UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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 1-3834
Continental Materials Corporation
(Exact name of registrant as specified in its charter)
|
Delaware |
|
36-2274391 |
|
(State or other jurisdiction |
|
(I.R.S. Employer Identification No.) |
|
of incorporation or organization) |
|
|
|
440 South La Salle Street, Suite 3100, Chicago, Illinois |
|
60605 |
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code 312-541-7200
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
|
Name of each exchange on which registered |
|
Common Stock - $0.25 par value |
|
NYSEMKT |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐ 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 ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ 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 the 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer ☐ |
|
Accelerated filer ☐ |
|
|
|
|
|
Non-accelerated filer ☐ |
|
Smaller reporting company ☒ |
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value (based on the July 1, 2016 closing price) of voting stock held by non-affiliates of registrant was approximately $7,747,000. As of March 24, 2017, there were 1,682,167 shares of the registrant’s common stock outstanding.
Incorporation by reference: Portions of registrant’s definitive proxy statement for the 2016 Annual Meeting of stockholders to be held May 24, 2017 into Part III of this Form 10-K. The definitive proxy statement is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Form 10-K.
2
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of Continental Materials Corporation’s (Company) management as well as on assumptions made by and information available to the Company at the time such statements were made. When used in this Annual Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors including but not limited to: the amount of new construction, weather, interest rates, availability of raw materials and their related costs, economic conditions and competitive forces in the regions where the Company does business, changes in governmental regulations and policies and the ability of the Company to obtain credit on commercially reasonable terms. Changes in the income tax code, income tax rates as well as accounting pronouncements could also alter projected results. Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. Forward-looking statements speak only as of the date they were made and we undertake no obligation to publicly update them.
(References to a “Note” are to the Notes to Consolidated Financial Statements contained elsewhere in this report.)
The Company is a Delaware corporation, incorporated in 1954. The Company operates primarily within two industry groups, Heating, Ventilation and Air Conditioning (HVAC) and Construction Products. The Company has identified two reportable segments in each of the two industry groups: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the Concrete, Aggregates and Construction Supplies (CACS) segment and the Door segment in the Construction Products industry group.
The Heating and Cooling segment primarily produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co. (WFC) of Colton, California. The Evaporative Cooling segment produces and sells primarily evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona. Concrete, aggregates and construction supplies are offered from numerous locations along the Southern portion of the Front Range of Colorado operated by the Company’s wholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co., of Colorado Springs, Colorado and Transit Mix of Pueblo, Inc. of Pueblo, Colorado (the three companies are collectively referred to as TMC). The Door segment sells hollow metal doors, door frames and related hardware, wood doors, lavatory fixtures and electronic access and security systems from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI), which operates out of facilities in Pueblo and Colorado Springs, Colorado. See Note 15 for additional financial information by industry segment.
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
MARKETING
The HVAC industry group markets its products throughout North America through plumbing, heating and air conditioning wholesale distributors as well as directly to major retail home-centers and other retail outlets. Some of the products are also sold to HVAC installing contractors and equipment manufacturers for commercial applications. The Company contracts with independent manufacturers’ representatives for all of its products while also employing and utilizing a staff of sales and sales support personnel. Sales of furnaces and evaporative coolers are predominantly in the United States and are concentrated in the Western and Southwestern states. Sales of furnaces and console heaters usually increase in the months of September through January. Sales of evaporative coolers have historically been higher in the months of March through July. Sales of the fan coil product line are throughout the United States, Canada and the Caribbean and are more evenly distributed throughout the year although volume can fluctuate depending upon the
3
shipment of larger orders. Extended payment terms, also referred to as dating programs, are offered to some customers in order to enhance sales of evaporative coolers and wall furnaces during the off season.
The Construction Products industry group markets its products primarily through its own direct sales personnel and, except for doors and related hardware, confines its sales largely to the Southern portion of the Front Range area in Colorado. Sales are primarily made to general and sub-contractors, government entities and individuals. Sales are affected by the general economic conditions and weather conditions in the areas serviced (as they relate to construction). Revenues usually decline in the winter months as the pace of construction slows. Sales of doors and the related hardware are made throughout the United States although sales are primarily within Colorado and adjacent states.
During 2016, no customer accounted for 10% or more of the total sales of the Company.
CUSTOMER SERVICE AND SUPPORT
The HVAC industry group maintains parts departments and help lines to assist contractors, distributors and end users in servicing the products. The Company does not currently perform installation services, nor are maintenance or service contracts offered. In addition, training and product information sessions for the furnace, fan coil and evaporative cooler product lines are offered at our plants and other sites for distributors, contractors, engineers, utility company employees and other customers. The HVAC industry group does not derive any revenue from after-sales service and support other than from parts sales.
The personnel in the CACS segment routinely take a leadership role in formulation of the products to meet the specifications of customers. The Company is not involved in setting forms or performing finishing work on any of its concrete products. The Door segment offers doors, frames and hardware, including electronic access systems. Doors, frames and related hardware and lavatory fixtures are installed by independent contractors engaged by the general contractor or building owner. Electronic access and security systems are installed by the Company’s technicians.
RESEARCH AND DEVELOPMENT/PATENTS
In general, the Company relies upon, and intends to continue to rely upon, unpatented proprietary technology and information. The amounts expended on research and development have increased in recent years but are not considered material and are expensed as incurred. The Company believes its interest in its proprietary knowledge is sufficient for its businesses as currently conducted.
MANUFACTURING
The Company conducts its manufacturing operations through a number of facilities as more completely described in Item 2 — Properties below.
Due to the seasonality of the HVAC businesses and to balance production throughout the year, furnaces and evaporative coolers are built during their respective off seasons in order for the Company to have adequate supplies to sell during the season. Although sales are made throughout the year, sales volume is generally higher from September through January for furnaces while sales volume of evaporative coolers is generally higher from March through July.
In general, the Company can obtain the raw materials required by its operations in all segments from various sources in the quantities desired. The Company’s CACS segment purchases most of its cement requirements from two suppliers in order to obtain favorable pricing. Although there have been times when heavy cement demand has caused some scarcity of cement supply, the Company does not expect to encounter this situation in the foreseeable future due to the addition of a new cement mill near Pueblo, Colorado since the last construction boom and slowing development of the oil fields north of Denver. The Company has no long-term supply contracts and does not consider itself to be dependent on any individual supplier. MDHI is an authorized distributor of a major manufacturer of hollow metal doors and hardware. MDHI has historically purchased the majority of its hardware primarily from this supplier in order to obtain favorable volume related pricing; however, other suppliers are available.
The Company mines aggregates (rock, gravel and sand) from various owned and leased properties in Colorado. Colorado mining permits require the permit holders to perform reclamation work in order to return the mined areas to a beneficial use. These requirements are similar in nature to those included in the mining permits of our competitors. Reclamation costs have increased since the mid-1990’s as the Company has engaged in enhanced reclamation projects
4
that exceed the stated requirements. The enhanced reclamation efforts are being performed, in part, to establish community goodwill. The Company performs the majority of the reclamation work using existing production employees and equipment primarily at times when production is curtailed due to inclement weather or there is decreased demand for our products. Consequently, the reclamation work to date has had a minimal impact on our capital expenditures. In September of 2014 the Company ceased operations at its leased gravel operation in Pueblo, Colorado and increased its reclamation reserve by $4,000,000 to reflect the costs to backfill the mined gravel pit from a previous mining phase. Prior to the shutdown the reclamation plan was to fill this pit with waste material and tailings from the ongoing gravel operation. See Note 2.
COMPETITIVE CONDITIONS
Heating and Cooling — The Company is one of three principal companies producing wall furnaces (excluding units sold to the recreational vehicle industry) and gas-fired console heaters. The wall furnace and console heater markets are only a small component of the heating industry. The Company serves its market from a plant in Colton, California. The sales force consists of in-house sales personnel and independent manufacturers’ representatives. The Company is one of nine primary companies producing fan coils. The heating and cooling industry is dominated by a few manufacturers which are substantially larger than the Company. These manufacturers sell diversified lines of heating and air conditioning units directed primarily toward central heating and cooling systems. All of the producers, including the Company, compete primarily on a basis of price, product features and performance, service and timeliness of delivery.
Evaporative Cooling — The Company manufactures evaporative air coolers at leased facilities in Phoenix, Arizona. The principal competitor is Essick Air Products, Inc. and its subsidiary Champion Cooler Corp. There are other small domestic competitors as well as a number of foreign producers that also distribute evaporative cooling products in the U.S. All producers of evaporative air coolers typically compete aggressively on the basis of price, product features and product availability during the cooling season.
Concrete, Aggregates and Construction Supplies — This segment operates in highly competitive markets along the Southern Front Range of Colorado. The Company is one of four companies producing ready-mix concrete in the Colorado Springs area and one of two companies producing ready-mix concrete in the Pueblo area. Because of the relatively high transportation costs associated with concrete, the level of competition is heavily influenced by the distance from production facilities to markets served. Price, plant location, transportation costs, service, product quality and reputation are major factors that affect competition among the ready-mix concrete producers. The Company is one of five producers of aggregates in the Colorado Springs and Pueblo marketing areas although one other producer ships some product into the Pueblo market. All producers compete on the basis of price, quality of material and service.
The Company’s sales of rebar and other construction supplies in the Colorado Springs and Pueblo metropolitan areas are subject to intense competition from three larger companies in Denver and one company in Colorado Springs although a number of small local competitors are also in the market. The Company believes it can compete effectively because many of our customers also purchase concrete and aggregates from us which our competitors for these product lines do not offer. In addition, the Company believes its Pueblo location has a slight competitive advantage with respect to the three Denver companies based upon delivery costs.
Door — The Company sells hollow metal and wood doors, door frames and related hardware, lavatory fixtures and electronic access and security systems throughout the United States although sales are primarily in Colorado and adjacent states. There are numerous competitors in our market area which compete aggressively based on price and delivery times.
5
EMPLOYEES
The Company employed 590 people as of December 31, 2016. Employment varies throughout the year due to the seasonal nature of the businesses. A breakdown of the current and prior year’s employment at year-end by segment was:
|
|
|
2016 |
|
2015 |
|
|
Heating and Cooling |
|
195 |
|
187 |
|
|
Evaporative Cooling |
|
125 |
|
119 |
|
|
Concrete, Aggregates and Construction Supplies |
|
214 |
|
201 |
|
|
Door |
|
43 |
|
41 |
|
|
Corporate Office and Other |
|
13 |
|
15 |
|
|
Total |
|
590 |
|
563 |
|
The factory employees at the Colton, California plant are represented by the Carpenters Local 721 Union under a contract that expires December 31, 2018. The Company considers relations with its employees and with their union to be good. There are no unions at any of the Company’s other operations.
ENVIRONMENTAL MATTERS
Our operations involve the use, release, discharge, disposal and clean-up of substances regulated under federal, state and/or local environmental protection laws and regulations, including those related to reclamation of mined areas. We strive not only to maintain compliance with all applicable environmental laws and regulations, but to exceed the minimum requirements of those laws and regulations where practicable.
In 2016, our capital expenditures and remediation expenses for environmental matters, except those expenses related to our mining reclamation efforts, were not material to our financial condition. Because of the complexity and ever-changing nature of environmental laws and regulations, we cannot predict whether capital expenditures and remediation expenses for future environmental matters will materially affect our financial condition, results of operations or liquidity.
AVAILABLE INFORMATION
The Company electronically files various reports and other information with the Securities and Exchange Commission (SEC) including this annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding the Company. Access to this information is available free of charge at the SEC’s website at http://www.sec.gov. This information may also be accessed at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549 on business days during the hours of 10 a.m. to 3 p.m. Information regarding the SEC’s Public Reference Room may be obtained by telephone at 1-800-SEC-0330. In addition to the SEC site, the Company maintains an internet site which contains SEC filings, SEC filings in XBRL format, Governance documents and Annual Reports. Access to this site and the information therein is available free of charge at www.continental-materials.com. The information on our website is not incorporated by reference into this Annual Report on Form 10-K.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such, is not required to provide information in response to this item.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
The Heating and Cooling segment operates out of an owned facility in Colton, California. This facility is, in the opinion of management, in good condition and sufficient for the Company’s current needs. A plant expansion planned for 2016, for the purpose of increasing fan coil throughput and providing space to manufacture the new air curtain line, was halted prior to commencement due to unforeseen building requirements which made the project cost prohibitive. Instead, the
6
Company is looking to implement vertical integration in 2017 to expand the current plant’s existing capacity. This project will provide the production capacity at the Colton plant such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery.
The Evaporative Cooling segment operates out of leased facilities in Phoenix, Arizona. These facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs. Production capacity exists at the Phoenix facilities such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery.
The CACS segment serves the Colorado ready-mix concrete market from seven owned batch plants. In addition, the Company currently operates aggregate processing facilities on two owned and one leased mining property. Two of the three mining properties are located in or near Colorado Springs or Pueblo. These properties presently provide the aggregate requirements of our Colorado Springs and Pueblo ready-mix concrete business as well as selling product to independent customers. In 2008 the Pikeview Quarry, located near Colorado Springs, experienced a landslide that closed the quarry. Operations at the quarry resumed in late May of 2013. The Pikeview Quarry experienced another landslide in May of 2015 which closed the quarry for three weeks. The Company also owns two properties and leases one property that are not currently in production. The Black Canyon Quarry ceased mining in the second quarter of 2013 as the deposit is fully depleted. In September of 2014 the Company ceased operations at its leased gravel operation in Pueblo, Colorado. The Company has filed suit in federal court in Denver, Colorado seeking, among other things, to rescind the sand and gravel lease. See Note 2 for further discussion. The remaining owned mining property has not yet been put into production. During 2015, the Company obtained an option to acquire the rights to an aggregates location south of Colorado Springs. The Company is pursuing the necessary permits, etc. for developing this site and the associated costs are being recorded as deferred development expenses. For further information, see the CACS segment in Management’s Discussion and Analysis of Financial Condition and Results of Operations below. Construction supplies are sold from owned facilities adjacent to the main batch plants in Colorado Springs and Pueblo. All of the CACS segment’s facilities are located along the Southern Front Range in Colorado and, in the opinion of management, are in good condition and sufficient for the Company’s current needs. In the opinion of management, the properties owned, leased and under option contain mineable reserves sufficient to service our own sand, rock and gravel requirements and customers for the foreseeable future.
The Door segment operates out of an owned facility in Colorado Springs and a leased facility in Pueblo, Colorado. The facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs.
Product volumes at all of the facilities of the Company are subject to seasonal fluctuations, but in the opinion of management, the facilities are generally well utilized.
The corporate office operates out of leased office space in Chicago, Illinois.
The Company is involved in litigation matters related to its continuing business, principally product liability matters related to the gas-fired heating products and the fan coil products in the Heating and Cooling segment. In the Company’s opinion, none of these proceedings, when concluded, will have a material adverse effect on the Company’s consolidated results of operations or financial condition as the Company has established adequate accruals for known occurrences which represent management’s best estimate of the future liability related to these claims up to the associated deductible.
On September 15, 2016 a Partial Summary Judgment Order was issued regarding the Company’s previously disclosed litigation, Continental Materials Corporation v. Valco, Inc., Civil Action No. 2014-cv-2510, filed in the United States District Court for the District of Colorado. The suit regards a sand and gravel lease between the Company and Valco, Inc. (“Valco”) that calls for the payment of royalties over the life of the lease on an agreed 50,000,000 tons of sand and gravel reserves. In the suit the Company sought, among other things, to reform the sand and gravel lease in regard to the agreed amount of sand and gravel reserves and to recover approximately $1,282,000 of royalty overpayments. The Partial Summary Judgment Order resolved many of the Company’s claims in Valco’s favor, but the Company’s claim for the return of royalty overpayments made during the statutorily allowed period is still pending. On September 30, 2016 Valco filed a motion seeking to add three counterclaims alleging damages in excess of $5,900,000. The Company opposed Valco’s motion and on December 9, 2016, Valco withdrew its motion to add counterclaims. The Company has asserted partial failure of consideration as a defense to Valco’s counterclaims for unpaid royalties because the
7
consideration for the promise to pay royalties was the 50,000,000 tons of sand and gravel reserves that do not exist. The Company sought certification of the Partial Summary Judgment Order because it and its legal counsel believe the court improperly resolved factual issues in its Partial Summary Judgment Order that should have been decided by a jury. The Company and its legal counsel believe there is a likelihood that some, or all, of the issues resolved by the Partial Summary Judgment Order may be reversed on appeal and remanded for trial by jury although there can be no assurance that an appeal will result in reversal. The Company paid royalties on approximately 17,700,000 tons, including the overpayments, of the 50,000,000 tons of sand and gravel reserves through the end of the third quarter of 2014. The impact of these proceedings could have a material financial effect on the Company; however, the Company does not believe that there is a reasonable basis for estimating the financial impact, if any, of the final outcome of these proceedings and accordingly no accrual or reserve has been recorded in compliance with accounting principles generally accepted in the United States of America. On February 23, 2017, the Partial Summary Judgment Order was certified for immediate appeal, and all other claims, counterclaims and defenses were stayed pending the resolution of that appeal. The Company filed a notice of appeal on March 24, 2017. The appeal is currently pending. See Note 2 for further discussion.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 6.
Item 4. MINE SAFETY DISCLOSURES
The Company’s aggregates mining operations, all of which are surface mines, are subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (as amended, the “Mine Act”). MSHA inspects these operations on a regular basis and issues various citations and orders when it believes a violation of the Mine Act has occurred. Information concerning mine safety violations and other regulatory matters required to be disclosed by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this Annual Report.
8
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common stock of Continental Materials Corporation is traded on the NYSEMKT under the symbol CUO. Market sales prices for the fiscal quarters of the past two years are:
|
|
|
|
|
High |
|
Low |
|
||
|
2016 |
|
Fourth Quarter |
|
$ |
24.40 |
|
$ |
21.15 |
|
|
|
|
Third Quarter |
|
|
26.69 |
|
|
15.70 |
|
|
|
|
Second Quarter |
|
|
15.85 |
|
|
12.18 |
|
|
|
|
First Quarter |
|
|
14.95 |
|
|
10.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
Fourth Quarter |
|
$ |
15.25 |
|
$ |
12.09 |
|
|
|
|
Third Quarter |
|
|
16.80 |
|
|
12.80 |
|
|
|
|
Second Quarter |
|
|
18.19 |
|
|
14.73 |
|
|
|
|
First Quarter |
|
|
18.06 |
|
|
14.10 |
|
At March 17, 2017, the Company had fewer than 300 shareholders.
The Company has never paid, nor does it currently intend to declare, any dividends. The Company’s policy of reinvesting earnings from operations is reviewed periodically by the Board of Directors.
The following sets forth information regarding the Company’s equity plans as of December 31, 2016:
|
Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
|
Weighted-average exercise price of outstanding options, warrants and rights |
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders |
- |
|
- |
|
66,000 |
|
|
|||||
|
Equity compensation plans not approved by security holders |
- |
|
- |
|
- |
|
Total |
- |
- |
66,000 |
||
The Company established an open-ended program to repurchase its common stock under which the Board authorized purchases up to a maximum amount of $2,750,000. Repurchases may be made on the open market or in block trades at the discretion of management. As of December 31, 2016, $1,117,603 of the authorized amount remained available for stock repurchases.
On April 16, 2009, the Company entered into a credit agreement with a bank which contains certain restrictions on the Company’s ability to repurchase its stock. Amendments to the credit agreement have retained these restrictions. See further discussion in the “Financial Condition, Liquidity and Capital Resources” section of Item 7 below.
Item 6. SELECTED FINANCIAL DATA
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and, as such, is not required to provide information in response to this item.
9
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
As discussed in Item 1- Business, the Company operates primarily in two industry groups, HVAC and Construction Products. Within each of these two industry groups, the Company has identified two reportable segments: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the CACS segment and the Door segment in the Construction Products industry group.
The Heating and Cooling segment primarily produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, WFC of Colton, California. The Evaporative Cooling segment produces and sells primarily evaporative coolers from the Company’s wholly-owned subsidiary, PMI of Phoenix, Arizona. Sales of these two segments are nationwide, but are concentrated in the southwestern United States. Concrete, aggregates and construction supplies are offered from numerous locations along the Southern portion of the Front Range of Colorado operated by the Company’s wholly-owned subsidiaries collectively referred to as TMC. The Door segment sells hollow metal and wood doors, door frames and related hardware, lavatory fixtures and electronic access and security systems through the Company’s wholly-owned subsidiary, MDHI which operates out of facilities in Pueblo and Colorado Springs, Colorado. Sales of these two segments are highly concentrated in the Southern Front Range area of Colorado although Door Segment sales are also made throughout the United States.
Sales in the CACS and Door segments are affected by the level of construction activity in the areas served and general economic conditions. Sales of furnaces and evaporative coolers are less affected by the level of construction activity and are influenced by weather conditions as a large portion of their sales are for replacement units.
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during 2016 was $8,099,000. The increased cash flow, compared to the 2015 level, is attributable mainly to improved operations and receipt of $1,106,000 for redemption of an $854,000 preferred investment previously classified in other assets as of January 2, 2016 and $252,000 of related interest.
Cash provided by operations during 2015 was $1,558,000. The increased cash flow, compared to the 2014 level, is attributable mainly to improved operations.
Investing activities during 2016 used $4,095,000. Capital expenditures of $4,405,000, primarily in the CACS segment, were offset by $310,000 received for the sale of property and equipment.
Investing activities during 2015 used $2,070,000 as $2,303,000 in capital expenditures was partially offset by $233,000 received for the sale of property and equipment.
During 2016, the Company repaid $4,200,000 on its revolving credit line while $50,000 was used to repurchase stock from a former officer of the Company.
During 2015, the Company borrowed an additional $400,000 against its revolving credit line while $16,000 was used to repurchase stock from a former officer of the Company.
Budgeted capital spending for 2017 is approximately $5,600,000. Projected depreciation, depletion and amortization are approximately $2,800,000. The Company expects to fund the planned capital expenditures from available cash, operating cash flow and/or funds available from the revolving credit facility.
