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Building Materials Holding 10-K 2006 Documents found in this filing:
UNITED
STATES
SECURITIES
AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For
the fiscal year
ended December 31, 2005
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.
 www.bmhc.com
Building
Materials Holding Corporation
Four
Embarcadero Center, Suite 3250, San Francisco, CA 94111
(415)
627-9100
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock ($.001 par value)
Indicate
by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule
405
of the Securities Act.
Yes
þ
No ¨
Indicate
by check
mark if the registrant is not required to file reports pursuant to Section
13 or
Section 15(d) of the Act.
Yes
¨
No þ
Indicate
by check
mark whether the registrant (1) has filed all reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past
90 days.
Yes
þ
No ¨
Indicate
by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. ¨
Indicate
by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Indicate
by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the
Act).
Yes
¨
No þ
The
aggregate
market value of common stock held by non-affiliates of the registrant as of
June
30, 2005 was $864,493,013. The market value computation excludes
1,754,794 shares of common stock held by affiliates such as directors, officers
and holders of more than 5% of the shares outstanding as of June 30,
2005.
The
number of
shares outstanding of common stock as of February 22, 2006 was
14,458,294.
Documents
Incorporated by Reference
Building
Materials
Holding Corporation
FORM
10-K
For
the Fiscal Year
Ended December 31, 2005
Introduction
- Risk Factors and Forward-Looking Statements
There
are a
number of business risks and uncertainties that affect our operations and
therefore could cause future results to differ from past financial performance
or expected results and ultimately affect the trading price of our common
shares. Information regarding these risks and uncertainties is
contained in Item 1A of this Form 10-K under the caption Risk
Factors.
Certain
statements in this Form 10-K including those related to expectations about
homebuilding activity in our markets, demographic trends supporting homebuilding
and anticipated sales and operating income are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Statements that are not historical or current facts, including
statements about our expectations, anticipated financial results and future
business prospects are forward-looking statements. While these
statements represent our current judgment on what the future may hold and we
believe these judgments are reasonable, these statements involve risks and
uncertainties that are important factors that could cause our actual results
to
differ materially from those in forward-looking statements. These
factors include, but are not limited to the risks and uncertainties cited in
Item 1A of this Form 10-K under the caption Risk Factors. Undue
reliance should not be placed on such forward-looking statements, as such
statements speak only as of the date of the filing of our 2005 Annual Report
on
Form 10-K. We undertake no obligation to update forward-looking
statements.
PART
I
General
Overview
Building
Materials
Holding Corporation, a Fortune 1000 company, is one of the largest providers
of
residential construction services and building products in the United States
with annual sales of approximately $3 billion. We serve the
homebuilding industry through two subsidiaries, BMC Construction and BMC
West. BMC
Construction
provides
construction services to high-volume production homebuilders in key growth
markets across the country. With locations in the western and
southern states, BMC
West
distributes
building products and manufactures building components for professional builders
and contractors.
As
the result of a branding strategy, we changed the name of BMC Construction
to
SelectBuild Construction. This change is expected to be formally
announced in the first quarter of 2006.
Incorporated
in the
state of Delaware in 1987, Building Materials Holding Corporation trades on
the
NASDAQ under the ticker symbol BMHC and is headquartered in San Francisco,
California.
Periodic
and
current reports filed with the Securities and Exchange Commission are available
at our website www.bmhc.com.
Industry
Overview
The
residential
construction services and building products industry is dependent on demand
for
single-family homes. Housing demand is influenced by many factors
including the overall condition of the U.S. economy, mortgage and other interest
rates, consumer confidence, job formation and demographic trends as well as
other factors. The National Association of Home Builders reported
single-family housing starts at a historic high of 1.7 million units in 2005
and
is projecting approximately a 7% decline in housing starts in 2006 to 1.6
million units. Although the industry remains fragmented,
consolidation continues to occur among building material distributors and
construction service providers. The industry is experiencing the
emergence of larger scale operations with improved financial strength,
negotiating leverage and other resources.
At
BMC
Construction,
we offer
construction services to high-volume production homebuilders. Our
services include framing, concrete, plumbing, other construction trades,
managing labor and construction schedules as well as sourcing
materials. High-volume production homebuilders complete a substantial
share of single-family residential construction. These builders
generally outsource framing and other construction
services.
At
BMC
West,
we distribute
building materials, manufacture building components and provide construction
services to professional builders and contractors. Products include
dimensional lumber, panel products and building materials purchased from
manufacturers as well as manufactured building components including millwork,
trusses and wall panels. Construction services include framing and
installation of miscellaneous building products. We compete with
local, regional and national building products distributors. We serve
our customers based on a regional market management approach where strategic
locations offer our entire breadth of building products, manufactured building
components and construction services to a market area.
Our
ability to
provide construction services and distribute building products is a competitive
advantage to builders seeking full-service providers. Many businesses
lack the advantages we offer such as a proven reputation for providing quality
construction services and building products, expertise in sourcing products
and
labor, sufficient working capital and administrative as well as management
support.
Acquisition
Strategy
Our
acquisition
strategy is focused on increasing our construction service offerings and
manufactured building components. The fragmented nature of the
existing construction services and building products markets provides us with
acquisition opportunities. We clearly define and thoroughly analyze
target markets. In attractive markets, acquisitions are evaluated
based on their anticipated performance, management depth, cultural fit, industry
reputation and long-term potential customer base. We typically enter
a market by purchasing all or part of an existing business and seek to rapidly
integrate our services and products to capture market share. We
assign experienced due diligence teams to review potential acquisition
candidates and develop integration plans once we have agreed in principle to
the
general terms of an acquisition.
Over
the past few
years, BMC
Construction
acquired
businesses providing construction services to high-volume production
homebuilders. Specifically, these businesses were as
follows:
2005
2004
2003
In
January 2006, we also completed the acquisition of two framing services
businesses in northern and southern California as well as Reno,
Nevada. As part of our growth strategy, we continue to evaluate
acquisition opportunities that strengthen and broaden our construction trades
as
well as presence in attractive markets.
At
BMC
West,
we recently
completed the acquisition of three facilities providing building materials
distribution and millwork services in Houston, Texas (February
2006). We continue to pursue other potential candidates and are also
expanding our building products, manufactured building components, millwork
and
construction services to become a full-service provider to
homebuilders.
