 2014	December 2009 through December 2014
SelectBuild Illinois	January 2008 through January 2012	January 2008 through January 2012

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6.Marketable Securities

Investments in marketable securities consist of debt securities held by our captive insurance subsidiary and are considered available-for-sale and recorded at fair 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 income (loss), net, a component of shareholders’ equity. There were no significant unrealized losses.

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

	September 30		December 31
	2007		2006
U.S. government and agencies	$	26,005	$	25,661
Asset backed securities		16,681		18,278
Corporate securities		16,129		13,911
	$	58,815	$	57,850

Contractual maturities were as follows (thousands):

	September 30		December 31
	2007		2006
Less than 1 year	$	6,623	$	4,337
Due in 1 to 2 years		16,705		16,648
Due in 2 to 5 years		35,194		36,865
More than 5 years		293		—
	$	58,815	$	57,850

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7.Intangible Assets and Goodwill

Intangible assets represent the values assigned to customer relationships, covenants not to compete, trade names and favorable leases. 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 3 to 5 years, trade names over 3 years and favorable leases over 5 years. Amortization expense for intangible assets was $12.3 million for the period ended September 30, 2007, $10.6 million for the period ended September 30, 2006 and $14.7 million for 2006. Intangible assets consist of the following (thousands):

	September 30, 2007
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	123,560	$	(31,155	)	$	92,405
Covenants not to compete		12,179		(6,200	)		5,979
Trade names		204		(204	)		—
Favorable leases		780		(198	)		582
	$	136,723	$	(37,757	)	$	98,966

	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
Favorable leases		146		(64	)		82
	$	135,942	$	(27,150	)	$	108,792

Estimated amortization expense for intangible assets is $4.2 million for the remainder of 2007, $16.0 million for 2008, $15.4 million for 2009, $14.4 million for 2010, $13.1 million for 2011 and $35.9 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		(182	)		—		(182	)
Goodwill acquired		13,023			—		13,023
Balance at September 30, 2007	$	299,964		$	20,877	$	320,841

While goodwill is tested for impairment annually and not amortized for financial statement purposes, 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		(4,656	)		—		(4,656	)
Balance at September 30, 2007	$	29,283		$	7,423	$	36,706

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8.Debt

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

As of September 30, 2007						Notional Amount of		Effective Interest Rate
	Balance			Stated Interest Rate		Interest  Rate Swaps		Average for Quarter		As of September 30
Revolver	$	28,700	��		LIBOR plus  1.50% or  Prime plus 0.25% and 0.25 commitment fee	$	—		8.0%		10.8%
Term note		346,500			LIBOR plus  2.50% or Prime plus 1.25%		200,000		7.7%		7.8%
Other		3,656			Various		—		—		—
		378,856				$	200,000
Less:  Current portion		4,971
	$	373,885

As of December 31, 2006					Notional Amount of		Effective Interest Rate
	Balance		Stated Interest Rate		Interest  Rate Swaps		Average for Year		As of December 31
Revolver	$	—		LIBOR plus 1.25% or Prime plus 0.00% and 0.225% commitment fee	$	―		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%. Additionally, a commitment fee for the unused portion of the revolver is subject to quarterly operating performance and ranges from 0.20% to 0.35%. Interest is paid quarterly. As of September 30, 2007, $28.7 million was outstanding under the revolver.

The effective interest rate is based on interest rates for the period as well as the commitment fee for the unused portion of the revolver.

Letters of credit outstanding that guaranteed performance or payment to third parties were $92.9 million as of September 30, 2007 and $97.2 million as of December 31, 2006. These letters of credit reduce borrowing availability 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 September 30, 2007, $346.5 million was outstanding under this term note.

Other

As of September 30, 2007, other long-term debt was $3.7 million. Other long-term debt 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 September 30, 2007, we were in compliance with these covenants and conditions.

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

2007	$	1,277
2008		4,792
2009		4,109
2010		3,824
2011		32,409
Thereafter		332,445
	$	378,856

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 $346.5 million term note to a fixed interest rate of 7.6% through November 2012, thus reducing the impact of increases in interest rates on future interest expense. Approximately 58% of the outstanding variable rate borrowings of the term note as of September 30, 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 54% fixed and 46% 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 $2.7 million and a corresponding deferred tax asset of $1.0 million as of September 30, 2007. The effective portion was recorded in accumulated other comprehensive income (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. The corresponding deferred tax asset was also recorded in accumulated other comprehensive income (loss), net for the income tax related to the estimated fair value of the interest rate swap contracts. The ineffective portion, if any, 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.

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 29.4 million are issued and outstanding as of September 30, 2007.

