FINANCIAL REVIEW
Building Materials Holding Corporation
This financial review covers management's discussion and analysis of
consolidated financial condition and operating results and should be read in
conjunction with the financial statements and the notes thereto appearing
elsewhere in this Annual Report.
RESULTS OF OPERATIONS
The following table sets forth, for the years ended December 31, 2000, 1999 and
1998, the percentage relationship to net sales of certain costs, expenses and
income items.
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2000 1999 1998
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Net sales ........................ 100.0% 100.0% 100.0%
Gross profit ..................... 26.7 25.0 24.4
Selling, general and
administrative expense ......... 22.7 20.7 20.5
Other income ..................... 0.2 0.2 0.1
Income from operations ........... 4.2 4.5 4.0
Equity in earnings of
unconsolidated companies ....... 0.8 0.5 --
Interest expense ................. 1.7 1.3 1.2
Income taxes ..................... 1.3 1.4 1.1
Extraordinary charge ............. -- (0.3) --
Net income ....................... 1.9 2.0 1.7
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2000 COMPARED WITH 1999
Net sales for 2000 were $1,014.0 million, a 0.7% increase over net sales of
$1,007.1 million in 1999. Sales at facilities that operated for at least nine
months of the year in both 1999 and 2000 decreased 1.2%. This same-store sales
decrease is primarily due to deflation of commodity wood prices. Value-added
products accounted for $410.1 million, or 40.4% of net sales in 2000, an
increase from $348.6 million, or 34.6% of net sales in 1999.
Gross profit increased to $270.4 million, or 26.7% of net sales in 2000
from $252.0 million, or 25.0% of net sales, in 1999, primarily as a result of a
positive effect of the increased mix of higher-margin value-added products such
as pre-hung doors, millwork, roof trusses and pre-assembled windows. In
addition, gross margins of our commodity wood products have increased due to the
impact of the deflationary environment resulting in lower material costs.
Selling, general and administrative ("SG&A") expense increased to $229.9
million, or 22.7% of net sales, in 2000 from $208.8 million, or 20.7% of net
sales, in 1999. This increase as a percentage of net sales was due primarily to
the continued deflation in prices of commodity wood products and higher costs
associated with expanding value-added sales. In addition, low unemployment and a
tight labor market resulted in higher wage costs in our efforts to attract and
retain high quality employees in 2000.
In 2000, other income included a $2.2 million gain on the sale of real
estate in Beaverton, Oregon, offset by a $1.8 million goodwill asset impairment
charge resulting from the pending sale of a business unit in Grand Junction,
Colorado. Other income in 1999 included a $1.4 million gain on sales of
equipment and three business units located in Texas, offset by costs of $0.8
million related to a postponed private placement of subordinated debt.
Equity in earnings of unconsolidated companies increased to $8.4 million,
net of amortization of goodwill, compared to $5.0 million in 1999. This increase
is attributed to the improved profitability of the companies in which we have
invested and the inclusion of equity in earnings for all of 2000 compared to
only eight months in 1999.
Interest expense increased to $17.7 million, or 1.7% of net sales in 2000
from $13.2 million, or 1.3% of net sales in 1999. The increase was due primarily
to increases in interest rates and average debt outstanding. Average debt
outstanding was $175.2 million in 2000 compared with $156.2 million in 1999.
Average interest rates on variable rate debt were approximately 9.3% for 2000
compared with 7.6% for 1999. Increased average debt outstanding resulted
primarily from additional financing needed during peak sales months during the
year and from financing of acquisitions made in 1999 and 2000.
The provision for income taxes decreased to $13.5 million in 2000 from
$14.4 million in 1999. The decrease in the provision for income taxes resulted
primarily from decreased income from operations in 2000 as compared with the
prior year. In 2000, our tax rate increased to 40.7% from 38.5% in 1999. This
was primarily due to the non-deductibility of the goodwill asset impairment
charge for tax purposes.
1999 COMPARED WITH 1998
Net sales for 1999 were $1,007.1 million, a 14.8% increase over net sales
of $877.3 million in 1998. Sales in 1999 were positively affected by favorable
overall economic conditions including strong employment levels and consumer
confidence. Acquisitions of building materials centers and value-added
facilities that occurred in 1998 and 1999 contributed a 5.3% increase to net
sales in 1999. Sales at facilities that operated for at least nine months of the
year in both 1998 and 1999 increased 13.5%. This same-store sales increase is
largely due to the shift in our focus toward value-added products that attract
new customers and gives us the opportunity to increase our total sales per
building permit. Value-added products accounted for $348.6 million, or 34.6% of
net sales in 1999, an increase from $275.9 million, or 31.4% of net sales in
1998.
Gross profit increased to $252.0 million, or 25.0% of net sales in 1999
from $214.2 million, or 24.4% of net sales, in 1998, primarily as a result of a
positive effect of the increased mix of higher-margin, value-added products such
as pre-hung doors, millwork, roof trusses and pre-assembled windows and higher
commodity wood prices.
SG&A increased to $208.8 million, or 20.7% of net sales, in 1999 from
$180.1 million, or 20.5% of net sales, in 1998. This increase as a percentage of
net sales was due primarily to higher costs associated with expanding
value-added sales and costs associated with integrating new operating units
acquired in the fourth quarter of 1998 and the full year of 1999. In addition,
low unemployment and a tight labor market resulted in higher wage costs in 1999
in an effort to attract and retain high quality employees.
Other income increased primarily from a gain of $1.4 million on sales of
equipment and three facilities located in Texas. This was partially offset by
costs of $0.8 million related to a postponed private placement of subordinated
debt.
Equity in earnings of unconsolidated companies increased to $5.0 million,
net of amortization of goodwill, after completion of an investment of a 49%
interest in Knipp Brothers Industries, LLC, a framing company, and KBI
Distribution, LLC, a lumber yard, during 1999.
Interest expense increased to $13.2 million, or 1.3% of net sales in 1999
from $10.2 million, or 1.2% of net sales in 1998. The increase was due primarily
to increases in interest rates and average debt outstanding. Average debt
outstanding was $156.2 million in 1999 compared with $121.9 million in 1998.
Average interest rates on variable rate debt were approximately 7.6% for 1999
compared with 6.8% for 1998. Increased average debt outstanding resulted
primarily from higher working capital requirements resulting from increased
sales activity and from financing of acquisitions made in 1999.
The provision for income taxes increased to $14.4 million in 1999 from $9.8
million in 1998. The increase in the provision for income taxes resulted
primarily from increased income from operations in 1999 as compared with the
prior year. In 1999, our tax rate decreased to 38.5% from 39.2% in 1998. This
was primarily due to a decrease in our state income taxes.