Both
of our
business segments customize their respective building products and construction
services mix to meet customer needs in their respective markets. Our
acquisition and expansion strategy has changed our sales mix as follows:
Our
Customers
We
build relationships with professional builders engaged in single-family
residential construction. Builders are generally repeat customers,
with high-volume material and labor needs that require materials procurement,
manufactured building components, construction services and on-time job-site
delivery. These services and products are not typically offered by
retailers selling to do-it-yourselfers, home improvement contractors and trades
people. BMC
Construction
customers are
high-volume production homebuilders. Our ability to offer multiple
trades such as framing, concrete, plumbing and other construction services
allows builders to focus on other aspects of their business, including land
development and new home sales. We maintain favorable relationships
with our customers due to our:
BMC
West
customers are
primarily local and regional professional homebuilders and
contractors. We maintain favorable customer relationships as a result
of our:
On
a consolidated basis, our largest customer accounted for 6.6% of sales in 2005,
while the top five customers represented approximately 23% of consolidated
sales. At BMC Construction and BMC West, the top five customers
accounted for approximately 33% and 14% of each business segment’s sales,
respectively.
Focus
on Service
Our
focus on
service is a key factor that distinguishes us from competitors. We
employ experienced, service-oriented individuals. Our construction
service skills and product knowledge enable customers to rely on our expertise
for project implementation and product recommendations. Our quality
assurance efforts and initiatives limit callbacks on the services and products
we provide. Our dedication to providing superior customer service to
builders allows our employees to develop consistent relationships and generate
repeat and referral business.
Competition
Our
construction
services and products compete with similar offerings in the
marketplace. The markets in each of our business segments are
fragmented and highly competitive. Our competitors vary in size,
management expertise and capabilities.
BMC
Construction
provides
construction services to high-volume production
homebuilders. Competitors range from single-crew operations to large
well-managed organizations spanning multiple markets. Also, some
high-volume production homebuilders perform their own framing and other
construction services. Our multiple trade offerings in certain
markets include framing, concrete, plumbing and other construction services
and
allow homebuilders to secure these construction services with us. We
believe our ability to provide multiple trades such as framing, concrete and
plumbing in certain markets is a competitive advantage. We also
compare favorably to competitors in some of our markets as a result of our
certifications from the National Association of Home Builders which demonstrates
our professional credibility, competence, business integrity and solid record
of
customer satisfaction. Additionally, we are recognized in our markets
for our reputation, quality and reliability of our services and products as
well
as capital resources.
BMC
West
competes with
local, regional and national building products distributors. Builders
generally select suppliers based on competitive pricing, product availability,
reliable delivery, service, trade credit and knowledgeable
personnel. Our industry reputation helps us attract experienced and
professional product and service personnel. We also offer training
programs to enhance product and service knowledge. By working closely
with our customers and supported by our management information systems, our
business units maintain appropriate inventory and staffing levels and are well
positioned to deliver quality building products. We serve our
customers based on a regional market management approach where strategic
locations offer our entire breadth of building products, manufactured building
components and construction services to a market area. We believe
being a full-service provider to many of our customers distinguishes us from
our
competition and is a competitive advantage.
Sales
and Marketing
Our
operations are
located in many of the largest and most rapidly growing markets for
single-family home construction. Our presence is principally in the
single-family home construction markets of California; Las Vegas, Nevada;
Phoenix and Tucson, Arizona; Texas; the Intermountain and Northwest states
as
well as Florida. Economic strength as well as historical population
and migration trends have generally supported the growth of residential
construction in our market areas. According to the United States
Census Bureau, housing starts have favored the southern and western regions,
contributing over 70% of annual starts over the past three
years. Because of weather conditions in some of our markets, our
operating results may be affected by slower construction activity during the
first and fourth quarters of the year.
BMC
Construction relies
on the value
and solid reputation of their integrated construction services model to secure
and maintain national and regional relationships with high-volume production
homebuilders.
BMC
West
attracts customers
by consistently providing quality building products and dependable customer
service. Marketing consists of industry-wide brand communications
along with an array of regional marketing events and activities to enhance
customer relationships. Business
Segments
The
following
information is presented for our BMC Construction and BMC West business
segments.
Sales
to external
customers by services and products (thousands):
Selected
financial
information is as follows (thousands):
Operating
Strategy
Our
business units
operate in specific markets and are organized under our business segments,
BMC
Construction and BMC West. Each regional manager has substantial
autonomy and responsibility to address customer needs specific to their
markets. The reputation of a construction services provider or
building products distributor is often determined locally, where service,
product suitability and knowledgeable customer service are
critical. Managers are responsible for optimizing business activities
in their markets, including the efficient use of personnel, assessing and
maintaining working capital and construction labor requirements, identifying
potential customers and developing appropriate service and product
offerings. Incentive compensation is based on successful growth and
financial returns tied to specific market areas and regions. We
focus on
improving efficiency and productivity at our business units while giving special
attention and support to units that are not meeting strategic
objectives. When a business unit fails to meet performance criteria,
alternatives include adjusting the mix of products and services, restructuring
management, consolidation or liquidation.
Purchasing
We
purchase building products from numerous manufacturers and
suppliers. In 2005, our largest supplier accounted for approximately
9.6% of purchases. Because commodity wood products are available from
several manufacturers and suppliers, we believe the loss of any single supplier
would not have a material adverse effect on our financial position, results
of
operations or cash flows.
In
order to meet market specific needs and maintain appropriate inventory levels,
purchasing decisions are made at the business unit level. Large
volume purchases are made under company-wide guidelines. In addition,
we participate in volume rebate programs with our suppliers.
The
prices of
commodity wood products, concrete, steel and other building products are
volatile and may adversely impact financial condition and results of operations
when prices rapidly rise or fall. Our information systems allow
business unit managers to closely monitor sales and inventory. With
this supply and demand information, we generally avoid overstocking commodity
wood products. As a result, we turn our commodity wood product
inventory on average 12 to 13 times per year. Such rapid inventory
turnover limits our potential exposure to inventory loss from commodity price
fluctuations.
Management
Information Systems
We
are standardizing software and infrastructure platforms that support the
information needs of our organization. Our standardization effort
includes job cost and construction information, estimating, inventory
management, reporting, project scheduling and human resource
management.
8
We
have developed a project methodology that allows us to efficiently deploy
these
information systems to our business units and acquisitions. Most
acquisitions are on-line with our corporate infrastructure within 30 days
of
acquisition, enabling access to our network
capabilities.
Our
job cost and
construction information systems are operating in approximately 80% of our
BMC
Construction business units with full deployment scheduled by
2007. We expect our inventory management system to be upgraded by
early 2007 and our human resources system to be completed in 2006. We
continue to research, recommend and implement new technology solutions to
improve information for decision-making and our efficiencies.
