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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 September 30, 2002 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
Delaware 91-1834269
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Building Materials Holding Corporation
Four Embarcadero Center, Suite 3250, San Francisco, CA 94111
Telephone: (415)627-9100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Shares Outstanding as
Class of November 8, 2002:
-----
Common stock $.001 par value 13,135,562
1
BUILDING MATERIALS HOLDING CORPORATION
INDEX
Page
Number
------
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2002 and 2001 3
Condensed Consolidated Balance Sheets as of September
30, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 4 - Controls and Procedures 18
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
BUILDING MATERIALS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(amounts in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $316,930 $326,204 $864,593 $817,769
Cost of sales 227,008 236,052 617,944 590,156
-------- -------- -------- --------
Gross profit 89,922 90,152 246,649 227,613
Selling, general and
administrative expense 71,522 74,309 210,799 195,582
Other income (expense), net 193 (330) 558 560
-------- -------- -------- --------
Income from operations 18,593 15,513 36,408 32,591
Equity in earnings of
unconsolidated companies,
net of amortization -- -- -- 4,817
Interest expense 2,635 3,664 7,590 10,534
-------- -------- -------- --------
Income before income taxes,
minority interest and change
in accounting principle 15,958 11,849 28,818 26,874
Income taxes 6,079 4,562 11,030 10,346
-------- -------- -------- --------
Income before minority interest
and change in accounting principle 9,879 7,287 17,788 16,528
Minority interest 169 -- 169 --
-------- -------- -------- --------
Income before change in
accounting principle 9,710 7,287 17,619 16,528
Change in accounting principle,
net of tax benefit of $6,286 -- -- (11,650) --
-------- -------- -------- --------
Net income $ 9,710 $ 7,287 $ 5,969 $ 16,528
======== ======== ======== ========
Income before change in accounting
principle per common share:
Basic: $ 0.74 $ 0.56 $ 1.35 $ 1.28
======== ======== ======== ========
Diluted: $ 0.73 $ 0.55 $ 1.33 $ 1.27
======== ======== ======== ========
Change in accounting principle,
net of tax, per common share:
Basic: $ -- $ -- $ (0.89) $ --
======== ======== ======== ========
Diluted: $ -- $ -- $ (0.88) $ --
======== ======== ======== ========
Net income per common share:
Basic: $ 0.74 $ 0.56 $ 0.46 $ 1.28
======== ======== ======== ========
Diluted: $ 0.73 $ 0.55 $ 0.45 $ 1.27
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
BUILDING MATERIALS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(UNAUDITED)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets
Cash $ 10,555 $ 5,182
Receivables, net 142,102 112,557
Inventories 96,327 85,826
Deferred income tax benefit 5,907 4,657
Prepaid expenses and other current assets 3,962 10,802
-------- --------
Total current assets 258,853 219,024
Property, plant and equipment, net 178,173 177,554
Goodwill 58,723 68,339
Other intangibles, net 13,155 10,513
Deferred loan costs 3,059 4,387
Other long-term assets 7,372 5,925
-------- --------
Total assets $519,335 $485,742
======== ========
LIABILITIES, MINORITY INTEREST AND
SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 84,176 $ 58,120
-------- --------
Total current liabilities 84,176 58,120
Long-term debt 165,611 167,417
Deferred income taxes 2,170 7,803
Other long-term liabilities 11,571 9,508
-------- --------
Total liabilities 263,528 242,848
Minority interest 5,378 --
Shareholders' equity
Common stock, $0.001 par value, 20,000,000
shares authorized; 13,135,562 and
12,984,284 shares issued and outstanding,
respectively 13 13
Additional paid-in capital 112,227 110,661
Retained earnings 138,189 132,220
-------- --------
Total shareholders' equity 250,429 242,894
-------- --------
Total liabilities, minority interest and
shareholders' equity $519,335 $485,742
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BUILDING MATERIALS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Nine months ended
September 30,
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $ 5,969 $16,528
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 14,236 12,556
Deferred income taxes (597) (2,265)
Net loss/(gain) on sale of assets 725 (884)
Equity in earnings of unconsolidated
companies, net of amortization -- (4,817)
Distributions received from unconsolidated
companies -- 5,325