The Company entered into a new senior secured credit facility in 1999 and
used the net proceeds to repay amounts borrowed under its prior senior credit
facility, two outstanding series of senior notes and a promissory note issued in
connection with an acquisition. Upon repayment of the senior notes, the Company
paid a redemption premium and wrote off related deferred financing costs, the
aggregate of which is reflected as an extraordinary charge that reduced 1999
earnings by $3.4 million, or $0.26 per diluted share, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for capital resources is to fund future growth
and capital expenditures, as well as to finance its working capital needs, which
have been increasing as the Company has grown in recent years. Capital resources
have primarily consisted of cash flows from operations and incurrence of debt.
OPERATIONS
In 2000, operations provided $41.4 million in cash, compared with $14.6
million in 1999, an increase of $26.8 million. This increase is primarily a
result of improved collections of receivables, improved inventory management,
increased cash distributions from the Company's equity investments in
unconsolidated companies and prepayment of 2000 income taxes in 1999, offset by
increased interest payments in 2000. In 1999, operations provided $14.6 million
in cash, compared with $44.8 million in 1998, a decrease of $30.2 million due
primarily to changes in accounts receivable, inventory, prepaid expenses and
accounts payable and accrued expenses.
Actual net working capital was $142.1 million at the end of 2000, compared
with $139.3 million at the end of 1999. The increase in working capital was
primarily due to an increase in receivables and a decrease in payables. Actual
net working capital was $139.3 million at the end of 1999, compared with $116.7
million at the end of 1998. The increase in working capital was primarily the
result of higher sales activity over 1998 levels. Receivables, net, increased
$18.0 million, or 19.6% compared to the prior year, however, $6.7 million of
this increase was attributable to locations acquired in 1999.
CAPITAL INVESTMENT AND ACQUISITIONS
Capital expenditures, exclusive of acquisitions, were $35.5 million in
2000, $27.4 million in 1999 and $19.6 million in 1998. Capital expenditures were
incurred to acquire additional property and expand and remodel existing building
materials centers and value-added facilities. Proceeds from the dispositions of
property, plant and equipment were $11.5 million in 2000, related primarily to
the sale of the Beaverton, Colorado Springs and South Austin properties.
In 2000, cash used for acquisitions totaled $5.9 million. During 2000, the
Company completed the acquisition of a millwork facility that was consolidated
into one of the Company's existing locations and the acquisition of four window
distribution centers along with several sales offices.
In 1999, cash used for acquisitions and equity investments totaled $41.9
million. During 1999, the Company completed four transactions, including nine
value-added facilities and two equity-basis investments.
FINANCING
Net cash used by financing activities was $13.6 million in 2000 compared to
$44.5 million of cash provided in 1999. The Company was able to utilize its cash
from operations to reduce debt levels in 2000.
The Company's existing senior credit facility provided for borrowings up to
$247.2 million, which includes $108.3 million provided for by the term loan, all
of which was outstanding at December 31, 2000, and $138.9 million provided for
by the revolving credit facility, $52.2 million of which was outstanding at
December 31, 2000. Borrowings under the agreement bear interest at prime plus
0.50% to 1.50%, or Offshore1 Rate plus 2.00% to 3.00%. The agreement expires in
2004.
The agreements related to these borrowings contain covenants providing for
the maintenance of certain financial ratios and conditions including total
funded debt to earnings before interest, taxes, amortization (EBITA) and
limitations on capital expenditures, among certain other restrictions. The
Company is currently in compliance with these covenants and conditions.
The Company filed a shelf registration with the Securities and Exchange
Commission to register 2,000,000 shares of common stock. These shares may be
issued from time to time in connection with future business combinations,
mergers and/or acquisitions.
Based on the Company's ability to generate cash flow from operations, its
borrowing capacity under the revolver and its access to equity markets, the
Company believes it will have sufficient capital to meet its anticipated needs.
DISCLOSURES OF CERTAIN MARKET RISKS
The Company experiences changes in interest expense when market interest
rates change. Changes in the Company's debt could also increase these risks. The
Company has managed its exposure to market interest rate changes through
periodic refinancing of its variable rate debt with fixed rate term debt
obligations. Based on debt outstanding at December 31, 2000, a 25 basis point
increase in interest rates would result in approximately $413,000 of additional
interest costs.
Commodity wood products, including lumber and panel products, accounted for
approximately 41% and 44% of net sales in 2000 and 1999, respectively. Prices of
commodity wood products, which are subject to significant volatility, could
directly affect the Company's net sales. As disclosed in the financial
statements the Company does not utilize any derivative financial instruments.
QUARTERLY RESULTS AND SEASONALITY
The Company's first and fourth quarters historically are adversely affected
by weather patterns in the Company's markets which result in decreases in levels
of building and construction activity. In addition, quarterly results
historically have reflected, and are expected to continue to reflect,
fluctuations from period to period as a consequence of the impact of various
other factors, including general economic conditions, commodity wood prices,
interest rates, building permit activity, single-family housing starts,
employment levels, consumer confidence, and the availability of credit to
professional contractors.
The composition and level of working capital typically change during
periods of increasing sales as the Company carries more inventories and
receivables. Working capital levels typically increase in the second and third
quarters of the year due to higher sales during the peak building and
construction season. These increases historically have resulted in negative
operating cash flows during this peak season, which generally have been financed
through the revolving credit agreement. Collection of receivables and reduction
in inventory levels following the peak of the building and construction season
have more than offset this negative cash flow in recent years. The Company
believes it will continue to generate positive annual cash flows from operating
activities.
NEW ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Statement
establishes accounting and reporting standards requiring derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at their
fair value. The Company was required to adopt this Statement, as amended by SFAS
No. 138, on January 1, 2001 and, based on the Company's present and historic use
of derivative instruments, the adoption of this statement did not have a
material impact on the Company's consolidated results of operations, financial
position or cash flows.
In April 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation-an interpretation of APB Opinion No. 25." FIN 44 clarifies
and modifies APB 25, "Accounting for Stock Issued to Employees". The provisions
of FIN 44 became effective in 2000 and did not have a material effect on the
Company's results of operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements".
The SAB summarizes certain staff views in applying generally accepted accounting
principles to revenue recognition in financial statements. The provisions of
this bulletin became effective in 2000 and did not have a material effect on the
Company's results of operations, financial position or cash flow.
OUTLOOK
The Company's financial performance could be negatively impacted by any
adverse economic changes in the Company's geographic market areas. The building
materials industry has seen cyclicality in the past. The Company's operations
have been subject to fluctuations from period to period as a reflection of
changes in general economic conditions, commodity wood product prices, building
permit activity, interest rates, single-family housing starts, employment
levels, consumer confidence and the availability of credit to professional
contractors and homeowners. These factors may have a more significant impact on
the Company, which derives a significant percentage of its net sales from
professional contractors, than on those building supply companies that target a
broad range of retail customers. The Company expects that fluctuations from
period to period will continue in the future.