We
have also made investments in our infrastructure to improve backup capabilities
for our network. Because of our rapid growth, we are expanding our
data center capabilities beyond our facility in Boise, Idaho to also include
Phoenix, Arizona. This will provide redundant services between the
two centers and allow for a more seamless disaster recovery
capability. We are also moving to the next generation of wide area
network technology to provide a redundant link between our locations and the
data centers. This architecture will also reduce the costs to operate
our network and provide us with the capability to rapidly deploy additional
bandwidth to meet accelerating business demand.
Safety
and Risk Management
Due
to our growth
in construction services in recent years, the number of employees dedicated
to
our construction trades has increased. The construction services
industry incurs a higher number of accidents and subsequent costs for workers’
compensation claims than typically experienced at building materials
distribution facilities. Consequently, we have initiated several
programs to enhance safety and reduce the risks encountered by our
employees. These programs include instruction and training for truck
drivers, fall protection and construction safety as well as on-line training
programs about compliance matters and safety hazards in the
workplace. Additionally, our managers are compensated for their
effectiveness in reducing the incidence of workers compensation
claims.
We
maintain comprehensive insurance coverage to mitigate the potential cost of
claims. Our estimated cost for automobile, general liability and
workers compensation claims is determined by actuarial
methods. Claims in excess of certain amounts are insured with
third-party insurance carriers. Reserves for claims are recognized
based on the estimated costs of these claims as limited by the deductible of
the
applicable insurance policies.
Employees
Our
success is
highly dependent on the quality of our employees. Due to competition
in attracting and retaining qualified employees, we maintain competitive
compensation and benefit programs to attract, motivate and retain
top-performers. We also provide extensive product knowledge, customer
service and other supervisory/management training programs to achieve our goal
of being both the employer and supplier of choice.
We
employ approximately 21,000 people. Specifically, BMC Construction
employs 16,000 employees, while BMC West employs 5,000. Unions
represent approximately 1,000 or less than 5% of these employees. We
have not experienced any strikes or other work interruptions and have maintained
generally favorable relations with our employees.
Executive
Officers
Risks
Related to Our Business
There
are a number
of business risks and uncertainties that affect our operations and therefore
could cause future results to differ from past performance or expected
results. These risks or uncertainties may include, but are not
limited to the following factors:
Our
business is dependent on demand for single-family homes which is influenced
by
changes in the overall condition of the U.S. economy, including interest rates,
job formation, consumer confidence and other important
factors.
The
residential
construction services and building products industry is highly dependent on
demand for single-family homes which is influenced by several
factors. These factors include economic changes nationally and
locally, mortgage and other interest rates, job formation, consumer confidence,
demographic trends, inflation and building permit activity as well as other
factors. The construction of new homes may also experience declines
due to the availability and affordability of land in attractive metropolitan
areas, shortages of qualified trades people, material shortages and regulations
that impose restrictive zoning and density requirements. All of these
factors could limit demand for home construction and may adversely impact our
financial condition, results of operations or cash flows.
There
are risks associated with changes to our business
model.
Our
business model
seeks the strategic growth of construction services and distribution of building
products in an effort to provide a comprehensive solution to high-volume
production and other homebuilders. Providing these services and
products include the risks of availability and cost of qualified labor and
claims for construction defects, product liability and workers compensation
as
well as the timely sourcing and availability of building
products. Additionally, there is no guarantee that our efforts to
offer these comprehensive solutions will continue to be accepted by the
marketplace.
The
integration of acquired businesses may not result in anticipated cost savings
and revenue synergies being fully realized or may take longer to realize than
expected.
Our
growth over the
past several years has been largely due to acquisitions and we intend to
continue this strategy. The integration of acquired businesses may
not result in anticipated cost savings and revenue synergies being fully
realized or may take longer to realize than expected. The management
and acquisition of businesses involves substantial risks including:
Our
growth is dependent upon our ability to identify suitable acquisition
candidates.
Our
growth over the
past several years has been largely due to acquisitions and we intend to
continue this strategy. Failure to identify and acquire suitable
acquisition candidates could have a material adverse effect on our
growth. Also, the increasing level of consolidation occurring in the
building products distribution and construction services industry may limit
the
availability and suitability of acquisition candidates.
Our
success is dependent upon the availability of and our ability to attract, train
and retain qualified individuals.
Competition
for
employees is especially intense in both construction services and building
products distribution. In markets with strong housing demand, we may
experience shortages in qualified labor and key personnel, which may limit
our
ability to complete contracts as well as obtain additional contracts with
builders. Changes to immigration policies could also limit the
availability of qualified labor. We have been successful in
recruiting and retaining qualified employees, however we cannot guarantee that
we will continue to be successful in the future.
An
inability to implement and maintain cost structures that align with revenue
growth may have an adverse impact on our operating
results.
When
we experience
slower periods of homebuilding activity, acquire new businesses or expand
existing operations, we may experience inefficiencies in our cost
structures. Our evaluation and changes to fixed and variable expenses
in response to declining sales may not occur in a timely manner, leading to
higher costs and lower returns on sales.
Changes
in the business models of customers may limit our ability to provide
construction services and building products required by our
customers.
As
the business models of our customers evolve, our existing construction service
and building product offerings may not meet the needs of certain
homebuilders. Homebuilders may decide to no longer outsource
construction services. Also, changes to housing patterns may occur,
such as urban living rather than single-family suburban
neighborhoods. If we do not timely assess shifts in customer
expectations, preferences and demands, our financial condition, results of
operations or cash flows could be adversely affected.
Our
operating results are affected by fluctuations in our costs and the availability
of sourcing channels for commodity wood products, concrete, steel and other
building materials.
Prices
of commodity
wood products, concrete, steel and other building products are historically
volatile and are subject to fluctuations arising from changes in domestic and
international supply and demand, labor costs, competition, market speculation,
government regulations and periodic delays in delivery. Rapid and
significant changes in product prices may affect sales as well as margins due
to
a limited ability to pass on short-term price changes. We do not use
derivative financial instruments to hedge commodity price
changes.
Generally,
our
products are obtainable from various sources and in sufficient
quantities. However, we may experience shortages of building products
as a result of unexpected demand or production difficulties as well as
transportation limitations. Any disruption in our sources of supply
for key building products could negatively impact our financial condition,
results of operations or cash flows.
Our
business is subject to intense competition.
We
experience competition across all markets for our construction services and
building products. Recently, there has been increased consolidation
within the building materials distribution and construction services
industry. Also, other building materials distributors, including
large retail distributors focused on consumers, may more aggressively pursue
our
target market of professional homebuilders. These competitive
pressures may lead to decreases in sales, margin reductions and increases in
operating costs and may limit acquisition opportunities. Loss of
significant market share due to competition could result in the closure of
facilities.