10
Sales of the Company’s HVAC products are seasonal except for fan coils. Sales of furnaces, heaters and evaporative coolers are sensitive to weather conditions particularly during the peak selling season. Fan coil sales are, to a significant extent, dependent on commercial construction, particularly of hotels. Revenues in the CACS segment are primarily dependent on the level of construction activity along the Southern Front Range in Colorado. Sales for the Door segment are not as seasonal nor are they much affected by weather conditions. Historically, the Company has experienced operating losses during the first quarter except when the weather is mild and the concrete demand is strong along the Southern Front Range. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in southern Colorado and the seasonal sales of the Evaporative Cooling segment. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. The Company typically experiences operating cash flow deficits during the first half of the year reflecting operating results, the use of sales dating programs (extended payment terms) related to the Evaporative Cooling segment and payments of the prior year’s accrued incentive bonuses and Company profit-sharing contributions, if any. As a result, the Company’s borrowings against its revolving credit facility tend to peak during the second quarter and then decline over the remainder of the year.
Revolving Credit and Term Loan Agreement
The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective November 18, 2011. During 2015, the Company entered into the Fifth Amendment to Credit Agreement effective March 20, 2015 and the Sixth Amendment to Credit Agreement effective August 10, 2015. On March 24, 2016 the Company entered into the Seventh Amendment to Credit Agreement. The Company had previously entered into four separate amendments to the Credit Agreement. Cumulatively, the amendments were entered into by the Company to, among other things, (i) modify certain of the financial covenants, (ii) adjust the amount of the Revolving Commitment, (iii) terminate the Term Loan Commitment upon the repayment in full of the outstanding principal balance (and accrued interest thereon) of the Term Loan, (iv) modify the Borrowing Base calculation to provide for borrowing availability in respect of new Capital Expenditures, (v) decrease the interest rates on the Revolving Loans and (vi) extend the maturity date. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Credit Agreement bear interest based on a London Interbank Offered Rate (LIBOR) or prime rate based option.
The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period.
The Credit Agreement as amended provides for the following:
|
· |
The Revolving Commitment is $20,000,000. |
|
· |
Borrowings under the Revolving Commitment are limited to (a) 80% of eligible accounts receivable, (b) the lesser of 50% of eligible inventories and $8,500,000 plus (c) 80% of new Capital Expenditures not to exceed $5,500,000 with respect to each of Fiscal Year 2016 and 2017. |
|
· |
The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.15 to 1.0 for each trailing twelve month period measured at the end of each Fiscal Quarter. |
|
· |
The Company must not permit Tangible Net Worth as of the last day of any future Computation Period to be less than $31,000,000 (provided that the required amount of Tangible Net Worth shall increase (but not decrease) by an amount equal to 50% of the Consolidated Net Income for the immediately preceding Fiscal Year). At December 31, 2016 the required amount of Tangible Net Worth was $32,525,000 |
|
· |
The Balance Sheet Leverage Ratio as of the last day of any Computation Period may not exceed 1.00 to 1.00. |
|
· |
The maturity date of the credit facility is May 1, 2018. |
|
· |
Interest rate pricing for the revolving credit facility is currently LIBOR plus 2.50% or the prime rate plus 0.25%. |
11
Definitions under the Credit Agreement as amended are as follows:
|
· |
Tangible Net Worth is defined as net worth plus subordinated debt, minus intangible assets (goodwill, intellectual property, prepaid expenses, deposits and deferred charges), minus all obligations owed to the Company or any of its subsidiaries by any affiliate or any or its subsidiaries and minus all loans owed by its officers, stockholders, subsidiaries or employees. |
|
· |
Fixed Charge Coverage Ratio is defined as, for any computation period, the ratio of (a) the sum for such period of (i) EBITDA, as defined, minus (ii) the sum of income taxes paid in cash and all unfinanced capital expenditures to (b) the sum for such period of interest expense. |
|
· |
Balance Sheet Leverage Ratio is defined as the ratio of Total Debt to Tangible Net Worth. |
|
· |
EBITDA means for any Computation Period (or another time period to the extent expressly provided for in the Credit Agreement) the sum of the following with respect to the Company and its Subsidiaries each as determined in accordance with GAAP: (a) Consolidated Net Income, plus (b) federal, state and other income taxes deducted in the determination of Consolidated Net Income, plus (c) Interest Expense deducted in the determination of Consolidated Net Income, plus (d) depreciation, depletion and amortization expense deducted in the determination of Consolidated Net Income, plus (e) for 2014, charges directly related to the closing and reclamation of the Pueblo aggregates mining site, plus (f) any other non-cash charges and any extraordinary charges deducted in the determination of Consolidated Net Income, including any asset impairment charges (including write downs of goodwill), minus (g) any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued operations included in the determination of Consolidated Net Income. |
Outstanding funded debt (term debt and revolving credit) was $2,000,000 as of December 31, 2016 compared to $6,200,000 as of January 2, 2016. The highest balance outstanding during 2016 and 2015 was $7,500,000 and $7,400,000, respectively. Average outstanding funded debt was $3,712,000 and $5,205,000 for 2016 and 2015, respectively. At December 31, 2016, the Company had outstanding letters of credit totaling $5,415,000. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the available borrowing capacity exceeded the cash needs of the Company and this situation is expected to continue for the foreseeable future.
The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including planned capital expenditures, for the next twelve months. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.
Reconciliation of Fair Value of Reporting Units to Market Capitalization
The Company estimates that the aggregate fair value of its four reporting units as of December 31, 2016 is approximately $89,000,000. The fair value of the CACS reporting unit was determined as described in the Critical Accounting Policies discussion of Goodwill and Other Intangible Assets below. The fair value of all other reporting units was estimated by management based on a discounted cash flow valuation using a 13% discount rate in all cases. After deducting all outstanding funded debt the calculation yields a net fair value of the equity of the reporting units of $87,000,000. The Company’s market capitalization as of December 31, 2016 was approximately $40,020,000 based on a December 31, 2016 share price of $23.95 and 1,671,000 common shares outstanding. It is the Company’s opinion that its share price reflects the negative impact of its corporate office expenses as many of these would not be required to operate the individual companies. It is also the Company’s opinion that the value of its operating businesses is not diminished as a result of the corporate expenses. Therefore, in the Company’s opinion, in reconciling the fair value of the operating units to the market capitalization, an adjustment to the market capitalization for the corporate expenses is appropriate. Using the five year average corporate office expenses after the related income tax benefit and applying a 13% capitalization rate results in an adjusted market capitalization of $55,321,000 as of December 31, 2016. In the Company’s opinion, the difference between the net fair value of the reporting units and the adjusted market capitalization represents the value of the control premium. As of December 31, 2016 the control premium was
12
approximately 57% of the adjusted market capitalization. A reconciliation of the fair value of the reporting units to the adjusted market capitalization is shown in the table below. Amounts are in thousands except share data.
|
|
|
Market Capitalization |
|
Market Capitalization |
|
||
|
|
|
Based on |
|
Based on the highest |
|
||
|
|
|
December 31, 2016 |
|
2017 year-to-date |
|
||
|
|
|
Closing Price |
|
Closing Price of |
|
||
|
|
|
$23.95 Per Share |
|
$30.55 Per Share |
|
||
|
Estimated Fair Value of Reporting Units |
|
$ |
89,000 |
|
$ |
89,000 |
|
|
Less outstanding funded debt as of 12/31/2016 and 2/10/2017 |
|
|
(2,000) |
|
|
(1,000) |
|
|
Net Fair Value of Reporting Units |
|
$ |
87,000 |
|
$ |
88,000 |
|
|
|
|
|
|
|
|
|
|
|
Market capitalization: |
|
|
|
|
|
|
|
|
1,671,000 and 1,670,000 common shares outstanding, respectively |
|
$ |
40,020 |
|
$ |
51,019 |
|
|
Adjustment for corporate expenses after income tax effect |
|
|
15,301 |
|
|
15,301 |
|
|
Adjusted Market Capitalization |
|
|
55,321 |
|
|
66,319 |
|
|
Control Premium |
|
|
31,679 |
|
|
21,681 |
|
|
Fair Value of Reporting Units as determined above |
|
$ |
87,000 |
|
$ |
88,000 |
|
|
Control Premium as a percentage of Adjusted Market Capitalization |
|
|
57 |
% |
|
33 |
% |
The lowest closing price of the Company’s common stock since December 31, 2016 was $24.76. Based on the $24.76 closing price of January 3, 2017 this same computation yields a control premium of 54%.
A significant portion of the Company’s common stock is closely held. At December 31, 2016, the Gidwitz Family and other officers and directors of the Company together with the two largest institutional shareholders own approximately 81% of the outstanding shares. The remaining shares (“available float”) represent only 19% of the outstanding shares. Generally, there is limited trading activity in the Company’s shares. On some trading days there is no trading activity. The Company’s share price is subject to sharp volatility on trades of a few hundred shares or less. For these reasons, it is the opinion of the Company that its market capitalization at any given time is not indicative of the aggregate fair value of the reporting units.
Insurance Policies
The Company maintained insurance policies since March 31, 2016 with the following per incident deductibles and policy limits:
|
|
|
|
|
|
Per Occurrence |
|
Policy Aggregate |
|
||
|
|
|
Deductible |
|
Limits |
|
Limits |
|
|||
|
Product liability |
|
$ |
250,000 |
|
$ |
1,000,000 |
|
$ |
2,000,000 |
|
|
General liability |
|
|
250,000 |
|
|
1,000,000 |
|
|
5,000,000 |
|
|
Workers’ compensation |
|
|
350,000 |
|
|
350,000 |
|
|
Statutory |
|
|
Auto and truck liability |
|
|
100,000 |
|
|
2,000,000 |
|
|
No limit |
|
Should any or all policy limits be exceeded, the Company maintains an umbrella policy which covers the next $25,000,000 of claims.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that are likely to have a material current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
RESULTS OF OPERATIONS
In the ensuing discussions of the results of operations, we define the term gross profit as the amount determined by deducting cost of sales before depreciation, depletion and amortization from sales. The gross profit ratio is gross profit divided by sales.
13
DISCUSSION OF CONSOLIDATED RESULTS OF OPERATIONS
2016 vs. 2015
Consolidated sales in 2016 were $151,592,000, an increase of 10.8% or $14,757,000 compared to 2015. Sales in the CACS segment improved $11,772,000, or 21.3%, contributing a majority of the improvement. This increase is attributable to strengthening construction activity in both the Colorado Springs and Pueblo markets, increased pricing in both markets and a windmill job serviced by a portable plant which provided $2,837,000 in revenue. Sales in the Heating and Cooling segment increased by $2,355,000 (6.0%) as both furnace and fan coil sales exceeded prior year levels. Sales in the Evaporative Cooling segment improved marginally, $620,000 (2.5%) while sales in the Door segment were relatively flat.
The consolidated gross profit ratio in 2016 was 20.7% compared to 18.7% for 2015. The gross profit ratio improved in all business segments; more so in the CACS segment and to a lesser degree in the Door, Evaporative Cooling and Heating and Cooling segments.
Selling and administrative expenses were $1,943,000 higher in 2016 compared to 2015. A $218,000 write-off of an uncollectible receivable and increased spending on advertising and promotion in the Evaporative Cooling segment combined with increased compensation costs in all segments contributed to the increase. As a percentage of consolidated sales, selling and administrative expenses were virtually the same, 15.1% and 15.2%, in 2016 and 2015, respectively.
Depreciation and amortization charges were consistent between 2016 and 2015 at $2,436,000 and $2,421,000, respectively. Capital expenditures, which have been lower for several years, increased in 2016 versus the prior year primarily in the CACS segment with the purchase of new mixer trucks and the continued development of an aggregates property under option.
The results for 2016 include a write-off of $632,000 of prepaid royalties related to the cessation of mining at the leased gravel operation in Pueblo, Colorado. See Note 2 for further discussion.
Operating income in 2016 was $5,841,000 compared to $2,516,000 in 2015. The improved operating results are primarily attributable to the CACS segment which reported an increase of $3,689,000. This improvement was the result of increased concrete sales volume and higher sales prices. The Evaporative Cooling and Door segments reported increases of $277,000 and $283,000, respectively while the Heating and Cooling segment reported a decrease in operating profit, $325,000, in 2016 compared to 2015.
Interest income in 2016 was $306,000 compared to $55,000 in 2015. 2016 included $252,000 of interest recorded with redemption of a preferred investment in the CACS segment. Interest expense in 2016 was $367,000 compared to $453,000 in 2015. The decline from the prior year is attributable to lower average borrowings, largely due to improved earnings, and the capitalization of $38,000 of interest expense associated with expenditures related to continued development of an aggregates property under option. The weighted average interest rate on outstanding funded debt, including the availability fee on the unused line of credit and other recurring bank charges but excluding finance charges on letters of credit was approximately 5.7% for 2016 compared to 4.8% for 2015. Average outstanding funded debt in 2016 was $3,712,000 compared to $5,205,000 in 2015.
The Company’s effective income tax rate reflects federal and state statutory income tax rates adjusted for non-deductible expenses, tax credits and other tax items. The effective income tax rate related to 2016 income was 36.8% compared to 35.6% related to 2015 income.
The Company operates four businesses in two industry groups. The businesses are seasonal, weather sensitive and subject to cyclical factors. The following addresses various aspects of operating performance focusing on the reportable segments within each of the two industry groups.
14
Construction Products Industry Group
The table below presents a summary of operating information for the two reportable segments within the Construction Products industry group for the fiscal years 2016 and 2015 (amounts in thousands).
|
|
|
Concrete, |
|
|
|
||
|
|
|
Aggregates and |
|
|
|
||
|
|
|
Construction |
|
|
|
||
|
|
|
Supplies |
|
Door |
|
||
|
2016 |
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
67,091 |
|
$ |
16,990 |
|
|
Segment gross profit |
|
|
10,187 |
|
|
4,543 |
|
|
Gross profit as percent of sales |
|
|
15.2 |
% |
|
26.7 |
% |
|
Segment operating income |
|
|
3,433 |
|
|
1,563 |
|
|
Operating income as a percent of sales |
|
|
5.1 |
% |
|
9.2 |
% |
|
Segment assets as of December 31, 2016 |
|
$ |
33,518 |
|
$ |
6,173 |
|
|
Return on assets |
|
|
10.2 |
% |
|
25.3 |
% |
|
|
|
Concrete, |
|
|
|||
|
|
|
Aggregates and |
|
|
|||
|
|
|
|
Construction |
|
|
||
|
|
|
Supplies |
|
Door |
|
||
|
2015 |
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
55,319 |
|
$ |
16,981 |
|
|
Segment gross profit |
|
|
5,982 |
|
|
4,173 |
|
|
Gross profit as percent of sales |
|
|
10.8 |
% |
|
24.6 |
% |
|
Segment operating (loss) income |
|
|
(256) |
|
|
1,280 |
|
|
Operating (loss) income as a percent of sales |
|
|
(0.5) |
% |
|
7.5 |
% |
|
Segment assets as of January 2, 2016 |
|
$ |
31,791 |
|
$ |
6,471 |
|
|
Return on assets |
|
|
(0.8) |
% |
|
19.8 |
% |
Concrete, Aggregates and Construction Supplies Segment
2016 vs. 2015
The product offerings of the CACS segment consist of ready-mix concrete, aggregates and construction supplies. Ready-mix concrete and aggregates are produced at multiple locations in or near Colorado Springs and Pueblo, Colorado. Construction supplies encompass numerous products purchased from third party suppliers and sold to the construction trades particularly concrete sub-contractors. In 2016 concrete, aggregates (including aggregates consumed internally in the production of concrete) and construction supplies accounted for approximately 77%, 17% and 6% of sales of the CACS segment, respectively. In 2015 the sales mix between concrete, aggregates and construction supplies was 72%, 20% and 8%, respectively. Sales to third parties increased by $11,772,000 (21.3%) in 2016 compared to 2015. In 2016 the Company serviced a windmill project from a portable plant which contributed $2,837,000 in revenue. There was no such project in 2015. Excluding the sales to the windmill project for the current year, sales in 2016 increased $8,935,000 (16.2%). The increase is attributable to sustained improvement in the construction market in Colorado Springs, an improving Pueblo market and increased pricing in both markets.
Ready-mix concrete sales, excluding flow fill material, improved by $13,242,000 (32.0%) in 2016 compared to 2015 primarily due to an improved Pueblo market, the windmill project serviced by the portable plant and improved pricing. Concrete volume increased by 18.7%. Excluding the windmill project, ready-mix volume increased by 14.3%. Average concrete prices for 2016, excluding the windmill project and flow fill material, increased by 9.5% compared to 2015. While concrete prices have increased, the market remains sharply competitive especially on large construction projects. Material costs per yard, including cement, increased by 3.4% in 2016 compared to 2015 as higher cement, rock and sand costs were partially offset by lower admixture expenses. Batching costs per yard increased 2.9%, in 2016 compared to 2015 as several technical jobs required additional personnel and overtime. Delivery cash costs per yard decreased 2.2% in 2016 compared to 2015 as lower repairs and maintenance and fuel cost more than offset increased labor and contract
15
trucking expenses. The gross profit ratio from concrete increased from 11.8% in 2015 to 18.6% in 2016. The windmill project was a significant contributor to the increase in volume, sales and gross profit during 2016.
Sand, crushed limestone and gravel (“aggregates”) are produced and sold from various deposits in and around Colorado Springs and Pueblo, Colorado. In 2016 aggregates were produced from three separate locations: two in or near Colorado Springs and one near Florence. As more fully discussed in Note 2, the Company ceased mining at the leased gravel operation in Pueblo, Colorado, in September 2014. Sales volume (tons) of construction aggregates, including those used internally in the production of ready-mix concrete, decreased by 3.6% in 2016. Average selling prices, excluding delivery charges, increased 8.4% from 2015. The Colorado Springs sand operation sold a significant amount of unprocessed fill sand beginning in the fourth quarter of 2015 and continuing through the second quarter of 2016. Fill sand is a lower priced product as it requires less processing. Net sales of construction aggregates, including those consumed internally in the production of concrete but excluding delivery charges, increased by 4.5%. The Company’s Colorado Springs sand operation also produces industrial sand used in well fracking, the production of stucco and other purposes. As a percentage of total tons of aggregates sold during 2016 and 2015, industrial sand sales were only approximately 0.7% of total aggregate sales volume in each year. The gross profit, before depreciation, from all aggregate operations in 2016 was a loss of $721,000 compared to a profit of $241,000 in 2015. Operating challenges at two quarries and carrying costs related to the closed Pueblo quarry contributed to the decline in gross profit.
Sales of construction supplies declined 11.3% in 2016. The gross profit ratio improved from 11.0% in 2015 to 12.0% in 2016 mainly due to lower material costs.
Depreciation and amortization charges were $24,000 less in 2016 reflecting a lower level of capital spending in the last five years.
Selling and administrative expenses were $35,000 lower in 2016 compared to 2015. Increased compensation related costs were offset by decreased legal fees. Litigation expenses related to the Pueblo aggregate lease were $876,000 in 2016 compared to $1,200,000 in 2015. As a percentage of sales, selling and administrative expenses were 7.5% in 2016 compared to 9.2% in 2015.
Gains on disposition of assets were $276,000 in 2016, compared to $220,000 in 2015. Additionally, 2016 includes a write-down of $632,000 related to prepaid royalties discussed in Note 2 and $252,000 of interest income recorded with the redemption of a preferred investment previously classified in other assets as of January 2, 2016.
The prices of two commodities, cement and diesel fuel, can have a significant effect on the results of operations of this segment. Management negotiates cement prices with producers who have production facilities in or near the concrete markets that we serve. Management may negotiate separate cement prices for large construction projects depending on the demand for and availability of cement from the local producers. The Company buys diesel fuel from local distributors and occasionally enters into a short term arrangement with a distributor whereby the price of diesel fuel is fixed for a period of up to six months. In the past year the Company did not hedge diesel fuel prices. Increases in the cost of these two commodities have a direct effect on the results of operations depending upon whether competitive conditions prevailing in the marketplace enable management to adjust its selling prices to recover the increased cement and diesel prices.
Door Segment
2016 vs. 2015
The Door segment sells hollow metal doors, door frames and related hardware, wood doors, lavatory fixtures and electronic access and security systems. Nearly all of the Door segments sales are for commercial and institutional buildings such as schools and healthcare facilities. Approximately 65% to 70% of the sales of the Door segment are related to jobs obtained through a competitive bidding process. Bid prices may be higher or lower than bid prices on similar jobs in the prior year. The Door segment does not track unit sales of the various products through its accounting or management reporting. Management relies on the level of the sales backlog, the trend in sales and the gross profit rate in managing the business.
16
Door sales in 2016 were virtually static with the prior year. Bidding activity remains steady and bid prices are still competitive. The gross profit ratio in 2016 was 26.7%, up from 24.6% in 2015. The improvement was the result of improved pricing combined with lower material costs.
Sales and administrative expenses increased by $92,000 (3.3%). The increase was primarily due to higher compensation. As a percentage of sales, these expenses were 16.8% and 16.1%, in 2016 and 2015, respectively.
The Door segment sales backlog at the end of 2016 was $5,331,000 compared to $5,139,000 at the end of 2015.
HVAC Industry Group
The table below presents a summary of operating information for the two reportable segments within the HVAC industry group for the fiscal years 2016 and 2015 (amounts in thousands).
|
|
|
Heating and |
|
Evaporative |
|
||
|
|
|
Cooling |
|
Cooling |
|
||
|
2016 |
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
41,853 |
|
$ |
25,642 |
|
|
Segment gross profit |
|
|
10,639 |
|
|
6,046 |
|
|
Gross profit as percent of sales |
|
|
25.4 |
% |
|
23.6 |
% |
|
Segment operating income |
|
|
3,046 |
|
|
1,413 |
|
|
Operating income as a percent of sales |
|
|
7.3 |
% |
|
5.5 |
% |
|
Segment assets as of December 31, 2016 |
|
$ |
22,381 |
|
$ |
12,283 |
|
|
Return on assets |
|
|
13.6 |
% |
|
11.5 |
% |
|
|
|
Heating and |
|
Evaporative |
|
||
|
|
|
Cooling |
|
Cooling |
|
||
|
2015 |
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
39,498 |
|
$ |
25,022 |
|
|
Segment gross profit |
|
|
10,010 |
|
|
5,398 |
|
|
Gross profit as percent of sales |
|
|
25.3 |
% |
|
21.6 |
% |
|
Segment operating income |
|
|
3,371 |
|
|
1,135 |
|
|
Operating income as a percent of sales |
|
|
8.5 |
% |
|
4.5 |
% |
|
Segment assets as of January 2, 2016 |
|
$ |
22,628 |
|
$ |
12,730 |
|
|
Return on assets |
|
|
14.9 |
% |
|
8.9 |
% |
Heating and Cooling Segment
2016 vs. 2015
Sales in the Heating and Cooling segment improved $2,355,000 (6.0%) between 2016 and 2015. In 2016, approximately 69% of sales consisted of wall furnaces and heaters. Fan coils accounted for approximately 31% of the segment’s sales and other products made up less than 1%. In 2015 these shares of total segment sales were 68%, 32% and less than 1%, respectively. Unit sales of furnaces and heaters were up 2.8% and sales volume increased $2,231,000 (8.3%) in 2016 compared to 2015. Better pricing and product mix contributed to the improvement in sales volume 2016 compared to 2015.