Additionally, the Company's results of operations throughout the year are
impacted by the weather in the states in which the Company has operations. The
Company's financial performance could be negatively impacted by poor weather,
which historically has affected building activity levels in the Company's market
areas in the first and fourth quarters. Commodity wood products, including
lumber and panel products, currently account for approximately 41% of the
Company's net sales. Prices of commodity wood products, which are subject to
significant volatility, directly affect the Company's sales, and future declines
in commodity wood prices could adversely impact the Company's results of
operations.
Certain statements in the Financial Review and elsewhere in the Annual
Report to Shareholders may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors are discussed in detail above or in the
Company's Form 10-K for the fiscal year ended December 31, 2000. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the results of any revisions to
any of the forward-looking statements contained in the Annual Report on Form
10-K except as required by law.
CONSOLIDATED STATEMENTS OF INCOME
Building Materials Holding Corporation
For the years ended December 31,
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(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998
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Net sales ........................................ $1,013,968 $1,007,108 $877,280
Cost of sales .................................... 743,523 755,137 663,122
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Gross profit ..................................... 270,445 251,971 214,158
Selling, general and administrative expense ...... 229,861 208,775 180,129
Other income (expense), net ...................... 1,952 2,466 1,094
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Income from operations ........................... 42,536 45,662 35,123
Equity in earnings of unconsolidated companies,
net of amortization ............................ 8,421 4,978 --
Interest expense ................................. 17,722 13,184 10,218
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Income before income taxes and extraordinary item. 33,235 37,456 24,905
Income taxes ..................................... 13,523 14,421 9,756
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Income before extraordinary item ................. 19,712 23,035 15,149
Extraordinary item, net of tax ................... -- (3,352) --
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Net income ....................................... $ 19,712 $ 19,683 $ 15,149
=======================================================================================
Income before extraordinary item per share:
Basic .......................................... $ 1.55 $ 1.82 $ 1.21
Diluted ........................................ $ 1.54 $ 1.80 $ 1.20
Net income per share:
Basic .......................................... $ 1.55 $ 1.55 $ 1.21
Diluted ........................................ $ 1.54 $ 1.54 $ 1.20
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
CONSOLIDATED BALANCE SHEETS
Building Materials Holding Corporation
At December 31,
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(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 2000 1999
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ASSETS
Current assets
Cash .......................................................... $ 4,570 $ 7,452
Receivables, net .............................................. 111,287 110,123
Inventories ................................................... 79,023 80,679
Deferred income tax benefit ................................... 4,375 2,781
Prepaid expenses .............................................. 3,934 7,652
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Total current assets ........................................ 203,189 208,687
Property, plant and equipment, net .............................. 167,709 153,598
Equity investments in unconsolidated companies .................. 31,787 30,762
Goodwill, net ................................................... 46,679 47,477
Deferred loan costs ............................................. 3,981 4,873
Other long-term assets .......................................... 6,289 4,722
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Total assets .................................................... $459,634 $450,119
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt ............................. $ -- $ 3,200
Accounts payable and accrued expenses ......................... 61,114 66,204
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Total current liabilities ................................... 61,114 69,404
Long-term debt, net of current portion .......................... 165,006 170,547
Deferred income taxes ........................................... 6,303 5,124
Other long-term liabilities ..................................... 6,656 4,934
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Total liabilities ............................................... 239,079 250,009
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Commitments and Contingencies
Shareholders' equity
Common stock, $.001 par value, 20,000,000 shares authorized;
12,839,607 and 12,679,686 shares outstanding, respectively 13 13
Additional paid-in capital .................................... 109,166 108,433
Retained earnings ............................................. 111,376 91,664
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Total shareholders' equity .................................. 220,555 200,110
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Total liabilities and shareholders' equity ...................... $459,634 $450,119
========================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Building Materials Holding Corporation
Common Stock Additional
----------------- Paid-In Retained
(AMOUNTS IN THOUSANDS) Shares Amount Capital Earnings Total
- ----------------------------------------------------------------------------------------------
Balance, December 31, 1997 ............ 12,331 $12 $104,107 $ 56,832 $160,951
Net income ............................ -- -- -- 15,149 15,149
Stock issued for acquisitions ......... 299 -- 4,000 -- 4,000
Stock options exercised and other ..... 22 1 149 -- 150
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Balance, December 31, 1998 ............ 12,652 13 108,256 71,981 180,250
Net income ............................ -- -- -- 19,683 19,683
Stock options exercised and other ..... 28 -- 177 -- 177
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Balance, December 31, 1999 ............ 12,680 13 108,433 91,664 200,110
NET INCOME ............................ -- -- -- 19,712 19,712
STOCK OPTIONS EXERCISED AND OTHER ..... 160 -- 733 -- 733
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BALANCE, DECEMBER 31, 2000 ............ 12,840 $13 $109,166 $111,376 $220,555
==============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Building Materials Holding Corporation
For the years ended December 31,
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(AMOUNTS IN THOUSANDS) 2000 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................ $ 19,712 $ 19,683 $ 15,149
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization ........................... 17,213 14,149 12,955
Deferred income taxes ................................... (415) (573) (137)
Loss (gain) on sale of assets ........................... (2,611) (1,403) 91
Asset impairment charge ................................. 1,800 -- --
Equity in earnings of unconsolidated companies, net
of amortization ....................................... (8,421) (4,978) --
Distributions received from unconsolidated companies .... 7,396 2,496 --
Extraordinary item, write-off of deferred financing costs -- 663 --
Changes in assets and liabilities, net of effects of
acquisitions and location sales
Receivables, net ........................................ 823 (12,418) 733
Inventories ............................................. 2,020 (2,419) 5,974
Prepaid expenses ........................................ 3,735 (5,287) 1,213
Accounts payable and accrued expenses ................... (1,465) 662 8,868
Other long-term liabilities ............................. 1,722 1,633 3
Other, net .............................................. (69) 2,409 (34)
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Net cash provided by operating activities ................. 41,440 14,617 44,815
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ....................... (35,500) (27,380) (19,595)
Acquisitions, net of cash acquired ........................ (5,905) (15,779) (24,330)
Equity investment in unconsolidated companies ............. -- (26,093) --
Proceeds from dispositions of property and equipment ...... 11,526 4,152 909
Proceeds from sale of business units, net of cash sold .... -- 6,680 --
Investments in preferred stock ............................ -- (1,000) --
Other, net ................................................ (818) (511) --
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Net cash used in investing activities ..................... (30,697) (59,931) (43,016)
