10-Q 1 cuo-20180630x10q.htm 10-Q cuo_Current folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

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 of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

440 South LaSalle Street, Suite 3100, Chicago, Illinois

 

60605

(Address of principal executive offices)

 

(Zip Code)

 

(312) 541-7200

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 of 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)

 

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act).  Yes ☐  No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.25 par value, shares outstanding at August 7, 2018: 1,697,855.

 

 


 

PART I — FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2018 AND DECEMBER 30, 2017

(000’s omitted except share data)

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

JUNE 30, 2018

 

DECEMBER 30,

 

 

 

(Unaudited)

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

257

 

$

507

 

Receivables, net

 

 

25,866

 

 

24,227

 

Receivable for insured losses

 

 

248

 

 

 —

 

Inventories

 

 

 

 

 

 

 

Finished goods

 

 

5,543

 

 

8,391

 

Work in process

 

 

2,690

 

 

1,198

 

Raw materials and supplies

 

 

12,679

 

 

10,770

 

Prepaid expenses

 

 

2,476

 

 

1,901

 

Refundable income taxes

 

 

584

 

 

57

 

Total current assets

 

 

50,343

 

 

47,051

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

17,648

 

 

22,824

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

7,229

 

 

7,229

 

Deferred income taxes

 

 

2,497

 

 

1,616

 

Other assets

 

 

3,674

 

 

3,769

 

 

 

$

81,391

 

$

82,489

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Revolving bank loan payable

 

$

8,000

 

$

3,500

 

Accounts payable and accrued expenses

 

 

16,097

 

 

18,374

 

Liability for unpaid claims covered by insurance

 

 

248

 

 

 —

 

Total current liabilities

 

 

24,345

 

 

21,874

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

6,490

 

 

6,293

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1,930

 

 

1,887

 

Retained earnings

 

 

62,907

 

 

66,987

 

Treasury shares, 876,209 and 892,097 at cost

 

 

(14,924)

 

 

(15,195)

 

 

 

 

50,556

 

 

54,322

 

 

 

$

81,391

 

$

82,489

 

 

See notes to condensed consolidated financial statements.

2


 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED JUNE 30, 2018 AND JULY 1, 2017

(Unaudited)

(000’s omitted except per-share amounts)

 

 

 

 

 

 

 

 

 

 

    

JUNE 30,

    

JULY 1,

 

 

 

2018

 

2017

 

Net sales

 

$

43,300

 

$

39,887

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation, depletion and amortization)

 

 

35,095

 

 

31,734

 

Depreciation, depletion and amortization

 

 

707

 

 

677

 

Selling and administrative

 

 

5,539

 

 

5,845

 

Net reduction to write off of deferred development

 

 

(94)

 

 

 —

 

Gain on disposition of property and equipment

 

 

(889)

 

 

(24)

 

 

 

 

40,358

 

 

38,232

 

 

 

 

 

 

 

 

 

Operating income

 

 

2,942

 

 

1,655

 

 

 

 

 

 

 

 

 

Interest income

 

 

21

 

 

14

 

Interest expense

 

 

(167)

 

 

(108)

 

Other income (expense), net

 

 

22

 

 

(4)

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

2,818

 

 

1,557

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

705

 

 

529

 

 

 

 

 

 

 

 

 

Net income

 

 

2,113

 

 

1,028

 

 

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

 

60,794

 

 

64,747

 

 

 

 

 

 

 

 

 

Retained earnings, end of period

 

$

62,907

 

$

65,775

 

 

 

 

 

 

 

 

 

Basic and diluted income per share

 

$

1.24

 

$

0.61

 

Average shares outstanding

 

 

1,698

 

 

1,682

 

 

See notes to condensed consolidated financial statements

3


 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND JULY 1, 2017

(Unaudited)

(000’s omitted except per-share amounts)

 

 

 

 

 

 

 

 

 

 

 

JUNE 30,

 

JULY 1,

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Net sales

 

$

80,173

 

$

73,990

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation, depletion and amortization)

 

 

66,440

 

 

59,806

 

Depreciation, depletion and amortization

 

 

1,383

 

 

1,315

 

Selling and administrative

 