Change in accounting principle, net of tax
benefit of $6,286 11,650 --
Minority interest 169 --
Changes in assets and liabilities, net of
effects of location sales and acquisitions
Receivables, net (29,669) (11,381)
Inventories (10,488) (3,464)
Prepaid expenses and other current assets 6,840 1,919
Accounts payable and accrued expenses 26,986 18,677
Other long-term assets and liabilities 2,719 5,177
------- -------
Net cash provided by operating activities 28,540 37,371
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchases of property and equipment (14,837) (20,561)
Acquisition of businesses (7,919) (34,324)
Proceeds from sale of locations, net of cash sold 2,750 2,238
Proceeds from disposition of property and equipment 534 6,137
Other, net (907) (848)
------- -------
Net cash used in investing activities (20,379) (47,358)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net change under revolving credit agreements 1,900 10,645
Principal payments on term notes (3,300) 7,232
Principal payments on other notes payable (156) --
Change in book overdrafts (2,184) (4,444)
Stock options exercised 1,043 --
Other, net (91) (741)
------- -------
Net cash (used in)/provided by financing activities (2,788) 12,692
------- -------
Net change in cash 5,373 2,705
Cash, beginning of period 5,182 4,570
------- -------
Cash, end of period $10,555 $ 7,275
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
BUILDING MATERIALS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
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. Certain information and footnote
disclosures normally included in the consolidated financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP") 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, these condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto included in the Company's 2001 Annual Report. 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.
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.
2. NET SALES BY PRODUCT (in thousands)
Three months ended September 30, Nine months ended September 30,
2002 2001 2002 2001
------------------- -------------------- ------------------ ------------------
Lumber products $100,138 31.6% $113,470 34.8% $280,762 32.5% $308,050 37.7%
Services and
manufactured
components 168,503 53.2 164,921 50.6 454,591 52.6 378,758 46.3
Building materials 29,680 9.3 30,088 9.2 76,590 8.8 82,531 10.1
Other 18,609 5.9 17,725 5.4 52,650 6.1 48,430 5.9
-------- ----- -------- ----- -------- ----- -------- -----
$316,930 100.0% $326,204 100.0% $864,593 100.0% $817,769 100.0%
======== ===== ======== ===== ======== ===== ======== =====
6
3. NET INCOME PER COMMON SHARE
Net income per common share was determined using the following information (in
thousands):
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income available to common shareholders $9,710 $7,287 $5,969(1) $16,528
====== ====== ====== =======
Weighted average shares used to determine
basic net income per common share 13,134 12,945 13,070 12,889
Net effect of dilutive stock options 116 203 163 104
------ ------ ------ ------
Weighted average shares used to determine
diluted net income per common share 13,250 13,148 13,233 12,993
====== ====== ====== ======
Net income per common share:
Basic $0.74 $0.56 $0.46(1) $1.28
===== ===== ===== =====
Diluted $0.73 $0.55 $0.45(1) $1.27
===== ===== ===== =====
(1) After change in accounting principle of $(11,650), net of tax
4. DEBT
At September 30, 2002 and December 31, 2001, debt consisted of the following (in
thousands):
September 30, December 31,
2002 2001
-------- --------
Term note $106,700 $110,000
Revolving credit facility 55,000 53,100
Non-interest bearing term note,
net of related discounts of $1,435
and $650, respectively
2,853 3,794
Other 1,058 523
-------- --------
$165,611 $167,417
======== ========
In connection with a 1999 acquisition, the Company issued a $5,000,000
non-interest bearing term note to the previous owner as partial consideration
for the purchase. Under the terms of the note, a portion of the payments may be
due based on operating results of the acquired business. The Company's original
discount of the note was based on a 15% effective interest rate and estimates of
the operating results of the acquired business. Due to the uncertain timing of
the payout of this term note, the note represented a form of contingent
consideration paid for the acquired business. As a result, the Company adjusted
its estimates related to the timing of the payout of the term note, which
resulted in recording an additional discount of $1,074,000 during the first
quarter of 2002.