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CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under term note ................................. 11,100 100,000 --
Net (payments) borrowings under revolving credit agreements (20,785) 27,792 7,705
Principal payments of unsecured senior notes .............. -- (66,667) (9,457)
Principal payments of other note payables ................. -- (8,723) --
Decrease in net checks in process ......................... (3,880) (3,112) --
Deferred financing costs .................................. -- (4,963) --
Other, net ................................................ (60) 175 40
- -------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities ....... (13,625) 44,502 (1,712)
- -------------------------------------------------------------------------------------------
Net change in cash ........................................ (2,882) (812) 87
Cash, beginning of period ................................. 7,452 8,264 8,177
- -------------------------------------------------------------------------------------------
Cash, end of period ....................................... $ 4,570 $ 7,452 $ 8,264
==========================================================================================
Supplemental Disclosure of Cash Flow Information Cash paid
during the year for:
Interest, net of amounts capitalized ................... $ 16,858 $ 13,294 $ 10,389
Income taxes .......................................... $ 9,612 $ 21,314 6,068
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Building Materials Holding Corporation
1. ORGANIZATIONAL STRUCTURE, NATURE OF OPERATIONS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATIONAL STRUCTURE AND NATURE OF OPERATIONS
Building Materials Holding Corporation ("BMHC") operates two wholly-owned
subsidiaries-BMC West Corporation ("BMHC West") and BMC Framing, Inc. BMC West
is a distributor and retailer of building materials in regions of the United
States, selling primarily to professional contractors, as well as to
project-oriented consumers (including professional repair and remodel
contractors hired by them), with 137 facilities organized into 56 business
units. BMC West provides value-added products, which include pre-hung doors,
roof trusses and pre-assembled windows, and lumber pre-cut to meet customer
specifications. BMC Framing, Inc., owns a 49% equity interest in Knipp Brothers
Industries, LLC, ("KBI") a framing contractor in Arizona and Nevada, KBI
Distribution, LLC ("Distribution"), a provider of building materials in Arizona,
and KB Industries Limited Partnership, a framing contractor in California.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of BMHC and its
wholly owned subsidiaries (the "Company"). The equity method of accounting is
used for investments in which the Company has significant influence. All
significant intercompany balances and transactions are eliminated in
consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to amounts reported in prior
periods, none of which affect the Company's financial position, results of
operations, or cash flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America 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 and the reported amounts of revenues and expenses during
the reporting period. Actual amounts could differ from those estimates.
The Company reviews the recoverability of all long-lived assets including
goodwill, whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The measurement of any impairment is
based primarily on the ability to recover the cost of long-lived assets from
expected future operating cash flows on an undiscounted basis. Except for that
disclosed in note 3, in management's opinion, no such impairment existed at
December 31, 2000 and 1999.
CASH AND CASH EQUIVALENTS
Cash represents amounts on deposit with high-credit-quality financial
institutions and such balances may, at times, exceed FDIC limits. The Company
considers all highly liquid investments that have a maturity of three months or
less at the date of purchase to be cash equivalents.
INVENTORIES
Inventories consist principally of materials purchased for resale and are
stated at the lower of average cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including software costs, are stated at cost
and depreciated using the straight-line method. The estimated useful lives are
ten to thirty years for buildings and improvements, seven to ten years for
machinery and fixtures and three to ten years for handling and delivery
equipment.
Major additions and improvements are capitalized, while maintenance and
repairs that do not extend the useful life of the property are expensed as
incurred. Gains and losses from dispositions of property, plant and equipment
are included in the Company's consolidated statement of income in other income
(expense) net.
The Company capitalizes interest on borrowings during the active
construction period on major capital projects. Capitalized interest is added to
the cost of the underlying asset and is amortized over the useful life of the
asset.
In 1999, the Company adopted Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires companies to capitalize certain costs,
including interest, of computer software developed or obtained for internal use,
provided that those costs are not research and development, and other certain
criteria are met. As a result, the Company capitalized $6,182,000 of internal
use software development costs through December 31, 2000.
DEFERRED LOAN COSTS
Loan costs are capitalized upon the issuance of long-term debt and
amortized over the life of the related debt using the effective interest rate
method for the Company's term note and the straight-line method for the
Company's revolving credit facility.
Interest expense includes amortization of deferred loan costs of $1,166,000,
$341,000, and $410,000 in 2000, 1999, and 1998, respectively.
GOODWILL
Goodwill is amortized on a straight-line basis generally over 30 years.
Accumulated amortization of goodwill was $6,842,000 and $5,460,000 at December
31, 2000 and 1999, respectively.
OTHER ASSETS
Other assets consist of cash surrender values on Company owned life
insurance, a preferred stock investment accounted for at historical cost,
non-compete agreements arising from acquisitions and trade rebates receivable
from cooperative supplier organizations. The non-compete agreements are
amortized over the life of the related agreements (two to five years).
REVENUE RECOGNITION
Revenues are recognized when title to the goods passes to the buyer, which
is generally at the time of delivery.
STOCK COMPENSATION
The Company records compensation expense associated with awards of stock
using the intrinsic method rather than the fair value method.
ADVERTISING
Advertising costs are expensed when incurred. During 2000, 1999 and 1998
advertising expense was $922,000, $1,964,000, and $1,953,000, respectively.
SHIPPING AND HANDLING
Shipping and handling costs are included in selling, general, and
administrative expense. During 2000, 1999, and 1998, shipping and handling costs
were $19,681,000, $17,443,000, and $15,457,000, respectively.
NEW ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Statement
establishes accounting and reporting standards requiring derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at their
fair value. The Company was required to adopt this Statement, as amended by SFAS
No. 138, January 1, 2001 and based on the Company's present and historic use of
derivative instruments, the adoption of this Statement did not have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.
In April 2000, the Financial Accounting Standards Board issued
Interpretation No.44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation-an interpretation of APB Opinion No. 25". FIN 44 clarifies
and modifies APB 25, "Accounting for Stock Issued to Employees". The provisions
of FIN 44 became effective in 2000 and did not have a material effect on the
Company's results of operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements". The SAB summarizes certain staff views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The provisions of this bulletin became effective in 2000 and did not have a
material effect on the Company's results of operations, financial position or
cash flows.
2. EXTRAORDINARY ITEM
During the fourth quarter of 1999, the Company repaid its unsecured senior
subordinated notes prior to maturity. In connection with this early retirement,
the Company wrote off $663,000 of related deferred loan costs and paid a
make-whole premium of $4,788,000. These costs are included in the 1999
consolidated statement of income as an extraordinary item, net of a $2,099,000
tax benefit.
3. ASSET IMPAIRMENT CHARGE
During the fourth quarter of 2000, as a part of its continuous evaluation
of its portfolio of business units, the Company completed a strategic evaluation
of a business unit located in Grand Junction, Colorado. As a result of this
evaluation, the Company entered into a definitive purchase and sale agreement
for the sale of the business unit. Consequently, the Company determined that the
goodwill associated with this unit was impaired and recorded a charge of
$1,800,000, which is included in other expense. Net sales and operating profit
for the business unit were $7,185,000, and $411,000, respectively, in 2000. The
sale of the business unit was completed on February 5, 2001.