Of the unissued shares, 47,330 shares were reserved for the following:

Employee Stock Purchase Plan	4,767
2004 Incentive and Performance Plan	42,563

Shareholders’ Rights Plan

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

Dividends

Cash dividends per common share were as follows:

	2007		2006
First quarter		$0.10		$0.10
Second quarter		0.10		0.10
Third quarter		0.10		0.10
Fourth quarter		—		0.10
		$0.30		$0.40

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 September 30, 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.

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. Vesting in matching contributions occurs at the rate of 20% per year of service or upon reaching age 65, death, disability or under certain circumstances. Matching contributions of $3.6 million for the period ended September 30, 2007, $3.8 million for the period ended September 30, 2006 and $4.5 million for 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).

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 installments 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 $0.3 million for the period ended September 30, 2007, $0.4 million for the period ended September 30, 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.

Contributions are 5.5% of net income and are allocated proportionately to participants based on their base salaries. Contributions, including the guaranteed return, were $2.7 million for the period ended September 30, 2007, $6.8 million for the period ended September 30, 2006 and $7.5 million for 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, as approved by our shareholders 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. A total of 400,000 shares were initially reserved for this plan with 4,767 remaining for future purchase as of September 30, 2007. Shares are no longer issued due to the number of shares remaining in the plan. Compensation expense recognized was $0.2 million for the period ended September 30, 2007, $0.3 million for the period ended September 30, 2006 and $0.3 million for 2006.

2004 Incentive and Performance Plan

In February 2004, our Board of Directors adopted the 2004 Incentive and Performance Plan, as approved by our shareholders in May 2004. A total of 2.4 million shares were 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. Unissued shares were 42,563 as of September 30, 2007, 736,466 as of September 30, 2006 and 736,466 as of December 31, 2006.

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. Under certain circumstances some or all of the options may vest earlier. Options were awarded with exercise prices equal to the closing share price of our common shares on the date of grant.

· In February 2000, our Board of Directors adopted the 2000 Stock Incentive Plan, as approved by our shareholders 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. Under certain circumstances some or all of the options may vest earlier. Options were awarded with exercise prices equal to the closing share price of our common shares on the date of grant. No further grants will be made under this plan.

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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.

The fair value of each option was estimated on the date of grant using the modified Black-Scholes-Merton model. The following table presents the weighted average assumptions used in the valuation and the resulting fair value:

	Nine Months Ended September 30
	2007		2006		2006
Expected term (years)	5.2		5.6		5.6
Expected volatility	54.5	%	48.6	%	48.6	%
Expected dividend yield	2.0	%	0.7	%	0.7	%
Risk-free interest rate	4.5	%	3.8	%	3.8	%
Exercise price	$18		$38		$38
Weighted average fair value	$8		$18		$18

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):

	September 30 2007							September 30 2006					2006
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at beginning    of the period		2,521			$14		5.1		2,300			$10		2,300			$10
Granted		541			$18				409			$38		409			$38
Exercised		(26	)		$6				(75	)		$9		(176	)		$7
Forfeited		(34	)		$30				(12	)		$22		(12	)		$22
Outstanding at end of the    period		3,002			$15		4.7		2,622			$14		2,521			$14
Exercisable at end    of the period		2,045			$11		4.1		1,619			$8		1,658			$8

	Nine Months Ended September 30
	2007	2006	2006
Weighted average grant-date fair value	$8	$18	$18
Intrinsic value of options exercised	$282	$1,837	$3,840
Fair value of options vested	$4,473	$2,457	$2,955

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The intrinsic value (the difference between our share price on the date of exercise and the exercise price) for options exercised represents the value received by option holders that exercised their options.

As of September 30, 2007, option awards outstanding and exercisable were as follows (thousands, except per share data):

	Options Outstanding						Options Exercisable
Exercise Price Range	Shares		Weighted Average Exercise Price	Intrinsic Value	Weighted Average Remaining Contractual Life (years)		Shares		Weighted Average Exercise Price	Intrinsic Value
$4 to $6		540	$5			2.7		540	$5
$6 to $7		335	$7			5.4		335	$7
$7 to $8		467	$7			5.2		415	$7
$8 to $9		332	$9			3.6		332	$9
$14 to $19		532	$18			6.5		5	$18
$22 to $29		413	$23			4.4		280	$23
$37 to $39		383	$38			5.3		138	$38
		3,002						2,045
In-the-money:
Outstanding		1,674		$6,347
Exercisable								1,622			$6,239

The intrinsic value (the difference between our share price on the last day of trading in September 2007 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 fair value of compensation expense recognized for options was $3.9 million for the period ended September 30, 2007, $3.9 million for the period ended September 30, 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.

