SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
- - of 1934
For the quarterly period ended March 31, 1999 or
--------------
__ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number 0-19335
BUILDING MATERIALS HOLDING CORPORATION
(Parent of BMC West Corporation)
Delaware 91-1834269
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Building Materials Holding Corporation
One Market Plaza, Steuart Tower, Ste 2650, San Francisco, CA 94105
Telephone: (208)331-4410 or (415)227-1650
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 month (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 X No
---- ----
CLASS Shares Outstanding as
of May 1, 1999:
Common stock $.001 par value 12,666,900
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1
BUILDING MATERIALS HOLDING CORPORATION
INDEX
Page
Number
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PART I -- FINANCIAL INFORMATION
3
Item 1 - Financial Statements
Condensed Consolidated Statements of Income for the three months ended March 31, 1999
and 1998 4
Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998
5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 4 - Submission of Matters to a Vote of Security Holders
16
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES 18
INDEX TO EXHIBITS 19
EXHIBITS 20
2
PART I - FINANCIAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by Building Materials Holding Corporation ("BMHC" or the "Company")on a
consolidated basis, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments necessary to present fairly the results for the periods presented
have been included. The adjustments made were of a normal, recurring nature.
Certain information and footnote disclosures normally included in the
consolidated financial statements have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's 1998 Annual
Report.
Due to the seasonal nature of BMHC's business, the condensed consolidated
results of operations and resulting cash flows for the periods presented are not
necessarily indicative of the results that might be expected for the fiscal
year.
3
BUILDING MATERIALS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands, Except per Share Data)
Three Months Ended
March 31, March 31,
1999 1998
-------- --------
Net sales $215,625 $183,631
Cost of sales 161,514 139,666
-------- --------
Gross profit 54,111 43,965
Selling, general and 47,954 40,436
administrative expense
Other income, net 487 373
-------- --------
Income from operations 6,644 3,902
Interest expense 2,544 2,497
-------- --------
Income before income taxes 4,100 1,405
Income taxes 1,579 555
-------- --------
Net income $ 2,521 $ 850
-------- --------
-------- --------
Net income per common share:
Basic: $ 0.20 $ 0.07
-------- --------
-------- --------
Diluted: $ 0.20 $ 0.07
-------- --------
-------- --------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
BUILDING MATERIALS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
March 31, December 31,
1999 1998
-------- --------
ASSETS
Current assets
Cash $ 8,403 $ 8,264
Receivables, net 101,920 92,113
Inventories 82,898 78,746
Deferred income tax benefit 2,488 2,488
Prepaid expenses 2,176 2,355
-------- --------
Total current assets 197,885 183,966
Property, plant and equipment, net 141,823 139,585
Deferred loan costs 845 914
Goodwill, net 43,756 43,903
Other 5,169 5,613
-------- --------
Total assets $389,478 $373,981
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 50,286 $ 45,509
Accrued compensation 5,948 8,937
Sales tax payable 4,561 3,734
Other accrued expenses 8,739 9,042
-------- --------
Total current liabilities 69,534 67,222
Long-term debt 128,262 117,805
Deferred income taxes 5,405 5,404
Other long-term liabilities 3,488 3,300
Shareholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized; 12,656,109 and
12,652,298 shares outstanding at March 31,
1999 and December 31, 1998, respectively 13 13
Additional paid-in capital 108,272 108,256
Retained earnings 74,504 71,981
-------- --------
Total shareholders' equity 182,789 180,250
-------- --------
Total liabilities and shareholders' equity $389,478 $373,981
-------- --------
-------- --------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
BUILDING MATERIALS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
Three Months Ended
-------------------------
March 31, March 31,
1999 1998
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,521 $ 850
Adjustments to reconcile net income to cash
(used) provided by operating activities:
Depreciation and amortization 3,515 3,113
Gain on sale of assets (102) (29)
Stock option compensation -- 16
Changes in working capital items net of
effects of acquisitions and divestitures (11,338) 115
Changes in other long-term liabilities 188 (488)
Other 180 (295)
-------- -------
Net cash(used)provided by operating activities (5,036) 3,282
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,206) (3,458)
Payments for acquisitions (304) --
Sale of property and equipment 212 128
-------- -------
Net cash used in investing activities (5,298) (3,330)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable (5,023) --
Net borrowings(repayments)under revolving
credit agreement
15,480 (800)
Other 16 (23)
-------- -------
Net cash provided(used)by financing activities 10,473 (823)
-------- -------
Net increase(decrease)in cash 139 (871)
Cash, beginning of period 8,264 8,177
-------- -------
Cash, end of period $ 8,403 $ 7,306
-------- -------
-------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 1,049 $ 768
Income taxes $ 3,470 --
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
BUILDING MATERIALS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. WORKING CAPITAL CHANGES
Changes in working capital items, net of acquisitions, for the three months
ended March 31, 1999 and 1998 are as follows (in thousands):
1999 1998
-------- -------
(Increase)decrease in accounts receivable $ (9,710) $ 435
Increase in inventories (4,074) (2,369)
Decrease in prepaid expenses 179 2,324
Increase(decrease)in accounts payable and
accrued expenses
772 (2,004)
Increase in interest payable 1,495 1,729
-------- -------
$ 11,338 $ 115
-------- -------
-------- -------
2. LONG-TERM DEBT
Long-term debt consisted of the following(in thousands):
March 31, December 31,
1999 1998
-------- --------
Revolving credit agreement borrowings $ 57,895 $ 42,415
9.18% unsecured senior notes 50,000 50,000
8.10% unsecured senior notes 16,667 16,667
Other 3,700 8,723
-------- --------
$128,262 $117,805
-------- --------
-------- --------
The Company is in compliance with all covenants and conditions related to the
above borrowings.
7
3. EARNINGS PER SHARE
Net income per share was determined as follows (in thousands, except shares
and per share amounts)
Three Months Ended
------------------------------
March 31, March 31,
1999 1998
----------- -----------
COMPUTATION OF BASIC EARNINGS PER SHARE
Net income available to
common shareholders $ 2,521 $ 850
----------- -----------
----------- -----------
Weighted average shares outstanding 12,655,281 12,333,405
----------- -----------
----------- -----------
BASIC EARNINGS PER SHARE $ 0.20 $ 0.07
----------- -----------
----------- -----------
COMPUTATION OF DILUTED EARNINGS PER SHARE
Net income available to
common shareholders $ 2,521 $ 850
----------- -----------
----------- -----------
Weighted average shares outstanding 12,655,281 12,333,405
Net effect of dilutive stock options
based on the treasury stock method
using average market price 125,202 139,057
----------- -----------
Weighted average diluted
shares outstanding 12,780,483 12,472,462
----------- -----------
----------- -----------
DILUTED EARNINGS PER SHARE $ 0.20 $ 0.07
----------- -----------
----------- -----------
8
4. AQCUISITIONS
In the first quarter of 1999, the Company completed one acquisition
consisting of a value-added facility located in Colorado that was
consolidated into an existing facility. The total consideration given was
approximately $350,000.
5. SUBSEQUENT EVENTS
On May 3, 1999, the Company completed the acquisition of a 49% interest in
Knipp Brothers Industries, LLC, a framing company with operations in
Phoenix and Tuscon, Arizona, and Las Vegas, Nevada. The total
consideration given was $28 million consisting of $25.8 million in cash
and $2.2 million from various assets of our Phoenix operation. BMHC has
the right to acquire the remaining 51% interest in Knipp Brothers. Larry
Knipp has a corresponding right to require BMHC to purchase Knipp Brothers
51% after five years.
On March 31, 1999, BMHC renegotiated its revolving credit agreement with
Wells Fargo Bank. The amendment to the amended and restated credit
agreement was effective March 31, 1999. The amendment extended the period
of availability for the $100 million revolver from March 31, 1999 to
August 31, 1999 and changed the rates at which interest and fees are
charged and the minimum net worth required. Borrowings under the agreement
now bear interest at prime plus 0% to 1.25%, or LIBOR plus 1.00% to 2.25%.