4. ACQUISITIONS
Businesses acquired are accounted for using the purchase method of
accounting. Under this accounting method, 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. Any excess of the
purchase price over the estimated fair value of the net assets acquired is
recorded as goodwill. Operating results of the acquired businesses are included
in the consolidated statements of income from the date of acquisition.
During 2000, the Company completed the acquisition of Alberta Sales, a
millwork facility that was consolidated into the Company's existing Carson
Valley location, and the acquisition of four warehouse distribution centers
along with several sales offices doing business
as Marvin Windows Planning Centers from Frontier Wholesale Company. The total
cash consideration given was $5,905,000.
The following summarized unaudited pro forma results of operations assume
the 2000 acquisitions occurred as of the beginning of 1999. The pro forma data
has been prepared for comparative purposes only. It 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 years presented, or that
may occur in the future. (In thousands, except per share data).
(Unaudited)
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Net sales ....................................... $1,019,706 $1,024,108
Net income ...................................... 19,701 19,952
Net income per diluted common share.............. $ 1.54 $ 1.56
In 1999, the Company completed three acquisitions involving six value-added
facilities located in Colorado, Montana, Nevada, and Texas. The aggregate
purchase price was $19,319,000, consisting of $15,779,000 in cash and a note
payable for $3,540,000, net of discount. The issuance of the note payable is
considered a non-cash transaction for purposes of the consolidated statement of
cash flows.
The following summarized unaudited pro forma results of operations assume
the 1999 acquisitions occurred as of the beginning of 1998. The pro forma data
has been prepared for comparative purposes only. It 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 years presented, or that
may occur in the future. (In thousands, except share data.)
(Unaudited)
- --------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Net sales ....................................... $1,037,304 $908,886
Income before extraordinary item ................ 25,516 17,333
Net income ...................................... 22,164 17,333
Income before extraordinary item
per diluted common share ...................... 1.99 1.37
Net income per diluted common share ............. 1.73 1.37
5. RECEIVABLES
Receivables consisted of the following at December 31, (in thousands):
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Trade receivables $106,556 $106,965
Other 6,915 5,415
Allowance for returns, discounts
and doubtful accounts (2,184) (2,257)
- --------------------------------------------------------------------------------
$111,287 $110,123
================================================================================
Because the customers are dispersed among the Company's various markets,
its credit risk to any one customer or state economy is not significant. The
Company performs ongoing credit evaluations of its customers and provides an
allowance for doubtful accounts when events or circumstances indicate that
collection is doubtful.
6. EQUITY INVESTMENT
In May 1999, the Company completed the investment of a 49% interest in KBI,
a framing company with operations in Phoenix and Tucson, Arizona, and Las Vegas,
Nevada. The total cost was $28,293,000 consisting of $26,093,000 in cash and
$2,200,000 from various assets of its Phoenix operation. The Company has the
right to acquire the remaining 51% interest in KBI and the 51% owner has a
corresponding right to require the Company to purchase its 51% ownership after
five years.
In December 1999, KBI contributed the net assets and liabilities of its
lumberyard operation to Distribution in consideration for a 100% ownership
interest, which was subsequently distributed to the members of KBI in proportion
to their respective ownership interest in KBI. In 2000, BMC Framing Inc.
participated in the formation of KB Industries Limited Partnership and acquired
a 49% limited partnership interest.
Summarized 2000 and 1999 combined financial information of the Company's
equity-basis unconsolidated companies follows (in thousands):
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Income statement information:
Net sales ................................... $ 161,420 $ 101,354
Income from operations ...................... $ 2,818 $ 1,298
Net income .................................. $ 3,434 $ 1,478
Less other members share of net income....... (1,751) (754)
- --------------------------------------------------------------------------------
Company's share of net income ............... 1,683 724
Other income allocations,
net of amortization of intangibles ........ 6,738 4,254
- --------------------------------------------------------------------------------
Equity in earnings of
unconsolidated companies .................. $ 8,421 $ 4,978
================================================================================
Financial position information:
Current assets .............................. $ 36,404 $ 29,569
Noncurrent assets ........................... $ 5,750 $ 5,444
Total liabilities (current) ................. $ 10,347 $ 6,639
Members capital ............................. $ 31,807 $ 28,374
- --------------------------------------------------------------------------------
Less other members share of capital ......... (16,222) (14,471)
Company's share of capital .................. 15,585 13,903
Goodwill .................................... 16,202 16,859
- --------------------------------------------------------------------------------
Equity investments in unconsolidated companies. $ 31,787 $ 30,762
================================================================================
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
(in thousands):
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Land ................................................... $ 40,551 $ 39,337
Buildings and improvements ............................. 94,701 80,414
Machinery and fixtures ................................. 43,493 38,391
Handling and delivery equipment......................... 37,486 34,573
Construction in progress ............................... 9,242 11,097
- --------------------------------------------------------------------------------
225,473 203,812
Less accumulated depreciation .......................... (57,764) (50,214)
- --------------------------------------------------------------------------------
$ 167,709 $ 153,598
================================================================================
Interest of $777,000, $221,000, and $94,000 has been capitalized during
2000, 1999 and 1998, respectively. Depreciation expense was $13,576,000
$11,779,000, and $10,484,000 in 2000, 1999 and 1998, respectively.
At December 31, 2000 the Company had $5,704,000 of land and buildings and
improvements held for sale accounted for at the lower of cost or market. During
2000, the Company recorded net gains from the sale of assets of $2,611,000
consisting primarily of the gain on the sale of real estate in Beaverton, Oregon
for approximately $2,250,000. During 1999, the Company recorded net gains from
the sale of assets of $1,403,000 consisting primarily of a gain of $1,384,000 on
the sale of three of its centers (located in Fredericksburg, Marble Falls and
Shiner, Texas).
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, (in thousands):
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Trade accounts payable .................................. $29,396 $33,583
Net checks in process ................................... 8,308 12,188
Accrued compensation .................................... 12,782 10,966
Sales tax payable ....................................... 3,817 4,114
Other ................................................... 6,811 5,353
- --------------------------------------------------------------------------------
$61,114 $66,204
- --------------------------------------------------------------------------------
9. DEBT
Debt consisted of the following at December 31, (in thousands):
- --------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------
Term note .......................................................... $108,323
Revolving credit facility .......................................... 52,200
Non-interest bearing term note,
net of related discount of $1,183 ................................ 3,817
Other .............................................................. 666
- --------------------------------------------------------------------------------
$165,006
================================================================================
During the fourth quarter of 1999, management entered into a new senior
credit facility that included a revolving credit facility of $125,000,000 and a
term note of $100,000,000. The financing was arranged through Bank of America,
N.A., as administrative agent, and nine other banks. The facility was used to
repay the Company's 8.10% and 9.18% unsecured senior notes and other debt and is
available to fund future acquisitions. In June 2000, the Company executed the
First Amendment to the senior credit facility that added an additional bank,
Banque Nationale de Paris, and increased its credit availability by $25 million.