 

11,650

 

 

11,849

 

Charges related to write off of deferred development

 

 

6,840

 

 

 —

 

Gain on disposition of property and equipment

 

 

(889)

 

 

(24)

 

 

 

 

85,424

 

 

72,946

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(5,251)

 

 

1,044

 

 

 

 

 

 

 

 

 

Interest income

 

 

45

 

 

32

 

Interest expense

 

 

(275)

 

 

(174)

 

Other income, net

 

 

41

 

 

16

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(5,440)

 

 

918

 

 

 

 

 

 

 

 

 

Benefit (provision) for income taxes

 

 

1,360

 

 

(312)

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

(4,080)

 

 

606

 

 

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

 

66,987

 

 

65,169

 

 

 

 

 

 

 

 

 

Retained earnings, end of period

 

$

62,907

 

$

65,775

 

 

 

 

 

 

 

 

 

Basic and diluted (loss) income per share

 

$

(2.40)

 

$

0.36

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

 

1,697

 

 

1,678

 

 

See notes to condensed consolidated financial statements

4


 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND JULY 1, 2017

(Unaudited)

(000’s omitted)

 

 

 

 

 

 

 

 

 

 

    

JUNE 30,

    

JULY 1,

 

 

 

2018

 

2017

 

Net cash used by operating activities

 

$

(4,002)

 

$

(2,797)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,148)

 

 

(2,803)

 

Cash proceeds from sale of property and equipment

 

 

1,400

 

 

27

 

Net cash used in investing activities

 

 

(748)

 

 

(2,776)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Borrowings on the revolving bank loan

 

 

20,500

 

 

14,500

 

Repayments on the revolving bank loan

 

 

(16,000)

 

 

(8,900)

 

Net cash provided by financing activities

 

 

4,500

 

 

5,600

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(250)

 

 

27

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

 

507

 

 

301

 

 

 

 

 

 

 

 

 

End of period

 

$

257

 

$

328

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow items:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest, net

 

$

259

 

$

189

 

Income taxes, net

 

 

50

 

 

 —

 

 

See notes to condensed consolidated financial statements

5


 

CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED JUNE 30, 2018

(Unaudited)

 

1.    Basis of Presentation:

 

Basis of Presentation:

The unaudited interim condensed consolidated financial statements included herein are prepared pursuant to the Securities and Exchange Commission (the “Commission”) rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The condensed consolidated balance sheet of Continental Materials Corporation (the “Company”) as of December 30, 2017 has been derived from the audited consolidated balance sheet of the Company as of that date. The interim condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K. In the opinion of management, the condensed consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods and to ensure the financial statements are not misleading. Certain reclassifications have been made to the 2017 consolidated financial statements to conform to the 2018 presentation. The reclassifications had no effect on the consolidated results of operations, the net change in cash or the total assets, liabilities or shareholders’ equity of the Company.

 

Revenue Recognition:

Effective December 31, 2017, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments, which creates a single source of revenue guidance for all companies in all industries and is more principles-based than previous revenue guidance. The Company adopted the standard using the modified retrospective approach. The adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on its financial position, consolidated results of operations or consolidated cash flows. As such, prior period financial statements were not recast and there was no cumulative effect adjustment upon adoption.

 

Sales are recognized when control of the promised goods or services transfers to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s payment terms generally range between 30 to 90 days after invoice is billed to the customer. Sales are reported net of sales tax. Shipping and other transportation costs paid by the Company and rebilled to the buyer are recorded gross (as both sales and cost of sales). The Company receives blanket purchase orders from many of its customers on an annual basis. Generally, such purchase orders and related documents set forth the annual terms, including pricing, related to the products. Such purchase orders generally do not specify the exact products, quantities or delivery times. For example, the Company may receive a blanket order for furnaces; however models are not specifically identified or a customer may provide the Company with an estimated concrete volume for the year without specifying the strength and other variables. The Company generally recognizes revenue from the sale of products at a point in time as the products are shipped.