Fan coil sales slowed somewhat in the second half of 2016, but ended the year $640,000 (5.1%) ahead of 2015 results as construction spending in the U.S. lodging industry remains steady. Historically, approximately 90% of the company’s sales of fan coils are custom-made systems for hotels and other commercial buildings. Fan coil sales in both 2016 and 2015 were in line with this historical experience. Fan coil jobs are obtained through a competitive bidding process. Every bid job is a unique configuration of materials and parts, therefore the company does not track units of sales or production as per unit information would not be useful in managing the business. Management focuses on the contribution margin by job, current level of sales and the sales backlog in managing the fan coil business. Contribution
17
margin is an internal measure calculated by deducting variable manufacturing costs and variable selling expenses from sales for a particular product line and is used as an internal measure of profitability for a product or product line. The fan coil contribution margin percentage increased by approximately 2.2 percentage points in 2016 from the 2015 margin. The fan coil sales backlog at the end of 2016 was approximately $2,702,000 compared to $4,679,000 at the end of 2015.
The Heating and Cooling segment’s gross profit ratio was marginally higher at 25.4% in 2016 compared to 25.3% in 2015.
Selling and administrative expenses in 2016 were approximately $925,000 higher than the prior year mainly due to additional headcount, increased compensation costs, including salaries and bonuses, employee benefit costs and commissions. As a percentage of sales, such expenses were 16.9% in 2016 compared to 15.5% in 2015.
Evaporative Cooling Segment
2016 vs. 2015
Sales of evaporative coolers during 2016 increased $620,000, approximately 2.5% compared to the prior year. Unit sales of evaporative coolers were down 4.4% in 2016. Average selling prices per unit, excluding the effect of parts sales, increased approximately 6.1% due to product mix with unit sales of higher priced industrial and commercial coolers up 11.6% from 2015. Fourth quarter 2016 and fourth quarter 2015 unit sales of standard and single inlet coolers were significantly lower than historical results which management attributes to a recent trend of lower pre-season purchasing. Parts sales increased 5.9% in 2016. Actual average price increases, including parts sales, in 2016 were approximately 6.9%. The change in product mix and higher parts sales combined to account for the overall improvement in average selling prices. The gross profit ratio increased from 21.6% in 2015 to 23.6% in 2016 due to the benefits of higher average selling prices and lower material costs, most notably steel. Selling and administrative expenses were approximately $357,000 (9.2%) higher in 2016. This increase includes a $218,000 write-off of an uncollectible receivable. Greater spending on product marketing, including advertising and trade shows, and lower commission expenses also contributed to the overall increase in selling and administrative expenses. As a percentage of sales, these expenses were 16.5% and 15.4% for 2016 and 2015, respectively.
Both businesses in the HVAC group are sensitive to changes in the prices for a number of different raw materials, commodities and purchased parts. Prices of steel and copper in particular can have a significant effect on the results of operations of this group. The Company is not currently a party to any hedging arrangements with regard to steel or copper.
OUTLOOK
Overall the Company expects consolidated sales in 2017 to exceed the 2016 level. Revenues in the CACS segment are dependent on the level of construction activity along the Front Range in Southern Colorado as well as the level of selling prices. Construction activity has exhibited modest and thus far sustained improvement during the past two years in the Colorado Springs markets. Construction activity in the Pueblo market has shown some improvement in the current year as well. Concrete pricing has also improved, but the pricing on most bid jobs remains sharply competitive. Further improvements in the CACS segment operating results will depend on a sustained improvement in the Colorado Springs and Pueblo construction markets and the ability to maintain or enhance ready-mix concrete prices especially in response to any increases in cement and/or fuel costs that may occur.
The Company’s HVAC Industry Group anticipates some increase in sales in 2017 primarily from higher fan coil sales due to continued construction spending in the lodging industry. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not heavily reliant on new construction. Sales of these products are generally dependent on the overall strength of the economy especially employment levels. Sales of furnaces, heaters and evaporative coolers are also significantly influenced by weather conditions particularly during their respective selling seasons.
18
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission requires all registrants, including the Company, to include a discussion of “critical” accounting policies or methods used in the preparation of financial statements. We believe the following are our critical accounting policies and methods.
Goodwill and Other Intangible Assets
The Company annually assesses goodwill for potential impairment as of the last day of its fiscal year. In addition, to the extent that events occur, either involving the relevant reporting unit or in their industries, the Company revisits its assessment of the recorded goodwill to determine if impairment has occurred and should be recognized. As of December 31, 2016, the Company had recorded $7,229,000 of goodwill consisting of $6,229,000 related to the CACS reporting unit and $1,000,000 related to the Door reporting unit.
The Company follows Accounting Standards Update (ASU) 2011-08 which allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. At the end of 2016 and 2015, the Company concluded that the quantitative analysis was more appropriate than the qualitative analysis. For purposes of measuring the fair value of the CACS reporting unit the Company engages the services of an investment banking firm to assist management with the calculation. The fair value of this reporting unit is determined by applying three valuation methods. These are 1) discounted cash flow (“DCF”) valuation, 2) an analysis of comparable transactions within the industry and 3) comparable enterprise valuations of other public companies in the industry. The DCF valuation was calculated using a discount rate of 13%. The simple average of EBITDA (earnings before interest, taxes, depreciation and amortization) multiples of select transactions in the construction materials industry in the last couple of years was used for method #2 and the simple average of EBITDA multiples of select publicly traded construction materials companies comparable to CACS was used for method #3. The simple average of the valuations under the three methods exceeded the carrying value on the Company’s books by over 150%.
Long-lived Assets (other than Goodwill and Intangible Assets)
The Company reviews long-lived assets by asset group for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the amount and useful life over which cash flows will occur and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available given the Company’s historical experience and internal business plans. In the third quarter of 2016, the Company wrote off $632,000 of royalty overpayments included in other long-term assets at January 2, 2016 after it was determined collection was not likely. See Note 2. Additionally in 2016, the Company received $854,000 for the redemption of a preferred investment that was previously included in other long-term assets at January 2, 2016.
Liabilities
The Company purchases insurance coverage for workers’ compensation, general product and automobile liability, retaining certain levels of risk (self-insured portion). See the above section titled “Insurance Policies” for information related to per incident deductibles and policy limits. Provision for workers’ compensation claims is estimated by management based on information provided by the independent third party administrator and periodic review of all outstanding claims. The Company’s independent claims administrator tracks all claims and assigns a liability to each individual claim based upon facts known at the time of estimation. In addition, management periodically reviews each individual claim with both the third party claims administrator and legal counsel and the third party administrator revises the estimated liability accordingly. The Company also retains an independent expert who applies actuarial methodology to the claims data provided by the Company’s independent claims administrator to estimate the ultimate aggregate settlement amount of the claims using specific loss development factors based on the Company’s prior experience. The Company then establishes its reserve for workers’ compensation claims based upon the actuarial evaluation and management’s knowledge of the outstanding claims. Management tracks changes to the incurred and paid amounts of
19
individual workers compensation claims up to the date of final closure. In recent years, the net amounts that the claims have ultimately settled for have indicated that the reserve recorded by the Company has been sufficient.
With regard to product liability, provisions for both claims and unasserted claims that would be covered under the self-insured portion of the policies are reviewed at least annually and are recorded in accordance with accounting guidance on contingent liabilities provided in the FASB Accounting Standards Codification (Codification). Management also incorporates information from discussions with legal counsel handling the individual claims when revising its estimates. Provision for automobile claims is estimated based upon information provided by the Company’s independent claims administrator and the Company’s own experience. The number of automobile claims and the amounts involved are not material. Historically, there have not been many instances of significant variances between actual final settlements and our estimates regarding automobile and product liability claims.
The Company maintains a reserve for future reclamation work to be performed at its various aggregate operations based upon an estimate of the total expense that will be incurred to reclaim the disturbed areas. Actual reclamation costs are charged to expense. The adequacy of the recorded reserve is assessed annually. The assessment may be done more frequently if events or circumstances arise that may indicate a change in estimated costs, recoverable material or the period of mining activity. For the annual assessment of the reserve, the Company engages an independent professional to assist in reevaluating the estimates of both the quantities of recoverable material and the cost of reclamation. The assessment of the adequacy of the reclamation reserves is based on management’s assumptions with the assistance of the independent professional. The analysis requires the use of significant assumptions and estimates about the mining plans, homogeneity of the deposits, third party costs to perform work, method of reclamation to be used, etc.
Management believes that the assumptions and estimates used to determine the reserve are reasonable; however, changes in the aforementioned assumptions and estimates, as well as the effects of unknown future events or circumstances, including legislative requirements, could materially affect estimated costs, the quantities of recoverable material or the period of mining. Depletion of rock and sand deposits and amortization of deferred development costs are computed by the units-of-production method based upon estimated recoverable quantities of rock and sand.
Sales
The Company recognizes revenue as products are shipped to customers. Sales are recorded net of estimates of applicable provisions for discounts, volume incentives, returns and allowances based upon current program terms and historical experience. At the time of revenue recognition, the Company also provides an estimate of potential bad debt and warranty expense as well as an amount anticipated to be granted to customers under cooperative advertising programs based upon current program terms and historical experience. Additionally, the HVAC companies offer discounts for early payment of amounts due under dating and other extended payment programs. The Company records reserves for these items based upon historical experience.
Guidance provided by the Codification mandates that cash consideration (including sales incentives) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services unless both of the following conditions are met: a) the vendor receives an identifiable benefit in exchange for the consideration and b) the vendor can reasonably estimate the fair value of the benefit. Under this guidance, volume incentives and customer discounts provided to our customers are presumed to be a reduction in the selling price of our products and accordingly we record these as a reduction of gross sales. We require that our customers submit proof of both the advertisement and the cost of the advertising expenditure before we allow a deduction for cooperative advertising. Since the Company receives an identifiable and quantifiable benefit, these costs are recorded as selling and administrative expenses. These programs did not have a material effect on operations in 2016 or 2015.
Recently Issued Accounting Standards
The “Recently Issued Accounting Pronouncements” section of Note 1 discusses new accounting policies adopted by the Company since 2015 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards has an effect on our financial condition, results of operations or liquidity, the impacts are discussed in the applicable notes to the consolidated financial statements.
20
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and, as such, is not required to provide information in response to this item.
21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
PAGE |
|
Financial Statements and Financial Statement Schedule of Continental Materials Corporation and Report of Independent Registered Public Accounting Firm thereon: |
|
|
|
|
|
|
|
Consolidated statements of income for fiscal years 2016 and 2015 |
|
23 |
|
|
|
|
|
Consolidated statements of cash flows for fiscal years 2016 and 2015 |
|
24 |
|
|
|
|
|
Consolidated balance sheets as of December 31, 2016 and January 2, 2016 |
|
25 |
|
|
|
|
|
Consolidated statements of shareholders’ equity for fiscal years 2016 and 2015 |
|
26 |
|
|
|
|
|
|
27-39 |
|
|
|
|
|
|
|
40 |
22
Continental Materials Corporation
Consolidated Statements of Income
For Fiscal Years 2016 and 2015
(Amounts in thousands, except per share data)
|
|
|
2016 |
|
2015 |
|
||
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
151,592 |
|
$ |
136,835 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation, depletion and amortization) |
|
|
120,161 |
|
|
111,257 |
|
|
Depreciation, depletion and amortization |
|
|
2,436 |
|
|
2,421 |
|
|
Selling and administrative |
|
|
22,809 |
|
|
20,866 |
|
|
Charges related to cessation of mining an aggregates deposit |
|
|
632 |
|
|
— |
|
|
Gain on disposition of property and equipment |
|
|
(287) |
|
|
(225) |
|
|
Operating income |
|
|
5,841 |
|
|
2,516 |
|
|
Interest income |
|
|
306 |
|
|
55 |
|
|
Interest expense |
|
|
(367) |
|
|
(453) |
|
|
Other income, net |
|
|
54 |
|
|
76 |
|
|
Income before income taxes |
|
|
5,834 |
|
|
2,194 |
|
|
Provision for income taxes |
|
|
(2,148) |
|
|
(781) |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,686 |
|
$ |
1,413 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share |
|
|
2.21 |
|
|
0.85 |
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding |
|
|
1,669 |
|
|
1,661 |
|
The accompanying notes are an integral part of the consolidated financial statements.
23
Continental Materials Corporation
Consolidated Statements of Cash Flows For Fiscal Years 2016 and 2015
(Amounts in thousands)
|
|
|
2016 |
|
2015 |
|
||
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,686 |
|
$ |
1,413 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
2,436 |
|
|
2,421 |
|
|
Write-off of prepaid royalties associated with the Pueblo aggregates deposit |
|
|
632 |
|
|
— |
|
|
Deferred income tax provision |
|
|
1,533 |
|
|
771 |
|
|
Compensation of Board of Directors paid by issuance of treasury shares |
|
|
152 |
|
|
197 |
|
|
Provision for doubtful accounts |
|
|
280 |
|
|
63 |
|
|
Gain on disposition of property and equipment |
|
|
(287) |
|
|
(225) |
|
|
Changes in working capital items: |
|
|
|
|
|
|
|
|
Receivables |
|
|
44 |
|
|
(2,767) |
|
|
Inventories |
|
|
(999) |
|
|
(2,170) |
|
|
Prepaid expenses |
|
|
331 |
|
|
(499) |
|
|
Accounts payable and accrued expenses |
|
|
2,666 |
|
|
1,960 |
|
|
Income taxes payable and refundable |
|
|
(669) |
|
|
394 |
|
|
Other |
|
|
(1,706) |
|
|
— |
|
|
Net cash provided by operating activities |
|
|
8,099 |
|
|
1,558 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(4,405) |
|
|
(2,303) |
|
|
Cash proceeds from sale of property and equipment |
|
|
310 |
|
|
233 |
|
|
Net cash used in investing activities |
|
|
(4,095) |
|
|
(2,070) |
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Borrowings on the revolving bank loan |
|
|
27,250 |
|
|
34,350 |
|
|
Repayments on the revolving bank loan |
|
|
(31,450) |
|
|
(33,950) |
|
|
Payments to acquire treasury stock |
|
|
(50) |
|
|
(16) |
|
|
Net cash (used in) provided by financing activities |
|
|
(4,250) |
|
|
384 |
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(246) |
|
|
(128) |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
547 |
|
|
675 |
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
301 |
|
$ |
547 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow items: |
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
Interest, net |
|
$ |
365 |
|
$ |
412 |
|
|
Income taxes, net |
|
|
1,285 |
|
|
(388) |
|
The accompanying notes are an integral part of the consolidated financial statements.
24
Continental Materials Corporation
Consolidated Balance Sheets As of December 31, 2016 and January 2, 2016
(Amounts in thousands except share data)
|
|
|
December 31, 2016 |
|
January 2, 2016 |
|
||
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
301 |
|
$ |
547 |
|
|
Receivables less allowance of $220 for fiscal 2016 and 2015 |
|
|
22,359 |
|
|
22,715 |
|
|
Receivable for insured losses |
|
|
32 |
|
|
— |
|
|
Inventories |
|
|
20,645 |
|
|
19,646 |
|
|
Prepaid expenses |
|
|
1,807 |
|
|
2,138 |
|
|
Refundable income taxes |
|
|
739 |
|
|
70 |
|
|
Total current assets |
|
|
45,883 |
|
|
45,116 |
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Land and improvements |
|
|
2,781 |
|
|
2,766 |
|
|
Buildings and improvements |
|
|
20,531 |
|
|
20,278 |
|
|
Machinery and equipment |
|
|
77,366 |
|
|
77,633 |
|
|
Mining properties |
|
|
8,776 |
|
|
7,063 |
|
|
Less accumulated depreciation and depletion |
|
|
(89,848) |
|
|
(90,101) |
|
|
|
|
|
19,606 |
|
|
17,639 |
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
Goodwill |
|
|
7,229 |
|
|
7,229 |
|
|
Amortizable intangible assets, net |
|
|
— |
|
|
21 |
|
|
Deferred income taxes |
|
|
1,616 |
|
|
3,149 |
|
|
Other assets |
|
|
3,674 |
|
|
2,601 |
|
|
|
|
$ |
78,008 |
|
$ |
75,755 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Revolving bank loan payable |
|
$ |
2,000 |
|
$ |
6,200 |
|
|
Accounts payable |
|
|
7,532 |
|
|
7,122 |
|
|
Accrued expenses |
|
|
|
|
|
|
|
|
Compensation |
|
|
3,280 |
|
|
1,767 |
|
|
Reserve for self-insured losses |
|
|
1,861 |
|
|
2,334 |
|
|
Liability for unpaid claims covered by insurance |
|
|
32 |
|
|
— |
|
|
Profit sharing |
|
|
1,310 |
|
|
831 |
|
|
Reclamation |
|
|
748 |
|
|
695 |
|
|
Other |
|
|
2,988 |
|
|
2,518 |
|
|
Total current liabilities |
|
|
19,751 |
|
|
21,467 |
|
|
|
|
|
|
|
|
|
|
|
Accrued reclamation |
|
|
5,192 |
|
|
4,980 |
|
|
Other long-term liabilities |
|
|
861 |
|
|
892 |
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Common shares, $.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares |
|
|
643 |
|
|
643 |
|
|
Capital in excess of par value |
|
|
1,765 |
|
|
1,817 |
|
|
Retained earnings |
|
|
65,169 |
|
|
61,483 |
|
|
Treasury shares, at cost |
|
|
(15,373) |
|
|
(15,527) |
|
|
|
|
|
52,204 |
|
|
48,416 |
|
|
|
|
$ |
78,008 |
|
$ |
75,755 |
|
The accompanying notes are an integral part of the consolidated financial statements.
25
Continental Materials Corporation
Consolidated Statements of Shareholders’ Equity
For Fiscal Years 2016 and 2015
(Amounts in thousands except share data)
|
|
|
|
|
Common |
|
Capital |
|
|
|
|
|
|
|
||||
|
|
|
Common |
|
shares |
|
in excess |
|
Retained |
|
Treasury |
|
Treasury |
|
||||
|
|
|
shares |
|
amount |
|
of par |
|
earnings |
|
shares |
|
shares cost |
|
||||
|
Balance at January 3, 2015 |
|
2,574,264 |
|
$ |
643 |
|
$ |
1,827 |
|
$ |
60,070 |
|
924,097 |
|
$ |
15,718 |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
1,413 |
|
— |
|
|
— |
|
|
Compensation of Board of Directors by issuance of treasury shares |
|
— |
|
|
— |
|
|
(10) |
|
|
— |
|
(12,000) |
|
|
(207) |
|
|
Purchase of treasury shares |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
1,000 |
|
|
16 |
|
|
Balance at January 2, 2016 |
|
2,574,264 |
|
|
643 |
|
|
1,817 |
|
|
61,483 |
|
913,097 |
|
|
15,527 |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
3,686 |
|
— |
|
|
— |
|
|
Compensation of Board of Directors by issuance of treasury shares |
|
— |
|
|
— |
|
|
(52) |
|
|
— |
|
(12,000) |
|
|
(204) |
|
|
Purchase of treasury shares |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
2,000 |
|
|
50 |
|
|
Balance at December 31, 2016 |
|
2,574,264 |
|
$ |
643 |
|
$ |
1,765 |
|
$ |
65,169 |
|
903,097 |
|
$ |
15,373 |
|
The accompanying notes are an integral part of the consolidated financial statements.
26
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Continental Materials Corporation (the Company) is a Delaware corporation, incorporated in 1954. The Company operates primarily within two industry groups, Heating, Ventilation and Air Conditioning (HVAC) and Construction Products. The Company has identified two reportable segments in each of the two industry groups: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the Concrete, Aggregates and Construction Supplies (CACS) segment and the Door segment in the Construction Products industry group.
The Heating and Cooling segment primarily produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co. (WFC) of Colton, California. The Evaporative Cooling segment produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona. Concrete, aggregates and construction supplies (CACS) are offered from numerous locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co., of Colorado Springs and Transit Mix of Pueblo, Inc. of Pueblo (the three companies collectively referred to as TMC). The Door segment sells hollow metal and wood doors, door frames and related hardware, lavatory fixtures and electronic access and security systems from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI), which operates out of facilities in Pueblo and Colorado Springs, Colorado.
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Continental Materials Corporation and all of its subsidiaries (the Company). Intercompany transactions and balances have been eliminated. All subsidiaries of the Company are wholly-owned.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 2015 Consolidated Balance Sheet and Consolidated Statement of Cash Flows to conform to the 2016 financial statement presentation. These reclassifications had no effect on total assets, liabilities or shareholders’ equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the first quarter of 2016, the Company implemented ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on organizations’ balance sheets. The change has been applied retrospectively for all periods presented. The effect of implementation is to report a consolidated non-current net asset of $1,616,000 and $3,149,000 in the consolidated balance sheets as of December 31, 2016 and January 2, 2016, respectively. Adoption of this update resulted in reclassifying current deferred income tax assets of $1,078,000 to non-current deferred income tax assets in the consolidated balance sheet as of January 2, 2016.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new revenue standard creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. Subsequently, the FASB has issued various ASUs to provide further clarification around certain aspects of ASC 606. This standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and the Company will adopt the standard on January 1,
27
2018. While the Company has not completed its analysis of the impact of the provisions of this standard, we do not expect a significant impact to the consolidated financial statements or disclosure.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new standard supersedes existing lease guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The standard will be effective for the Company in the first quarter of 2019 and will be adopted using a modified retrospective approach. While we anticipate the adoption of ASU 2016-02 may have a significant impact on our consolidated balance sheets, consolidated statements of income and disclosures, we are unable to quantify the financial statement impact at this time.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 31, 2016 and January 2, 2016 and the reported amounts of revenues and expenses during both of the two years in the period ended December 31, 2016. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value. The Company has reclassified negative cash balances to Accounts Payable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.
The following methods were used to estimate the fair value of the financial instruments recognized in the accompanying balance sheet.
Cash and Cash Equivalents: The carrying amount approximates fair value and was valued as Level 1.
Debt: Fair value was estimated based on the borrowing rates then available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of debt represents a reasonable estimate of the corresponding fair value as the Company’s debt is held at variable interest rates and was valued as Level 2.