A fee of .25% to .50% per annum is charged on the unused portion of the
loan commitement. After August 31, 1999, the borrowing capacity will
return to $70 million until the revolving credit agreement's expiration.
On May 7, 1999, BMHC signed a Joinder Agreement with Bank of America to
become an Additional Bank providing an additional $25 million pursuant to
the above mentioned amendment to the revolving credit agreement. Bank of
America agreed to be bound by the revolving credit agreement as if it had
been an original party to the revolving credit agreement.
9
BUILDING MATERIALS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain costs, expenses and income items. The table
and subsequent discussion should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere herein and in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
For The Three Months Ended
---------------------------
March 31, March 31,
1999 1998
--------- ---------
Net sales 100.0% 100.0%
Gross profit 25.1 23.9
Selling, general and
administrative expense 22.2 22.0
Other income, net 0.2 0.2
Income from operations 3.1 2.1
Interest expense 1.2 1.4
Income taxes 0.7 0.3
Net income 1.2 0.5
FIRST QUARTER OF 1999 COMPARED TO THE FIRST QUARTER OF 1998
Net sales for the three months ended March 31, 1999 increased 17.4% to a record
$215.6 million from $183.6 million in the same period one year ago. The increase
resulted primarily from same-store sales (facilities that operated for at least
two months in both the first quarter of 1998 and the first quarter of 1999)
growth of 12.0%, as well as a 7.5% increase from acquisitons made during the
past year. Adjusting for product price inflation (primarily commodity wood
product prices) of approximately 3.4%, real same-store sales were 8.6% ahead of
the year-ago quarter.
Gross profit as a percentage of sales increased to 25.1% in the first quarter of
1999 from 23.9% in the first quarter of 1998, primarily as a result of on- going
efforts by the Company to improve margins through its increased focus on
value-added products, such as roof and floor trusses, pre-hung doors, millwork,
and pre-assembled windows.
10
Selling, general and administrative (SG&A) expenses, were $48.0 million in the
first quarter of 1999 as compared to $40.4 million in 1998, and increased as a
percentage of net sales from 22.0% in 1998 to 22.2% in 1999. The Company
attributes this partially to increases in value-added sales that carry higher
SG&A expenses, higher sales which carry higher commissions and incentives, and
the cost of integrating new operating locations that were not included in the
comparable prior year period.
Interest expense of $2.5 million in the first quarter of 1999 was approximately
the same as the comparable prior year period.
Income taxes were provided at estimated annual effective tax rates of 38.5% and
39.5% for the periods ended March 31, 1999 and March 31, 1998, respectively.
As a result of the foregoing factors, net income increased by $1.7 million or
196.6% to $2.5 million or 1.2% of net sales in the first quarter of 1999, as
compared to $850,000, or 0.5% of net sales, in the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 the Company had $128.3 million of long-term debt outstanding,
consisting of $70.4 million of term borrowings under fixed rate notes, and $57.9
million of variable rate debt under the revolving credit agreement.
In the first three months of 1999, the Company used $5.0 million of cash in
operating activities. Working capital increased from $116.7 million at December
31, 1998 to $128.4 million at March 31, 1999, due primarily to seasonality and
favorable economic conditions.
Based on its ability to generate cash from operations and the available
borrowing capacity at March 31, 1999 of $42.1 million under the revolving credit
agreement (availability of which is subject to the satisfaction of
11
certain customary borrowing conditions), the Company believes it will have
sufficient funds to meet its currently anticipated requirements.