 

While the return of products is generally not allowed, some large retail customers have been granted the right to return a certain amount at the end of the normal selling season for furnaces and evaporative coolers. Sales returns and allowances are estimated based on current program terms and historical experience. Provisions for estimated returns, discounts, volume rebates and other price adjustments are provided for in the same period the related revenues are recognized and are netted against revenues. Price protection is offered on evaporative coolers sold into certain areas where the competition is selling at a lower margin. Although a credit is granted only after a distributor requests relief by providing a report of where the units were sold and at what discount, the Company does record an accrual for such credits at the time of sale based upon historical experience.

 

6


 

The Company is responsible for warranty related to the manufacture of its HVAC products; however, the Company estimates the future warranty claims based upon historical experience and management estimates. The Company does not perform installation services except for installation of electronic access and security systems in the Door segment. These installation service contracts are generally short-term in nature, usually less than 30 days. It was determined for the installation service contracts there are two performance obligations, the equipment and the installation services. The transaction price for these contracts is allocated to each performance obligation based on its stated stand-alone selling price. Revenue is recognized at a point in time as each performance obligation is completed. No maintenance or service contracts are offered by the Company.

 

See Note 7 for disaggregation of revenue by segment.

 

 

2.    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.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the United States. The Tax Act significantly revised the U.S. tax code by, among other items, reducing the Company’s federal tax rate from 34% to 21%, providing for the full expensing of certain depreciable property and eliminating the corporate Alternative Minimum Tax (AMT).

 

The Tax Act repeals AMT and allows for all existing credit carryforwards to be used to offset regular tax liabilities in 2018 through 2020 or, if not fully usable to offset regular tax liabilities, refunded by 2021. For state tax purposes, net operating losses can be carried forward for various periods 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. The Company has established a valuation reserve related to a portion of the California Enterprise Zone credit not expected to be utilized prior to expiration.

 

The Company’s income tax returns are subject to audit by the Internal Revenue Service (the “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. The Company did not identify any such uncertain tax positions as of June 30, 2018 or December 30, 2017.

 

3.    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 that 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 all other financial instruments recognized in the accompanying balance sheet:

 

Cash and Cash Equivalents: The carrying amount approximates fair value and was valued as Level 1.

7


 

 

Revolving Bank Loan Payable: Fair value is estimated based on the borrowing rates currently 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 the Revolving Bank Loan Payable 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 quarter.

 

4.    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 issued various ASUs to provide further clarification around certain aspects of ASC 606. This standard was adopted by the Company in the first quarter of fiscal 2018. See Note 1 for further discussion of the Company’s revenue recognition policies and practices.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), requiring that the statement of cash flows explain the change in total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This standard was adopted by the Company is the first quarter of fiscal 2018 and did not have a material impact to the consolidated statement of cash flows.

 

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 fiscal 2019. The original guidance requires adoption using a modified retrospective approach; however, in March 2018, the FASB approved amendments that allow companies the option of using the effective date of the new standard as the date of initial application. The Company continues the task of accumulating information on all of its existing leases. Although not quantified yet, the Company expects that adoption of ASU 2016-02 will have a significant impact on its consolidated balance sheets and disclosures, but does not anticipate a material impact on its consolidated cash flow or consolidated results of operations.

 

There are no other significant prospective accounting pronouncements that are expected to have a material effect on the Company’s consolidated financial statements.

 

5.    Operating results for the first six months of 2018 are not necessarily indicative of performance for the entire year due to the seasonality of most of the Company’s products. Historically, sales of the Evaporative Cooling segment are higher in the first and second quarters, sales of the Concrete, Aggregates and Construction Supplies (CACS) segment are higher in the second and third quarters and sales of the Heating and Cooling segment are higher in the third and fourth quarters. Sales of the Door segment are generally more evenly spread throughout the year.

 

6.    There is no difference in the calculation of basic and diluted earnings per share (EPS) for the three-month or six-month periods ended June 30, 2018 and July 1, 2017 as the Company does not have any dilutive instruments.

 

7.    The Company operates primarily in two industry groups, Heating, Ventilation and Air Conditioning (HVAC) and Construction Products. The Company has identified two reportable segments within each of the 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, Williams Furnace Co. (WFC) of Colton, California. The Evaporative Cooling segment primarily produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. (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 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

8


 

Pueblo, Inc. of Pueblo, Colorado (the three companies collectively are 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. Sales of these two segments are highly concentrated in the Southern Front Range of Colorado although door sales are also made throughout the United States.