Weather
conditions, including natural catastrophic events, may cause our operating
results to fluctuate each quarter.
Our
first and
fourth quarters historically have been, and are expected to continue to be,
adversely affected by weather conditions in some of our markets, causing
decreases in operating results due to slower homebuilding
activity. In addition, natural catastrophic events may cause our
operating results to fluctuate.
The
nature of our business exposes us to construction defect and product liability
claims as well as other legal proceedings.
We
are involved in construction defect and product liability claims relating to
our
various construction trades and the products we distribute and
manufacture. Although we believe we maintain adequate insurance, we
may not be able to maintain such insurance on acceptable terms or such insurance
may not provide adequate protection against potential
liabilities. Current or future claims may adversely affect our
financial condition, results of operations or cash flows.
We
may be adversely affected by disruptions in our information
systems.
Our
operations are
dependent upon information for decision-making and the related information
systems. A substantial disruption in our information systems for a
prolonged period could result in delays in our services and products and
adversely affect our ability to complete contracts and fulfill customer
demands. Such delays, problems or costs may have an adverse effect on
our financial condition, results of operations or cash flows.
Actual
and perceived vulnerabilities as a result of terrorist activities and armed
conflict may adversely impact consumer confidence and our
business.
Instability
in the
economy and financial markets as a result of terrorism or war may impact
consumer confidence and result in a decrease in homebuilding in our
markets. Terrorist attacks may also directly impact our ability to
maintain operations and services and may have a material adverse effect on
our
business.
Numerous
other matters of a local and regional scale, including those of a political,
economic, business, competitive or regulatory nature may have an adverse impact
on our business.
Many
factors shape
the homebuilding industry. In addition to the factors previously
cited, there are other matters of a local and regional scale, including those
of
a political, economic, business, competitive or regulatory nature which may
have
a material adverse effect on our business. Risks
Related to Our Shares
Risks
related to
our shares include, however are not limited to:
Our
share price may fluctuate significantly, which may make it difficult for
shareholders to sell our
shares when desired or at attractive prices.
The
market price of
our shares is subject to significant changes as a result of our operating
performance and the other factors discussed above as well as perceptions and
events that are beyond our control. Price and trading volume
fluctuations for our shares may be unrelated or disproportionate to our
operating performance. Additionally, our share price could fluctuate
based on the expectations and performance of other publicly traded companies
in
the construction services and building products distribution
industry.
Anti-takeover
defenses in our governing documents and certain provisions under Delaware law
could prevent
an acquisition of our company or limit the price that investors might be willing
to pay for our shares.
Our
governing documents and certain provisions of Delaware law that apply to us
could make it difficult for another company to acquire control of our
company. For example, we
have a rights
plan, commonly known as a “poison pill,” which would make it difficult for
someone to acquire our company without the approval of our Board of
Directors. Also, our certificate of incorporation allows our Board of
Directors to issue, at any time and without shareholder approval, preferred
shares with such terms as it may determine. These
provisions and others could delay, prevent or allow our Board of Directors
to
resist an acquisition of our company, even if a majority of our shareholders
favored the proposed transaction.
We
have no unresolved comments from the Securities and Exchange
Commission. We
lease our headquarters in San Francisco, California and our administrative
service center in Boise, Idaho. Principal properties include
distribution centers for building products, millwork fabrication and
distribution sites, truss manufacturing plants, sales and administrative
offices. Properties are located in growing metropolitan areas and
emerging housing markets. Substantially all of the properties for BMC
Construction are leased while at BMC West approximately 63% are owned and 37%
are leased. Our properties provide adequate capacity to meet the
needs of our customers and are in good operating condition. Locations
operate under the trade names BMHC, BMC Construction and BMC West, as well
as
other brand names or trademarks. Properties by business segment are
as follows:
We
are involved in litigation and other legal matters arising in the normal course
of business. In the opinion of management, the recovery or liability,
if any, under any of these matters will not have a material effect on our
financial position, results of operations or cash flows.
There
were no
matters submitted to a vote of security holders during the fourth quarter of
the
fiscal year.
PART
II
ITEM
5. Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases
of Equity Securities
Our
common shares
are traded on the NASDAQ market under the symbol BMHC. The high and
low share prices as well as cash dividends for each period were as
follows:
At
the annual meeting of shareholders on May 3, 2005, our shareholders voted to
increase the number of authorized common shares to 50 million from 20
million.
On
February 14, 2006, our Board of Directors approved a two for one split of our
outstanding common shares. Shareholders of record as of February 28,
2006 will receive a stock dividend of one additional common share for every
common share they own. The additional shares will be distributed on
March 14, 2006.
The
information
throughout this Form 10-K is presented as of December 31, 2005 and before
the
two for one split of our common shares which is effective February 28,
2006.
On
February 14, 2006, our Board of Directors approved a quarterly cash dividend
of
$0.10 per share for common shares outstanding after the share
split. The dividend is payable on March 24, 2006 to shareholders of
record.
Dividends
are paid
at the discretion of the Board of Directors and we expect to continue these
payments. The continuation of dividend payments (cash or shares)
depends on many factors, including financial position, results of operations
or
cash flows.
As
of February 22, 2006, there were approximately 9,858 shareholders of record
and
the closing price of our shares was $74.18.
The
following
selected financial data should be read in conjunction with Item 7 - Management’s
Discussion and Analysis of Financial Condition and Results of Operations as
well
as Item 8 - Financial Statements and Supplementary Data. These
resources provide further information to understand the comparability of
selected financial data.
Selected
Financial Data
(thousands,
except
share data)
The
following
discussion should be read in conjunction with the Consolidated Financial
Statements and related notes that appear in Item 8 of Form 10-K as well as
the
caption under this item entitled Business Risks and Forward-Looking
Statements.
OVERVIEW
Homebuilding
Industry
The
residential
construction services and building products industry experienced another strong
year in 2005. Factors that influence the demand for single-family
homes such as economic conditions, mortgage interest rates, job formation and
consumer confidence were generally favorable. Consequently, the
National Association of Home Builders reported an increase of 7.2% in
single-family housing starts to a historic high of 1.7 million units in
2005. The forecast for 2006 projects a decline of approximately 7% in
single-family housing starts to 1.6 million units.
Our
operations are
located in attractive metropolitan areas that have generally outpaced U.S.
averages for residential building permit activity. With construction
services and building product offerings in California; Las Vegas, Nevada;
Phoenix and Tucson, Arizona; Texas; the Intermountain and Northwest states
as
well as Florida, we believe we are in homebuilding markets supported by positive
demographic trends. We are optimistic about the industry trends that
support our business and therefore remain confident in our long-term growth.