As of September 30, 2007, there was $7.3 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.

Options exercised are settled with newly issued common shares.

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. The fair value of restricted shares is the closing share price of our common shares on the date of grant. Compensation expense is recognized over the vesting period.

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

	September 30 2007					September 30 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			$24		258			$16		258			$16
Granted		172			$18		139			$38		139			$38
Vested		(142	)		$11		—			$—		—			$—
Forfeited		(14	)		$26		(1	)		$38		(1	)		$38
Nonvested at end of the period		412			$26		396			$24		396			$24

	Nine Months Ended September 30
	2007	2006	2006
Weighted average grant-date fair value	$18	$38	$38
Fair value granted	$3,034	$5,220	$5,220
Fair value of restricted shares vested	$1,556	$—	$—

The fair value of compensation expense recognized for restricted shares was $2.4 million for the period ended September 30, 2007, $2.3 million for the period ended September 30, 2006 and $3.1 million for 2006. 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.

As of September 30, 2007, there was $5.0 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.

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 27,000 shares in May 2007, 12,000 shares in May 2006 and 14,000 shares in May 2005 and recognized compensation expense of $0.3 million for the period ended September 30, 2007, $0.3 million for the period ended September 30, 2006 and $0.4 million for 2006.

The following table summarizes equity compensation information as of September 30, 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	3,414		$13		43
Equity compensation plans not approved by security holders	—		—		—
Total	3,414		$13		43

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 $6.7 million for the period ended September 30, 2007, $6.9 million for the period ended September 30, 2006 and $8.9 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 2003 are either under examination or open for future examination. We believe the ultimate results of examinations, if any, will not have an adverse effect on our financial condition, results of operations or cash flows. Revisions of estimated tax liabilities are reflected in the period such revisions are known.

Our combined federal and state tax rate decreased for the quarter and nine months due to tax credits.

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 $1.5 million for the period ended September 30, 2006 and $1.7 million for 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 exercised options and vested restricted shares reduced taxes payable $0.9 million for the period ended September 30, 2007, $0.7 million for the period ended September 30, 2006 and $1.5 million for 2006. The tax impact for the difference between the fair value and the exercised value for options exercised and the difference between the grant-date value and vest-date value for vested restricted shares is 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 54% fixed and 46% variable. The estimated market value of our debt, based on current interest rates for similar obligations with like maturities, was:

· $2.0 million more than the amount of debt reported on the consolidated balance sheet at September 30, 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 7.6% through November 2012. Changes in the fair value of the interest rate swap contracts are recorded as accumulated other comprehensive income (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 Months Ended September 30						Nine Months Ended September 30
	2007			2006			2007			2006			2006
Balance at beginning of    the period	$	7,002		$	7,163		$	7,155		$	5,404		$	5,404
Provision for warranties		691			472			1,036			2,885			3,009
Provision for warranties       from acquisitions		—			22			—			117			117
Warranty charges		(505	)		(331	)		(1,003	)		(1,080	)		(1,375	)
Balance at end of the    period	$	7,188		$	7,326		$	7,188		$	7,326		$	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 production 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 continuing 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.