 

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 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.

9


 

The following table presents information about reported segments for the six-month and three-month periods ended June 30, 2018 and July 1, 2017 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

 

 

 

Combined

 

 

 

 

 

 

 

Construction

 

 

 

Construction

 

and

 

Evaporative

 

HVAC

 

Unallocated

 

 

 

 

 

Supplies

 

Doors

 

Products

 

Cooling

 

Cooling

 

Products

 

Corporate

 

Total

 

Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

34,931

 

$

10,078

 

$

45,009

 

$

18,405

 

$

16,726

 

$

35,131

 

$

33

 

$

80,173

 

Depreciation, depletion and amortization

 

 

738

 

 

82

 

 

820

 

 

325

 

 

215

 

 

540

 

 

23

 

 

1,383

 

Operating (loss) income

 

 

(5,302)

 

 

1,356

 

 

(3,946)

 

 

74

 

 

520

 

 

594

 

 

(1,899)

 

 

(5,251)

 

Segment assets

 

 

37,540

 

 

8,190

 

 

45,730

 

 

19,346

 

 

12,854

 

 

32,200

 

 

3,461

 

 

81,391

 

Capital expenditures

 

 

1,478

 

 

79

 

 

1,557

 

 

248

 

 

297

 

 

545

 

 

46

 

 

2,148

 

Three Months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

19,867

 

$

5,782

 

$

25,649

 

$

7,412

 

$

10,210

 

$

17,622

 

$

29

 

$

43,300

 

Depreciation, depletion and amortization

 

 

382

 

 

42

 

 

424

 

 

163

 

 

108

 

 

271

 

 

12

 

 

707

 

Operating income (loss)

 

 

2,620

 

 

918

 

 

3,538

 

 

(497)

 

 

776

 

 

279

 

 

(875)

 

 

2,942

 

Segment assets

 

 

37,540

 

 

8,190

 

 

45,730

 

 

19,346

 

 

12,854

 

 

32,200

 

 

3,461

 

 

81,391

 

Capital expenditures

 

 

1,127

 

 

46

 

 

1,173

 

 

48

 

 

232

 

 

280

 

 

(5)

 

 

1,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction Products Industry

 

HVAC Industry

 

 

 

 

 

 

    

Concrete,

    

 

    

 

    

 

    

 

    

 

    

 

    

 

 

 

 

Aggregates &

 

 

 

Combined

 

Heating

 

 

 

Combined

 

 

 

 

 

 

 

Construction

 

 

 

Construction

 

and

 

Evaporative

 

HVAC

 

Unallocated

 

 

 

 

 

Supplies

 

Doors

 

Products

 

Cooling

 

Cooling

 

Products

 

Corporate

 

Total

 

Six Months Ended July 1, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

31,596

 

$

8,629

 

$

40,225

 

$

17,214

 

$

16,542

 

$

33,756

 

$

 9

 

$

73,990

 

Depreciation, depletion and amortization

 

 

710

 

 

72

 

 

782

 

 

302

 

 

215

 

 

517

 

 

16

 

 

1,315

 

Operating income (loss)

 

 

882

 

 

944

 

 

1,826

 

 

68

 

 

849

 

 

917

 

 

(1,699)

 

 

1,044

 

Segment assets

 

 

39,020

 

 

7,360

 

 

46,380

 

 

21,543

 

 

11,896

 

 

33,439

 

 

2,670

 

 

82,489

 

Capital expenditures

 

 

2,219

 

 

119

 

 

2,338

 

 

365

 

 

65

 

 

430

 

 

35

 

 

2,803

 

Three Months ended July 1, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

18,113

 

$

4,760

 

$

22,873

 

$

6,778

 

$

10,233

 

$

17,011

 

$

 3

 

$

39,887

 

Depreciation, depletion and amortization

 

 

373

 

 

37

 

 

410

 

 

151

 

 

108

 

 

259

 

 

 8

 

 

677

 

Operating income (loss)

 

 

1,466

 

 

652

 

 

2,118

 

 

(497)

 

 

906

 

 

409

 

 

(872)

 

 

1,655

 

Segment assets (a)

 

 

39,020

 

 

7,360

 

 

46,380

 

 

21,543

 

 

11,896

 

 

33,439

 

 

2,670

 

 

82,489

 

Capital expenditures (b)

 

 

1,837

 

 

18

 

 

1,855

 

 

267

 

 

22

 

 

289

 

 

29

 

 

2,173

 

 


(a)

Segment assets are as of December 30, 2017.