7
The scheduled principal payments of total debt at September 30, 2002 are $4.9
million in 2002, $18.2 million in 2003, $140.3 million in 2004, $0.3 million in
2005 and $1.9 million in 2006. Principal payments of $18.6 million due within
the next twelve months 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.
5. ACQUISITIONS
On July 3, 2001 the Company purchased the remaining 51% interest it did not
already own in Knipp Brothers Industries, LLC, KBI Distribution LLC and KB
Industries Limited Partnership (collectively, "KBI") for total consideration of
$34.4 million in cash, net of cash acquired of $1.8 million. As a result, KBI
operating results are included in the consolidated statements of income
beginning July 3, 2001.
On July 1, 2002, the Company purchased a 51% interest in a newly formed
partnership, KBI Norcal, for approximately $4.9 million in cash, $0.8 million of
assumed debt (equipment leases and a working capital loan) and the issuance of
34,384 shares of BMHC common stock. The other 49% interest is owned by RJ
Norcal, LLC, a limited liability company owned by Robert Garcia and John
Volkman. KBI Norcal provides turnkey framing services in Northern California.
Under the purchase agreement, BMHC will have the option to purchase the
remaining 49% interest in KBI Norcal from July 1, 2004 through June 30, 2008 and
the principals of RJ Norcal, LLC have the option to require BMHC to purchase the
remaining 49% of KBI Norcal from July 1, 2006 through June 30, 2008. The
purchase price for the remaining 49% will generally be based on a multiple of
historical earnings. As of September 30, 2002, the purchase price would be
approximately $7.5 million of cash consideration.
KBI Norcal's operating results have been consolidated in these financial
statements effective July 1, 2002. The impact of the 49% ownership interest of
Robert Garcia and John Volkman is reflected in minority interest on the income
statement and on the balance sheet.
During the first nine months of 2002 the Company made three other acquisitions
for aggregate cash consideration of $2.1 million.
8
The following summarizes unaudited pro forma results of operations for 2001 and
actual results for 2002 assuming the July 3, 2001 acquisition of KBI (the "KBI
Acquisition") occurred as of the beginning of 2001. The pro forma information
does not include the effects of the KBI Norcal investment because such effects
are not material. 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 KBI Acquisition been consummated at the beginning of
2001, or that may occur in the future (in thousands, except per share data):
Nine months ended Nine months ended
September 30, September 30,
2002 2001
(unaudited) (unaudited)
-------- --------
Net sales $864,593 $903,522
Net income before change in
accounting principle $17,619 $18,936
Income per diluted common share
before change in accounting
principle $1.33 $1.46
6. EQUITY INVESTMENT
Summarized combined income statement information of the Company's equity-basis
unconsolidated companies follows (in thousands):
Nine months ended
September 30,
2002(1) 2001
------- --------
Net sales $-- $ 85,753
Income from operations -- 3,488
Net income -- 3,343
Less other members share of net income -- (1,705)
------- --------
Company's share of net income -- 1,638
Other income allocations, net of
amortization of intangibles -- 3,179
------- --------
Equity in earnings of unconsolidated
companies $-- $ 4,817
======= ========
(1) As a result of the KBI Acquisition, the Company no longer accounts for its
investment in KBI under the equity method of accounting
9
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following at September 30, 2002 (in
thousands):
As of September 30, 2002
Gross
Carrying Accumulated Net Carrying
Amount Amortization Amount
------- ------- -------
Amortized intangible assets
Covenants not to compete $ 1,968 $(1,004) $ 964
Customer relationships 2,902 (73) 2,829
Other amortized intangibles 500 (318) 182
Unamortized intangible assets
Customer relationships 9,180 -- 9,180
------- ------- -------
$14,550 $(1,395) $13,155
======= ======= =======
Aggregate amortization expense for intangible assets was $241,000 for the three
months ended September 30, 2002 and $568,000 for the nine months ended September
30, 2002. Estimated amortization expense for intangible assets is $239,000 for
the remainder of 2002, $906,000 in 2003, $598,319 in 2004, $345,000 in 2005 and
$290,000 in 2006.