YEAR 2000 SYSTEM ISSUE
As is the case with most other companies, the Year 2000 computer problem creates
risks for BMHC. However, the Company believes that the risks of the Year 2000
computer problem are not as severe for the building materials industry as
compared to other more technology dependent industries, because the building
materials industry, in general, and the Company and its professional contractor
customers, in particular, are not as heavily dependent upon computerized
systems. Except for millwork and truss operations, the Company is primarily a
distributor of building materials to its customers and is dependent upon rail
and truck transportation for timely receipt and delivery of inventory. The
Company could be affected if its transportation suppliers are materially and
adversely affected by Year 2000 related issues.
The following discussion summarizes management's present analyses and proposed
plans with respect to the anticipated material impacts of the Year 2000 computer
problem on the Company's primary operations. The discussion focuses on "mission
critical" systems, which management believes are important to the Company's day
to day functional operations. The Year 2000 problem may also impact systems that
are not mission critical or information technology related. These systems, which
may include telephone, electronic mail, elevators, heating and air conditioning
equipment, and security will be tested and any problems addressed on a
case-by-case basis, but none are expected to be material to the Company's
results of operations or financial condition. It is expected that assessment,
remediation and contingency planning activities will be on-going throughout 1999
with the goal of appropriately resolving all significant internal systems and
third party issues.
State of Readiness
BMHC has evaluated the impact of the Year 2000 computer problem on its mission
critical systems. The mission critical systems that have been identified are:
- - retail system software used in each of the operations for sales
transactions, inventory and in-store accounting
12
- corporate financial and accounting system
- millwork configuration and order entry system
- truss production and engineering system
- payroll system, which is operated by a third party vendor
Each of the five mission critical systems is in the process of becoming
Year 2000 compliant, or management is verifying with the original vendor
that the existing systems are Year 2000 compliant. The current status of
the readiness effort with respect to the five mission critical systems is
as follows:
The retail system is being upgraded in a two-step process that involves
hardware and operating system improvements that were originally scheduled
for 1998. The first phase of the process has been successfully completed.
The final phase of the upgrade process is well underway, and the process is
well understood. The final software upgrade for Year 2000 compliance, as
warranteed by the vendor, has been received and is currently being tested
and is expected to be fully implemented in the summer of 1999.
The remainder of the year will be used to thoroughly test the system.
The corporate financial and accounting system has been upgraded to the Year
2000 compliant version as warranteed by the vendor. This upgrade was
successfully completed in December 1998, and the system is fully compliant.
Extensive testing to verify the vendor's level of compliance will occur in
the middle of 1999.
It has been determined that the current millwork software will not meet the
long term needs of the Company, and a decision to replace this software
package has been made. However, due to the complexity of implementing a new
system, it has also been decided to bring the current system to a Year 2000
compliant state. This project will be performed by the original vendor of
the software. The Year 2000 compliant version of the current software is
scheduled for delivery in the summer of 1999. Additionally, a replacement
software package has been identified that is warranteed by the vendor as
Year 2000 compliant. The new system is scheduled to come on-line in
13
selected sites in July 1999. In both cases, testing of the software will
occur during the latter half of 1999.
The vendors for the truss production system and outsourced payroll system
have advised the Company that the systems are currently Year 2000
compliant. Verification and testing of these systems for compliance is
currently underway, and will be completed during the middle of 1999.
Cost to Address Year 2000 Issues
Much of the cost to address Year 2000 issues was budgeted and scheduled as
part of routine maintenance of the Company's systems. Since these costs
were identified and planned for in the budget cycle, the financial impact
on the Company is not expected to be material in any one year. However, it
is anticipated that the total cost of becoming Year 2000 compliant for all
systems currently in use by the Company will be approximately $1.5 million.
To date approximately $0.7 million has been spent in remediation of Year
2000 issues. These costs include consulting, hardware upgrades and employee
time.