Under the existing revolving credit facility, the Company has the ability
to borrow up to $138,900,000 due 2004. Borrowings under the revolver bear
interest at prime plus 0.50% to 1.50%, or Offshore Rate plus 2.00% to 3.00%. A
fee of 0.375% to 0.50% per annum is charged on the unused portion. At December
31, 2000 the Company had $86,700,000 of remaining capacity under this revolver.
The term note is due 2004 with annual commitment reductions through 2004, and
bears interest at prime plus .50% to 1.50%, or Offshore Rate plus 2.00% to
3.00%. At December 31, 2000 there was $108,323,000 outstanding under this term
note.
The term loan and revolving credit facility are both collateralized by the
following assets: all accounts, chattel paper, deposit accounts, documents,
equipment, general intangibles, pledged collateral, inventory, books, letter of
credit proceeds and deeds of trust on certain real property.
The agreements related to the above borrowings contain covenants providing
for the maintenance of certain financial ratios and conditions including total
funded debt to capitalization; consolidated net worth; and coverage ratio which
includes earnings before interest, taxes and amortization and limitations on
capital expenditures, among certain other restrictions. At December 31, 2000,
the Company was in compliance with these covenants and conditions.
In connection with a 1999 acquisition, the Company issued a $5,000,000
non-interest bearing five-year term note to the previous owner as partial
consideration for the purchase. The note has been recorded assuming a 15%
effective interest rate resulting in a discount of $1,460,000 at December 31,
1999. Under the terms of the note, principal payments are due beginning 2004;
however, accelerated payments may be due based on the operating results of the
acquired facilities during each of the next five years. The Company has
discounted its principal payments for this note based on estimates of the
operating results of the acquired business. The scheduled principal payments of
debt are $12,330,000 in 2001, $13,562,000 in 2002, $17,850,000 in 2003 and
$121,264,000 in 2004.
The $12,330,000 of principal payments due in 2001 are expected to be
refinanced through the unused portion of the revolving credit facility. As a
result, this amount has been classified as long-term.
As of December 31, 2000, the Company had $2,800,000 in letters of credit to
guarantee performance or payments to third parties.
10. PREFERRED STOCK
BMHC has 2,000,000 shares of preferred stock authorized but not currently
issued.
11. STOCK PURCHASE AND INCENTIVE PLANS
SHAREHOLDERS' RIGHTS PLAN
BMHC adopted a shareholder rights plan that expires in 2007. Under the
plan, if a company acquires 15% or more of the Company's stock or makes a tender
or other offer to do so without the approval of the Board of Directors,
shareholders would have the right to purchase stock of BMHC or the acquiring
company at a significant discount. The Board of Directors of BMHC has the right
to redeem the rights for a nominal amount, to extend the period before
shareholders may exercise the rights or to take other actions permitted by the
plan. The rights trade with BMHC's stock but do not give shareholders any voting
rights. The rights plan is intended to encourage any person seeking to acquire
BMHC to negotiate with the Board of Directors.
CASH EQUITY PLAN
On April 1, 1999, BMHC adopted a Cash Equity Plan to provide incentives for
key management employees. The awards vest after three years from the date of
grant and expire after five years. Each unit under an award allows for an
exchange for cash in the amount of the fair market value of BMHC's common stock
at the date of exercise. The number of units available for grant including those
units outstanding and unexercised, cannot exceed two- percent of BMHC's common
shares outstanding at any given time. During 2000 and 1999, the Company awarded
100,435 and 73,190 units, respectively, and recognized compensation expense of
$340,000 and $243,000 respectively. At December 31, 2000 161,705 units remained
outstanding and unexercised. Accelerated vesting may occur if there is a change
of control of the Company, as defined in the Cash Equity Plan.
EMPLOYEE STOCK PURCHASE PLAN
On October 1, 2000, BMHC adopted a non-compensatory Employee Stock Purchase
Plan ("ESPP"). Under the ESPP, eligible employees may elect each year to have up
to 10% of their annual qualified compensation withheld to purchase the Company's
common stock. The purchase price of the stock is 85% of the lower of the
beginning of the purchase period or end of the purchase period market price of
BMHC's common stock. The purchase period is one month, commencing on the
effective date of the ESPP, and continues consecutively after the termination of
the preceding purchase period. There were 200,000 shares of common stock
authorized for purchase under the ESPP. As of December 31, 2000, there were
197,000 shares available for future purchase under the ESPP.
STOCK AND STOCK OPTION PLANS
The Company has five stock and stock option plans, the 1991 Senior
Management and Field Management Plan, the 1992 Non-Qualified Stock Option Plan,
the 1993 Employee Stock Option Plan, the 1993 Second Amended and Restated
Non-Employee Stock Plan and the 2000 Stock Incentive Plan (the Stock Option
Plans). As of December 31, 2000, there were 1,746,373 shares of common stock
reserved for issuance under the plans.
The 1991 Senior Management and Field Management Plan provided for the
granting of options to purchase shares of BMHC's common stock at exercise prices
below fair market value. At December 31, 2000, there were no options remaining
for future grants under the 1991 plan. Such options expire ten years from the
date of grant. Options vest over four years from the date of grant and expire at
the end of ten years if unexercised.
The 1992 Non-Qualified Stock Option Plan and the 1993 Employee Stock Option
Plan provided for the granting of options, at the discretion of the Board of
Directors, to purchase shares of BMHC's common stock. At December 31, 2000,
there were no options remaining for future grants under the 1992 and 1993 plans.
The exercise price is equal to the fair market value of BMHC's common stock on
the date the options are granted. Options vest over five years from the date of
grant and expire at the end of ten years if unexercised.
On February 18, 2000, BMHC amended the 1993 Amended and Restated
Non-Employee Stock Option Plan to the 1993 Second Amended and Restated Stock
Plan. As a result, the Company now grants awards of the Company's common stock
rather than stock option awards under this plan. This plan is available only to
non-employee directors, and awards vest immediately upon grant. During 2000, the
Company granted 16,800 shares of stock under this plan and recognized
compensation expense of $176,400. At December 31, 2000, 71,700 shares remain in
the plan for future issuance. The options that remain outstanding from grants
under the pre-amended plan are exercisable after one year following the date of
grant and expire at the end of ten years if unexercised.