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 are as follows (in thousands):
Balance as of January 1, 2002 $68,339
Goodwill acquired during the period 9,394
Impairment losses(1) (17,936)
Contingent consideration adjustment(2) (1,074)
-------
Balance as of September 30, 2002 $58,723
=======
(1) See Note 8 related to the transitional impairment analysis.
(2) See Note 4 related to the re-pricing of the non-interest bearing
note payable.
8. CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets" in the first quarter of 2002. The
provisions of SFAS 142 eliminate the amortization of goodwill and other
indefinite lived intangible assets on a prospective basis beginning with
acquisitions completed after June 30, 2001, or January 1, 2002 for those
completed prior to June 30, 2001. This standard required the Company to complete
a transitional impairment analysis of its recorded goodwill and indefinite lived
intangible assets and to record any impairment charge as a change in accounting
principle as of the first quarter of 2002. The Company has completed the
transitional impairment analysis, which resulted in the following impaired
amounts of goodwill as of January 1, 2002 (in thousands):
10
Goodwill
Goodwill Impairment,
Reporting Unit Impairment Net of Tax
--------------------------------- ---------- ----------
Northern Nevada $ 2,257 $ 1,388
Utah 1,397 859
Spokane 41 25
San Antonio / Austin 2,194 1,969
Royal Door 2,975 1,830
Dallas / Fort Worth 1,403 863
Puget Sound 6,253 3,846
Portland 1,416 870
------- -------
Total $17,936 $11,650
======= =======
In the case of each Reporting Unit (as defined by SFAS 142), fair value was
estimated using the present value of expected future cash flows. Management's
estimate of future cash flows used in the present value analysis resulted in
estimated fair market value being less than the recorded value of tangible and
intangible assets for the Reporting Units listed above. After considering the
estimated fair market value of tangible assets, including land, an impairment of
recorded goodwill occurred. Reasons for the impairment could include increased
competition, a reduction in residential home building within the geographic
markets that these Reporting Units serve, or management issues.
On a prospective basis, the Company is required to test acquired goodwill and
other indefinite-lived intangible assets for impairment on an annual basis. This
annual test will take place during the fourth quarter each year.
The following reflects adjustments that would be made to net income and earnings
per share if the non-amortization provisions of SFAS 142 had been adopted as of
January 1, 2001 (in thousands, except per share data):
For the three For the nine
months ended months ended
September 30, September 30,
2002 2001 2002 2001
------ ------ ------ ------
Reported net income $9,710 $7,287 $5,969 $16,528
Add back: Goodwill
amortization, net of tax -- 293 -- 879
Add back: Customer
relationship amortization,
net of tax -- 24 -- 72
------ ------ ------ ------
Adjusted net income $9,710 $7,604 $5,969 $17,479
====== ====== ====== ======
BASIC EARNINGS PER SHARE:
Reported net income $0.74 $0.56 $0.46 $1.28
Goodwill amortization,
net of tax -- 0.02 -- 0.07
Customer relationship
amortization, net
of tax -- 0.00 -- 0.01
------ ------ ------ ------
Adjusted net income $0.74 $0.58 $0.46 $1.36
====== ====== ====== ======
DILUTED EARNINGS PER SHARE:
Reported net income $0.73 $0.55 $0.45 $1.27
Goodwill amortization,
net of tax -- 0.02 -- 0.07
Customer relationship
amortization, net
of tax -- 0.00 -- 0.01
------ ------ ------ ------
Adjusted net income $0.73 $0.57 $0.45 $1.35
====== ====== ====== ======
11
BUILDING MATERIALS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND CRITICAL ACCOUNTING ESTIMATES
- ------------------------------------------------------------
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 our actual results, performance
or achievements, 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,
2001. Given these uncertainties, investors are cautioned not to place undue
reliance on such forward-looking statements. We disclaim any obligation to
update any such factors or to announce publicly 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our Annual
Report to Shareholders for information regarding our critical accounting
estimates.