Risks of Year 2000 Issues for BMHC
Even in a most likely worst case scenario for BMHC, the risks due to failure to
accomplish Year 2000 remediations are not expected to have a material adverse
effect on the results of operations or financial condition of the Company. Each
of the Company's operating locations currently has procedures in place to deal
with the failure of the retail system. In this instance, the increased amount of
hand processing of accounting and inventory tracking would result in higher
overtime and payroll expense. However, it is not anticipated that there will be
a material impact on the ability of the Company to deliver products to
customers. In order to reduce the risks of delays in transportation of inventory
either to the Company or its customers, the Company intends to monitor Year 2000
compliance by its transportation suppliers and will consider a build-up of
certain inventories in the fourth quarter of 1999, if appropriate. The Company
does not expect that the cost of a short-term increase in its inventory levels
to reduce Year 2000 risks will be material to the Company's financial condition
or operating results.
14
Since each of the systems independently perform specified functions that are
well understood by staff personnel in the operating locations and at the
corporate office, complete failure of all of the systems could be worked around
to perform the necessary functions of the systems. It is extremely unlikely that
this would occur due to the independent nature of the systems architecture
employed at BMHC. However, steps to avoid this possibility are being taken.
Contingency Plans
The Company believes that temporary solutions to most failures are readily and
economically available. For example, the dates on the systems could be set to
dates prior to 2000 that have the same days of the week, such as the year 1972.
This would involve a data conversion and hand correcting of dates on printed
documents, but could be accomplished in just a few days. Also, personal
computers with spreadsheets could be used to maintain accounting and inventory
information as well as corporate financial data. Millwork configuration is
unaffected by the date change, but dates would need to be changed for order
tracking if the system were not capable of dealing with dates after December 31,
1999. Processing of payroll could be done with personal computers. Truss
engineering would need validation by the plate manufacturer to ensure structural
integrity. Finally, the Company can increase inventory levels to mitigate risks
of Year 2000 transportation problems. All of these plans could be put in place
in a short time frame, and would mitigate nearly all the material risks to the
Company. Further evaluation of contingency plans will be made, if necessary, as
test results from the various systems become available.
Summary
BMHC has proactively identified and is in the process of correcting the Year
2000 issues that it believes could have a material impact on the Company. It is
anticipated that all systems will be capable of functioning in a normal fashion
upon the change of the millennium. It is not anticipated that BMHC will suffer
any loss of revenue due to Year 2000 issues. The Company is also
15
in the process of requesting from all of its significant vendors a statement
regarding their preparations for the Year 2000 date change. Since the Year 2000
issue was anticipated in the budget cycle over the last two years, no material
impact is expected on the results of operations or cash flows in any period or
on the overall financial condition of the Company. Also, no projects were
canceled or delayed as a result of Year 2000 remediation activities
Certain statements made in this Form 10-Q 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 in Building Materials Holding Corporation's Form 10-K for
the fiscal year ended December 31, 1998. 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 or this Form 10-Q except
as required by law.
PART II -- OTHER INFORMATION
ITEM 1. 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 effect on the Company's financial position,
liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
16
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10-28 - Amendment No. 1 to the Third Amended and Restated
Credit Agreement between Wells Fargo Bank, National
Association and BMC West Corporation dated March 31,
1999.
Exhibit 10-29 - Joinder Agreement between Bank of America National
Trust and Savings Association and BMC West
Corporation dated May 7, 1999.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BUILDING MATERIALS HOLDING CORPORATION
Date: May 7, 1999 /s/ Robert E. Mellor
-----------------------------------------------
Robert E. Mellor
President, Chief Executive Officer
and Director (Principal Executive Officer)
Date: May 7, 1998 /s/ Ellis C. Goebel
-----------------------------------------------
Ellis C. Goebel
Senior Vice President - Finance
and Treasurer
(Principal Financial Officer)
18
INDEX TO EXHIBITS
BUILDING MATERIALS HOLDING CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1999
Page
Exhibit Description Number
- ------- ----------- ------
10.28 Amendment No. 1 to the Third Amended and
Restated Credit Ageement between Wells
Fargo Bank, National Association and
BMC West Corporation date March 31, 1999.
10.29 Joinder Agreement between Bank of America
National Trust and Savings Association and BMC West
Corporation dated May 7, 1999.
27 Financial Data Schedule
19