(b)

Capital expenditures are presented on the accrual basis of accounting.

 

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.

 

8.    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. Valco asserted counterclaims against the

10


 

Company alleging breach of contract and declaratory judgment regarding the Company’s refusal to make further royalty payments under the Lease. In the ordinary course of business and absent any breach by Valco, the Company is required to make quarterly royalty payments amounting to not less than $300,000 in a calendar year. In response to Valco’s breaches of contract, the Company stopped making royalty payments at the start of the 2015 calendar year. The Company has asserted partial failure of consideration as an affirmative defense to Valco’s counterclaims to offset the alleged back-due quarterly royalty payments and the amount due on quarterly royalty payments in the future. 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. The Partial Summary Judgment Order did not resolve Valco’s counterclaims or the Company’s affirmative defense. 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. 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. On February 23, 2017, the Partial Summary Judgment Order was certified for immediate appeal, and all other claims, counterclaims and affirmative defenses were stayed pending the resolution of that appeal. The Company filed a notice of appeal which was denied on July 2, 2018 for lack of jurisdiction and remanded to the trial court for further proceedings. 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.

 

9.  The Company issued a total of 16,000 shares to the eight eligible board members effective January 16, 2018 as full payment for their 2018 retainer fee. The Company issued at total of 12,000 shares to the eight eligible board members effective March 8, 2017 as full payment for their 2017 retainer fee. All shares were issued under the 2010 Non-Employee Directors Stock Plan.

 

10.  The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective November 18, 2011. The Company entered into the Ninth Amendment to Credit Agreement effective May 15, 2018. The Company had previously entered into eight 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, (vi) extend the maturity date and (vii) decrease the Letter of Credit fee rate. 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

11


 

$5,500,000 in any fiscal year (excluding the aggregate amount of any Capital Expenditures financed with the proceeds of a Revolving Line Advance).

·

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 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). Therefore, the required Tangible Net Worth as of June 30, 2018 is $33,752,000.

·

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, 2020.

·

Interest rate pricing for the revolving credit facility is currently LIBOR plus 2.25% or the prime rate.

 

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 of 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, the amount expended related to the development of the mining property discussed in Note 12 and all unfinanced capital expenditures to (b) the sum for such period of interest expense related to the Credit Agreement.

·

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 $8,000,000 as of June 30, 2018 compared to $3,500,000 as of December 30, 2017. The highest balance outstanding during the first six months of 2018 and 2017 was $9,800,000 and $8,800,000, respectively. Average outstanding funded debt was $5,779,000 and $4,651,000 for the first six months of 2018 and 2017, respectively. At June 30, 2018, the Company had outstanding letters of credit totaling $4,745,000. 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.

 

11.  The Company is involved in litigation matters related to its business. 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 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. Additionally, see Note 8 for discussion of litigation regarding the Pueblo sand and gravel lease.

12


 

 

 

12.  During July 2015, TMC began development of a granite mining property south of Colorado Springs. These costs included drilling the property to ascertain its suitability for mining, engineering studies and legal expenses related to the preparation of TMC’s application to obtain the required mining permits from the State of Colorado and El Paso County.

 

TMC made its initial application for a mining permit from the state of Colorado in 2016. The state’s Reclamation Mining and Safety Division (DRMS) of the Colorado Department of Natural Resources rejected issuing the permit by a 3 to 2 vote with one recusal and one absence. The DRMS invited TMC to resubmit its request to address the concerns raised during the hearing for the initial application. TMC filed its second application to the state in November 2017 addressing the issues cited during the first hearing. The Colorado Department of Natural Resources staff reviewed the mining application and recommended that the mining plan be approved as submitted. On April 26, 2018 despite the staff recommendation to approve the application, the head of the Department of Natural Resources, who has a seat on the DRMS Committee, voted against the permit. The permit was rejected 3 to 2 with two members recusing themselves.