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

		Sales							Income (Loss) from Continuing Operations Before
		Total		Inter- Segment			Trade		Taxes and Minority Interests			Depreciation and Amortization		Capital (1) Expenditures		Assets
Three Months Ended September 30, 2007
SelectBuild	$	298,597	$	(45	)	$	298,552	$	3,408		$	8,127	$	749	$	736,456
BMC West		320,312		(584	)		319,728		20,623			3,038		4,671		420,887
Corporate		—		—			—		(13,896	)		1,196		354		147,427
Discontinued    operations		—		—			—		—			—		4		1,560
	$	618,909	$	(629	)	$	618,280		10,135		$	12,361	$	5,778	$	1,306,330
Interest expense									8,751
								$	1,384
Three Months Ended September 30, 2006
SelectBuild	$	448,743	$	(10,729	)	$	438,014	$	36,918		$	8,467	$	10,400	$	800,592
BMC West		380,140		(360	)		379,780		31,403			3,107		11,853		504,511
Corporate		—		—			—		(5,587	)		790		1,788		107,061
Discontinued    operations		—		—			—		—			—		4		9,683
	$	828,883	$	(11,089	)	$	817,794		62,734		$	12,364	$	24,045	$	1,421,847
Interest expense									8,566
								$	54,168
Nine Months Ended September 30, 2007
SelectBuild	$	937,952	$	(178	)	$	937,774	$	21,696		$	24,126	$	8,029	$	736,456
BMC West		929,246		(1,207	)		928,039		63,219			8,965		11,423		420,887
Corporate		—		—			—		(37,679	)		3,289		2,455		147,427
Discontinued    operations		—		—			—		—			—		79		1,560
	$	1,867,198	$	(1,385	)	$	1,865,813		47,236		$	36,380	$	21,986	$	1,306,330
Interest expense									26,470
								$	20,766
Nine Months Ended September 30, 2006
SelectBuild	$	1,450,415	$	(12,172	)	$	1,438,243	$	130,091		$	22,030	$	31,008	$	800,592
BMC West		1,169,809		(1,553	)		1,168,256		99,471			8,957		30,976		504,511
Corporate		—		—			—		(49,781	)		2,146		5,078		107,061
Discontinued    operations		—		—			—		—			—		27		9,683
	$	2,620,224	$	(13,725	)	$	2,606,499		179,781		$	33,133	$	67,089	$	1,421,847
Interest expense									20,621
								$	159,160
Year Ended December 31, 2006
SelectBuild	$	1,744,092	$	(12,278	)	$	1,731,814	$	148,416		$	30,002	$	33,409	$	722,328
BMC West		1,473,219		(1,766	)		1,471,453		119,737			11,987		33,107		479,101
Corporate		—		—			—		(75,484	)		3,104		6,174		118,880
Discontinued    operations		—		—			—		—			—		28		8,602
	$	3,217,311	$	(14,044	)	$	3,203,267		192,669		$	45,093	$	72,718	$	1,328,911
Interest expense									29,082
								$	163,587

⁽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	$	561,342		$	686,191	$	618,280	$	—
Income (loss) from continuing operations	$	(5,417	)	$	18,601	$	1,118	$	—
Income from discontinued operations	$	451		$	816	$	3,050	$	—
Net income (loss) per share:
Continuing operations		$(0.19	)		$0.63		$0.04		$—
Discontinued operations		0.02			0.03		0.10		—
Diluted		$(0.17	)		$0.66		$0.14		$—
Common share prices:
High		$24.93			$18.36		$15.23		$—
Low		$18.11			$13.34		$10.58		$—
2006
Sales	$	876,993		$	911,712	$	817,794	$	596,768
Income from continuing operations	$	27,738		$	33,482	$	34,400	$	3,483
Income from discontinued operations	$	331		$	693	$	948	$	999
Net income per share:
Continuing operations		$0.94			$1.13		$1.17		$0.12
Discontinued operations		0.01			0.03		0.03		0.03
Diluted		$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

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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 production 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 61 manufacturing facilities.

On a national level, the homebuilding industry is experiencing a sharp downturn in new home construction. Over the past ten years, single-family housing starts have averaged 1.4 million units, with highs occurring most recently in 2005 and 2004. As of September 2007, the U.S. Census Bureau reported single-family housing starts at an annual rate of 1.0 million, a decline of approximately 31% over the prior year. Reduced buyer demand, high inventories of unsold homes and tighter lending practices are weakening the prospects of a recovery in the near future.

Our operating results have not been immune to the economic challenges of the homebuilding industry. Single-family building permits in our markets were down 33% for the three and nine months ended September 30, 2007 compared to the same periods a year ago. We are downsizing our operations to align with the current revenue trend in home construction and remain focused on managing costs, preserving capital and generating cash flow while maintaining or advancing our market share.

Historically, acquisitions have strengthened and broadened our construction services and building product capabilities as well as our presence in attractive markets. As part of our growth strategy, we believe acquisition opportunities strengthen and broaden our construction services and building products as well as our presence in attractive markets. In particular, we believe production homebuilders are seeking cost effective and reliable 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 be limited.

Acquisition History

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

2007

· remaining 49% interest in our existing door and molding installation services business in Las Vegas, Nevada (September)

· remaining 49% interest in our existing truss manufacturer business in Fort Pierce, Florida (September)

· remaining 33% interest in our existing framing services business in Delaware, Maryland and Virginia (May)

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

· concrete services in Fresno, California (March)

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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)

· 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 distributor and truss manufacturer in Eastern Idaho (June)

· building materials distributor 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 third quarter and nine months ended September 30, 2007 and 2006.

In September 2007, BMC West reported income from discontinued operations of $3.1 million which included a $3.7 million non-operating gain for a portion of the real estate associated with the sale of three building materials distribution operations in Western Colorado as well as their results of operations prior to the sale. The sale advanced the strategy of BMC West to emphasize value-added products and services for professional builders rather than retail-oriented operations. These business units were approximately 3% of sales and 5% of operating results for this business segment. The discussion regarding our results of operations for the third quarter and nine months ended September 30, 2007 and 2006 will focus on income from operations as reflected by continuing operations.