There were no transfers between fair value measurement levels of any financial instruments in the current year.
28
INVENTORIES
Inventories are valued at the lower of cost or market and are reviewed periodically for excess or obsolete stock with a provision recorded, where appropriate. Cost for inventory in the HVAC industry group is determined using the last-in, first-out (LIFO) method. These inventories represent approximately 79% of total inventories at December 31, 2016 and 82% at January 2, 2016. The cost of all other inventory is determined by the first-in, first-out (FIFO) or average cost methods. Some commodity prices such as copper, steel, cement and diesel fuel have experienced significant fluctuations in recent years. Cement and diesel fuel prices are principally relevant to the CACS segment while steel prices and copper prices are principally relevant to our two HVAC businesses. The general effect of using LIFO is that higher prices are not reflected in the inventory carrying value. Current costs are reflected in the cost of sales. The inventories of the businesses using either FIFO or an average costing method for valuing inventories turn over frequently and at any point in time the amount of cement or fuel inventory is not significant. As a result of these circumstances, the commodity fluctuations have primarily affected the cost of sales with little effect on the valuation of inventory. Due to the nature of our products, obsolescence is not typically a significant exposure, however our HVAC businesses will from time to time contend with some slow-moving inventories or parts that are no longer used due to engineering changes. We believe that our inventory valuation reserves are not material. At December 31, 2016, inventory reserves were approximately 1.4% of the total FIFO inventory value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method as follows:
|
Land improvements |
|
5 to 31 years |
|
Buildings and improvements |
|
10 to 31 years |
|
Leasehold improvements |
|
Shorter of the term of the lease or useful life |
|
Machinery and equipment |
|
3 to 20 years |
Depletion of rock and sand deposits and amortization of deferred development costs are computed by the units-of-production method based upon estimated recoverable quantities of rock and sand. The estimated recoverable quantities are periodically reassessed.
The cost of property sold or retired and the related accumulated depreciation, depletion and amortization are removed from the accounts and the resulting gain or loss is reflected in operating income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized and depreciated over their estimated useful lives.
OTHER ASSETS
The Company annually assesses goodwill for potential impairment at the end of each year. In addition, the Company will reassess the recorded goodwill to determine if impairment has occurred if events arise or circumstances change in the relevant reporting segments or in their industries. No goodwill impairment was recognized for any of the periods presented.
Amortizable intangible assets consist of a restrictive land covenant and customer relationships related to the Company’s acquisition of the assets of a ready-mix concrete business in 2006. The restrictive land covenant was being amortized on a straight-line basis over its estimated life of ten years. The customer relationships amount was amortized over its estimated life of ten years using the sum-of-the-years digits method. Both of these intangible assets were fully amortized as of December 31, 2016.
During the fourth quarter of 2016 the Company paid $2,500,000 related to an aggregate property near Colorado Springs. As the Company negotiates with the State of Colorado to obtain the necessary mining permits the amount is being held in an escrow account and is included in other assets as of December 31, 2016.
29
The Company is party to three aggregate property leases which require royalty payments. The leased gravel operation in Pueblo Colorado is currently the subject of litigation as the Company seeks, among other things, to rescind the lease and to recover overpayment of approximately $627,000 of royalties. This overpayment is included in the other long-term assets category. See Note 2.
RETIREMENT PLANS
The Company and certain subsidiaries have various contributory profit sharing retirement plans for specific employees. The plans allow qualified employees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k). The Company may make annual contributions, at its discretion, based primarily on profitability. In addition, any individuals whose compensation is in excess of the amount eligible for the Company matching contribution to the 401(k) plan as established by Section 401 of the Internal Revenue Code, participate in an unfunded Supplemental Profit Sharing Plan. This plan accrues an amount equal to the difference between the amount the person would have received as Company contributions to his account under the 401(k) plan had there been no limitations and the amount the person will receive under the 401(k) plan giving effect to the limitations. Costs under the plans are charged to operations as incurred. As of December 31, 2016 and January 2, 2016, the unfunded liabilities related to the Supplemental Profit Sharing Plan were $854,000 and $901,000, respectively.
RESERVE FOR SELF-INSURED AND INSURED LOSSES
The Company’s risk management program provides for certain levels of loss retention for workers’ compensation, automobile liability, healthcare plan coverage and general and product liability claims. The components of the reserve for self-insured losses have been recorded in accordance with Generally Accepted Accounting Principles (GAAP) requirements that an estimated loss from a loss contingency shall be accrued if information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. The recorded reserve represents management’s best estimate of the future liability related to these claims up to the associated deductible.
GAAP also requires an entity to accrue the gross amount of a loss even if the entity has purchased insurance to cover the loss. Therefore the Company has recorded losses for workers’ compensation, automobile liability, medical plan coverage and general and product liability claims in excess of the deductible amounts, i.e., amounts covered by insurance contracts, in “Liability for unpaid claims covered by insurance” with a corresponding “Receivable for insured losses” on the balance sheet. The components of the liability represent both unpaid settlements and management’s best estimate of the future liability related to open claims. Management has evaluated the creditworthiness of our insurance carriers and determined that recovery of the recorded losses is probable and, therefore, the receivable from insurance has been recorded for the full amount of the insured losses. The amount of claims and related insured losses at December 31, 2016 was $32,000. There were no such claims and related insured losses at January 2, 2016.
RECLAMATION
In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas whether the property is owned or leased. The Company records a reserve for future reclamation work to be performed at its various aggregate operations based upon an estimate of the total expense that would be paid to a third party to reclaim the disturbed areas. Reclamation expense is determined during the interim periods using the units-of-production method. At each fiscal year-end, a more formal and complete analysis is performed and the expense and reserve is adjusted to reflect the estimated cost to reclaim the then disturbed and unreclaimed areas. The assessment of the reclamation liability may be done more frequently if events or circumstances arise that may indicate a change in estimated costs, recoverable material or period of mining activity. As part of the year-end analysis, the Company engages an independent specialist to assist in reevaluating the estimates of both the quantities of recoverable material and the cost of reclamation. Most of the reclamation on any mining property is generally performed concurrent with mining or soon after each section of the deposit is mined. The Company’s reserve for reclamation activities was $5,940,000 at December 31, 2016 and $5,675,000 at January 2, 2016. The Company classifies a portion of the reserve as a current liability, $748,000 at December 31, 2016 and $695,000 at January 2, 2016 based upon historical expenditures and the anticipated reclamation timeframe for the Pueblo aggregate operation which is still under litigation as discussed in Note 2.
30
REVENUE RECOGNITION
The Company recognizes revenue as products are shipped to customers. Sales are recorded net of sales tax and applicable provisions for discounts, volume incentives, returns and allowances. At the time of revenue recognition, the Company also provides an estimate of potential bad debt and warranty expense as well as an amount anticipated to be granted to customers under cooperative advertising programs based upon current program terms and historical experience. In addition, the revenues received for shipping and handling are included in sales while the costs associated with shipping and handling are reported as cost of sales.
The Company is responsible for warranty related to the manufacture of its HVAC products. The Company does not perform installation services except for installation of electronic access and security systems in the Door segment, nor are maintenance or service contracts offered. Changes in the aggregated product warranty liability for the fiscal years 2016 and 2015 were as follows (amounts in thousands):
|
|
|
2016 |
|
2015 |
|
||
|
Beginning balance |
|
$ |
121 |
|
$ |
109 |
|
|
Warranty related expenditures |
|
|
(120) |
|
|
(150) |
|
|
Warranty expense accrued |
|
|
117 |
|
|
162 |
|
|
Ending balance |
|
$ |
118 |
|
$ |
121 |
|
INCOME TAXES
Income taxes are accounted for under the asset and liability method that requires deferred income taxes to reflect the future tax consequences attributable to differences between the tax and financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized are based on the tax rates in effect in the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, based on available positive and negative evidence, it is “more likely than not” (greater than a 50% likelihood) that some or all of the net deferred tax assets will not be realized.
The Company has established a valuation reserve related to the carry-forward of all charitable contributions deductions arising from prior years. For Federal tax purposes, net operating losses can be carried forward for a period of 20 years while alternative minimum tax credits can be carried forward indefinitely. For state tax purposes, net operating losses can be carried forward for periods ranging from 5 to 20 years for the states that the Company is required to file in. California Enterprise Zone credits can be used through 2023 while Colorado credits can be carried forward for 7 years.
Income tax returns are subject to audit by the Internal Revenue Service (IRS) and state tax authorities. The amounts recorded for income taxes reflect the Company’s tax positions based on research and interpretations of complex laws and regulations. The Company accrues liabilities related to uncertain tax positions taken or expected to be taken in its tax returns.
CONCENTRATIONS
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables and temporary cash investments. The Company may invest its excess cash in commercial paper of companies with strong credit ratings. The Company has not experienced any losses on these investments.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. In many instances in the Concrete, Aggregates and Construction Supplies segment and in the Heating and Cooling segment (as it relates to the fan coil product line), the Company retains lien rights on the properties served until the receivable is collected. The Company writes off accounts when all efforts to collect the receivable have been exhausted. The Company maintains allowances for potential credit losses based upon the aging of accounts receivable, management’s assessment of individual accounts and historical experience. Such losses have been within management’s expectations. See Note 15 for a description of the Company’s customer base.
31
All long-lived assets are in the United States. No customer accounted for 10% or more of total sales of the Company in fiscal 2016 or 2015.
Substantially all of the Heating and Cooling Segment’s factory employees are covered by a collective bargaining agreement through the Carpenters Local 721 Union under a contract that expires on December 31, 2018.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow value is required. In the fiscal quarter ended October 1, 2016 the Company wrote off $632,000 of prepaid royalties related to the leased gravel operation in Pueblo, Colorado. See Note 2.
FISCAL YEAR END
The Company’s fiscal year-end is the Saturday nearest December 31. Fiscal 2016 and fiscal 2015 each consisted of 52 weeks.
2. CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE
On September 15, 2016 a Partial Summary Judgment Order was issued regarding the Company’s previously disclosed litigation, Continental Materials Corporation v. Valco, Inc., Civil Action No. 2014-cv-2510, filed in the United States District Court for the District of Colorado. The suit regards a sand and gravel lease between the Company and Valco, Inc. (“Valco”) that calls for the payment of royalties over the life of the lease on an agreed 50,000,000 tons of sand and gravel reserves. In the suit the Company sought, among other things, to reform the sand and gravel lease in regard to the agreed amount of sand and gravel reserves and to recover approximately $1,282,000 of royalty overpayments included in other long-term assets. The Partial Summary Judgment Order resolved many of the Company’s claims in Valco’s favor, but the Company’s claim for the return of royalty overpayments made during the statutorily allowed period is still pending. During the third quarter of 2016, the Company recorded a $632,000 write-down representing the portion of the royalty overpayment paid prior to the statutorily allowed period because of litigation risk attendant to recovering that amount. On September 30, 2016 Valco filed a motion seeking to add three counterclaims alleging damages in excess of $5,900,000. The Company opposed Valco’s motion and on December 9, 2016, Valco withdrew its motion to add counterclaims. The Company has asserted partial failure of consideration as a defense to Valco’s counterclaims for unpaid royalties because the consideration for the promise to pay royalties was the 50,000,000 tons of sand and gravel reserves that do not exist. The Company sought certification of the Partial Summary Judgment Order because it and its legal counsel believe the court improperly resolved factual issues in its Partial Summary Judgment Order that should have been decided by a jury. The Company and its legal counsel believe there is a likelihood that some, or all, of the issues resolved by the Partial Summary Judgment Order may be reversed on appeal and remanded for trial by jury although there can be no assurance that an appeal will result in reversal. The Company paid royalties on approximately 17,700,000 tons, including the overpayments, of the 50,000,000 tons of sand and gravel reserves through the end of the third quarter of 2014. The impact of these proceedings could have a material financial effect on the Company; however, the Company does not believe that there is a reasonable basis for estimating the financial impact, if any, of the final outcome of these proceedings and accordingly no accrual or reserve has been recorded in compliance with accounting principles generally accepted in the United States of America. On February 23, 2017, the Partial Summary Judgment Order was certified for immediate appeal, and all other claims, counterclaims and defenses were stayed pending the resolution of that appeal. The Company filed a notice of appeal on March 24, 2017. The appeal is currently pending.
32
3. INVENTORIES
Inventories consisted of the following (amounts in thousands):
|
|
|
December 31, 2016 |
|
January 2, 2016 |
|
||
|
Finished goods |
|
$ |
8,077 |
|
$ |
7,446 |
|
|
Work in process |
|
|
1,433 |
|
|
1,459 |
|
|
Raw materials and supplies |
|
|
11,135 |
|
|
10,741 |
|
|
|
|
$ |
20,645 |
|
$ |
19,646 |
|
If inventories valued on the LIFO basis were valued at current costs, inventories would be higher by $5,731,000 and $5,748,000 at December 31, 2016 and January 2, 2016, respectively.
4. GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS
As of December 31, 2016 the Company has recorded $7,229,000 of goodwill consisting of $6,229,000 related to the CACS segment and $1,000,000 related to the Door segment. The Company assesses goodwill for potential impairment at the end of each year. For the CACS segment, the Company engages the services of an investment banking firm to assist management in determining the fair value of the reporting unit. For the Door segment, the Company prepares a discounted cash flow analysis to estimate the fair value of the reporting unit. In addition, if events occur or circumstances change in the relevant reporting segments or in their industries the Company will then reassess the recorded goodwill to determine if impairment has occurred. No goodwill impairment was recognized for any of the periods presented. The valuation of goodwill and other intangibles is considered a significant estimate. Future economic conditions could negatively impact the value of the business which could trigger an impairment that would materially impact earnings.
There were no changes in recorded goodwill for either of the years ended December 31, 2016 or January 2, 2016.
Identifiable intangible assets consist of the following (amounts in thousands):
|
|
|
December 31, 2016 |
|
January 2, 2016 |
|
||||||||
|
|
|
Gross |
|
|
|
Gross |
|
|
|
||||
|
|
|
carrying |
|
Accumulated |
|
carrying |
|
Accumulated |
|
||||
|
|
|
amount |
|
amortization |
|
amount |
|
amortization |
|
||||
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restrictive land covenant |
|
$ |
350 |
|
$ |
350 |
|
$ |
350 |
|
$ |
332 |
|
|
Customer relationships |
|
|
370 |
|
|
370 |
|
|
370 |
|
|
367 |
|
|
|
|
$ |
720 |
|
$ |
720 |
|
$ |
720 |
|
$ |
699 |
|
Amortization expense of intangible assets was $21,000 for 2016 and $45,000 for 2015. All intangible assets are fully amortized as of December 31, 2016; therefore, future amortization expense is $0.
5. REVOLVING BANK LOAN
The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective November 18, 2011. The Company entered into the Fifth Amendment to Credit Agreement effective March 20, 2015 and the Sixth Amendment to Credit Agreement effective August 10, 2015. Effective March 24, 2016, the Company entered into the Seventh Amendment to Credit Agreement. The Company had previously entered into four separate amendments to the Credit Agreement. Cumulatively, the amendments were entered into by the Company to, among other things, (i) modify certain of the financial covenants, (ii) adjust the amount of the Revolving Commitment, (iii) terminate the Term Loan Commitment upon the repayment in full of the outstanding principal balance (and accrued interest thereon) of the Term Loan, (iv) modify the Borrowing Base calculation to provide for borrowing availability in respect of new Capital Expenditures, (v) decrease the interest rates on the Revolving Loans and (vi) extend the maturity date. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Credit Agreement bear interest based on a London Interbank Offered Rate (LIBOR) or prime rate based option.
33
The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period.
The Credit Agreement as amended provides for the following:
|
· |
The Revolving Commitment is $20,000,000. |
|
· |
Borrowings under the Revolving Commitment are limited to (a) 80% of eligible accounts receivable, (b) the lesser of 50% of eligible inventories and $8,500,000 plus (c) 80% of new Capital Expenditures not to exceed $5,500,000 with respect to each of Fiscal Years 2016 and 2017. |
|
· |
The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.15 to 1.0 for each trailing twelve month period measured at the end of each Fiscal Quarter. |
|
· |
The Company must not permit Tangible Net Worth as of the last day of any future Computation Period to be less than $31,000,000 (provided that the required amount of Tangible Net Worth shall increase (but not decrease) by an amount equal to 50% of the Consolidated Net Income for the immediately preceding Fiscal Year). |
|
· |
The Balance Sheet Leverage Ratio as of the last day of any Computation Period may not exceed 1.00 to 1.00. |
|
· |
The maturity date of the credit facility is May 1, 2018. |
|
· |
Interest rate pricing for the revolving credit facility is currently LIBOR plus 2.50% or the prime rate plus 0.25%. |
Definitions under the Credit Agreement as amended are as follows:
|
· |
Tangible Net Worth is defined as net worth plus subordinated debt, minus intangible assets (goodwill, intellectual property, prepaid expenses, deposits and deferred charges), minus all obligations owed to the Company or any of its subsidiaries by any affiliate or any or its subsidiaries and minus all loans owed by its officers, stockholders, subsidiaries or employees. |
|
· |
Fixed Charge Coverage Ratio is defined as, for any computation period, the ratio of (a) the sum for such period of (i) EBITDA, as defined, minus (ii) the sum of income taxes paid in cash and all unfinanced capital expenditures to (b) the sum for such period of interest expense. |
|
· |
Balance Sheet Leverage Ratio is defined as the ratio of Total Debt to Tangible Net Worth. |
|
· |
EBITDA means for any Computation Period (or another time period to the extent expressly provided for in the Credit Agreement) the sum of the following with respect to the Company and its Subsidiaries each as determined in accordance with GAAP: (a) Consolidated Net Income, plus (b) federal, state and other income taxes deducted in the determination of Consolidated Net Income, plus (c) Interest Expense deducted in the determination of Consolidated Net Income, plus (d) depreciation, depletion and amortization expense deducted in the determination of Consolidated Net Income, plus (e) for 2014, charges directly related to the closing and reclamation of the Pueblo aggregates mining site, plus (f) any other non-cash charges and any extraordinary charges deducted in the determination of Consolidated Net Income, including any asset impairment charges (including write downs of goodwill), minus (g) any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued operations included in the determination of Consolidated Net Income. |
Outstanding funded revolving debt was $2,000,000 as of December 31, 2016 compared to $6,200,000 as of January 2, 2016. The highest balance outstanding during 2016 and 2015 was $7,500,000 and $7,400,000 respectively. Average outstanding funded debt was $3,712,000 and $5,205,000 for 2016 and 2015, respectively. At December 31, 2016, the Company had outstanding letters of credit totaling $5,415,000. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the available borrowing capacity exceeded the cash needs of the Company and this situation is expected to continue for the foreseeable future.
The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including planned capital expenditures, for the next twelve months except for the expenditures related to the acquisition of the necessary equipment needed to begin
34
mining an aggregates property near Colorado Springs should TMC succeed in obtaining the required mining permits from the State of Colorado and El Paso County. As of December 31, 2016 the Company has invested and capitalized approximately $2,884,000 of deferred development expenditures related to this aggregates property. The Company expects to arrange for term or mortgage financing to fund the acquisition of the necessary equipment needed to begin mining the property should the permits be granted. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters related to its business, principally product liability matters related to the gas-fired heating products and fan coil products in the Heating and Cooling segment. In the Company’s opinion, none of these proceedings, when concluded, will have a material adverse effect on the Company’s consolidated results of operations, cash flows or financial condition as the Company has established adequate accruals for matters that are probable and estimable. The Company does not accrue estimated future legal costs related to the defense of these matters but rather expenses legal costs as incurred. Also see Note 2 for discussion of litigation regarding the Pueblo sand and gravel lease.
7. SHAREHOLDERS’ EQUITY
Four hundred thousand shares of preferred stock ($.50 par value) are authorized and unissued.
The Company purchased 2,000 shares and 1,000 shares of its common stock from a former employee to become treasury stock during fiscal 2016 and fiscal 2015, respectively. Under the 2010 Non-Employee Directors Stock Plan (the “Plan”) the Company reserved 150,000 treasury shares representing the maximum number of shares allowed to be granted to non-employee directors in lieu of the base director retainer fee. The Company issued a total of 12,000 shares to the eight eligible board members effective April 6, 2016 as full payment for their 2016 retainer fee. The Company issued a total of 12,000 shares to the eight eligible board members effective January 15, 2015 as full payment for their 2015 retainer fee.
8. EARNINGS PER SHARE
The Company does not have any common stock equivalents, warrants or other convertible securities outstanding, therefore there are no differences between the calculation of basic and diluted EPS for the fiscal years 2016 or 2015.
9. RENTAL EXPENSE, LEASES AND COMMITMENTS
The Company leases certain of its facilities and equipment and is required to pay the related taxes, insurance and certain other expenses. Rental expense was $4,595,000 and $3,429,000 for 2016 and 2015, respectively.
Future minimum rental commitments under non-cancelable operating leases for 2017 and thereafter are as follows: 2017 – $1,842,000; 2018 – $1,436,000; 2019 – $803,000; 2020 – $659,000; 2021 – $572,000 and thereafter – $2,234,000. The commitments do not include any amounts related to minimum royalty payments due on an aggregates property lease in conjunction with the Pueblo, Colorado operation as discussed in Note 2. The commitments do include amounts expected to be reimbursed to the Company by related party tenants as discussed in Note 13. These related party amounts for 2017 and thereafter are as follows: 2017 - $166,000; 2018 – $169,000; 2019 – $171,000; 2020 – $174,000; 2021 – $177,000 and thereafter – $1,057,000.
10. RETIREMENT PLANS
As discussed in Note 1, the Company maintains defined contribution retirement benefit plans for eligible employees. Total plan expenses charged to continuing operations were $1,229,000 and $873,000 in 2016 and 2015, respectively.
35
11. CURRENT ECONOMIC CONDITIONS
Construction activity along the Southern Front Range of Colorado, around Colorado Springs, exhibited modest and thus far sustained improvement over the past two years. Construction activity in the Pueblo market has shown some improvement in the current year as well. Residential construction is expected to remain below prior, more robust periods, however commercial construction is improving. A new street tax passed in Colorado Springs is expected to spur some municipal projects over the next five years. Economic growth in Southern Colorado continues to lag behind the growth experienced in the Denver area. Although pricing improved in the CACS segment during 2016, bidding on jobs has been and is expected to remain highly competitive. Further improvement in the CACS segment will require sustained improvement in the Colorado Springs and Pueblo construction markets and the ability to maintain or enhance ready-mix concrete prices especially in response to any increases in cement and/or fuel costs that may occur.