On February 18, 2000 BMHC adopted the 2000 Stock Incentive Plan, which provides
for the granting of sales or bonuses of stock, restricted stock, stock options,
stock purchase warrants, other rights to acquire stock, securities convertible
into or redeemable for stock, stock appreciation rights, and dividend
equivalents. The number of shares of common stock issued and issuable pursuant
to all awards granted under this plan shall not exceed 600,000, with annual
increases commencing in 2001 as defined in the plan. During 2000 there were
262,000 non-statutory options granted under the plan at a price equal to the
fair market value of the Company's common stock on the date of grant. These
grants vest at an annual rate of 25% commencing on December 31, 2000. On
December 1, 2000, the Company granted an additional 50,000 and 20,000
non-statutory stock options under the plan, which vest at the end of three and
two years, respectively, at an exercise price equal to 85% of the fair market
value of the Company's common stock on the date of grant. At December 31, 2000
there were 268,000 shares remaining in the plan for future issuance. All options
outstanding under the plan expire at the end of ten years if unexercised.
During 1997, as an additional incentive to attract a member of senior
management, the Board of Directors authorized and issued an award of 50,000
options. The exercise price was equal to the fair market value of the Company's
common stock on the date the options were granted. These options will vest in
2002, but vesting may be accelerated pursuant to the Company's common stock
reaching certain fair market values. These options expire 10 years from the date
of grant, or 2007, and are included in the tables below.
A summary of the activity of the Stock Option Plans for the years ended
December 31, 2000, 1999 and 1998, is presented in the table below:
- --------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE Weighted Average Weighted Average
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------------
Balance at beginning of the year ..... 1,074,801 $11.46 920,995 $11.57 795,704 $11.24
Options granted ...................... 490,500 9.40 215,750 10.42 173,470 12.52
Options exercised .................... (143,121) 9.47 (27,388) 3.40 (21,907) 3.05
Options forfeited .................... (15,507) 14.10 (34,556) 13.95 (26,272) 15.00
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of the year ........... 1,406,673 $11.73 1,074,801 $11.46 920,995 $11.57
==========================================================================================================================
Exercisable at end of the year ....... 765,526 $13.08 701,594 $11.33 606,187 $10.74
Weighted average fair value of options
granted at fair value .............. $6.38 $6.56 $6.24
Weighted average fair value of
options granted below fair value .. $5.43 -- --
The following table summarizes information about stock options outstanding
at December 31, 2000:
- ----------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------
NUMBER Weighted Average NUMBER
OUTSTANDING AT Remaining EXERCISABLE AT
Range of DECEMBER 31, Contractual Weighted Average DECEMBER 31, Weighted Average
Exercise Prices 2000 Life Years Exercise Price 2000 Exercise Price
- ----------------------------------------------------------------------------------------------------------
$ 1.21 to $ 6.85 ... 151,941 5.2 $ 6.04 81,941 $ 5.34
$ 8.67 to $17.00 ... 1,148,936 7.5 $11.47 577,789 $12.42
$19.50 to $29.75 ... 105,796 4.7 $22.70 105,796 $22.70
- ----------------------------------------------------------------------------------------------------------
$ 1.21 to $29.75 ... 1,406,673 7.07 $11.73 765,526 $13.08
==========================================================================================================
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2000, 1999 and 1998: risk-free interest rates of
6.0%, 5.4%, and 5.5%, respectively; estimated lives of approximately 8 years, 6
years and 6 years, respectively; and expected stock price volatility of 52.8%
61.6%, and 42.7%, respectively.
Had compensation cost for these plans been determined using the fair value
method, the Company's 2000 net income would have been reduced on a pro forma
basis by $859,000 and basic and diluted earnings per share would have been
reduced on a pro forma basis by $0.07. The 1999 pro forma reductions would have
been a reduction in net income of $617,000; and a reduction in basic and diluted
earnings per share of $0.05. The 1998 pro forma reductions would have been a
reduction in net income of $437,000; and a reduction in basic and diluted
earnings per share of $0.03.
12. INCOME TAXES
Income taxes for the years ended December 31, 2000, 1999 and 1998 consisted
of the following (in thousands):
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Current income taxes
Federal .............................. $12,768 $13,912 $8,853
State ................................ 1,170 1,082 1,040
- --------------------------------------------------------------------------------
....................................... 13,938 14,994 9,893
- --------------------------------------------------------------------------------
Deferred income taxes
Federal (383) (529) (126)
State (32) (44) (11)
- --------------------------------------------------------------------------------
(415) (573) (137)
- --------------------------------------------------------------------------------
$13,523 $14,421 $9,756
================================================================================
The tax benefit associated with non-statutory stock options exercised by
employees under the Company's stock plans reduced taxes payable by approximately
$344,000, $82,000, and $67,000 for 2000, 1999, and 1998, respectively. These
benefits were credited to additional paid-in capital.
A reconciliation of the statutory Federal income tax rate to the rate as
provided in the consolidated statements of income follows:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Statutory rate ................................ 35.0% 35.0% 35.0%
State income taxes ............................ 2.5 2.4 3.0
Asset impairment charge ....................... 2.4 -- --
Other ......................................... .8 1.1 1.2
- --------------------------------------------------------------------------------
40.7% 38.5% 39.2%
================================================================================
Deferred income taxes are provided to reflect temporary differences between
the financial and tax bases of assets and liabilities using presently enacted
tax rates and laws.
The components of deferred income taxes included in the Company's year-end
balance sheets were as follows (in thousands):
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Deferred tax assets
Tax basis in excess of book
basis of acquired assets ...................... $ 0 $ 30
Inventories, tax basis in
excess of book basis .......................... 2,246 1,647
Reserves not yet deductible for tax.............. 3,342 2,663
Other ........................................... 1,877 1,548
- --------------------------------------------------------------------------------
Total deferred tax assets ....................... 7,465 5,888
Deferred tax liabilities
Book basis in excess of tax
basis of acquired assets ...................... 256 --
Tax in excess of book depreciation .............. 6,997 7,040
Deferred costs deducted for taxes ............... 2,140 1,191
- --------------------------------------------------------------------------------
Total deferred tax liabilities .................. 9,393 8,231
- --------------------------------------------------------------------------------
$(1,928) $(2,343)
================================================================================
Classified as
Deferred income tax
benefit (current assets) ...................... $ 4,375 $ 2,781
Deferred income taxes
(long-term liabilities) ....................... (6,303) (5,124)
- --------------------------------------------------------------------------------
$(1,928) $(2,343)
================================================================================
13. NET INCOME PER COMMON SHARE
Net income per common share was determined as follows:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Net income available to
common shareholders ...................... $19,712 $19,683 $15,149
================================================================================
Weighted average shares
outstanding used to determine
basic net income per
common share ............................. 12,754 12,667 12,509
Net effect of dilutive
stock options(1) ......................... 69 125 138
- --------------------------------------------------------------------------------
Average shares used to
determine diluted net income
per common share ......................... 12,823 12,792 12,647
================================================================================
(1)Stock options of 1,247,232, 644,371, and 493,187 were not included in the
computation, because to do so would have been anti-dilutive for the years
ended December 31, 2000, 1999 and 1998, respectively.
