Building Materials Holding Corp. (BMHC), eyeing a potential $82.2 million in tax refunds thanks to a recent act of Congress, proposed today to sell by year-end what once was among its most successful units and wind down its business operations in Illinois.
America's sixth-biggest LBM operation, which has been under Chapter 11 bankruptcy-law protection from creditors since mid-June, also asked the U.S. Bankruptcy Court in a filing to let it conclude the deals in less than the normal time required, arguing that concluding its plans by Dec. 31 is worth roughly $23 million of those potential tax refunds.
Boise, Idaho-based BMHC has reaped far better returns from Uncle Sam than from the building material business lately. BMHC had run up $40.8 million in net losses from mid-June through September. The company was set to record a $27 million loss for October were it not for a $44.8 million tax benefit it booked that month. That enabled BMC to swing to a $17.9 million profit for October. (See story.)
All that occurred before last month's enactment of legislation that extended the net operating loss carryback period to five years from the previous two. As a result, companies can now apply 2008 and 2009 losses against the profits they racked up as far back as 2004. (Although for bigger companies, losses can be applied to only 50% of the 2004 profits; for the other years, 100% of the profits apply.)
In its filing, BMHC estimates it can recoup as much as $82.2 million in cash relating to taxes paid in 2004 and 2004. "Solely as a result of net operating losses sustained from continuing operations in 2009, [BMHC] will be able to realize approximately $50 million of tax refunds by virtue of the 2009 Act," the company said in its filing to U.S. Bankruptcy Court in Wilmington, Del.
However, BMHC added, it could reap an additional $23 million in tax refunds if by Dec. 31 it could complete two transactions: the sales of its C Construction unit and the winding down of its SelectBuild Illinois operation.
BMHC purchased what became C Construction in July 2006 from various entities related to Randolph and George Davis. What BMHC bought was known as the Ontario Framing Business, after the California region that saw some of the nation's hottest homebuilding action.
But as the housing industry cooled, so did Ontario Framing. Revenues in 2008 dropped 21.4% from the year before to hit $62.5 million, BMHC said, and so far this year its revenues are down by another third to $44.4 million. "Nevertheless, at the time of commencement of these Chapter 11 cases, the Ontario Framing was one of [BMHC's] most profitable business segments," BMHC said. Revenues continue to drop, however; third-quarter revenues were less than $5.1 million vs. the $7.9 million that BMHC had forecast in April, and in October the Ontario Framing Business took in only $738,000.
Deals with Ontario Framing typically require the company's services over 12 to 18 months. Consequently "many contractors have been unwilling to award subcontracts to Ontario Farming business for such extended period while the Debtors remain in bankruptcy," BMHC's filing said. "...This significant reduction in backlog, coupled with limitations in bonding capacity available to the Reorganized Debtors, leads the Debtors to believe that there is uncertainty that the Ontario Framing Business will be a source of significant revenue for the Debtors until late in 2010." In addition, Randolph Davis' employment contract with BMHC is set to end on July 31, 2010, BMHC noted, adding: "If Mr. Davis leaves the business, the entity may struggle to maintain its relationships with key stakeholders."
BMHC now proposes, in essence, to sell C Construction to Davis Development Co. While the terms of the deal are complicated, it appears that Davis Development in essence is buying C Construction for the net book value of its assets--roughly $1.2 million.
But it's the tax benefits that provide the big benefit. BMHC bought the Ontario Framing Business in 2006 for $78.6 million, but by mid-2009 its tax basis under that agreement is roughly $58.8 million. If the Bankruptcy Court were to approve the sale to Davis Development by Dec. 31, under the new net operating loss rules BMHC could apply its loss against profits made in 2004 and 2005.
"The result is that the Debtors could receive a tax refund of $20,567,983 in cash on account of the sale of the Ontario Framing Business," BMHC's filing says. "By contrast, the Debtors believe that the sale will cause them to assume liabilities on only approximately $62,250 related to the employee vacation and sick pay. The Debtors doubt whether continued operation of the Ontario Framing Business could provide this amount of income in the near term."
BMHC's Illinois operations lie in two entities: Select Build Illinois LLC and Illinois Framing Inc. Together, these two businesses in 2007 had revenues of about $44.7 million and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of about $1.7 million. But in 2008, the companies' revenues plummeted to $6.9 million and EBITDA swung to a negative $775,000, and by October of this year total revenue had fallen to $346,000.
"In addition, evidence suggests that when the housing market rebounds, the Illinois business may be poorly situated to take advantage of improving economic conditions," BMHC's filing said. "SelectBuild Illinois, in particular, is subject to fixed labor costs which has impaired and likely will continue to impair its ability to bid for future work."
BMHC noted that, given the Illinois companies have a total tax basis of $7,052,411, the new tax act would enable it to take a net loss for this entire amount and get a tax refund of $2,468,344.
BMHC--the No. 6 dealer on this year's ProSales 100, with total sales in 2008 of $1.3 billion--has said regularly that it hopes to emerge from Chapter 11 by year-end. On Nov. 19, a federal bankruptcy judge issued an order giving BMHC a three-month extension of its exclusive rights to offer a reorganization plan and solicit approval for that plan to exit from Chapter 11 bankruptcy-law protection. The action means BMHC now has exclusive rights through Jan. 12 to propose a reorganization plan and through March 15 to solicit acceptances of that plan.