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, 2001.
For the For the
three months ended nine months ended
September 30, September 30,
2002 2001 2002 2001
-------------- -------------- ------------- --------------
Net sales $316.9 100.0% $326.2 100.0% $864.6 100.0% $817.8 100.0%
Gross profit 89.9 28.4 90.2 27.6 246.6 28.5 227.6 27.8
Selling, general and
administrative expense 71.5 22.6 74.3 22.8 210.8 24.4 195.6 23.9
Other income (expense) 0.2 0.1 (0.3) (0.1) 0.6 0.1 0.6 0.1
Income from operations 18.6 5.9 15.5 4.8 36.4 4.2 32.6 4.0
Equity in earnings of
unconsolidated companies -- -- -- -- -- -- 4.8 0.6
Interest expense 2.6 0.8 3.7 1.1 7.6 0.9 10.5 1.3
Income taxes 6.1 1.9 4.6 1.4 11.0 1.3 10.3 1.3
Minority interest 0.2 0.1 -- -- 0.2 -- -- --
Income before change in
accounting principle 9.7 3.1 7.3 2.2 17.6 2.0 16.5 2.0
12
THIRD QUARTER OF 2002 COMPARED TO THE THIRD QUARTER OF 2001
- -----------------------------------------------------------
Net sales for the three months ended September 30, 2002 were $316.9 million,
down 2.8% from the third quarter of 2001 when sales were $326.2 million. The
decrease in net sales resulted primarily from a 3.6% reduction in same-store
sales, or a 0.3% increase after adjusting for decreases in commodity wood
product prices, as compared to the third quarter of 2001 at facilities that
operated for at least two months in the third quarter of both 2001 and 2002. The
impact of decreases in same store sales was partially offset by the
consolidation of KBI Norcal. Construction services and manufactured components
accounted for $168.5 million, or 53.2% of net sales for the third quarter of
2002, an increase from $164.9 million, or 50.6% of net sales for the third
quarter of 2001. Lumber products, building materials and other sales accounted
for $148.4 million, or 46.8% of net sales for the third quarter of 2002, as
compared to $161.3 million, or 49.4% of net sales, for the third quarter of
2001.
Gross profit as a percentage of sales increased to 28.4% in the third quarter of
2002 from 27.6% in the third quarter of 2001, primarily as a result of increased
sales of higher margin construction services and manufactured components, such
as framing, roof trusses, pre-hung doors, millwork, and pre-assembled windows.
Selling, general and administrative (SG&A) expense was $71.5 million, or 22.6%
of net sales in the third quarter of 2002 as compared to $74.3 million, or 22.8%
of net sales in the third quarter of 2001. The Company attributes most of this
decrease to a company-wide effort to reduce SG&A expenses and by the elimination
of goodwill amortization in accordance with new accounting standards. The
decrease was partially offset by higher general insurance expense.
Other income (expense), net, was $0.2 million in the third quarter of 2002
compared to ($0.3) million for the third quarter of 2001. The variance between
the two periods is primarily attributable to the Company's $1.0 million
write-off of its investment in BuildNet, Inc. in 2001, partially offset by a
gain from the sale of a facility in 2001.
Interest expense decreased to $2.6 million from $3.7 million during the third
quarter of 2002 and 2001, respectively, primarily due to a reduction in the
weighted average interest rate to 4.9% from 6.2% as well as a reduction in the
weighted average debt outstanding to $167.7 million during the third quarter of
2002 from $193.3 million during the same period of 2001. The decrease in the
average debt outstanding is primarily due to reduced working capital needs.