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.

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RESULTS OF OPERATIONS

THIRD QUARTER OF 2007 COMPARED TO 2006

The amounts and percentage relationship to sales of certain costs, expenses and income items are as follows (millions, except per share data): 

	Three Months Ended September 30
	2007					2006
Sales
Construction services	$	352		57.0	%	$	486		59.4	%
Building products		266		43.0			332		40.6
Total sales		618		100.0			818		100.0
Costs and operating expenses
Cost of goods sold
Construction services		307		87.2			400		82.3
Building products		193		72.6			239		72.0
Selling, general and administrative expenses		110		17.8			118		14.4
Other income, net		(2	)	(0.3	)		(2	)	(0.2	)
Total costs and operating expenses		608		98.4			755		92.3
Income from operations		10		1.6			63		7.7
Interest expense		9		1.5			9		1.1
Income from continuing operations before    income taxes and minority interests		1		0.1			54		6.6
Income taxes (benefit)		—		—			18		2.2
Minority interests income, net of income taxes		—		—			(2	)	0.2
Income from continuing operations		1		0.1			34		4.2
Income from discontinued operations prior to       sale		1		0.2			2		0.2
Gain on sale of discontinued operations		4		0.6			—		—
Income taxes		2		0.3			1		0.1
Income from discontinued operations		3		0.5			1		0.1
Net income	$	4		0.6	%	$	35		4.3	%
Net income per share:
Continuing operations		$0.04					$1.17
Discontinued operations		0.10					0.03
Diluted		$0.14					$1.20

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Consolidated Financial Results

Selected financial results are as follows (millions):

	2007		2006		$ Change			% Change
Sales
Construction services	$	352	$	486	$	(134	)		(28	)%
Building products		266		332		(66	)		(20	)%
	$	618	$	818	$	(200	)		(24	)%
Income from operations	$	10	$	63	$	(53	)		(84	)%

Sales decreased 24% or $200 million to $618 million from $818 million in the same quarter a year ago. The U.S. Census Bureau reported a decline of 28% in single-family permits for the three months ended August 2007. Consistent with the national downturn in homebuilding, our sales were lower and reflected a decline in contract starts and building permits across all our markets. Sales were particularly weak in our Pacific and Southeast regions.

Income from operations decreased 84% or $53 million to $10 million from $63 million in the same quarter a year ago. Lower sales and competitive pricing, particularly for construction services, led to the decline in income from operations. Gross margins were 19.1% compared to 21.9% in the same quarter a year ago and declined for both construction services and building products.

Selling, general and administrative expenses were down $8 million due to reductions in the number of employees and related expenses as well as incentive compensation. As a percent of sales, these expenses were 17.8% compared to 14.4% in the same quarter a year ago. We continue to review and adjust our cost structures to align with the current revenue trend in home construction.

Income Taxes

For the quarter, an income tax benefit for continuing operations was from lower operating results and tax credits. Our combined federal and state tax rate decreased due to tax credits.

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Business Segments

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

	2007					2006
	Sales		Income from Operations			Sales		Income from Operations
SelectBuild	$	298	$	3		$	438	$	37
BMC West		320		21			380		31
Corporate		—		(14	)		—		(5	)
	$	618	$	10		$	818	$	63

SelectBuild

Selected financial results are as follows (millions):

	2007			2006		$ Change			% Change
Sales	$	298		$	438	$	(140	)		(32	)%
Less: Acquisitions		(5	)		—		(5	)		—
	$	293		$	438	$	(145	)		(33	)%
Income from operations	$	3		$	37	$	(34	)		(92	)%
Less: Acquisitions		—			—		—			—
	$	3		$	37	$	(34	)		(92	)%

Sales decreased 32% to $298 million from $438 million in the same quarter a year ago. The decline in sales volume was pervasive across all our regions, especially the Pacific and Southeast. Weakening demand for construction services was evident by lower contract starts in our markets and a decline of 36% in single-family building permits. The unsold inventory of new homes remains high as production homebuilders continue to curtail construction to balance supply with demand.

Income from operations decreased 92% to $3 million from $37 million in the same quarter of last year. Lower sales volume and competitive bidding for contract starts led to a sharp decline in gross margins. Margins were 11.5% compared to 17.9% in the same quarter a year ago.

Selling, general and administrative expenses were down $11 million due to reductions in the number of employees and related expenses as well as incentive compensation. Due to lower sales volume, these expenses as a percentage of sales were 10.6% compared to 9.6% in the same quarter a year ago.