The markets for products manufactured or fabricated by the Heating and Cooling segment are expected to remain somewhat strong mainly due to anticipated continuation of construction spending in the lodging industry. The markets for the Evaporative Cooling and Door segments are expected to stay fairly constant. As has historically been the case, sales of all segments, other than the Door segment, are influenced by weather conditions.
12. INCOME TAXES
The provision for income taxes is summarized as follows (amounts in thousands):
|
|
|
2016 |
|
2015 |
|
||
|
Federal: Current |
|
$ |
613 |
|
$ |
(71) |
|
|
Deferred |
|
|
1,284 |
|
|
737 |
|
|
State: Current |
|
|
2 |
|
|
2 |
|
|
Deferred |
|
|
249 |
|
|
113 |
|
|
|
|
$ |
2,148 |
|
$ |
781 |
|
Note that the percentage effect of an item on the statutory tax rate in a given year will fluctuate based upon the magnitude of the pre-tax profit or loss in that year. The difference between the tax rate on income for financial statement purposes and the federal statutory tax rate was as follows:
|
|
|
2016 |
|
2015 |
|
|
Statutory tax rate |
|
34.0 |
% |
34.0 |
% |
|
Percentage depletion |
|
(1.8) |
|
(4.0) |
|
|
Non-deductible expenses |
|
1.0 |
|
2.0 |
|
|
Valuation allowance for tax assets |
|
1.0 |
|
(4.9) |
|
|
State income taxes, net of federal benefit |
|
4.2 |
|
5.7 |
|
|
Expiring charitable contributions |
|
— |
|
2.6 |
|
|
Domestic production deduction |
|
(0.8) |
|
— |
|
|
Other |
|
(0.8) |
|
0.2 |
|
|
|
|
36.8 |
% |
35.6 |
% |
36
For financial statement purposes, deferred tax assets and liabilities are recorded at a blend of the current statutory federal and states’ tax rates – 37.96%. The principal temporary differences and their related deferred taxes are as follows (amounts in thousands):
|
|
|
2016 |
|
2015 |
|
||
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Reserves for self-insured losses |
|
$ |
579 |
|
$ |
605 |
|
|
Accrued reclamation |
|
|
1,945 |
|
|
2,154 |
|
|
Unfunded supplemental profit sharing plan liability |
|
|
351 |
|
|
379 |
|
|
Asset valuation reserves |
|
|
267 |
|
|
317 |
|
|
Future state tax credits |
|
|
789 |
|
|
789 |
|
|
Net state operating loss carryforwards |
|
|
167 |
|
|
252 |
|
|
Federal AMT carryforward |
|
|
620 |
|
|
481 |
|
|
Federal NOL carryforward |
|
|
— |
|
|
16 |
|
|
Other |
|
|
873 |
|
|
746 |
|
|
|
|
|
5,591 |
|
|
5,739 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,013 |
|
|
841 |
|
|
Deferred development |
|
|
1,057 |
|
|
563 |
|
|
Prepaid royalties |
|
|
1,187 |
|
|
478 |
|
|
Other |
|
|
588 |
|
|
635 |
|
|
|
|
|
3,845 |
|
|
2,517 |
|
|
Net deferred tax asset before valuation allowance |
|
|
1,746 |
|
|
3,222 |
|
|
Valuation allowance |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
(73) |
|
|
(180) |
|
|
(Increase) decrease during the period |
|
|
(57) |
|
|
107 |
|
|
Ending Balance |
|
|
(130) |
|
|
(73) |
|
|
Net deferred tax asset |
|
$ |
1,616 |
|
$ |
3,149 |
|
At December 31, 2016 the Company carries a valuation reserve of $79,000 ($30,000 tax effected) related to the carry forward of charitable contribution deductions arising in prior years due to the uncertainty that the Company will be able to utilize these deductions prior to the expiration of their carry forward periods. For Federal purposes, Alternative Minimum Tax credits can be carried forward indefinitely. For State purposes, Net Operating Losses can be carried forward for periods ranging from 5 to 20 years for the states that the Company is required to file in. Of the $789,000 of recorded state tax credits, $760,000 relates to California Enterprise Zone hiring credits earned in prior years. California repealed the credit and limited its use to tax years through 2023. The Company established a valuation reserve of $152,000 ( $100,000 tax effected) at the end of the current year related to the carryforward of the California Enterprise Zone hiring credits due to the uncertainty that the Company will be able to utilize the credits prior to their expiration in 2023.
The realization of the deferred tax assets is subject to our ability to generate sufficient taxable income during the periods in which the temporary differences become realizable. In evaluating whether a valuation allowance is required, we consider all available positive and negative evidence, including prior operating results, the nature and reason of any losses, our forecast of future taxable income and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. The estimates are based on our best judgment at the time made based on current and projected circumstances and conditions.
As a result of the evaluation of the realizability of our deferred tax assets as of December 31, 2016, we concluded that it was more likely than not that all of our deferred tax assets would be realized to the extent not reserved for by a valuation allowance.
The Company accounts for uncertainty in income taxes recognized in its financial statements by applying GAAP’s recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The financial statement effects of a tax position are initially
37
recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold should initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon effective settlement with a taxing authority. There was no gross amount of unrecognized tax benefits at either December 31, 2016 or January 2, 2016.
We file income tax returns in the United States Federal and various state jurisdictions. Federal tax years 2013 and on remain subject to examination. Various state income tax returns also remain subject to examination.
13. RELATED PARTY TRANSACTIONS
A director of the Company is a partner in a law firm engaged to represent the Company in various legal matters including the lawsuit filed by the Company related to the sand and gravel lease discussed in Note 2. For the year ending December 31, 2016 the Company has paid the director’s firm $522,000 for services rendered. During fiscal 2015 the same director’s firm was paid $494,000.
The corporate office leases space in Chicago, Illinois that is shared with three organizations related to the Company’s principal shareholders. Each of the organizations pays its pro-rata share of rent and other expenses based on a square footage allocation. See Note 9 for additional discussion. Furthermore, the Company purchases insurance coverage for workers’ compensation, general and umbrella liability together with another company controlled by the Company’s principal shareholders to minimize insurance costs. Allocation of the expense of the program is either provided by the underwriter or based upon a formula that considers, among other things, sales levels, loss exposure and claim experience. Claims under the self-insured portion of the policies are charged directly to the incurring party. Amounts receivable from these organizations at December 31, 2016 and January 2, 2016 were $213,000 and $89,000, respectively.
14. UNAUDITED QUARTERLY FINANCIAL DATA
The following table and footnotes provide summarized unaudited fiscal quarterly financial data for 2016 and 2015 (amounts in thousands, except per share amounts):
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
||||
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
||||
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
34,228 |
|
$ |
42,721 |
|
$ |
37,647 |
|
$ |
36,996 |
|
|
Gross profit |
|
|
7,019 |
|
|
9,640 |
|
|
8,038 |
|
|
6,734 |
|
|
Depreciation, depletion and amortization |
|
|
639 |
|
|
651 |
|
|
607 |
|
|
539 |
|
|
Net income |
|
|
508 |
|
|
1,801 |
|
|
1,042 |
|
|
335 |
|
|
Basic and Diluted income per share |
|
|
0.31 |
|
|
1.08 |
|
|
0.62 |
|
|
0.20 |
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
||||
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
||||
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
30,685 |
|
$ |
34,865 |
|
$ |
36,165 |
|
$ |
35,120 |
|
|
Gross profit |
|
|
5,498 |
|
|
6,689 |
|
|
6,908 |
|
|
6,483 |
|
|
Depreciation, depletion and amortization |
|
|
646 |
|
|
651 |
|
|
640 |
|
|
484 |
|
|
Net (loss) income |
|
|
(196) |
|
|
346 |
|
|
562 |
|
|
701 |
|
|
Basic and Diluted (loss) income per share |
|
|
(0.12) |
|
|
0.21 |
|
|
0.34 |
|
|
0.42 |
|
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total for the year.
15. INDUSTRY SEGMENT INFORMATION
The Company operates primarily in two industry groups, HVAC and Construction Products. The Company has identified two reportable segments in each of the two industry groups: the Heating and Cooling segment and the Evaporative
38
Cooling segment in the HVAC industry group and the CACS segment and the Door segment in the Construction Products industry group. The Heating and Cooling segment primarily produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, WFC of Colton, California. The Evaporative Cooling segment primarily produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, PMI of Phoenix, Arizona. Sales of these two segments are nationwide, but are concentrated in the southwestern United States. Concrete, aggregates and construction supplies are offered by the CACS segment from numerous locations along the Southern portion of the Front Range of Colorado operated by the Company’s wholly-owned subsidiaries collectively referred to as TMC. The Door segment sells hollow metal and wood doors, door frames and related hardwares, lavatory fixtures and electronic access and security systems from the Company’s wholly-owned subsidiary, MDHI, which operates out of facilities in Pueblo and Colorado Springs, Colorado. Sales of these latter two segments are highly concentrated in the Southern Front Range area in Colorado although door sales are also made throughout the United States.
The Company evaluates the performance of its segments and allocates resources to them based on a number of criteria including operating income, return on investment and other strategic objectives. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest, other income or loss or income taxes.
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
The following table presents information about reported segments for the fiscal years 2016 and 2015 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):
|
|
|
Construction Products Industry |
|
HVAC Industry |
|
|
|
|
|
||||||||||||||||
|
|
|
Concrete, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
Aggregates & |
|
|
|
Combined |
|
Heating |
|
|
|
|
|
Unallocated |
|
|
|
||||||||
|
|
|
Construction |
|
|
|
Construction |
|
and |
|
Evaporative |
|
Combined |
|
Corporate |
|
|
|
||||||||
|
|
|
Supplies |
|
Doors |
|
Products |
|
Cooling |
|
Cooling |
|
HVAC |
|
(a) |
|
Total |
|
||||||||
|
Year Ended December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
67,091 |
|
$ |
16,990 |
|
$ |
84,081 |
|
$ |
41,853 |
|
$ |
25,642 |
|
$ |
67,495 |
|
$ |
16 |
|
$ |
151,592 |
|
|
Depreciation, depletion and amortization |
|
|
1,340 |
|
|
134 |
|
|
1,474 |
|
|
526 |
|
|
413 |
|
|
939 |
|
|
23 |
|
|
2,436 |
|
|
Operating income (loss) |
|
|
3,433 |
|
|
1,563 |
|
|
4,996 |
|
|
3,046 |
|
|
1,413 |
|
|
4,459 |
|
|
(3,614) |
|
|
5,841 |
|
|
Segment assets |
|
|
33,518 |
|
|
6,173 |
|
|
39,691 |
|
|
22,381 |
|
|
12,283 |
|
|
34,664 |
|
|
3,653 |
|
|
78,008 |
|
|
Capital expenditures |
|
|
3,296 |
|
|
110 |
|
|
3,406 |
|
|
655 |
|
|
182 |
|
|
837 |
|
|
162 |
|
|
4,405 |
|
|
|
|
Construction Products Industry |
|
HVAC Industry |
|
|
|
|
|
||||||||||||||||
|
|
|
Concrete, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
Aggregates & |
|
|
|
Combined |
|
Heating |
|
|
|
|
|
Unallocated |
|
|
|
||||||||
|
|
|
Construction |
|
|
|
Construction |
|
and |
|
Evaporative |
|
Combined |
|
Corporate |
|
|
|
||||||||
|
|
|
Supplies |
|
Doors |
|
Products |
|
Cooling |
|
Cooling |
|
HVAC |
|
(a) |
|
Total |
|
||||||||
|
Year Ended January 2, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
55,319 |
|
$ |
16,981 |
|
$ |
72,300 |
|
$ |
39,498 |
|
$ |
25,022 |
|
$ |
64,520 |
|
$ |
15 |
|
$ |
136,835 |
|
|
Depreciation, depletion and amortization |
|
|
1,364 |
|
|
128 |
|
|
1,492 |
|
|
504 |
|
|
399 |
|
|
903 |
|
|
26 |
|
|
2,421 |
|
|
Operating (loss) income |
|
|
(256) |
|
|
1,280 |
|
|
1,024 |
|
|
3,371 |
|
|
1,135 |
|
|
4,506 |
|
|
(3,014) |
|
|
2,516 |
|
|
Segment assets |
|
|
31,791 |
|
|
6,471 |
|
|
38,262 |
|
|
22,628 |
|
|
12,730 |
|
|
35,358 |
|
|
2,135 |
|
|
75,755 |
|
|
Capital expenditures |
|
|
1,539 |
|
|
31 |
|
|
1,570 |
|
|
494 |
|
|
239 |
|
|
733 |
|
|
— |
|
|
2,303 |
|
|
(a) |
Includes unallocated corporate office expenses and assets which consist primarily of cash and cash equivalents, prepaid expenses, property, plant and equipment. |
There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the last annual report.
39
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Shareholders
Continental Materials Corporation
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of Continental Materials Corporation (Company) as of December 31, 2016 and January 2, 2016, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years then ended. Our audit also included the years 2016 and 2015 information on the consolidated financial statement schedule listed in the Form 10-K Index at Part IV, Item 15(a)2. The Company’s management is responsible for these consolidated financial statements and consolidated financial statement schedule. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits of the basic consolidated financial statements. The consolidated financial statement schedule is presented for purposes of complying with the Securities and Exchange Commission’s rules and regulations and are not a required part of the consolidated financial statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Continental Materials Corporation as of December 31, 2016 and January 2, 2016, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As discussed in Note 1 to the consolidated financial statements, in 2016, the Company adopted new accounting guidance regarding classification of deferred tax assets and liabilities. Our opinion is not modified with respect to this matter.
/s/ BKD, LLP
Indianapolis, Indiana
March 31, 2017
40
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d‑15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) as of December 31, 2016. The Chief Executive Officer and Chief Financial Officer, based on that evaluation, concluded that our disclosure controls and procedures are effective and were reasonably designed to ensure that all material information relating to the Company (including its subsidiaries) required to be disclosed in our reports filed and submitted by the Company under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Commission.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15f under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control - Integrated Framework (1992). Based on this assessment, management concluded that, as of December 31, 2016, the Company’s internal control over financial reporting is effective. Management reviewed the results of its assessment with the Audit Committee of the Company’s Board of Directors.
As of December 31, 2016, the Company was not an “accelerated filer” as defined in Rule 12b-2 under the Exchange Act. Accordingly, pursuant to SEC rules and regulations, the Company is not required to include, and this Annual Report on Form 10-K does not include, an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We are required to annually reassess our status as a “smaller reporting company” as of the end of our fiscal year to determine whether we will be required to provide Management’s Annual Report on Internal Control Over Financial Reporting and the associated report of our independent registered public accounting firm in our Annual Report.
Changes in Internal Control Over Financial Reporting
As noted above, the Company continually reassesses its internal control over financial reporting and makes changes as deemed prudent. No material weaknesses were identified in the review, therefore no changes in the Company’s internal controls over financial reporting occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
The Company does not have any information, not already reported, that is required to be reported on Form 8-K during the fourth quarter of the year covered by this Form 10-K.
41
Items 10 through 14 of Part III have been omitted from this Annual Report because the registrant expects to file, not later than 120 days following the close of its fiscal year ended December 31, 2016, its definitive 2017 proxy statement. The information required by Items 10 through 14 of Part III will be included in that proxy statement and such information is hereby incorporated by reference.
|
Item 15. |
||
|
|
|
|
|
(a) 1 |
The following financial statements are included in Item 8 of Part II: |
|
|
|
Consolidated statements of income for fiscal years 2016 and 2015 |
|
|
|
Consolidated statements of cash flows for fiscal years ended 2016 and 2015 |
|
|
|
Consolidated balance sheets as of December 31, 2016 and January 2, 2016 |
|
|
|
Consolidated statements of shareholders’ equity for fiscal years 2016 and 2015 |
|
|
|
|
|
|
(a) 2 |
The following is a list of financial statement schedules filed as part of this Annual Report: |
|
|
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts & Reserves For the Fiscal Years 2016 and 2015 |
|
|
|
||
|
All other schedules are omitted because they are not applicable or the information is shown in the financial statements or notes thereto. |
||
|
|
|
|
|
(a) 3 |
The following is a list of all exhibits filed as part of this Annual Report: |
|
|
|
|
|
|
Exhibit 3.1 |
|
Restated Certificate of Incorporation dated May 28, 1975, as amended on May 24, 1978, May 27, 1987 and June 3, 1999 incorporated by reference to Exhibit 3 to Form 10-K for the year ended January 1, 2005 (Accession # 0001104659-05-016256). |
|
|
|
|
|
Exhibit 3.2 |
|
Registrant’s By-laws as amended September 19, 1975 filed as Exhibit 3a to Form 10-Q for the period ended June 28, 2014 (Accession # 0001104659-14-059740), incorporated herein by reference. |
|
|
|
|
|
Exhibit 10 |
|
Amended and Restated Credit Agreement dated November 18, 2011 among Continental Materials Corporation, as the Company (borrower), The Various Financial Institutions Party Hereto, as Lenders, and The PrivateBank and Trust Company, as Administrative Agent and Arranger, filed as Exhibit 10 to Form 10-Q for the quarter ended October 1, 2011, incorporated herein by reference; First Amendment thereto dated March 21, 2013 filed as Exhibit 10 to Form 10-K for the fiscal year ended December 29, 2012; Second Amendment thereto dated March 20, 2014 filed as Exhibit 10 to Form 10-K for the fiscal year ended December 28, 2013; Third Amendment thereto dated June 28, 2014 filed as Exhibit 10 to Form 10-Q for the quarter ended June 28, 2014; Fourth Amendment thereto dated November 13, 2014 filed as Exhibit 10 to Form 10-Q for the quarter ended September 27, 2015; Fifth Amendment thereto dated March 20, 2015 filed as Exhibit 10 to Form 10-K for the fiscal year ended January 2, 2016; Sixth Amendment thereto dated August 8, 2015 filed as Exhibit 10 to Form 10-Q for the quarter ended October 3, 2015 and the Seventh Amendment thereto dated March 24, 2016 filed as Exhibit 10 to Form 10-K for the fiscal year ended January 2, 2016. |
|
|
|
|
|
Exhibit 10a |
|
Fee Sand and Gravel Lease Between Valco, Inc. And Continental Materials Corporation filed as Exhibit 2C to Form 8-K filed November 4, 1996, incorporated herein by reference. |
|
|
|
|
|
Exhibit 10b |
|
Form of Supplemental Deferred Compensation Agreement filed as Exhibit 10 to Form 10-Q for the quarter ended July 1, 1983, incorporated herein by reference.* |
|
|
|
|
42
|
Exhibit 10c |
|
Continental Materials Corporation Employees Profit Sharing Retirement Plan, 2009 Amendment and Restatement filed as Exhibit 10c to Form 10-K for the year ended January, 2, 2010.* |
|
|
|
|
|
Exhibit 21 |
|
Subsidiaries of Registrant (filed herewith). |
|
|
|
|
|
Exhibit 23 |
|
Consent of Independent Registered Public Accounting Firm (filed herewith). |
|
|
|
|
|
Exhibit 31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) and Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
Exhibit 31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) and Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
Exhibit 32 |
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
|
|
Exhibit 95 |
|
Mine Safety Disclosures (filed herewith). |
|
|
|
|
|
Exhibit 101 |
|
The following financial information from the Company’s Annual Report for the fiscal year ended December 31, 2016 filed with the SEC on March 31, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income for the fiscal years 2016 and 2015, (ii) the Consolidated Statements of Cash Flows for the fiscal years 2016 and 2015, (iii) the Consolidated Balance Sheets as of December 31, 2016 and January 2, 2016, (iv) the Consolidated Statements of Shareholders’ Equity for fiscal years 2016 and 2015, and (v) Notes to Consolidated Financial Statements. |
* Compensatory plan or arrangement
43
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
CONTINENTAL MATERIALS CORPORATION |
|
|
|
Registrant |
|
|
|
|
|
|
By: |
/S/Mark S. Nichter |
|
|
|
Mark S. Nichter, Vice President, Secretary and Chief Financial Officer |
Date: March 31, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
SIGNATURE |
|
CAPACITY(IES) |
|
DATE |
|
|
|
|
|
|
|
/S/ James G. Gidwitz |
|
Chief Executive Officer and a Director |
|
|
|
James G. Gidwitz |
|
(Principal Executive Officer) |
|
March 31, 2017 |
|
|
|
|
|
|
|
/S/ Mark S. Nichter |
|
Vice President, Secretary and Controller |
|
|
|
Mark S. Nichter |
|
(Principal Financial and Accounting Officer) |
|
March 31, 2017 |
|
|
|
|
|
|
|
/S/ William D. Andrews |
|
|
|
|
|
William D. Andrews |
|
Director |
|
March 31, 2017 |
|
|
|
|
|
|
|
/S/ Thomas H. Carmody |
|
|
|
|
|
Thomas H. Carmody |
|
Director |
|
March 31, 2017 |
|
|
|
|
|
|
|
/S/ Betsy R. Gidwitz |
|
|
|
|
|
Betsy R. Gidwitz |
|
Director |
|
March 31, 2017 |
|
|
|
|
|
|
|
/S/ Ralph W. Gidwitz |
|
|
|
|
|
Ralph W. Gidwitz |
|
Director |
|
March 31, 2017 |
|
|
|
|
|
|
|
/S/ Ronald J. Gidwitz |
|
|
|
|
|
Ronald J. Gidwitz |
|
Director |
|
March 31, 2017 |
|
|
|
|
|
|
|
/S/ Theodore R. Tetzlaff |
|
|
|
|
|
Theodore R. Tetzlaff |
|
Director |
|
March 31, 2017 |
|
|
|
|
|
|
|
/S/ Peter E. Thieriot |
|
|
|
|
|
Peter E. Thieriot |
|
Director |
|
March 31, 2017 |
|
|
|
|
|
|
|
/S/ Darrell M. Trent |
|
|
|
|
|
Darrell M. Trent |
|
Director |
|
March 31, 2017 |
44
CONTINENTAL MATERIALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (e)
for the fiscal years 2016 and 2015
|
COLUMN A |
|
COLUMN B |
|
COLUMN C(1) |
|
COLUMN D |
|
COLUMN E |
|
||||
|
|
|
Balance at |
|
Additions |
|
|
|
|
|
||||
|
|
|
Beginning of |
|
Charged to Costs |
|
Deductions - |
|
Balance at End of |
|
||||
|
Description |
|
Period |
|
and Expenses |
|
Describe |
|
Period |
|
||||
|
Year 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (c) |
|
$ |
220,000 |
|
$ |
280,000 |
|
$ |
280,000 |
(a) |
$ |
220,000 |
|
|
Inventory valuation reserve (c) |
|
$ |
435,000 |
|
$ |
78,000 |
|
$ |
201,000 |
(b) |
$ |
312,000 |
|
|
Reserve for self-insured losses |
|
$ |
2,334,000 |
|
$ |
4,143,000 |
|
$ |
4,616,000 |
(d) |
$ |
1,861,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (c) |
|
$ |
235,000 |
|
$ |
63,000 |
|
$ |
78,000 |
(a) |
$ |
220,000 |
|
|
Inventory valuation reserve (c) |
|
$ |
383,000 |
|
$ |
163,000 |
|
$ |
111,000 |
(b) |
$ |
435,000 |
|
|
Reserve for self-insured losses |
|
$ |
2,492,000 |
|
$ |
4,601,000 |
|
$ |
4,759,000 |
(d) |
$ |
2,334,000 |
|
Notes:
|
(a) |
Accounts written off, net of recoveries. |
|
(b) |
Amounts written off upon disposal of assets. |
|
(c) |
Reserve deducted in the balance sheet from the asset to which it applies. |
|
(d) |
Payments of self-insured claims including healthcare claims accrued and paid in connection with the Company’s self-insured employee healthcare benefit plan. |
|
(e) |
Column C (2) has been omitted as the answer would be “none”. |
45
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Registrant has no parent; see proxy statement for Registrant’s principal shareholders. The following are Registrant’s subsidiaries included in the consolidated financial statements:
|
Name of Subsidiary |
|
State or Other |
|
|
|
|
|
Castle Concrete Company |
|
Colorado |
|
McKinney Door and Hardware, Inc. |
|
Colorado |
|
Phoenix Manufacturing, Inc. |
|
Arizona |
|
Transit Mix Concrete Co. |
|
Colorado |
|
Transit Mix of Pueblo, Inc. |
|
Colorado |
|
Williams Furnace Co. |
|
Delaware |
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement of Continental Materials Corporation (Company) on Form S-8 (File No. 33-23671) of our report dated March 31, 2017, on our audits of the consolidated financial statements and consolidated financial statement schedule of the Company as of December 31, 2016 and January 2, 2016, and for the years then ended, which report is included in this Annual Report on Form 10-K.