13
Overall, net income improved in the third quarter of 2002 when compared to the
third quarter of 2001. The improvement, however, is primarily attributable to
the net reductions of SG&A expenses and interest expense. Earnings from building
materials distribution and construction services and manufactured components
were lower in the third quarter of 2002 compared to the third quarter of 2001.
Management believes that third quarter earnings were adversely affected by
several factors, including deflation in commodity wood product prices and
increased insurance expense.
FIRST NINE MONTHS OF 2002 COMPARED TO THE FIRST NINE MONTHS OF 2001
- -------------------------------------------------------------------
Net sales for the nine months ended September 30, 2002 were $864.6 million, up
5.7% from the first nine months of 2001 when sales were $817.8 million. The
increase in net sales resulted primarily from the consolidation of KBI and KBI
Norcal. This increase was partially offset by a 4.9% decrease in same-store
sales, or a 4.4% decrease after adjusting for decreases in commodity wood
product prices, as compared to the first nine months of 2001 at facilities that
operated for at least six months in the first half of both 2001 and 2002.
Construction services and manufactured components accounted for $454.6 million,
or 52.6% of net sales for the first nine months of 2002, an increase from $378.8
million, or 46.3% of net sales for the first nine months of 2001. Lumber
products, building materials and other sales accounted for $410.0 million, or
47.4% of net sales, for the nine months ended September 30, 2002, a decrease
from $439.0 million, or 53.7% of net sales, for the nine months ended September
30, 2001.
Gross profit as a percentage of sales increased to 28.5% in the first nine
months of 2002 from 27.8% in the first nine months of 2001, primarily as a
result of increased sales of higher margin construction services and
manufactured components, such as framing, roof trusses, pre-hung doors,
millwork, and pre-assembled windows.
SG&A expense was $210.8 million, or 24.4% of net sales in the first nine months
of 2002 as compared to $195.6 million, or 23.9% of net sales in the first nine
months of 2001. The Company attributes most of this dollar increase to the
consolidation of KBI and KBI Norcal. Increased SG&A expense attributable to the
KBI Acquisition, the KBI Norcal investment and higher general insurance expense
were partially offset by the elimination of goodwill amortization in accordance
with new accounting standards and a company-wide effort to reduce other SG&A
expenses.
There was no equity in earnings of unconsolidated companies in the first nine
months of 2002, compared to $4.8 million in the first nine months of 2001.
14
This decrease is attributed to the consolidation of KBI, which resulted from the
KBI Acquisition on July 3, 2001.
Other income (expense), net, was $0.6 million for the first nine months of 2002
and 2001. The nine months ended September 30, 2001 includes the Company's $1.0
million write-off of its investment in BuildNet, Inc. and $1.6 million of other
net miscellaneous income.
Interest expense decreased to $7.6 million from $10.5 million during the first
nine months of 2002 and 2001, respectively, due to a reduction in the weighted
average interest rate to 4.9% from 7.3% between the two periods and a decrease
in the weighted average debt outstanding to $169.6 million during the first nine
months of 2002 from $171.4 million during the same period of 2001.
Overall, net income before change in accounting principle increased in the first
nine months of 2002 when compared to the first nine months of 2001. The increase
is primarily related to the consolidation of KBI, which resulted from the KBI
Acquisition on July 3, 2001, and reductions in interest expense. Management
believes that earnings were adversely affected by several factors, including
increased insurance expense and the impact of decreases in commodity wood
product prices.
LIQUIDITY AND CAPITAL RESOURCES
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The Company's primary need for capital resources is to fund future growth,
capital expenditures, and acquisitions, as well as to finance 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 the
incurrence of debt.