BMC West

Selected financial results are as follows (millions):

	2007		2006		$ Change			% Change
Sales	$	320	$	380	$	(60	)		(16	)%
Income from operations	$	21	$	31	$	(10	)		(32	)%

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Sales decreased 16% to $320 million from $380 million in the same quarter a year ago. Sales volume was lower across all our regions. Single-family building permits in our markets declined 29% relative to the third quarter of 2006. The decline in sales was less than the comparable decrease in building permits as we continue to expand our market share.

Income from operations decreased 32% to $21 million from $31 million in the same quarter of last year. The decline was attributable to lower sales volume. Gross margins of 26.2% were consistent with the same quarter a year ago despite a competitive pricing environment. Margins benefited from a shift in sales mix to higher margin manufactured building components and improvements in construction services.

Selling, general and administrative expenses decreased $5 million from the same quarter last year. We continue to review our operations for cost cutting opportunities as well as efficiencies in distribution and production processes. These expenses were lower due to:

· reductions in the number of employees and related expenses as well as incentive compensation and

· delivery and handling.

Due to lower sales, these expenses as a percent of sales increased to 19.9% from 18.0% in the same quarter a year ago.

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	$	14	$	5	$	9		180	%

Corporate expenses increased $9 million to $14 million from $5 million in the same quarter of 2006. The third quarter of 2006 included a $10 million reduction in the actuarial estimate of insurance expense as a result of improved claims experience. Excluding the reduction in the actuarial estimate in 2006, corporate expenses decreased due to reductions in the number of employees and related expenses as well as incentive compensation.

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NINE MONTHS OF 2007 COMPARED TO 2006

The amounts and percentage relationship to sales of certain costs, expenses and income items are as follows (millions, except per share data):

	Nine Months Ended September 30
	2007					2006
Sales
Construction services	$	1,077		57.7	%	$	1,595		61.2	%
Building products		789		42.3			1,011		38.8
Total sales		1,866		100.0			2,606		100.0
Costs and operating expenses
Cost of goods sold
Construction services		927		86.1			1,314		82.4
Building products		573		72.6			737		72.9
Impairment of assets		—		—			2		0.1
Selling, general and administrative expenses		333		17.8			377		14.5
Other income, net		(14	)	(0.7	)		(4	)	(0.2	)
Total costs and operating expenses		1,819		97.5			2,426		93.1
Income from operations		47		2.5			180		6.9
Interest expense		26		1.4			21		0.8
Income from continuing operations before    income taxes and minority interests		21		1.1			159		6.1
Income taxes (benefit)		5		0.3			55		2.1
Minority interests income, net of income taxes		(1	)	—			(8	)	0.3
Income from continuing operations		15		0.8			96		3.7
Income from discontinued operations prior to       sale		3		0.2			3		0.1
Gain on sale of discontinued operations		4		0.2			—		—
Income taxes		3		0.2			1		—
Income from discontinued operations		4		0.2			2		0.1
Net income	$	19		1.0	%	$	98		3.8	%
Net income per share:
Continuing operations	$	0.48				$	3.23
Discontinued operations		0.15					0.07
Diluted	$	0.63				$	3.30

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Consolidated Financial Results

Selected financial results are as follows (millions):

	2007		2006		$ Change			% Change
Sales
Construction services	$	1,077	$	1,595	$	(518	)		(32	)%
Building products		789		1,011		(222	)		(22	)%
	$	1,866	$	2,606	$	(740	)		(28	)%
Income from operations	$	47	$	180	$	(133	)		(74	)%

Sales of $1.9 billion decreased 28% or $740 million from the same period a year ago. Sales from comparable operations were down 31% or $819 million. Consistent with national trends in homebuilding, 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 for the eight months ended August 2007, single-family permits in our markets were down 33%, while the U.S. overall was down 28%.

Income from operations of $47 million decreased $133 million or 74% from the same period a year ago. Operating income from comparable operations decreased $141 million or 78%. Gross margins were 19.6% compared to 21.3% in the same period a year ago. Lower sales of construction services and competitive pricing led to the decrease in margins. Building product margins improved to 27.4% compared to 27.1% in the same period a year ago.

Partially offsetting lower gross margins, selling, general and administrative expenses were reduced $44 million over the same period in 2006. These expenses were lower due to reductions in the number of employees and related expenses as well as incentive compensation. Selling, general and administrative expenses as a percent of sales increased to 17.8% from 14.5% due to:

· lower sales, particularly construction services and the impact to sales of a decrease in commodity wood product prices and

· a higher portion of selling, general and administrative expenses from building products.