/s/ BKD, LLP
Indianapolis, Indiana
March 31, 2017
Exhibit 31.1
CERTIFICATION
I, James G. Gidwitz, certify that:
|
1. |
I have reviewed this annual report on Form 10-K of Continental Materials Corporation; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
|
5. |
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: March 31, 2017
|
|
By: |
/s/ James G. Gidwitz |
|
|
|
James G. Gidwitz |
|
|
|
Chairman of the Board and |
|
|
|
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Mark S. Nichter, certify that:
|
1. |
I have reviewed this annual report on Form 10-K of Continental Materials Corporation; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
|
4. |
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
|
5. |
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: March 31, 2017
|
|
By: |
/s/ Mark S. Nichter |
|
|
|
Mark S. Nichter |
|
|
|
Vice President and Chief Financial Officer |
Exhibit 32
CONTINENTAL MATERIALS CORPORATION
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Continental Materials Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James G. Gidwitz, the Chairman of the Board and Chief Executive Officer of the Company, and I, Mark S. Nichter, the Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 31, 2017
|
|
By: |
/s/ James G. Gidwitz |
|
|
|
James G. Gidwitz |
|
|
|
Chairman of the Board and |
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
By: |
/s/ Mark S. Nichter |
|
|
|
Mark S. Nichter |
|
|
|
Vice President and Chief Financial Officer |
The foregoing certification accompanies the issuer’s Annual Report on Form 10-K and is not filed as provided in SEC Release Nos. 33-8212, 34-4751 and IC-25967, dated November 16, 2007.
Exhibit 95
Mine Safety Disclosures
The following disclosures are provided pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K, which require certain disclosures by companies required to file periodic reports under the Securities Exchange Act of 1934, as amended, that operate mines regulated under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”).
Mine Safety Information. Whenever the Federal Mine Safety and Health Administration (“MSHA”) believes a violation of the Mine Act, any health or safety standard or any regulation has occurred, it may issue a citation which describes the alleged violation and fixes a time within which the mining operator must abate the alleged violation. In some situations, such as when MSHA believes that conditions pose a hazard to miners, MSHA may issue an order removing miners from the area of the mine affected by the condition until the alleged hazards are corrected. When MSHA issues a citation or order, it generally proposes a civil penalty, or fine, as a result of the alleged violation, that the operator is ordered to pay. Citations and orders can be contested and appealed, and as part of that process, are often reduced in severity and amount, and are sometimes dismissed. The number of citations, orders and proposed assessments vary depending on the size and type (underground or surface) of the mine as well as by the MSHA inspectors assigned.
Mine Safety Data. The following headings are used in the table below to describe the categories of violations, orders or citations issued by MSHA under the Mine Act with respect to the Company’s mines:
|
· |
Section 104 S&S Citations: Citations received from MSHA under Section 104 of the Mine Act for violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a mine safety or health hazard. |
|
· |
Section 104(b) Orders: Orders issued by MSHA under Section 104(b) of the Mine Act, which represents a failure to abate a citation under Section 104(a) within the period of time prescribed by MSHA. This results in an order of immediate withdrawal from the area of the mine affected by the condition until MSHA determines that the violation has been abated. |
|
· |
Section 104(d) Citations and Orders: Citations and orders issued by MSHA under Section 104(d) of the Mine Act for unwarrantable failure to comply with mandatory health or safety standards. |
|
· |
Section 110(b)(2) Violations: Flagrant violations issued by MSHA under Section 110(b)(2) of the Mine Act. |
|
· |
Section 107(a) Orders: Orders issued by MSHA under Section 107(a) of the Mine Act for situations in which MSHA determined an “imminent danger” existed. |
The following table details the violations, citations and orders issued to us by MSHA during the fiscal year ended December 31, 2016 (Dollar amounts in thousands):
|
Mine(1) |
|
Section 104 |
|
Section |
|
Section |
|
Section |
|
Section |
|
Proposed |
|
Mining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Snyder Quarry |
|
— |
|
— |
|
— |
|
— |
|
— |
|
$ |
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grisenti Farms Gravel Pit |
|
26 |
|
— |
|
— |
|
— |
|
— |
|
|
9 |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniels Sand Pit 1 & 2 |
|
7 |
|
— |
|
— |
|
— |
|
— |
|
|
1 |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pueblo East |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pikeview Quarry |
|
20 |
|
— |
|
— |
|
— |
|
— |
|
|
10 |
|
— |
|
|
(1) |
The definition of “mine” found in Section 3 of the Mine Act includes the mine, as well as other items used in, or to be used in, or resulting from, the work of extracting minerals, such as land, structures, facilities, equipment, machines, tools and minerals preparation facilities. Unless otherwise indicated, any of these other items associated with a single mine have been aggregated in the totals for that mine. MSHA assigns an identification number to each mine and may or may not assign separate identification numbers to related facilities such as preparation facilities. We are providing the information in the table by mine rather than MSHA identification number because that is how we manage and operate our mining business and we believe this presentation will be more useful to the reader than providing information based on MSHA identification numbers. |
|
(2) |
Represents the total dollar value of the proposed assessment from MSHA under the Mine Act pursuant to the citations and/or orders preceding such dollar value in the corresponding row. |
Pattern or Potential Pattern of Violations. During the fiscal year ended December 31, 2016, none of the mines operated by us received written notice from MSHA of (a) a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of mine health or safety hazards under Section 104(e) of the Mine Act or (b) the potential to have such a pattern.
Pending Legal Actions. There were no pending legal actions before the Federal Mine Safety and Health Review Commission (the “Commission”) as of December 31, 2016, nor were there any legal actions instituted and resolved during the fiscal year ended December 31, 2016. The Commission is an independent adjudicative agency established by the Mine Act that provides administrative trial and appellate review of legal disputes arising under the Mine Act. These cases may involve, among other questions, challenges by operators to citations, orders and penalties they have received from MSHA, or complaints of discrimination by miners under Section 105 of the Mine Act. The following provides additional information of the types of proceedings that may be brought before the Commission:
|
· |
Contest Proceedings: A contest proceeding may be filed by an operator to challenge the issuance of a citation or order issued by MSHA. |
|
· |
Civil Penalty Proceedings: A civil penalty proceeding may be filed by an operator to challenge a civil penalty MSHA has proposed for a violation contained in a citation or order. We do not institute civil penalty proceedings based solely on the assessment amount of proposed penalties. Any initiated adjudications address substantive matters of law and policy instituted on conditions that are alleged to be in violation of mandatory standards of the Mine Act. |
|
· |
Discrimination Proceedings: Involves a miner’s allegation that he or she has suffered adverse employment action because he or she engaged in activity protected under the Mine Act, such as making a safety complaint. Includes also temporary reinstatement proceedings involving cases in which a miner has filed a complaint with MSHA stating that he or she has suffered discrimination and the miner has lost his or her position. |
|
· |
Compensation Proceedings: A compensation proceeding may be filed by miners entitled to compensation when a mine is closed by certain closure orders issued by MSHA. The purpose of the proceeding is to determine the amount of compensation, if any, due to miners idled by the orders. |
|
· |
Temporary Relief: Applications for temporary relief are applications filed under Section 105(b)(2) of the Mine Act for temporary relief from any modification or termination of any order. |
|
· |
Appeals: An appeal may be filed by an operator to challenge judges’ decisions or orders to the Commission, including petitions for discretionary review and review by the Commission on its own motion. |
During fiscal 2016, we had no legal actions instituted or resolved. As of December 31, 2016, we had no pending legal actions.
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Mar. 24, 2017 |
Jul. 01, 2016 |
|
| Document and Entity Information | |||
| Entity Registrant Name | CONTINENTAL MATERIALS CORP | ||
| Entity Central Index Key | 0000024104 | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 2016 | ||
| Amendment Flag | false | ||
| Current Fiscal Year End Date | --12-31 | ||
| Entity Well-known Seasoned Issuer | No | ||
| Entity Voluntary Filers | No | ||
| Entity Current Reporting Status | Yes | ||
| Entity Filer Category | Smaller Reporting Company | ||
| Entity Public Float | $ 7,747,000 | ||
| Entity Common Stock, Shares Outstanding | 1,682,167 | ||
| Document Fiscal Year Focus | 2016 | ||
| Document Fiscal Period Focus | FY |
Consolidated Statements of Income - USD ($) shares in Thousands, $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Jan. 02, 2016 |
|
| Consolidated Statements of Income | ||
| Net sales | $ 151,592 | $ 136,835 |
| Costs and expenses: | ||
| Cost of sales (exclusive of depreciation, depletion and amortization) | 120,161 | 111,257 |
| Depreciation, depletion and amortization | 2,436 | 2,421 |
| Selling and administrative | 22,809 | 20,866 |
| Charges related to cessation of mining an aggregates deposit | 632 | |
| Gain on disposition of property and equipment | (287) | (225) |
| Operating income | 5,841 | 2,516 |
| Interest income | 306 | 55 |
| Interest expense | (367) | (453) |
| Other income, net | 54 | 76 |
| Income before income taxes | 5,834 | 2,194 |
| Provision for income taxes | (2,148) | (781) |
| Net income | $ 3,686 | $ 1,413 |
| Basic and diluted income per share | $ 2.21 | $ 0.85 |
| Average shares outstanding (in shares) | 1,669 | 1,661 |
Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands |
Dec. 31, 2016 |
Jan. 02, 2016 |
|---|---|---|
| Consolidated Balance Sheets | ||
| Receivables, allowance (in dollars) | $ 220 | $ 220 |
| Common shares, par value (in dollars per share) | $ 0.25 | $ 0.25 |
| Common shares, authorized shares | 3,000,000 | 3,000,000 |
| Common shares, issued shares | 2,574,264 | 2,574,264 |
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Continental Materials Corporation (the Company) is a Delaware corporation, incorporated in 1954. The Company operates primarily within two industry groups, Heating, Ventilation and Air Conditioning (HVAC) and Construction Products. The Company has identified two reportable segments in each of the two industry groups: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the Concrete, Aggregates and Construction Supplies (CACS) segment and the Door segment in the Construction Products industry group.
The Heating and Cooling segment primarily produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co. (WFC) of Colton, California. The Evaporative Cooling segment produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona. Concrete, aggregates and construction supplies (CACS) are offered from numerous locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co., of Colorado Springs and Transit Mix of Pueblo, Inc. of Pueblo (the three companies collectively referred to as TMC). The Door segment sells hollow metal and wood doors, door frames and related hardware, lavatory fixtures and electronic access and security systems from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI), which operates out of facilities in Pueblo and Colorado Springs, Colorado.
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Continental Materials Corporation and all of its subsidiaries (the Company). Intercompany transactions and balances have been eliminated. All subsidiaries of the Company are wholly-owned.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 2015 Consolidated Balance Sheet and Consolidated Statement of Cash Flows to conform to the 2016 financial statement presentation. These reclassifications had no effect on total assets, liabilities or shareholders’ equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the first quarter of 2016, the Company implemented ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on organizations’ balance sheets. The change has been applied retrospectively for all periods presented. The effect of implementation is to report a consolidated non-current net asset of $1,616,000 and $3,149,000 in the consolidated balance sheets as of December 31, 2016 and January 2, 2016, respectively. Adoption of this update resulted in reclassifying current deferred income tax assets of $1,078,000 to non-current deferred income tax assets in the consolidated balance sheet as of January 2, 2016.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new revenue standard creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. Subsequently, the FASB has issued various ASUs to provide further clarification around certain aspects of ASC 606. This standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and the Company will adopt the standard on January 1, 2018. While the Company has not completed its analysis of the impact of the provisions of this standard, we do not expect a significant impact to the consolidated financial statements or disclosure.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new standard supersedes existing lease guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The standard will be effective for the Company in the first quarter of 2019 and will be adopted using a modified retrospective approach. While we anticipate the adoption of ASU 2016-02 may have a significant impact on our consolidated balance sheets, consolidated statements of income and disclosures, we are unable to quantify the financial statement impact at this time.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 31, 2016 and January 2, 2016 and the reported amounts of revenues and expenses during both of the two years in the period ended December 31, 2016. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value. The Company has reclassified negative cash balances to Accounts Payable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.
The following methods were used to estimate the fair value of the financial instruments recognized in the accompanying balance sheet.
Cash and Cash Equivalents: The carrying amount approximates fair value and was valued as Level 1.
Debt: Fair value was estimated based on the borrowing rates then available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of debt represents a reasonable estimate of the corresponding fair value as the Company’s debt is held at variable interest rates and was valued as Level 2.
There were no transfers between fair value measurement levels of any financial instruments in the current year.
INVENTORIES
Inventories are valued at the lower of cost or market and are reviewed periodically for excess or obsolete stock with a provision recorded, where appropriate. Cost for inventory in the HVAC industry group is determined using the last-in, first-out (LIFO) method. These inventories represent approximately 79% of total inventories at December 31, 2016 and 82% at January 2, 2016. The cost of all other inventory is determined by the first-in, first-out (FIFO) or average cost methods. Some commodity prices such as copper, steel, cement and diesel fuel have experienced significant fluctuations in recent years. Cement and diesel fuel prices are principally relevant to the CACS segment while steel prices and copper prices are principally relevant to our two HVAC businesses. The general effect of using LIFO is that higher prices are not reflected in the inventory carrying value. Current costs are reflected in the cost of sales. The inventories of the businesses using either FIFO or an average costing method for valuing inventories turn over frequently and at any point in time the amount of cement or fuel inventory is not significant. As a result of these circumstances, the commodity fluctuations have primarily affected the cost of sales with little effect on the valuation of inventory. Due to the nature of our products, obsolescence is not typically a significant exposure, however our HVAC businesses will from time to time contend with some slow-moving inventories or parts that are no longer used due to engineering changes. We believe that our inventory valuation reserves are not material. At December 31, 2016, inventory reserves were approximately 1.4% of the total FIFO inventory value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method as follows:
Depletion of rock and sand deposits and amortization of deferred development costs are computed by the units-of-production method based upon estimated recoverable quantities of rock and sand. The estimated recoverable quantities are periodically reassessed.
The cost of property sold or retired and the related accumulated depreciation, depletion and amortization are removed from the accounts and the resulting gain or loss is reflected in operating income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized and depreciated over their estimated useful lives.
OTHER ASSETS
The Company annually assesses goodwill for potential impairment at the end of each year. In addition, the Company will reassess the recorded goodwill to determine if impairment has occurred if events arise or circumstances change in the relevant reporting segments or in their industries. No goodwill impairment was recognized for any of the periods presented.
Amortizable intangible assets consist of a restrictive land covenant and customer relationships related to the Company’s acquisition of the assets of a ready-mix concrete business in 2006. The restrictive land covenant was being amortized on a straight-line basis over its estimated life of ten years. The customer relationships amount was amortized over its estimated life of ten years using the sum-of-the-years digits method. Both of these intangible assets were fully amortized as of December 31, 2016.
During the fourth quarter of 2016 the Company paid $2,500,000 related to an aggregate property near Colorado Springs. As the Company negotiates with the State of Colorado to obtain the necessary mining permits the amount is being held in an escrow account and is included in other assets as of December 31, 2016.
The Company is party to three aggregate property leases which require royalty payments. The leased gravel operation in Pueblo Colorado is currently the subject of litigation as the Company seeks, among other things, to rescind the lease and to recover overpayment of approximately $627,000 of royalties. This overpayment is included in the other long-term assets category. See Note 2.
RETIREMENT PLANS
The Company and certain subsidiaries have various contributory profit sharing retirement plans for specific employees. The plans allow qualified employees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k). The Company may make annual contributions, at its discretion, based primarily on profitability. In addition, any individuals whose compensation is in excess of the amount eligible for the Company matching contribution to the 401(k) plan as established by Section 401 of the Internal Revenue Code, participate in an unfunded Supplemental Profit Sharing Plan. This plan accrues an amount equal to the difference between the amount the person would have received as Company contributions to his account under the 401(k) plan had there been no limitations and the amount the person will receive under the 401(k) plan giving effect to the limitations. Costs under the plans are charged to operations as incurred. As of December 31, 2016 and January 2, 2016, the unfunded liabilities related to the Supplemental Profit Sharing Plan were $854,000 and $901,000, respectively.
RESERVE FOR SELF-INSURED AND INSURED LOSSES
The Company’s risk management program provides for certain levels of loss retention for workers’ compensation, automobile liability, healthcare plan coverage and general and product liability claims. The components of the reserve for self-insured losses have been recorded in accordance with Generally Accepted Accounting Principles (GAAP) requirements that an estimated loss from a loss contingency shall be accrued if information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. The recorded reserve represents management’s best estimate of the future liability related to these claims up to the associated deductible.
GAAP also requires an entity to accrue the gross amount of a loss even if the entity has purchased insurance to cover the loss. Therefore the Company has recorded losses for workers’ compensation, automobile liability, medical plan coverage and general and product liability claims in excess of the deductible amounts, i.e., amounts covered by insurance contracts, in “Liability for unpaid claims covered by insurance” with a corresponding “Receivable for insured losses” on the balance sheet. The components of the liability represent both unpaid settlements and management’s best estimate of the future liability related to open claims. Management has evaluated the creditworthiness of our insurance carriers and determined that recovery of the recorded losses is probable and, therefore, the receivable from insurance has been recorded for the full amount of the insured losses. The amount of claims and related insured losses at December 31, 2016 was $32,000. There were no such claims and related insured losses at January 2, 2016.
RECLAMATION
In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas whether the property is owned or leased. The Company records a reserve for future reclamation work to be performed at its various aggregate operations based upon an estimate of the total expense that would be paid to a third party to reclaim the disturbed areas. Reclamation expense is determined during the interim periods using the units-of-production method. At each fiscal year-end, a more formal and complete analysis is performed and the expense and reserve is adjusted to reflect the estimated cost to reclaim the then disturbed and unreclaimed areas. The assessment of the reclamation liability may be done more frequently if events or circumstances arise that may indicate a change in estimated costs, recoverable material or period of mining activity. As part of the year-end analysis, the Company engages an independent specialist to assist in reevaluating the estimates of both the quantities of recoverable material and the cost of reclamation. Most of the reclamation on any mining property is generally performed concurrent with mining or soon after each section of the deposit is mined. The Company’s reserve for reclamation activities was $5,940,000 at December 31, 2016 and $5,675,000 at January 2, 2016. The Company classifies a portion of the reserve as a current liability, $748,000 at December 31, 2016 and $695,000 at January 2, 2016 based upon historical expenditures and the anticipated reclamation timeframe for the Pueblo aggregate operation which is still under litigation as discussed in Note 2.
REVENUE RECOGNITION
The Company recognizes revenue as products are shipped to customers. Sales are recorded net of sales tax and applicable provisions for discounts, volume incentives, returns and allowances. At the time of revenue recognition, the Company also provides an estimate of potential bad debt and warranty expense as well as an amount anticipated to be granted to customers under cooperative advertising programs based upon current program terms and historical experience. In addition, the revenues received for shipping and handling are included in sales while the costs associated with shipping and handling are reported as cost of sales.
The Company is responsible for warranty related to the manufacture of its HVAC products. The Company does not perform installation services except for installation of electronic access and security systems in the Door segment, nor are maintenance or service contracts offered. Changes in the aggregated product warranty liability for the fiscal years 2016 and 2015 were as follows (amounts in thousands):
INCOME TAXES
Income taxes are accounted for under the asset and liability method that requires deferred income taxes to reflect the future tax consequences attributable to differences between the tax and financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized are based on the tax rates in effect in the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, based on available positive and negative evidence, it is “more likely than not” (greater than a 50% likelihood) that some or all of the net deferred tax assets will not be realized.
The Company has established a valuation reserve related to the carry-forward of all charitable contributions deductions arising from prior years. For Federal tax purposes, net operating losses can be carried forward for a period of 20 years while alternative minimum tax credits can be carried forward indefinitely. For state tax purposes, net operating losses can be carried forward for periods ranging from 5 to 20 years for the states that the Company is required to file in. California Enterprise Zone credits can be used through 2023 while Colorado credits can be carried forward for 7 years.
Income tax returns are subject to audit by the Internal Revenue Service (IRS) and state tax authorities. The amounts recorded for income taxes reflect the Company’s tax positions based on research and interpretations of complex laws and regulations. The Company accrues liabilities related to uncertain tax positions taken or expected to be taken in its tax returns.