OPERATIONS
In the first nine months of 2002 and 2001, net cash provided by operations was
$28.5 million and $37.4 million, respectively. The decrease in cash provided by
operations is primarily due to increases in accounts receivable and inventory,
partially offset by increases in accounts payable and accrued expenses and
decreases in prepaid expenses and other current assets. Working capital
increased to $174.7 million at September 30, 2002 from $173.9 million at
September 30, 2001.
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CAPITAL INVESTMENT AND ACQUISITIONS
Capital expenditures were $14.8 million in the first nine months of 2002.
Capital expenditures were incurred to acquire additional property and expand and
remodel existing facilities. Cash used for acquisitions was $7.9 million,
primarily attributable to the Company's investment in KBI Norcal. Proceeds from
the sale of business units, net of cash sold, were $2.8 million during the first
nine months of 2002, related to the sale of the Jackson, Wyoming, Gardnerville,
Nevada, and Tooele, Utah locations.
FINANCING
Net cash used by financing activities was $2.8 million for the first nine months
of 2002 compared to $12.7 million of net cash provided by financing activities
for the first nine months of 2001. The variance between the two periods is
primarily attributable to borrowings made in June 2001 to purchase the remaining
51% of KBI on July 3, 2001.
At September 30, 2002 the Company's existing senior credit facility provided for
borrowings of up to $296.7 million, which includes $106.7 million provided for
by the term loan all of which was outstanding at September 30, 2002, and $190.0
million provided for by the revolving credit facility, $55.0 million of which
was outstanding at September 30, 2002. Revolver borrowings are limited by a
borrowing base equal to 60% of inventory plus 80% of trade accounts receivable.
The borrowing base is calculated monthly and was $171.4 million at September 30,
2002, resulting in revolver availability of $109.9 million, net of $6.4 million
in outstanding letters of credit. Borrowings under the facility bear interest at
prime plus 0.50% to 1.50%, or Offshore Rate plus 2.0% to 3.0%. The agreement
expires on December 1, 2004.
In the third quarter of 1998, a shelf registration was filed with the Securities
and Exchange Commission to register 2,000,000 shares of common stock. The
Company may issue these shares from time to time in connection with future
business combinations, mergers and/or acquisitions. As part of the KBI Norcal
acquisition on July 1, 2002, the Company issued 34,384 shares of stock from this
shelf registration (See Note 5).
Based on the Company's ability to generate cash flows from operations, its
borrowing capacity under the revolver and its access to debt and equity
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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 or changes are made to its debt structure. Based on debt outstanding at
September 30, 2002, a 25 basis point increase in interest rates would result in
approximately $404,000 of additional annual interest costs.
Commodity wood products accounted for approximately 32.5% and 37.7% of net sales
in the first nine months of 2002 and 2001, respectively. Prices of commodity
wood products, which are subject to significant volatility, directly affect net
sales and cost of sales and could affect net income. The Company does not
utilize any derivative financial instruments.
The Company has a cash equity incentive plan that is partially based on changes
in the Company's stock price. Under the plan, a $1.00 increase or decrease in
the Company's stock price after September 30, 2002 would result in an increase
or decrease in compensation expense of approximately $145,000.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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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. CONTROLS AND PROCEDURES
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Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the company's management, including the
Company's Chief Executive Officer and Senior Vice
President-Finance and Treasurer, of the effectiveness of the
design and operation of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Senior Vice
President-Finance and Treasurer concluded that the Company's
disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included
in the Company's periodic SEC filings. There have been no
significant changes in the Company's internal controls or in
other factors that could significantly affect those controls
subsequent to the date of their last evaluation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
Exhibit # Description
11.0 Statement regarding computation of earnings per share (see
Note 3)
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002
99.2 Certification of Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of The Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K - None filed
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SIGNATURES
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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: November 12, 2002 /s/ Robert E. Mellor
------------------------------------------------
Robert E. Mellor
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2002 /s/ Ellis C. Goebel
------------------------------------------------
Ellis C. Goebel
Senior Vice President - Finance
and Treasurer
(Principal Financial Officer)
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