Our
Strategy
We
grow our business through acquisitions as well as strategically expanding the
breadth of our construction services and building products offered to
professional builders and contractors. In particular, we believe
high-volume production homebuilders are seeking quality, reliable and cost
effective solutions to meet their construction services needs. In
2005, we completed several acquisitions to expand the trades offered to
homebuilders. Our services include framing, concrete, plumbing and
other construction services as well as building product distribution and
manufactured building components including trusses, millwork and wall
panels.
Business
Segments
We
compete in the homebuilding industry through two business
segments: BMC
Construction and
BMC
West. BMC
Construction offers construction services to high-volume production homebuilders
through operations in key growth markets across the country. With
locations in the western and southern states, BMC West distributes building
products and manufactures building components for professional builders and
contractors. These two business segments are subsidiaries of our
holding company - Building Materials Holding Corporation.
As
the result of a branding strategy, we changed the name of BMC Construction
to
SelectBuild Construction. This change is expected to be formally
announced in the first quarter of 2006. Acquisition
History
Over
the past few
years, BMC Construction acquired businesses providing construction services
to
high-volume production homebuilders. Specifically, these businesses
were as follows:
2005
2004
2003
In
January 2006, we acquired framing businesses in Palm Springs, California and
Reno, Nevada. As part of our growth strategy, we continue to evaluate
acquisition opportunities that strengthen and broaden our construction trades
as
well as presence in attractive markets.
At
BMC West, we recently acquired three facilities providing building materials
distribution and millwork services in Houston, Texas (February
2006). We continue to pursue other potential candidates and are also
expanding and integrating our building products, manufactured building
components, millwork and construction services to become a full-service provider
to homebuilders.
Performance
Measurements
We
measure our operating performance and financial condition based on several
factors including:
We
evaluate our results of operations including and excluding acquisitions not
present in comparable periods. We believe this approach enhances an
understanding of our acquisitions and operating results for the respective
reporting periods. The
discussion of
our results of operations and financial condition provides information to assist
the reader in understanding our financial statements, changes in key items
in
those financial statements and the primary factors that accounted for those
changes. The discussion of our consolidated financial results is
followed by a more detailed review of our business segments.
RESULTS
OF OPERATIONS
2005
COMPARED WITH 2004
The
following table
sets forth the amounts and percentage relationship to sales of certain costs,
expenses and income items (millions):
Consolidated
Financial Results
Selected
financial
results are as follows (millions):
A
key element of our business strategy for the past several years entails shifting
our product and service mix from commodity lumber to value added manufactured
building components and construction services. More recently, in the
periods presented in this Form 10-K, we have aggressively pursued this shift
in
emphasis to meet the demands of the market.
Sales
increased
$821 million to $2.9 billion due to an increase in construction services and
the
acquisition of construction services businesses. Sales from
acquisitions not present in comparable periods were $404 million or
approximately half of the increase. Strong homebuilding activity was
prevalent in most of our markets, particularly the Southwest
region. Building permits and housing starts were also higher in most
of our markets relative to the prior year.
Income
from
operations for 2005 increased 121% to $239 million from $108 million in the
prior year. Improved margins, particularly from demand for our
construction services, were a key factor. Margins as a percent of
sales for construction services were up 3.9% while building products also
improved 2.7% compared to the prior year. Selling, general and
administrative expenses were 14.5% of sales and improved by 70 basis
points. These expenses were lower as a percent of sales due to better
leveraging of these expenses at our building products operations.
Business
Segments
Sales
and operating
income by business segment are as follows (millions):
BMC
Construction
Selected
financial
results are as follows (millions):
Sales
increased
$640 million in 2005. Acquisitions of construction services
businesses not present in the same periods represented 60% of this
increase. Home construction activity was strong in Las Vegas and
Phoenix as well as most of our other markets. In addition, housing
starts in our markets compared favorably to the prior year. Income
from
operations for 2005 improved over $100 million compared to the prior
year. Margin improvement was a key factor, improving 4.6% as a
percent of sales to 19.3% compared to 14.7% in the prior
year. Further market acceptance of the value of our construction
services, particularly in the Las Vegas and Phoenix markets as well as improved
management of contracts, most notably in our Florida operations, contributed
to
the improvement. Acquisitions also contributed approximately 30% or
$31 million to the increase in operating income. Selling, general and
administrative expenses specific to the business segment were $56 million higher
with more than half of the increase due to acquisitions completed during the
year. As a percent of sales, these expenses were 7.7% compared to
6.8% in the prior year.
BMC
West
Selected
financial
results are as follows (millions):
Sales
increased
$181 million in 2005 as we experienced strong housing construction across all
our regions. Building permit activity for single-family homes in our
markets was up 13% and compares favorably to the U.S. average of
4%. In particular, our Texas, Northwest and Intermountain regions
reported strong increases in sales compared to a year ago. Our
continued focus on a regional business model that provides customers with
expanded choices for building products and services from multiple locations
also
contributed to our sales growth.
Income
from
operations for 2005 increased $55 million due to improved
margins. Margins as a percent of sales were 2.1% higher and were
25.7% compared to 23.6% in the prior year. Inventory was effectively
managed despite fluctuations during the year in commodity wood product
prices. Selling, general and administrative expenses specific to the
business segment were approximately $21 million higher than the preceding
year. However, these expenses were effectively leveraged as they
represented 15.9% of sales compared to 16.5% in the prior year.
Corporate
Corporate
represents expenses to support the operations of our business segments, BMC
Construction and BMC West. These costs include management,
information systems, administrative functions for reporting, accounts payable
and human resources, professional fees for regulatory compliance as well as
incentive compensation. These costs are not allocated to our business
segments. Selected
financial
results are as follows (millions):
Corporate
and other
expenses were $25 million higher in 2005 due to incentive compensation from
improved operating performance, professional fees for regulatory compliance
and
additional personnel to support our expanding business. These
expenses were 2.5% of sales compared to 2.3% in 2004.
2004
COMPARED WITH 2003
The
following table
sets forth the amounts and percentage relationship to sales of certain costs,
expenses and income items (millions):
Consolidated
Financial Results
Selected
financial
results are as follows (millions):
Sales
exceeded $2
billion in 2004, an increase of $676 million over the prior
year. Existing operations accounted for 67% or $455 million of the
increase and acquisitions of construction services businesses not present in
comparable periods represented the remaining $221
million. Construction services continue to increase as a result of
our strategy to offer more construction services and value-added building
products to homebuilders.