CONCENTRATIONS
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables and temporary cash investments. The Company may invest its excess cash in commercial paper of companies with strong credit ratings. The Company has not experienced any losses on these investments.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. In many instances in the Concrete, Aggregates and Construction Supplies segment and in the Heating and Cooling segment (as it relates to the fan coil product line), the Company retains lien rights on the properties served until the receivable is collected. The Company writes off accounts when all efforts to collect the receivable have been exhausted. The Company maintains allowances for potential credit losses based upon the aging of accounts receivable, management’s assessment of individual accounts and historical experience. Such losses have been within management’s expectations. See Note 15 for a description of the Company’s customer base.
All long-lived assets are in the United States. No customer accounted for 10% or more of total sales of the Company in fiscal 2016 or 2015.
Substantially all of the Heating and Cooling Segment’s factory employees are covered by a collective bargaining agreement through the Carpenters Local 721 Union under a contract that expires on December 31, 2018.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow value is required. In the fiscal quarter ended October 1, 2016 the Company wrote off $632,000 of prepaid royalties related to the leased gravel operation in Pueblo, Colorado. See Note 2.
FISCAL YEAR END
The Company’s fiscal year-end is the Saturday nearest December 31. Fiscal 2016 and fiscal 2015 each consisted of 52 weeks. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE | |
| CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE | 2. CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE
On September 15, 2016 a Partial Summary Judgment Order was issued regarding the Company’s previously disclosed litigation, Continental Materials Corporation v. Valco, Inc., Civil Action No. 2014-cv-2510, filed in the United States District Court for the District of Colorado. The suit regards a sand and gravel lease between the Company and Valco, Inc. (“Valco”) that calls for the payment of royalties over the life of the lease on an agreed 50,000,000 tons of sand and gravel reserves. In the suit the Company sought, among other things, to reform the sand and gravel lease in regard to the agreed amount of sand and gravel reserves and to recover approximately $1,282,000 of royalty overpayments included in other long-term assets. The Partial Summary Judgment Order resolved many of the Company’s claims in Valco’s favor, but the Company’s claim for the return of royalty overpayments made during the statutorily allowed period is still pending. During the third quarter of 2016, the Company recorded a $632,000 write-down representing the portion of the royalty overpayment paid prior to the statutorily allowed period because of litigation risk attendant to recovering that amount. On September 30, 2016 Valco filed a motion seeking to add three counterclaims alleging damages in excess of $5,900,000. The Company opposed Valco’s motion and on December 9, 2016, Valco withdrew its motion to add counterclaims. The Company has asserted partial failure of consideration as a defense to Valco’s counterclaims for unpaid royalties because the consideration for the promise to pay royalties was the 50,000,000 tons of sand and gravel reserves that do not exist. The Company sought certification of the Partial Summary Judgment Order because it and its legal counsel believe the court improperly resolved factual issues in its Partial Summary Judgment Order that should have been decided by a jury. The Company and its legal counsel believe there is a likelihood that some, or all, of the issues resolved by the Partial Summary Judgment Order may be reversed on appeal and remanded for trial by jury although there can be no assurance that an appeal will result in reversal. The Company paid royalties on approximately 17,700,000 tons, including the overpayments, of the 50,000,000 tons of sand and gravel reserves through the end of the third quarter of 2014. The impact of these proceedings could have a material financial effect on the Company; however, the Company does not believe that there is a reasonable basis for estimating the financial impact, if any, of the final outcome of these proceedings and accordingly no accrual or reserve has been recorded in compliance with accounting principles generally accepted in the United States of America. On February 23, 2017, the Partial Summary Judgment Order was certified for immediate appeal, and all other claims, counterclaims and defenses were stayed pending the resolution of that appeal. The Company filed a notice of appeal on March 24, 2017. The appeal is currently pending. |
INVENTORIES |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||
| INVENTORIES | |||||||||||||||||||||||||||||||||||||||||||||||||
| INVENTORIES | 3. INVENTORIES
Inventories consisted of the following (amounts in thousands):
If inventories valued on the LIFO basis were valued at current costs, inventories would be higher by $5,731,000 and $5,748,000 at December 31, 2016 and January 2, 2016, respectively. |
||||||||||||||||||||||||||||||||||||||||||||||||
GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS | 4. GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS
As of December 31, 2016 the Company has recorded $7,229,000 of goodwill consisting of $6,229,000 related to the CACS segment and $1,000,000 related to the Door segment. The Company assesses goodwill for potential impairment at the end of each year. For the CACS segment, the Company engages the services of an investment banking firm to assist management in determining the fair value of the reporting unit. For the Door segment, the Company prepares a discounted cash flow analysis to estimate the fair value of the reporting unit. In addition, if events occur or circumstances change in the relevant reporting segments or in their industries the Company will then reassess the recorded goodwill to determine if impairment has occurred. No goodwill impairment was recognized for any of the periods presented. The valuation of goodwill and other intangibles is considered a significant estimate. Future economic conditions could negatively impact the value of the business which could trigger an impairment that would materially impact earnings.
There were no changes in recorded goodwill for either of the years ended December 31, 2016 or January 2, 2016.
Identifiable intangible assets consist of the following (amounts in thousands):
Amortization expense of intangible assets was $21,000 for 2016 and $45,000 for 2015. All intangible assets are fully amortized as of December 31, 2016; therefore, future amortization expense is $0. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
REVOLVING BANK LOAN |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||
| REVOLVING BANK LOAN | |||||||||||||||||||||||||||||||||||||||||||||
| REVOLVING BANK LOAN | 5. REVOLVING BANK LOAN
The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective November 18, 2011. The Company entered into the Fifth Amendment to Credit Agreement effective March 20, 2015 and the Sixth Amendment to Credit Agreement effective August 10, 2015. Effective March 24, 2016, the Company entered into the Seventh Amendment to Credit Agreement. The Company had previously entered into four separate amendments to the Credit Agreement. Cumulatively, the amendments were entered into by the Company to, among other things, (i) modify certain of the financial covenants, (ii) adjust the amount of the Revolving Commitment, (iii) terminate the Term Loan Commitment upon the repayment in full of the outstanding principal balance (and accrued interest thereon) of the Term Loan, (iv) modify the Borrowing Base calculation to provide for borrowing availability in respect of new Capital Expenditures, (v) decrease the interest rates on the Revolving Loans and (vi) extend the maturity date. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Credit Agreement bear interest based on a London Interbank Offered Rate (LIBOR) or prime rate based option.
The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period.
The Credit Agreement as amended provides for the following:
Definitions under the Credit Agreement as amended are as follows:
Outstanding funded revolving debt was $2,000,000 as of December 31, 2016 compared to $6,200,000 as of January 2, 2016. The highest balance outstanding during 2016 and 2015 was $7,500,000 and $7,400,000 respectively. Average outstanding funded debt was $3,712,000 and $5,205,000 for 2016 and 2015, respectively. At December 31, 2016, the Company had outstanding letters of credit totaling $5,415,000. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the available borrowing capacity exceeded the cash needs of the Company and this situation is expected to continue for the foreseeable future.
The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including planned capital expenditures, for the next twelve months except for the expenditures related to the acquisition of the necessary equipment needed to begin mining an aggregates property near Colorado Springs should TMC succeed in obtaining the required mining permits from the State of Colorado and El Paso County. As of December 31, 2016 the Company has invested and capitalized approximately $2,884,000 of deferred development expenditures related to this aggregates property. The Company expects to arrange for term or mortgage financing to fund the acquisition of the necessary equipment needed to begin mining the property should the permits be granted. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term. |
COMMITMENTS AND CONTINGENCIES |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| COMMITMENTS AND CONTINGENCIES. | |
| COMMITMENTS AND CONTINGENCIES | 6. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters related to its business, principally product liability matters related to the gas-fired heating products and fan coil products in the Heating and Cooling segment. In the Company’s opinion, none of these proceedings, when concluded, will have a material adverse effect on the Company’s consolidated results of operations, cash flows or financial condition as the Company has established adequate accruals for matters that are probable and estimable. The Company does not accrue estimated future legal costs related to the defense of these matters but rather expenses legal costs as incurred. Also see Note 2 for discussion of litigation regarding the Pueblo sand and gravel lease. |
SHAREHOLDERS' EQUITY |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| SHAREHOLDERS' EQUITY | |
| SHAREHOLDERS' EQUITY | 7. SHAREHOLDERS’ EQUITY
Four hundred thousand shares of preferred stock ($.50 par value) are authorized and unissued.
The Company purchased 2,000 shares and 1,000 shares of its common stock from a former employee to become treasury stock during fiscal 2016 and fiscal 2015, respectively. Under the 2010 Non-Employee Directors Stock Plan (the “Plan”) the Company reserved 150,000 treasury shares representing the maximum number of shares allowed to be granted to non-employee directors in lieu of the base director retainer fee. The Company issued a total of 12,000 shares to the eight eligible board members effective April 6, 2016 as full payment for their 2016 retainer fee. The Company issued a total of 12,000 shares to the eight eligible board members effective January 15, 2015 as full payment for their 2015 retainer fee. |
EARNINGS PER SHARE |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| EARNINGS PER SHARE | |
| EARNINGS PER SHARE | 8. EARNINGS PER SHARE
The Company does not have any common stock equivalents, warrants or other convertible securities outstanding, therefore there are no differences between the calculation of basic and diluted EPS for the fiscal years 2016 or 2015. |
RENTAL EXPENSE, LEASES AND COMMITMENTS |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| RENTAL EXPENSE, LEASES AND COMMITMENTS | |
| RENTAL EXPENSE, LEASES AND COMMITMENTS | 9. RENTAL EXPENSE, LEASES AND COMMITMENTS
The Company leases certain of its facilities and equipment and is required to pay the related taxes, insurance and certain other expenses. Rental expense was $4,595,000 and $3,429,000 for 2016 and 2015, respectively.
Future minimum rental commitments under non-cancelable operating leases for 2017 and thereafter are as follows: 2017 – $1,842,000; 2018 – $1,436,000; 2019 – $803,000; 2020 – $659,000; 2021 – $572,000 and thereafter – $2,234,000. The commitments do not include any amounts related to minimum royalty payments due on an aggregates property lease in conjunction with the Pueblo, Colorado operation as discussed in Note 2. The commitments do include amounts expected to be reimbursed to the Company by related party tenants as discussed in Note 13. These related party amounts for 2017 and thereafter are as follows: 2017 - $166,000; 2018 – $169,000; 2019 – $171,000; 2020 – $174,000; 2021 – $177,000 and thereafter – $1,057,000. |
RETIREMENT PLANS |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| RETIREMENT PLANS | |
| RETIREMENT PLANS | 10. RETIREMENT PLANS
As discussed in Note 1, the Company maintains defined contribution retirement benefit plans for eligible employees. Total plan expenses charged to continuing operations were $1,229,000 and $873,000 in 2016 and 2015, respectively. |
CURRENT ECONOMIC CONDITIONS |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| CURRENT ECONOMIC CONDITIONS | |
| CURRENT ECONOMIC CONDITIONS | 11. CURRENT ECONOMIC CONDITIONS
Construction activity along the Southern Front Range of Colorado, around Colorado Springs, exhibited modest and thus far sustained improvement over the past two years. Construction activity in the Pueblo market has shown some improvement in the current year as well. Residential construction is expected to remain below prior, more robust periods, however commercial construction is improving. A new street tax passed in Colorado Springs is expected to spur some municipal projects over the next five years. Economic growth in Southern Colorado continues to lag behind the growth experienced in the Denver area. Although pricing improved in the CACS segment during 2016, bidding on jobs has been and is expected to remain highly competitive. Further improvement in the CACS segment will require sustained improvement in the Colorado Springs and Pueblo construction markets and the ability to maintain or enhance ready-mix concrete prices especially in response to any increases in cement and/or fuel costs that may occur.
The markets for products manufactured or fabricated by the Heating and Cooling segment are expected to remain somewhat strong mainly due to anticipated continuation of construction spending in the lodging industry. The markets for the Evaporative Cooling and Door segments are expected to stay fairly constant. As has historically been the case, sales of all segments, other than the Door segment, are influenced by weather conditions. |
INCOME TAXES |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES | 12. INCOME TAXES
The provision for income taxes is summarized as follows (amounts in thousands):
Note that the percentage effect of an item on the statutory tax rate in a given year will fluctuate based upon the magnitude of the pre-tax profit or loss in that year. The difference between the tax rate on income for financial statement purposes and the federal statutory tax rate was as follows:
For financial statement purposes, deferred tax assets and liabilities are recorded at a blend of the current statutory federal and states’ tax rates – 37.96%. The principal temporary differences and their related deferred taxes are as follows (amounts in thousands):
At December 31, 2016 the Company carries a valuation reserve of $79,000 ($30,000 tax effected) related to the carry forward of charitable contribution deductions arising in prior years due to the uncertainty that the Company will be able to utilize these deductions prior to the expiration of their carry forward periods. For Federal purposes, Alternative Minimum Tax credits can be carried forward indefinitely. For State purposes, Net Operating Losses can be carried forward for periods ranging from 5 to 20 years for the states that the Company is required to file in. Of the $789,000 of recorded state tax credits, $760,000 relates to California Enterprise Zone hiring credits earned in prior years. California repealed the credit and limited its use to tax years through 2023. The Company established a valuation reserve of $152,000 ( $100,000 tax effected) at the end of the current year related to the carryforward of the California Enterprise Zone hiring credits due to the uncertainty that the Company will be able to utilize the credits prior to their expiration in 2023.
The realization of the deferred tax assets is subject to our ability to generate sufficient taxable income during the periods in which the temporary differences become realizable. In evaluating whether a valuation allowance is required, we consider all available positive and negative evidence, including prior operating results, the nature and reason of any losses, our forecast of future taxable income and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. The estimates are based on our best judgment at the time made based on current and projected circumstances and conditions.
As a result of the evaluation of the realizability of our deferred tax assets as of December 31, 2016, we concluded that it was more likely than not that all of our deferred tax assets would be realized to the extent not reserved for by a valuation allowance.
The Company accounts for uncertainty in income taxes recognized in its financial statements by applying GAAP’s recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold should initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon effective settlement with a taxing authority. There was no gross amount of unrecognized tax benefits at either December 31, 2016 or January 2, 2016.
We file income tax returns in the United States Federal and various state jurisdictions. Federal tax years 2013 and on remain subject to examination. Various state income tax returns also remain subject to examination. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
RELATED PARTY TRANSACTIONS |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| RELATED PARTY TRANSACTIONS | |
| RELATED PARTY TRANSACTIONS | 13. RELATED PARTY TRANSACTIONS
A director of the Company is a partner in a law firm engaged to represent the Company in various legal matters including the lawsuit filed by the Company related to the sand and gravel lease discussed in Note 2. For the year ending December 31, 2016 the Company has paid the director’s firm $522,000 for services rendered. During fiscal 2015 the same director’s firm was paid $494,000.
The corporate office leases space in Chicago, Illinois that is shared with three organizations related to the Company’s principal shareholders. Each of the organizations pays its pro-rata share of rent and other expenses based on a square footage allocation. See Note 9 for additional discussion. Furthermore, the Company purchases insurance coverage for workers’ compensation, general and umbrella liability together with another company controlled by the Company’s principal shareholders to minimize insurance costs. Allocation of the expense of the program is either provided by the underwriter or based upon a formula that considers, among other things, sales levels, loss exposure and claim experience. Claims under the self-insured portion of the policies are charged directly to the incurring party. Amounts receivable from these organizations at December 31, 2016 and January 2, 2016 were $213,000 and $89,000, respectively. |
UNAUDITED QUARTERLY FINANCIAL DATA |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| UNAUDITED QUARTERLY FINANCIAL DATA | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| UNAUDITED QUARTERLY FINANCIAL DATA | 14. UNAUDITED QUARTERLY FINANCIAL DATA
The following table and footnotes provide summarized unaudited fiscal quarterly financial data for 2016 and 2015 (amounts in thousands, except per share amounts):
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total for the year. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INDUSTRY SEGMENT INFORMATION |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INDUSTRY SEGMENT INFORMATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INDUSTRY SEGMENT INFORMATION | 15. INDUSTRY SEGMENT INFORMATION
The Company operates primarily in two industry groups, HVAC and Construction Products. The Company has identified two reportable segments in each of the two industry groups: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the CACS segment and the Door segment in the Construction Products industry group. The Heating and Cooling segment primarily produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, WFC of Colton, California. The Evaporative Cooling segment primarily produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, PMI of Phoenix, Arizona. Sales of these two segments are nationwide, but are concentrated in the southwestern United States. Concrete, aggregates and construction supplies are offered by the CACS segment from numerous locations along the Southern portion of the Front Range of Colorado operated by the Company’s wholly-owned subsidiaries collectively referred to as TMC. The Door segment sells hollow metal and wood doors, door frames and related hardwares, lavatory fixtures and electronic access and security systems from the Company’s wholly-owned subsidiary, MDHI, which operates out of facilities in Pueblo and Colorado Springs, Colorado. Sales of these latter two segments are highly concentrated in the Southern Front Range area in Colorado although door sales are also made throughout the United States.
The Company evaluates the performance of its segments and allocates resources to them based on a number of criteria including operating income, return on investment and other strategic objectives. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest, other income or loss or income taxes.
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
The following table presents information about reported segments for the fiscal years 2016 and 2015 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):
There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the last annual report. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES | SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (e)
for the fiscal years 2016 and 2015
Notes:
Column C (2) has been omitted as the answer would be “none” |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||
| NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |||||||||||||||||||||||||||||||||||||||||||||||||
| PRINCIPLES OF CONSOLIDATION | PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Continental Materials Corporation and all of its subsidiaries (the Company). Intercompany transactions and balances have been eliminated. All subsidiaries of the Company are wholly-owned. |
||||||||||||||||||||||||||||||||||||||||||||||||
| RECLASSIFICATIONS | RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 2015 Consolidated Balance Sheet and Consolidated Statement of Cash Flows to conform to the 2016 financial statement presentation. These reclassifications had no effect on total assets, liabilities or shareholders’ equity. |
||||||||||||||||||||||||||||||||||||||||||||||||
| RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the first quarter of 2016, the Company implemented ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on organizations’ balance sheets. The change has been applied retrospectively for all periods presented. The effect of implementation is to report a consolidated non-current net asset of $1,616,000 and $3,149,000 in the consolidated balance sheets as of December 31, 2016 and January 2, 2016, respectively. Adoption of this update resulted in reclassifying current deferred income tax assets of $1,078,000 to non-current deferred income tax assets in the consolidated balance sheet as of January 2, 2016.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new revenue standard creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. Subsequently, the FASB has issued various ASUs to provide further clarification around certain aspects of ASC 606. This standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and the Company will adopt the standard on January 1, 2018. While the Company has not completed its analysis of the impact of the provisions of this standard, we do not expect a significant impact to the consolidated financial statements or disclosure.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new standard supersedes existing lease guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The standard will be effective for the Company in the first quarter of 2019 and will be adopted using a modified retrospective approach. While we anticipate the adoption of ASU 2016-02 may have a significant impact on our consolidated balance sheets, consolidated statements of income and disclosures, we are unable to quantify the financial statement impact at this time. |
||||||||||||||||||||||||||||||||||||||||||||||||
| USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS | USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 31, 2016 and January 2, 2016 and the reported amounts of revenues and expenses during both of the two years in the period ended December 31, 2016. Actual results could differ from those estimates. |
||||||||||||||||||||||||||||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS | CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value. The Company has reclassified negative cash balances to Accounts Payable. |
||||||||||||||||||||||||||||||||||||||||||||||||
| FAIR VALUE OF FINANCIAL INSTRUMENTS | FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.
The following methods were used to estimate the fair value of the financial instruments recognized in the accompanying balance sheet.
Cash and Cash Equivalents: The carrying amount approximates fair value and was valued as Level 1.
Debt: Fair value was estimated based on the borrowing rates then available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of debt represents a reasonable estimate of the corresponding fair value as the Company’s debt is held at variable interest rates and was valued as Level 2.
There were no transfers between fair value measurement levels of any financial instruments in the current year. |
||||||||||||||||||||||||||||||||||||||||||||||||
| INVENTORIES | INVENTORIES
Inventories are valued at the lower of cost or market and are reviewed periodically for excess or obsolete stock with a provision recorded, where appropriate. Cost for inventory in the HVAC industry group is determined using the last-in, first-out (LIFO) method. These inventories represent approximately 79% of total inventories at December 31, 2016 and 82% at January 2, 2016. The cost of all other inventory is determined by the first-in, first-out (FIFO) or average cost methods. Some commodity prices such as copper, steel, cement and diesel fuel have experienced significant fluctuations in recent years. Cement and diesel fuel prices are principally relevant to the CACS segment while steel prices and copper prices are principally relevant to our two HVAC businesses. The general effect of using LIFO is that higher prices are not reflected in the inventory carrying value. Current costs are reflected in the cost of sales. The inventories of the businesses using either FIFO or an average costing method for valuing inventories turn over frequently and at any point in time the amount of cement or fuel inventory is not significant. As a result of these circumstances, the commodity fluctuations have primarily affected the cost of sales with little effect on the valuation of inventory. Due to the nature of our products, obsolescence is not typically a significant exposure, however our HVAC businesses will from time to time contend with some slow-moving inventories or parts that are no longer used due to engineering changes. We believe that our inventory valuation reserves are not material. At December 31, 2016, inventory reserves were approximately 1.4% of the total FIFO inventory value. |
||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY, PLANT AND EQUIPMENT | PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method as follows:
Depletion of rock and sand deposits and amortization of deferred development costs are computed by the units-of-production method based upon estimated recoverable quantities of rock and sand. The estimated recoverable quantities are periodically reassessed.
The cost of property sold or retired and the related accumulated depreciation, depletion and amortization are removed from the accounts and the resulting gain or loss is reflected in operating income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized and depreciated over their estimated useful lives. |
||||||||||||||||||||||||||||||||||||||||||||||||
| OTHER ASSETS | OTHER ASSETS
The Company annually assesses goodwill for potential impairment at the end of each year. In addition, the Company will reassess the recorded goodwill to determine if impairment has occurred if events arise or circumstances change in the relevant reporting segments or in their industries. No goodwill impairment was recognized for any of the periods presented.
Amortizable intangible assets consist of a restrictive land covenant and customer relationships related to the Company’s acquisition of the assets of a ready-mix concrete business in 2006. The restrictive land covenant was being amortized on a straight-line basis over its estimated life of ten years. The customer relationships amount was amortized over its estimated life of ten years using the sum-of-the-years digits method. Both of these intangible assets were fully amortized as of December 31, 2016.