14. RETIREMENT PLANS
BMHC has a savings and retirement plan for its salaried and certain of its
hourly employees whereby the eligible employees may contribute a percentage of
their earnings to a trust, i.e. a 401(k) plan. The Company also makes
contributions to the trust based on a percentage of the contributions made by
the participating employees and a percentage of net income for the period. The
Company's contributions are charged against operations and were $3,050,000,
$2,707,000 and $2,402,000 in 2000, 1999 and 1998, respectively.
BMHC has a supplemental retirement plan for selected key management
employees and directors. The contributions are based on the Company achieving
certain operating earnings levels. Pursuant to this plan, the Company charged
operations for $1,309,000 in 2000, $1,420,000 in 1999, and $1,065,000 in 1998.
BMHC has purchased company-owned life insurance in order to have a funding
mechanism for this plan. Retirement payments will be paid to the participants or
their beneficiary over a 15-year period subsequent to retirement or death.
BMHC does not provide any other postretirement benefits for its employees.
15. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases real property, vehicles and office equipment under
operating leases. Rental expense was $7,028,000 in 2000, $6,813,000 in 1999, and
$6,503,000 in 1998. Certain of the leases are non-cancellable and have minimum
lease payment requirements of $6,278,000 in 2001, $4,796,000 in 2002, $3,940,000
in 2003, $3,018,000 in 2004, $1,875,000 in 2005 and $5,047,000 thereafter.
LEGAL PROCEEDINGS
The Company is involved in litigation and other legal matters arising in
the normal course of business. In the opinion of management, the Company's
recovery or liability, if any, under any of these matters will not have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
16. FINANCIAL INSTRUMENTS
The book values compared with the fair values of financial instruments at
December 31, were as follows (in thousands):
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
BOOK FAIR Book Fair
VALUE VALUE Value Value
- --------------------------------------------------------------------------------
Long-term debt:
Variable
rate debt ...... $160,523 $160,523 $170,207 $170,207
Fixed rate debt .. 4,483 3,857 3,540 3,540
- --------------------------------------------------------------------------------
$165,006 $164,380 $173,747 $173,747
================================================================================
The book values of cash and cash equivalents, accounts receivable, accounts
payable and variable interest rate long-term debt approximated fair value due to
either the short-term maturities or current variable interest rates of these
instruments.
The fair value of fixed rate debt has been estimated based upon the
discounted cash flows using the Company's incremental rate of borrowing for
similar debt.
17. BUSINESS SEGMENT AND PRODUCTS
The Company's chief operating decision makers consist of senior managers
who work together to allocate resources to and assess the performance of each of
the Company's individual locations. Management believes its locations have
similar operating and economic characteristics and has aggregated its operations
into a single reporting segment, that being the supply and distribution of
lumber and building materials to professional contractors and project oriented
consumers.
The Company's locations principally derive revenues from wood products
(lumber, plywood and oriented strand board), value-added products and services
(millwork, roof and floor trusses, pre-hung doors, windows, moldings and
installation), building materials (roofing, siding, insulation and steel
products), and other products (paint, hardware, tools, electrical and plumbing).
Net sales by product for the years ended December 31, 2000, 1999 and 1998 were
as follows (in thousands):
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Net sales
Wood products .................... $ 417,949 $ 444,834 $381,221
Value-added ...................... 410,057 348,569 275,862
Building materials ............... 117,985 136,757 136,856
Other ............................ 67,977 76,948 83,341
- --------------------------------------------------------------------------------
Total revenues ..................... $1,013,968 $1,007,108 $877,280
================================================================================
18. RESULTS OF QUARTERLY OPERATIONS (UNAUDITED)
Operating results by quarter for 2000 and 1999 are as follows (dollars in
thousands, except per share data):
- --------------------------------------------------------------------------------
First Second Third Fourth
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2000
NET SALES ................ $233,467 $271,404 $270,536 $238,561
GROSS PROFIT ............. 60,001 70,082 73,380 66,982
INCOME FROM
OPERATIONS ............. 9,661 13,579 13,304 5,992
NET INCOME ............... 4,467 7,033 6,807 1,405
NET INCOME PER DILUTED
COMMON SHARE(1) ........ .35 .55 .53 .11
COMMON STOCK PRICES:
HIGH ................... $ 10.938 $ 11.00 $ 10.438 $ 9.500
LOW .................... 8.875 7.75 8.500 7.563
1999
Net sales ................ $215,625 $256,005 $288,715 $246,763
Gross profit ............. 54,111 64,165 69,805 63,890
Income from operations 6,644 13,411 16,161 9,446
Extraordinary item ....... -- -- -- (3,352)
Net income ............... 2,521 7,039 8,964 1,159
Income before
extraordinary
item per diluted
common share ........... $ 0.20 $ 0.55 $ 0.70 $ 0.35
Net income per diluted
common share(1) ........ $ 0.20 $ 0.55 $ 0.70 $ 0.09
Common stock prices:
High ................... $ 12.625 $ 12.750 $ 13.313 $ 11.750
Low .................... 9.375 9.750 10.000 7.500
During the fourth quarter of 2000, as a part of its continuous evaluation
of its portfolio of business units, the Company completed a strategic evaluation
of a business unit located in Grand Junction, Colorado. As a result of this
evaluation, the Company entered into a definitive purchase and sale agreement
for the sale of the business unit. Consequently, the Company determined that the
goodwill associated with this unit was impaired and recorded a charge of
$1,800,000, which is included in other expense. Net sales and operating profit
for the business unit were $7,185,000, and $411,000, respectively, in 2000. The
sale of the business unit was completed on February 5, 2001.
(1)NET INCOME PER SHARE CALCULATIONS ARE BASED ON THE AVERAGE COMMON SHARES
OUTSTANDING FOR EACH PERIOD PRESENTED. ACCORDINGLY, THE TOTAL OF THE PER
SHARE FIGURES FOR THE QUARTERS MAY NOT EQUAL THE PER SHARE FIGURE REPORTED
FOR THE YEAR.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Building Materials Holding Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Building Materials
Holding Corporation and its subsidiaries (the "Company") at December 31, 2000,
and 1999 and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. The financial statements of the Company for
the year ended December 31, 1998 were audited by other independent accountants
whose report dated January 25, 1999 expressed an unqualified opinion on those
statements.
/s/ PRICEWATERHOUSECOOPERS LLP
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PRICEWATERHOUSECOOPERS LLP
San Francisco, California
February 27, 2001