Income
from
operations for 2004 increased to $108 million from $40 million in the prior
year. Margins as a percent of sales were 20.3% and approximately the
same as the prior year of 20.5%. Margins for building products were
0.6% lower, while margins for construction services improved 2.7%. Selling,
general and administrative expenses were 15.2% of sales compared to 17.7% in
2003 as a result of improved leveraging of these expenses at our building
products operations and maintaining these expenses as a percent of sales at
our
construction services operations and corporate
functions.
Business
Segments
Sales
and operating
income by business segment are as follows (millions):
BMC
Construction
Selected
financial
results are as follows (millions):
Sales
of $754
million in 2004 increased 85% over the prior year. Acquisitions of
construction services businesses not present in comparable periods accounted
for
$185 million or 53% of the increase with the remaining $161 million from
existing operations. Higher sales were due to robust home
construction in Las Vegas, Phoenix and northern California as well as contract
increases from rising labor and material costs.
Income
from
operations for 2004 was $60 million, up significantly from $19 million in the
prior year. Margins as a percent of sales were a driving factor,
improving 3.3% over the prior year. The improvement was primarily due
to the increased value assigned to our construction services in strong housing
markets as well as integration efficiencies from recent
acquisitions. Although selling, general and administrative expenses
specific to the business segment were approximately $24 million higher than
the
prior year, these expenses were 6.8% of sales and consistent with the prior
year.
BMC
West
Selected
financial
results are as follows (millions):
Sales
of $1.3
billion in 2004 were 33% higher than the prior year. The increase was
due to both growth in sales at existing business units and the impact of higher
commodity wood product prices relative to the prior year. In addition
to the benefit of commodity prices, higher sales were due to strong housing
demand as building permits in our markets were up 14% compared to the prior
year.
Income
from
operations for 2004 was $96 million, up from $55 million in the prior
year. Despite rising commodity wood product prices, margins remained
at approximately 24% as a percent of sales, reflective of our effective
management of inventory. Selling, general and administrative expenses
specific to the business segment were up $29 million or 15% compared to the
prior year primarily due to variable compensation expenses. However,
these expenses were leveraged against higher sales as they decreased 2.5% to
16.5% of sales compared to the prior year.
Corporate
Corporate
represents expenses to support the operations of our business segments, BMC
Construction and BMC West. These costs include management,
information systems, administrative functions for reporting, accounts payable
and human resources, professional fees for regulatory compliance as well as
incentive compensation. These costs are not allocated to our business
segments.
Selected
financial
results are as follows (millions):
Although
corporate
and other expenses were $14 million higher in 2004 due to compensation expenses
from improved operating performance, these expenses remained essentially the
same at 2.3% of consolidated sales in both years.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary need
for capital resources is to fund working capital and acquisitions as well as
finance capital expenditures. Capital resources have primarily
consisted of cash flows from operations and additional debt. For the
year ended December 31, 2005, $199.3 million of cash was provided by operations
and funded capital expenditures and the majority of our acquisitions as
additional debt borrowed was $78.5 million. Operations
In
2005, cash provided by operating activities was $199.3 million, up significantly
from $33.7 million in 2004. Strong home construction activity and
improved margins in both our construction services and building products
segments resulted in higher net income, providing $75.6 million of additional
operating cash flow over the prior year. Also, working capital
requirements were lower than the prior year due to lower commodity wood product
prices as well as improved inventory turns and days sales
outstanding. This improved management of working capital resulted in
cash used of $0.8 million compared to $61.3 million of cash used in the prior
year.
Cash
provided from
operating activities was $33.7 million in 2004 up significantly from $12.5
million in 2003. Strong home construction activity and our strategy
to provide additional construction services resulted in higher net income or
$34.0 million of additional operating cash flow over the prior
year. Changes in working capital requirements used $28.8 million of
this cash flow.
Capital
Investment and Acquisitions
In
2005, cash used in investing activities was $261.6 million compared to $58.0
million for the same period a year ago. Cash use included $203.2
million for the acquisition of three businesses providing framing, concrete
and
stucco services, a truss manufacturing facility and partial acquisition of
four
businesses providing concrete, plumbing and framing services. Cash
used for investing activities also included $46.5 million for purchase of
property and equipment and $14.1 million for the purchase of marketable
securities. Cash used in investing activities was $203.6 million
higher than the prior year when $58.0 million was used for the purchase of
property and equipment, acquisition of three businesses providing distribution,
windows installation and framing and the partial acquisition of a truss
manufacturing facility as well as the purchase of marketable securities at
our
captive insurance subsidiary.
Cash
used in
investing activities was $58.0 million in 2004 compared to $30.5 million in
2003. Cash use included $27.7 million for property and equipment,
$22.7 million for the acquisition of three businesses and partial acquisition
of
another business as well as $19.0 million invested in marketable securities
at
our captive insurance subsidiary. The cash use was partially offset
by proceeds of $12.3 million from the disposition of property in Montana, Texas
and Utah.
Financing
In
2005, cash provided by financing activities was $72.9 million compared to $24.3
million in the prior year. Coupled with strong operating cash flows,
funds were borrowed to finance acquisitions and purchase property and equipment
whereas funds were borrowed to finance working capital requirements and purchase
property and equipment in 2004.
Cash
provided by
financing activities was $24.3 million in 2004 compared to $28.3 million in
the
prior year. The primary sources of cash were $20.8 million of net
borrowings from the revolver and an increase in book overdrafts and stock
options exercised net of tax benefit. Cash from the net borrowings of
the revolver, book overdrafts and stock options exercised were used to make
payments on the term note, other notes and dividends. Revolver
In
June 2005, we entered into an amended $300 million revolver with a group of
lenders. The revolver matures in June 2010. The revolver
consists of both LIBOR and Prime based borrowings. Interest rates are
subject to quarterly adjustment based on operating performance and range from
LIBOR plus 0.75% to 2.00%, or Prime plus 0.0% to 0.75%. Interest is
paid quarterly. As of December 31, 2005, $77.5 million was
outstanding under the revolver.
Term
Notes
In
June 2005, we also entered into a $75 million term note with a group of
lenders. The term note matures in June 2010 with 10% of the initial
principal payable for each of the two years commencing September 2006, 20%
of
the initial principal payable for one year commencing September 2008 and the
remaining principal balance due June 2010. Interest rates are subject
to quarterly adjustment based on operating performance and range from LIBOR
plus
0.75% to 2.00%, or Prime plus 0.0% to 0.75%. Interest is paid
quarterly. As of December 31, 2005, $75 million was outstanding under
this term note.