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Interest Expense

Interest expense of $26 million was up $5 million from the same period a year ago. The increase was due to higher interest rates and average borrowings. Borrowings were higher to complete payments for acquisitions made in the prior year and fund working capital requirements.

Income Taxes

Our combined federal and state income tax rate for continuing operations decreased to 28% from 37% in the same period a year ago. The reduction was due to tax credits.

Business Segments

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

	2007					2006
	Sales		Income from Operations			Sales		Income from Operations
SelectBuild	$	938	$	22		$	1,438	$	130
BMC West		928		63			1,168		99
Corporate		—		(38	)		—		(49	)
	$	1,866	$	47		$	2,606	$	180

SelectBuild

Selected financial results are as follows (millions):

	2007			2006		$ Change			% Change
Sales	$	938		$	1,438	$	(500	)		(35	)%
Less: Acquisitions		(70	)		—		(70	)		—
	$	868		$	1,438	$	(570	)		(40	)%
Income from operations	$	22		$	130	$	(108	)		(83	)%
Less: Acquisitions		(8	)		—		(8	)		—
	$	14		$	130	$	(116	)		(89	)%

Sales decreased 35% or $500 million to $938 million from $1.4 billion in the same period a year ago. Sales from comparable operations were 40% or $570 million lower. Sales from acquisitions not present in the same period of 2006 represented 7% of sales or $70 million. Reflective of a 38% decline in single-family permits in our markets, sales were lower in all our regions, particularly the Pacific and Southwest. Weak buyer demand coupled with high inventories of unsold homes sharply reduced new home construction by production homebuilders.

Income from operations decreased 83% to $22 million from $130 million in the same period a year ago. Operating income from comparable operations decreased 89% or $116 million. Acquisitions not present in the same period of 2006 represented 36% or $8 million of operating income. The sharp decline in income from operations was due to lower gross margins. Margins were adversely impacted by lower sales volume and competitive pricing for fewer contract starts. Margins declined to 13.0% from 17.8% in the same period a year ago.

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Selling, general and administrative expenses decreased $23 million due to reductions in the number of employees and related expenses as well as incentive compensation. These reductions were partially offset by $5 million of expenses from acquisitions not present in the same period a year ago. Due to lower sales volume, selling, general and administrative expenses were higher as a percent of sales and were 10.9% compared to 8.7% in the same period a year ago.

BMC West

Selected financial results are as follows (millions):

	2007			2006		$ Change			% Change
Sales	$	928		$	1,168	$	(240	)		(21	)%
Less: Acquisitions		(9	)		—		(9	)		—
	$	919		$	1,168	$	(249	)		(21	)%
Income from operations	$	63		$	99	$	(36	)		(36	)%
Less: Acquisitions		—			—		—			—
	$	63		$	99	$	(36	)		(36	)%

Sales decreased 21% to $928 million from $1.2 billion in the same period a year ago. Sales were lower due to a 27% decrease in single-family building permits in our markets as well as the impact of lower commodity wood product prices. The decline in sales was pervasive across all our markets.

Income from operations decreased 36% to $63 million from $99 million in the same period a year ago. Income from operations included a pre-tax gain of $8.2 million for the sale of certain real estate associated with the relocation of a building materials operation in Texas. Gross margins benefited from a shift in sales mix to higher margin manufactured building components. Despite an improvement in gross margins to 26.1%, operating income declined due to lower sales volume.

Selling, general and administrative expenses decreased $10 million from the same period a year ago due to:

· reductions in the number of employees and related expenses as well as incentive compensation and

· delivery and handling.

Due to lower sales and decreases in commodity wood product prices, these expenses as a percent of sales increased to 20.5% from 17.1% in the same period a year ago.

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	$	38	$	49	$	(11	)		(22	)%

Corporate expenses decreased 22% to $38 million from $49 million in the same period of 2006. The 2006 period included a $11 million reduction in the actuarial estimate of insurance expense due to improved claims experience. Excluding this reduction in the actuarial estimate in 2006, corporate expenses decreased $22 million due to reductions in the number of employees and related expenses as well as incentive compensation. Excluding this reduction in the actuarial estimate in 2006, these expenses were 2.0% of sales compared to 2.4% in 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 borrowings under our credit facility.

For the period ended September 30, 2007, cash was borrowed to complete payments for acquisitions made in the prior year and fund working capital requirements as well as finance capital expenditures. The sections that follow discuss in more detail our operating, investing and financing activities as well as our financing arrangements.