During the fourth quarter of 2016 the Company paid $2,500,000 related to an aggregate property near Colorado Springs. As the Company negotiates with the State of Colorado to obtain the necessary mining permits the amount is being held in an escrow account and is included in other assets as of December 31, 2016.
The Company is party to three aggregate property leases which require royalty payments. The leased gravel operation in Pueblo Colorado is currently the subject of litigation as the Company seeks, among other things, to rescind the lease and to recover overpayment of approximately $627,000 of royalties. This overpayment is included in the other long-term assets category. See Note 2. |
||||||||||||||||||||||||||||||||||||||||||||||||
| RETIREMENT PLANS | RETIREMENT PLANS
The Company and certain subsidiaries have various contributory profit sharing retirement plans for specific employees. The plans allow qualified employees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k). The Company may make annual contributions, at its discretion, based primarily on profitability. In addition, any individuals whose compensation is in excess of the amount eligible for the Company matching contribution to the 401(k) plan as established by Section 401 of the Internal Revenue Code, participate in an unfunded Supplemental Profit Sharing Plan. This plan accrues an amount equal to the difference between the amount the person would have received as Company contributions to his account under the 401(k) plan had there been no limitations and the amount the person will receive under the 401(k) plan giving effect to the limitations. Costs under the plans are charged to operations as incurred. As of December 31, 2016 and January 2, 2016, the unfunded liabilities related to the Supplemental Profit Sharing Plan were $854,000 and $901,000, respectively. |
||||||||||||||||||||||||||||||||||||||||||||||||
| RESERVE FOR SELF-INSURED AND INSURED LOSSES | RESERVE FOR SELF-INSURED AND INSURED LOSSES
The Company’s risk management program provides for certain levels of loss retention for workers’ compensation, automobile liability, healthcare plan coverage and general and product liability claims. The components of the reserve for self-insured losses have been recorded in accordance with Generally Accepted Accounting Principles (GAAP) requirements that an estimated loss from a loss contingency shall be accrued if information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. The recorded reserve represents management’s best estimate of the future liability related to these claims up to the associated deductible.
GAAP also requires an entity to accrue the gross amount of a loss even if the entity has purchased insurance to cover the loss. Therefore the Company has recorded losses for workers’ compensation, automobile liability, medical plan coverage and general and product liability claims in excess of the deductible amounts, i.e., amounts covered by insurance contracts, in “Liability for unpaid claims covered by insurance” with a corresponding “Receivable for insured losses” on the balance sheet. The components of the liability represent both unpaid settlements and management’s best estimate of the future liability related to open claims. Management has evaluated the creditworthiness of our insurance carriers and determined that recovery of the recorded losses is probable and, therefore, the receivable from insurance has been recorded for the full amount of the insured losses. The amount of claims and related insured losses at December 31, 2016 was $32,000. There were no such claims and related insured losses at January 2, 2016. |
||||||||||||||||||||||||||||||||||||||||||||||||
| RECLAMATION | RECLAMATION
In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas whether the property is owned or leased. The Company records a reserve for future reclamation work to be performed at its various aggregate operations based upon an estimate of the total expense that would be paid to a third party to reclaim the disturbed areas. Reclamation expense is determined during the interim periods using the units-of-production method. At each fiscal year-end, a more formal and complete analysis is performed and the expense and reserve is adjusted to reflect the estimated cost to reclaim the then disturbed and unreclaimed areas. The assessment of the reclamation liability may be done more frequently if events or circumstances arise that may indicate a change in estimated costs, recoverable material or period of mining activity. As part of the year-end analysis, the Company engages an independent specialist to assist in reevaluating the estimates of both the quantities of recoverable material and the cost of reclamation. Most of the reclamation on any mining property is generally performed concurrent with mining or soon after each section of the deposit is mined. The Company’s reserve for reclamation activities was $5,940,000 at December 31, 2016 and $5,675,000 at January 2, 2016. The Company classifies a portion of the reserve as a current liability, $748,000 at December 31, 2016 and $695,000 at January 2, 2016 based upon historical expenditures and the anticipated reclamation timeframe for the Pueblo aggregate operation which is still under litigation as discussed in Note 2. |
||||||||||||||||||||||||||||||||||||||||||||||||
| REVENUE RECOGNITION | REVENUE RECOGNITION
The Company recognizes revenue as products are shipped to customers. Sales are recorded net of sales tax and applicable provisions for discounts, volume incentives, returns and allowances. At the time of revenue recognition, the Company also provides an estimate of potential bad debt and warranty expense as well as an amount anticipated to be granted to customers under cooperative advertising programs based upon current program terms and historical experience. In addition, the revenues received for shipping and handling are included in sales while the costs associated with shipping and handling are reported as cost of sales.
The Company is responsible for warranty related to the manufacture of its HVAC products. The Company does not perform installation services except for installation of electronic access and security systems in the Door segment, nor are maintenance or service contracts offered. Changes in the aggregated product warranty liability for the fiscal years 2016 and 2015 were as follows (amounts in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES | INCOME TAXES
Income taxes are accounted for under the asset and liability method that requires deferred income taxes to reflect the future tax consequences attributable to differences between the tax and financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized are based on the tax rates in effect in the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, based on available positive and negative evidence, it is “more likely than not” (greater than a 50% likelihood) that some or all of the net deferred tax assets will not be realized.
The Company has established a valuation reserve related to the carry-forward of all charitable contributions deductions arising from prior years. For Federal tax purposes, net operating losses can be carried forward for a period of 20 years while alternative minimum tax credits can be carried forward indefinitely. For state tax purposes, net operating losses can be carried forward for periods ranging from 5 to 20 years for the states that the Company is required to file in. California Enterprise Zone credits can be used through 2023 while Colorado credits can be carried forward for 7 years.
Income tax returns are subject to audit by the Internal Revenue Service (IRS) and state tax authorities. The amounts recorded for income taxes reflect the Company’s tax positions based on research and interpretations of complex laws and regulations. The Company accrues liabilities related to uncertain tax positions taken or expected to be taken in its tax returns. |
||||||||||||||||||||||||||||||||||||||||||||||||
| CONCENTRATIONS | CONCENTRATIONS
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables and temporary cash investments. The Company may invest its excess cash in commercial paper of companies with strong credit ratings. The Company has not experienced any losses on these investments.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. In many instances in the Concrete, Aggregates and Construction Supplies segment and in the Heating and Cooling segment (as it relates to the fan coil product line), the Company retains lien rights on the properties served until the receivable is collected. The Company writes off accounts when all efforts to collect the receivable have been exhausted. The Company maintains allowances for potential credit losses based upon the aging of accounts receivable, management’s assessment of individual accounts and historical experience. Such losses have been within management’s expectations. See Note 15 for a description of the Company’s customer base.
All long-lived assets are in the United States. No customer accounted for 10% or more of total sales of the Company in fiscal 2016 or 2015.
Substantially all of the Heating and Cooling Segment’s factory employees are covered by a collective bargaining agreement through the Carpenters Local 721 Union under a contract that expires on December 31, 2018. |
||||||||||||||||||||||||||||||||||||||||||||||||
| IMPAIRMENT OF LONG-LIVED ASSETS | IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow value is required. In the fiscal quarter ended October 1, 2016 the Company wrote off $632,000 of prepaid royalties related to the leased gravel operation in Pueblo, Colorado. See Note 2. |
||||||||||||||||||||||||||||||||||||||||||||||||
| FISCAL YEAR END | FISCAL YEAR END
The Company’s fiscal year-end is the Saturday nearest December 31. Fiscal 2016 and fiscal 2015 each consisted of 52 weeks. |
||||||||||||||||||||||||||||||||||||||||||||||||
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||
| NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of estimated useful lives of property, plant and equipment |
|
||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of changes in the aggregated product warranty liability | Changes in the aggregated product warranty liability for the fiscal years 2016 and 2015 were as follows (amounts in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||
INVENTORIES (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||
| INVENTORIES | |||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of inventories | Inventories consisted of the following (amounts in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||
GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of identifiable intangible assets | Identifiable intangible assets consist of the following (amounts in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INCOME TAXES (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of provision (benefit) for income taxes for continuing operations | The provision for income taxes is summarized as follows (amounts in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of difference between the tax rate for continuing operations on income or loss for financial statement purposes and the federal statutory tax rate |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of principal temporary differences and the related deferred taxes | The principal temporary differences and their related deferred taxes are as follows (amounts in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNAUDITED QUARTERLY FINANCIAL DATA (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| UNAUDITED QUARTERLY FINANCIAL DATA | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of unaudited fiscal quarterly financial data | The following table and footnotes provide summarized unaudited fiscal quarterly financial data for 2016 and 2015 (amounts in thousands, except per share amounts):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INDUSTRY SEGMENT INFORMATION (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INDUSTRY SEGMENT INFORMATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of information about reported segments along with the items necessary to reconcile the segment information to totals reported in financial statements |
The following table presents information about reported segments for the fiscal years 2016 and 2015 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Nature of Business (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2016
item
| |
| Nature of business | |
| Number of industry groups in which the entity operates | 2 |
| Number of companies collectively referred to as TMC | 3 |
| Number of financial instruments transferred from Level 1 to Level 2 | 0 |
| Number of financial instruments transferred from Level 2 to Level 1 | 0 |
| Heating Ventilation and Air Conditioning Products [Member] | |
| Nature of business | |
| Number of reportable segments | 2 |
| Construction Products [Member] | |
| Nature of business | |
| Number of reportable segments | 2 |
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Recently issued accounting pronouncements (Details) - USD ($) |
Dec. 31, 2016 |
Jan. 02, 2016 |
|---|---|---|
| Deferred income taxes, non current | $ 1,616,000 | $ 3,149,000 |
| Accounting Standards Update 2015-17 | ||
| Deferred income taxes, non current | 1,078,000 | |
| Accounting Standards Update 2015-17 | Restatement Adjustment | ||
| Noncurrent assets, net | $ 1,616,000 | $ 3,149,000 |
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Inventories (Details) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Jan. 02, 2016 |
|
| INVENTORIES | ||
| Percentage of total LIFO inventory | 79.00% | 82.00% |
| Maximum inventory reserve as a percentage of FIFO inventory value | 1.40% |
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Property Plant and Equipment (Details) |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| Land Improvements [Member] | Minimum [Member] | |
| PROPERTY, PLANT AND EQUIPMENT | |
| Estimated useful lives | 5 years |
| Land Improvements [Member] | Maximum [Member] | |
| PROPERTY, PLANT AND EQUIPMENT | |
| Estimated useful lives | 31 years |
| Building and Building Improvements [Member] | Minimum [Member] | |
| PROPERTY, PLANT AND EQUIPMENT | |
| Estimated useful lives | 10 years |
| Building and Building Improvements [Member] | Maximum [Member] | |
| PROPERTY, PLANT AND EQUIPMENT | |
| Estimated useful lives | 31 years |
| Leasehold Improvements [Member] | |
| PROPERTY, PLANT AND EQUIPMENT | |
| Estimated useful lives | Shorter of the term of the lease or useful life |
| Machinery and Equipment [Member] | Minimum [Member] | |
| PROPERTY, PLANT AND EQUIPMENT | |
| Estimated useful lives | 3 years |
| Machinery and Equipment [Member] | Maximum [Member] | |
| PROPERTY, PLANT AND EQUIPMENT | |
| Estimated useful lives | 20 years |
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Other Assets (Details) |
12 Months Ended | |
|---|---|---|
|
Dec. 31, 2016
USD ($)
item
|
Jan. 02, 2016
USD ($)
|
|
| Amortizable intangible assets | ||
| Goodwill impairment charges recognized | $ 0 | $ 0 |
| Other Assets, Noncurrent | $ 3,674,000 | $ 2,601,000 |
| Number of aggregate property leases which require royalty payments to which the entity is a party | item | 3 | |
| Recovery amount due pending outcome of litigation | $ 627,000 | |
| Aggregate property near Colorado Springs [Member] | ||
| Amortizable intangible assets | ||
| Other Assets, Noncurrent | $ 2,500,000 | |
| Restrictive land covenant [Member] | ||
| Amortizable intangible assets | ||
| Useful lives of intangible assets | 10 years | |
| Customer relationships [Member] | ||
| Amortizable intangible assets | ||
| Useful lives of intangible assets | 10 years | |
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) |
3 Months Ended | 12 Months Ended | |
|---|---|---|---|
|
Oct. 01, 2016
USD ($)
|
Dec. 31, 2016
USD ($)
item
|
Jan. 02, 2016
USD ($)
item
|
|
| RETIREMENT PLANS | |||
| Unfunded liabilities related to the Supplemental Profit Sharing Plan | $ 854,000 | $ 901,000 | |
| RESERVE FOR SELF-INSURED AND INSURED LOSSES | |||
| Amount of claims and related insured losses | 32,000 | 0 | |
| RECLAMATION | |||
| Reserve for reclamation activities | 5,940,000 | 5,675,000 | |
| Current portion of reserve for reclamation | 748,000 | 695,000 | |
| Changes in the aggregated product warranty liability | |||
| Beginning balance | 121,000 | 109,000 | |
| Warranty related expenditures | (120,000) | (150,000) | |
| Warranty expense accrued | 117,000 | 162,000 | |
| Ending balance | $ 118,000 | $ 121,000 | |
| CONCENTRATIONS | |||
| Number of customers accounted for 10% or more of total sales | item | 0 | 0 | |
| Fiscal year end | |||
| Length of fiscal year | 364 days | 364 days | |
| Pueblo Colorado gravel operations | |||
| IMPAIRMENT OF LONG-LIVED ASSETS | |||
| Write off of prepaid royalties | $ 632,000 | ||
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Income taxes (Details) |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| Internal Revenue Service (IRS) | |
| Operating Loss Carryforwards [Line Items] | |
| Operating Loss Carryforwards Expiration Period | 20 years |
| State and Local Jurisdiction | COLORADO | |
| Operating Loss Carryforwards [Line Items] | |
| Tax Credit Carryforwards Expiration Period | 7 years |
| State and Local Jurisdiction | Maximum [Member] | |
| Operating Loss Carryforwards [Line Items] | |
| Operating Loss Carryforwards Expiration Period | 20 years |
| State and Local Jurisdiction | Minimum [Member] | |
| Operating Loss Carryforwards [Line Items] | |
| Operating Loss Carryforwards Expiration Period | 5 years |
CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE (Details) |
3 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|
|
Sep. 30, 2016
USD ($)
claim
|
Oct. 01, 2016
USD ($)
|
Sep. 27, 2014
T
|
Dec. 31, 2016
USD ($)
T
|
|
| CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE | ||||
| Royalties recoverable pending outcome of litigation | $ 627,000 | |||
| Pueblo Colorado gravel operations | ||||
| CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE | ||||
| Sand and gravel reserves (in tons) | T | 50,000,000 | |||
| Royalties recoverable pending outcome of litigation | $ 1,282,000 | |||
| Write off of prepaid royalties | $ 632,000 | |||
| Number of counterclaims | claim | 3 | |||
| Sand and gravel tons paid for | T | 17,700,000 | |||
| Overpayment of sand and gravel reserve | T | 50,000,000 | |||
| Pueblo Colorado gravel operations | Minimum [Member] | ||||
| CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE | ||||
| Amount of damages sought | $ 5,900,000 | |||
INVENTORIES (Details) - USD ($) |
Dec. 31, 2016 |
Jan. 02, 2016 |
|---|---|---|
| INVENTORIES | ||
| Finished goods | $ 8,077,000 | $ 7,446,000 |
| Work in process | 1,433,000 | 1,459,000 |
| Raw materials and supplies | 11,135,000 | 10,741,000 |
| Inventories | 20,645,000 | 19,646,000 |
| Increase in inventories, if inventories valued on the LIFO basis were valued at current costs | $ 5,731,000 | $ 5,748,000 |
GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS - Goodwill (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Jan. 02, 2016 |
|
| Goodwill | ||
| Goodwill | $ 7,229,000 | $ 7,229,000 |
| Goodwill impairment charges recognized | 0 | 0 |
| Changes recorded in value of goodwill | 0 | $ 0 |
| Concrete Aggregates and Construction Supplies [Member] | ||
| Goodwill | ||
| Goodwill | 6,229,000 | |
| Doors [Member] | ||
| Goodwill | ||
| Goodwill | $ 1,000,000 | |
GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS - Amortization of Intangible Assets (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Jan. 02, 2016 |
|
| Amortizable intangible assets | ||
| Gross carrying amount | $ 720,000 | $ 720,000 |
| Accumulated amortization | 720,000 | 699,000 |
| Amortization expense | 21,000 | 45,000 |
| Future amortization expenses | 0 | |
| Restrictive land covenant [Member] | ||
| Amortizable intangible assets | ||
| Gross carrying amount | 350,000 | 350,000 |
| Accumulated amortization | 350,000 | 332,000 |
| Customer relationships [Member] | ||
| Amortizable intangible assets | ||
| Gross carrying amount | 370,000 | 370,000 |
| Accumulated amortization | $ 370,000 | $ 367,000 |
COMMITMENTS AND CONTINGENCIES (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2016
item
| |
| COMMITMENTS AND CONTINGENCIES. | |
| Number of proceedings having material adverse effect on the consolidated results of operations, cash flows or financial condition | 0 |
SHAREHOLDERS' EQUITY (Details) |
12 Months Ended | |
|---|---|---|
|
Dec. 31, 2016
item
$ / shares
shares
|
Jan. 02, 2016
item
shares
|
|
| Related Party Transactions | ||
| Preferred stock, authorized shares | 400,000 | |
| Preferred stock, par value (in dollars per share) | $ / shares | $ 0.50 | |
| Treasury Stock purchased | 2,000 | 1,000 |
| Director [Member] | ||
| Related Party Transactions | ||
| Maximum number of shares allowed to be granted under the Plan | 150,000 | |
| Number of shares issued to eligible board members | 12,000 | 12,000 |
| Number of eligible board members | item | 8 | 8 |
EARNINGS PER SHARE (Details) - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Jan. 02, 2016 |
|
| EARNINGS PER SHARE | ||
| Difference between the calculation of basic and diluted EPS (in dollars per share) | $ 0 | $ 0 |
RENTAL EXPENSE, LEASES AND COMMITMENTS (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Jan. 02, 2016 |
|
| RENTAL EXPENSE, LEASES AND COMMITMENTS | ||
| 2017 | $ 1,842,000 | |
| 2018 | 1,436,000 | |
| 2019 | 803,000 | |
| 2020 | 659,000 | |
| 2021 | 572,000 | |
| Thereafter | 2,234,000 | |
| Rental expense | 4,595,000 | $ 3,429,000 |
| Operating leases rent expected future reimbursement | ||
| 2017 | 166,000 | |
| 2018 | 169,000 | |
| 2019 | 171,000 | |
| 2020 | 174,000 | |
| 2021 | 177,000 | |
| Thereafter | $ 1,057,000 | |
RETIREMENT PLANS (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Jan. 02, 2016 |
|
| RETIREMENT PLANS | ||
| Total plan expenses charged to continuing operations | $ 1,229,000 | $ 873,000 |
INCOME TAXES - Unrecognized tax benefits (Details) - USD ($) |
Dec. 31, 2016 |
Jan. 02, 2016 |
|---|---|---|
| Interest and penalties recognized on the liability for unrecognized tax benefits | ||
| Amount of unrecognized tax benefits that would affect the effective tax rates | $ 0 | $ 0 |
RELATED PARTY TRANSACTIONS (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Jan. 02, 2016 |
|
| RELATED PARTY TRANSACTIONS | ||
| Amount paid for service rendered by related party | $ 522,000 | $ 494,000 |
| Amount of contingent fee received by related party | $ 213,000 | $ 89,000 |
UNAUDITED QUARTERLY FINANCIAL DATA (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 12 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 |
Oct. 01, 2016 |
Jul. 02, 2016 |
Apr. 02, 2016 |
Jan. 02, 2016 |
Oct. 03, 2015 |
Jul. 04, 2015 |
Apr. 04, 2015 |
Dec. 31, 2016 |
Jan. 02, 2016 |
|
| UNAUDITED QUARTERLY FINANCIAL DATA | ||||||||||
| Net sales | $ 36,996 | $ 37,647 | $ 42,721 | $ 34,228 | $ 35,120 | $ 36,165 | $ 34,865 | $ 30,685 | $ 151,592 | $ 136,835 |
| Gross profit | 6,734 | 8,038 | 9,640 | 7,019 | 6,483 | 6,908 | 6,689 | 5,498 | ||
| Depreciation, depletion and amortization | 539 | 607 | 651 | 639 | 484 | 640 | 651 | 646 | 2,436 | 2,421 |
| Net (loss) income: | ||||||||||
| Net income | $ 335 | $ 1,042 | $ 1,801 | $ 508 | $ 701 | $ 562 | $ 346 | $ (196) | $ 3,686 | $ 1,413 |
| Basic and Diluted (loss) income per share | ||||||||||
| Basic and Diluted income per share | $ 0.20 | $ 0.62 | $ 1.08 | $ 0.31 | $ 0.42 | $ 0.34 | $ 0.21 | $ (0.12) | $ 2.21 | $ 0.85 |
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (e) (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Jan. 02, 2016 |
|
| Allowance for doubtful accounts | ||
| Movement in valuation and qualifying accounts and reserves | ||
| Balance at Beginning of Period | $ 220,000 | $ 235,000 |
| Additions Charged to Costs and Expenses | 280,000 | 63,000 |
| Deductions - Describe | 280,000 | 78,000 |
| Balance at End of Period | 220,000 | 220,000 |
| Inventory valuation reserve | ||
| Movement in valuation and qualifying accounts and reserves | ||
| Balance at Beginning of Period | 435,000 | 383,000 |
| Additions Charged to Costs and Expenses | 78,000 | 163,000 |
| Deductions - Describe | 201,000 | 111,000 |
| Balance at End of Period | 312,000 | 435,000 |
| Reserve for self-insured losses | ||
| Movement in valuation and qualifying accounts and reserves | ||
| Balance at Beginning of Period | 2,334,000 | 2,492,000 |
| Additions Charged to Costs and Expenses | 4,143,000 | 4,601,000 |
| Deductions - Describe | 4,616,000 | 4,759,000 |
| Balance at End of Period | $ 1,861,000 | $ 2,334,000 |
H;D@@01A0#3>#8IBN*61LD-?6U!_7]*
MR!+D6T. X_?