In
August 2003, we entered into a $125 million term note with a group of
lenders. The term note matures in June 2010 and is payable in
quarterly installments for the first six years in amounts equal to 1% of the
initial principal amount per year and equal quarterly installments for the
remaining principal balance during year seven. The term note was
amended in March 2005 to reduce interest rates by 0.75% and in June 2005 to
reduce interest rates another 0.25%. The interest rate for the term
note is LIBOR plus 1.75% or Prime plus 1.00%. Interest is paid
quarterly. As of December 31, 2005, $121.9 million was outstanding
under this term note.
Other
Other
long-term
debt of $13.9 million consists of term notes, equipment notes and capital leases
for equipment. Interest rates vary and dates of maturity are through
March 2013.
Expansion
of Credit Facility, Covenants and Maturities
The
credit facility
consists of the revolver and term notes. The credit facility may be
increased an aggregate amount of up to $150 million. The credit
facility is collateralized by all tangible and intangible property, except
assets of the captive insurance subsidiary. The credit facility
contains covenants and conditions requiring the maintenance of certain financial
ratios. At December 31, 2005, we were in compliance with these
covenants and conditions.
Scheduled
maturities of long-term debt are as follows (thousands):
As
of December 31, 2005 and December 31, 2004, there were $75.9 million and $41.2
million, respectively of letters of credit outstanding that guaranteed
performance or payment to third parties. These letters of credit
reduce borrowing availability under the revolver.
Hedging
Activities
Derivative
and
hedging activities are recorded on the balance sheet at their fair
values. In June 2004, we entered into interest rate swap contracts
that effectively convert a portion of the floating rate borrowings of the $121.9
million term note to a fixed interest rate through June 2009, thus reducing
the
impact of increases in interest rates on future interest
expense. Approximately 82% of the outstanding floating rate
borrowings of the term note as of December 31, 2005 have been hedged through
the
designation of interest rate swap contracts accounted for as cash flow
hedges. As a result, the interest rate on $100 million of the $121.9
million floating rate borrowings outstanding at December 31, 2005 was fixed
at
an average rate of 6.14%. After giving effect to the interest rate
swap contracts, total borrowings are 40% fixed and 60% floating.
The
fair value of
derivative instruments is based on pricing models using current market
rates. The fair value of the interest rate swap contracts was a
long-term asset of $1.2 million as of December 31, 2005. The
effective portion was recorded as accumulated other comprehensive income, net,
a
separate component of shareholders’ equity, and is subsequently reclassified
into earnings in the same financial statement line item, interest expense,
in
the same period during which the hedged transaction is recognized in
earnings. A corresponding deferred tax liability of $0.5 million was
also recorded in accumulated other comprehensive income, net for the income
tax
expense related to the estimated asset of the interest rate swap
contracts. The ineffective portion of the change in the value of the
interest rate swap contracts is immediately recognized as a component of
interest expense. Hedge ineffectiveness for the period ended December
31, 2005 was not significant. Management may choose not to swap
floating rate debt to a fixed rate or may terminate a previously executed swap
if the floating rate positions are more beneficial.
Equity
At
the annual meeting of shareholders on May 3, 2005, our shareholders voted to
increase the number of authorized common shares to 50 million from 20
million. These additional shares may be issued for reasons including
but not limited to stock splits, financing acquisitions, establishing strategic
relationships with corporate partners and providing equity incentives.
On
February 14, 2006, our Board of Directors approved a two for one split of our
outstanding common shares. Shareholders of record as of February 28,
2006 will receive a stock dividend of one additional common share for every
common share they own. The additional shares will be distributed on
March 14, 2006.
The
information
throughout these financial statements is presented as of December 31, 2005
and
before the two for one split of our common shares which is effective February
28, 2006.
In
the third quarter of 1998, we filed a shelf registration with the Securities
and
Exchange Commission to register two million common shares. We may
issue these shares in connection with future business acquisitions, combinations
or mergers. Shares have been issued from this registration statement
for a portion of the purchase price for acquisitions. There are
approximately 1.9 million shares remaining and available under this shelf
registration.
Based
on our
historical ability to generate cash flows from operations, borrowing capacity
under the credit facility and access to debt and equity markets, management
believes it will have sufficient capital to meet anticipated needs.
OFF-BALANCE
SHEET ARRANGEMENTS
As
part of our on-going business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships
often referred to as structured finance or special purpose entities which might
be established to facilitate off-balance sheet arrangements or other
contractually narrow or limited purposes. As of December 31, 2005, we
are not involved in any transactions with unconsolidated entities.
DISCLOSURES
OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Contractual
obligations as of December 31, 2005 (millions):
Accelerated
repayment of our revolver and term notes may occur if certain financial
conditions or warranties and representations are not met. The credit
facility consists of the revolver and term notes. The credit facility
is collateralized by all tangible and intangible property, except assets of
the
captive insurance subsidiary. The credit facility contains covenants
and conditions requiring the maintenance of certain financial
ratios. At December 31, 2005, we were in compliance with these
covenants and conditions.
We
have potential put and call obligations associated with our interests in BBP
Companies, Riggs Plumbing, RCI Construction, A-1 Truss, WBC Mid-Atlantic and
WBC
Construction. Under the purchase agreements, we have the right to
purchase the remaining portions during certain periods or if certain conditions
are met. Likewise, the other owners have the option to require us to
purchase the remaining portions during certain dates. The purchase
price for the remaining portions will be based generally on a multiple of
historical earnings.
As
part of our revolver, we have $75.9 million in letters of credit outstanding
principally for the deductible portion of automobile, general liability and
workers’ compensation claims. These obligations are not required to
be recorded on our balance sheet and renew automatically on their various
anniversary dates or until released by their respective
beneficiaries.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Prices
of commodity
wood products, which are subject to significant volatility, may adversely impact
operating income when prices rapidly rise or fall within a relatively short
period of time. We do not use derivative financial instruments to
hedge commodity wood product prices.
Changes
in interest
expense occur when market interest rates change. Changes in the
carrying amount of debt could also increase these interest rate
risks. We use interest rate swap contracts to hedge interest rate
risks. Approximately 82% of the outstanding floating rate borrowings
of the term notes as of December 31, 2005 have been hedged through the
designation of interest rate swap contracts accounted for as cash flow
hedges. After giving effect to the interest rate swap contracts,
total borrowings are 40% fixed and 60% floating. Based on debt
outstanding as of December 31, 2005, a 0.25% increase in interest rates would
result in approximately $0.4 million of additional interest expense
annually.