Operations

Cash provided by operating activities was $20.3 million compared to $187.0 million for the same period a year ago. Net income adjusted for non-cash items decreased $97.0 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 $59.6 million more than the same period a year ago. For the period, cash was used for working capital requirements due to business seasonality whereas seasonality requirements in the same period a year ago were offset as the company began to experience a sharp cyclical correction of the homebuilding industry.

Capital Investment and Acquisitions

Cash used in investing activities was $72.9 million or $194.9 million less than $267.8 million in the same period a year ago. Cash use for investing activities reflected a $124.3 million reduction in acquisition expenditures. Cash used for the current period of $76.4 million was principally for payments on acquisitions made in 2006.

Cash used for investing activities also included capital expenditures of $21.8 million or $26.0 million less than $47.8 million for the same period a year ago. Capital expenditures were principally for relocation and expansion of materials distribution facilities as well as routine replacement of operating equipment. 

Financing

Cash provided by financing activities was $11.9 million or $86.2 million less than $98.1 million for the same period a year ago as acquisitions and capital expenditures were substantially curtailed for the period.

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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%. Additionally, a commitment fee for the unused portion of the revolver is subject to quarterly operating performance and ranges from 0.20% to 0.35%. Interest is paid quarterly. As of September 30, 2007, $28.7 million was outstanding under the revolver.

The effective interest rate is based on interest rates for the period as well as the commitment fee for the unused portion of the revolver.

Letters of credit outstanding that guaranteed performance or payment to third parties were $92.9 million as of September 30, 2007 and $97.2 million as of December 31, 2006. These letters of credit reduce borrowing availability under the revolver.

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 September 30, 2007, $346.5 million was outstanding under this term note.

Other

As of September 30, 2007, other long-term debt was $3.7 million. Other long-term debt 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 September 30, 2007, we were in compliance with these covenants and conditions.

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

2007	$	1,277
2008		4,792
2009		4,109
2010		3,824
2011		32,409
Thereafter		332,445
	$	378,856

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 $346.5 million term note to a fixed interest rate of 7.6% through November 2012, thus reducing the impact of increases in interest rates on future interest expense. Approximately 58% of the outstanding variable rate borrowings of the term note as of September 30, 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 54% fixed and 46% variable.

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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 $2.7 million and a corresponding deferred tax asset of $1.0 million as of September 30, 2007. The effective portion was recorded in accumulated other comprehensive income (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. The corresponding deferred tax asset was also recorded in accumulated other comprehensive income (loss), net for the income tax related to the estimated fair value of the interest rate swap contracts. The ineffective portion, if any, 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.

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 September 30, 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 September 30, 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 September 30, 2007, we were in compliance with these covenants and conditions.

We have potential put obligations and call rights associated with the interests in SelectBuild Mechanical (KBI Mechanical) and SelectBuild Illinois (RCI Construction) 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 $92.9 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 September 30, 2007, the reserve for these estimated losses was $0.3 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 September 30, 2007, goodwill was $299.9 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 uncertain. 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 September 30, 2007, the reserve for automobile, general liability and workers’ compensation claims was $55.4 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. 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. Actual loss experience may be substantially different than the actuarial estimate.

·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 September 30, 2007, the reserve for warranties was $7.2 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 effective 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 58% of the outstanding floating rate borrowings of the $346.5 million term note as of September 30, 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 54% fixed and 46% floating. Based on debt outstanding as of September 30, 2007, a 0.25% increase in interest rates would result in approximately $0.4 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, availability of credit as well as other factors. The construction of new homes may experience decline due to over supply of home inventory levels, lack of availability of credit, the unavailability and unaffordability of land in attractive metropolitan areas, shortages of qualified tradespeople, 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 production 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 past growth has been largely due to acquisitions. 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.

Our growth is dependent upon our ability to identify suitable acquisition candidates.

Our growth 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.

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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 employment and eligibility requirements as well as enhanced and perceived enforcement from state and federal authorities 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 trends 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 of and changes to expenses in response to declining sales may not occur timely, 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, 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 production 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 Department of Homeland Security and 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, 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. Also, our certificate of incorporation provides that, during certain types of transactions that could affect control, including the acquisition of 15% or more of our common shares, affiliates of any party to the transaction and persons having a material financial interest in the transaction may not be elected to the Board of Directors. 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 June 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 September 30, 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

None.

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Item 5 - Other Information

None.

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Item 6 - Exhibits

(a)	Exhibits
	Number	Description
	11.0	Statement regarding computation of earnings per share (see Note 3 to Consolidated Financial Statements)
	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: October 31, 2007		/s/ Robert E. Mellor
		Robert E. Mellor Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

Date: October 31, 2007	/s/ William M. Smartt
	William M. Smartt Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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