CRITICAL
ACCOUNTING ESTIMATES
Preparing
financial
statements requires management to make estimates and assumptions that affect
the
reported amounts of assets, liabilities, revenues and expenses. These
estimates and assumptions include critical accounting estimates which are
defined by the Securities and Exchange Commission as those that are the most
important to the portrayal of our financial condition, results of operations
or
cash flows. These estimates require management’s subjective and
complex judgments often as a result of the need to estimate matters that are
inherently uncertain. We review the development, selection and
disclosure of these estimates with our Audit Committee. Management
believes the estimates utilized are reasonable under the circumstances, however
actual results could differ from these estimates and may require adjustment
in
future periods. Our critical accounting estimates are:
Revenue
Recognition for Construction Services
The
percentage-of-completion method is used to recognize revenue for construction
services. Periodic estimates of our progress towards completion are
made based on a comparison of labor costs incurred to date with total estimated
contract costs for labor. The percentage-of-completion method
requires the use of various estimates, including among others, the extent of
progress towards completion, contract revenues and contract completion
costs. Contract revenues and contract costs to be recognized are
dependent on the accuracy of estimates, including quantities of materials,
labor
productivity and other cost estimates. We have a history of making
reasonable estimates of the extent of progress towards completion, contract
revenues and contract completion costs. However, due to uncertainties
inherent in the estimation process, it is possible that actual completion costs
may vary from estimates. Revisions of contract revenues and cost
estimates as well as provisions for estimated losses on uncompleted contracts
are reflected in the period such revisions are
determined.
Estimated
Losses on Uncompleted Contracts and Changes in Contract
Estimates
Estimated
losses on
uncompleted contracts and changes in contract estimates are reflected in the
period such revisions are determined. These reserves are established
by assessing estimated costs to complete, change orders and claims for
uncompleted contracts.
At
December 31, 2005, the reserve for these estimated losses was $0.5 million
for
BMC Construction and less than $0.1 million for BMC West. These
reserves are established by assessing estimated costs to complete, change orders
and claims. Assumptions for estimated costs to complete include
material prices, labor costs, labor productivity and contract
claims. Such estimates are inherently uncertain and therefore it is
possible that actual completion costs may vary from these
estimates. We have a history of making reasonable estimates of the
extent of progress towards completion, contract revenue and contract completion
costs. However, due to uncertainties inherent in the estimation
process, it is possible that actual completion costs may vary from
estimates. Revisions of estimated losses on uncompleted contracts are
reflected in the period such revisions are determined.
Goodwill
Goodwill
represents
the excess of purchase price over the fair values of net tangible and
identifiable intangible assets of acquired businesses. An annual
assessment for impairment is completed in the fourth quarter and whenever events
and circumstances indicate the carrying amount may not be
recoverable. An impairment is recognized if the carrying amount is
more than the estimated future operating cash flows as measured by fair value
techniques.
At
December 31, 2005, goodwill was $167.3 million for BMC Construction and $20.2
million for BMC West. Our fourth quarter assessment concluded with an
impairment of $0.8 million related to goodwill due to changes in a specific
market at BMC Construction and no impairment for goodwill at BMC
West. The impairment assessment includes determining the estimated
fair value of reporting units based on discounting the future operating cash
flows using a discount rate reflecting our estimated average cost of
funds. Future operating cash flows are derived from our budget
information, which includes assumptions of future volumes, pricing of commodity
products and labor costs. Prices for commodity products are
inherently volatile.
Due
to the
variables associated with prices of commodity products and the effects of
changes in circumstances, both the precision and reliability of the estimates
of
future operating cash flows are subject to uncertainty. As additional
information becomes known, we may change our estimates.
Insurance
Deductible Reserves
The
estimated cost
of automobile liability, general liability and workers’ compensation claims is
determined by actuarial methods. Claims in excess of insurance
deductibles are insured with third-party insurance carriers. Reserves
for claims are recognized based on the estimated costs of these claims as
limited by deductibles of the applicable insurance
policies.
32
At
December 31, 2005, the reserve for automobile, general liability and workers’
compensation claims was $42.6 million. The actuarial assessment
includes determining the estimated cost of claims. The reserve for
these claims is susceptible to change based on the estimated cost of the
claims. Actual loss experience substantially different than the
actuarial assumptions may occur. Future reserves are subject to the
nature and frequency of claims, medical cost inflation and changes in the
insurance deductibles of the applicable insurance policies.
Share-based
Compensation
Our
estimate of the
fair values of our share-based payment transactions are based on the modified
Black-Scholes-Merton model. In order to meet the fair value
measurement objective, we are required to develop estimates regarding expected
exercise patterns, share price volatility, forfeiture rates, risk-free interest
rate and dividend yield. These assumptions are based principally on
historical experience. When circumstances indicate the availability
of new or different information that would be useful in estimating these
assumptions, revisions will be made and reflected in the periods such revisions
are determined. Due to uncertainties inherent in these assumptions,
it is possible that actual share-based compensation may vary from this
estimate.
RECENT
ACCOUNTING PRINCIPLES
In
December 2004, the Financial Accounting Standards Board (FASB) revised Statement
of Financial Accounting Standards No. 123, Share-Based
Payment,
and superseded
Accounting Principles Board Opinion No. 25, Accounting
for
Stock Issued to Employees. This
statement requires the measurement and recognition of liabilities incurred
to
employees in share-based payment transactions at fair
value. Compensation cost for share-based awards and the related tax
effects are recognized in the same financial statement line as cash compensation
as the requisite service is rendered. Compensation cost is based on
the fair value of those awards on the grant date. This statement is
effective for the first quarter of 2006. As a result, we expect to
recognize compensation cost for share-based awards of $4.5 million in 2006,
$4.6
million in 2007 and $3.1 million in 2008. These estimates may change based
on additional share-based awards as well as actual forfeiture and vesting
experience. Additionally, tax benefits for share-based compensation
will be reported as a financing activity, rather than as an operating cash
flow.
BUSINESS
RISKS AND FORWARD-LOOKING STATEMENTS
There
are a number
of business risks and uncertainties that affect our operations and therefore
could cause future results to differ from past performance or expected
results. Additional information regarding business risks and
uncertainties is contained in Item 1A of this Form 10-K. These risks
and uncertainties may include, however are not limited to:
Risks
related to
our shares include, however are not limited to:
Certain
statements
in the Annual Report to Shareholders including those related to expectations
about homebuilding activity in our markets, demographic trends supporting
homebuilding and anticipated sales and operating income are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of
1995. Statements that are not historical or current facts, including
statements about our expectations, anticipated financial results and future
business prospects are forward-looking statements. While these
statements represent our current judgment on what the future may hold and we
believe these judgments are reasonable, these statements involve risks and
uncertainties that are important factors that could cause our actual results
to
differ materially from those in forward-looking statements. These
factors include, but are not limited to the risks and uncertainties cited in
the
above paragraph. Undue reliance should not be placed on such
forward-looking statements, as su | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||