 

The Company wrote off all capitalized costs associated with the permit application in the first quarter of 2018. As of December 30, 2017 the Company had capitalized $5,430,000 of deferred development which was included in Property, plant and equipment on the consolidated balance sheet. As of March 31, 2018 TMC had invested $6,308,000 in the project. This amount plus an estimated $626,000 of additional expenses incurred during April 2018, a total of $6,934,000, was written off as of March 31, 2018. During May and June 2018 there were two unanticipated bills received and one consultant voluntarily reduced an outstanding bill resulting in a net recovery of $94,000. This second quarter recovery reduced the total write-off to $6,840,000.

 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help investors understand the Company’s results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report and the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.

 

Company Overview

 

For an overview of the Company’s operations and operating structure, see Note 7 to the condensed consolidated financial statements contained in this Quarterly Report.

 

Liquidity and Capital Resources

 

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 their respective peak selling seasons. 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 demand 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

13


 

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.

 

Cash used by operations was $4,002,000 during the first six months of 2018 compared to $2,797,000 during the first six months of 2017.  The current year use of cash is attributable to  changes in working capital items as receivables, prepaid expenses and inventory levels all increased from the 2017 year-end levels while accounts payable and accrued expenses declined. The prior year provision of cash was attributable to operating results combined with changes in working capital items, primarily increases in receivables and inventory levels.

 

During the six months ended June 30, 2018, investing activities used $748,000 of cash compared to $2,776,000 of cash used in the prior year’s period. Capital expenditures during the first six months of 2018 were $2,148,000 compared to $2,803,000 during the first six months of 2017.  The primary source of capital spending was the CACS segment which added new rolling machinery in both periods. Additionally, during the first six months of 2017, the CACS segment was deferring costs related to the development of an aggregates property. These amounts were written off as of March 30, 2018. See Note 12 for further discussion. The six months ended June 30, 2018 included  $1,400,000 of cash proceeds from the sale of equipment in the CACS segment discussed in the quarterly results. The first six months of 2017 included $27,000 of cash proceeds from the sale of equipment.

 

Financing activities during the first six months of 2018 provided  $4,500,000 of cash as borrowings against the Company’s revolving bank loan were used primarily to finance the increase in working capital. During the first six months of 2017 financing activities provided  $5,600,000 of cash as borrowings were used to finance the increase in working capital and the pursuit of mining permits for the aggregates property discussed in Note 12. See also the discussion of the Revolving Credit and Term Loan Agreement below.

 

Revolving Credit and Term Loan Agreement

 

As discussed in Note 10 to the condensed consolidated financial statements contained in this Quarterly Report, the Company maintains a Credit Agreement, which, as amended, provides for a Revolving Commitment of $20,000,000. The Revolving Commitment covers the Company’s outstanding letters of credit ($4,745,000 at June 30, 2018) and cash borrowings. 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 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 in any fiscal year (excluding the aggregate amount of any Capital Expenditures financed with the proceeds of a Revolving Line advance). Borrowings under the Credit Agreement bear interest based on a 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 has a maturity date of May 1, 2020.

 

The Company’s outstanding borrowings against the revolving credit facility were $8,000,000 at June 30, 2018. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the entire revolving credit facility was available to the Company. This situation is expected to continue for the foreseeable future.

 

As of June 30, 2018 the Company was in compliance with all covenants in the Credit Agreement, as amended, and expects to be in compliance with all loan covenants for the remaining term of the Credit Agreement. 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.

 

14


 

Results of Operations - Comparison of Quarter Ended June 30, 2018 to the Quarter Ended July 1, 2017

 

In the ensuing discussions of the results of operations the Company defines 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.

 

Consolidated sales in the second quarter of 2018 were $43,300,000, an increase of $3,413,000, or 8.6%, compared to the second quarter of 2017. The improvement was seen in the Door, CACS and Heating and Cooling segments where sales were higher by 21.5%, 9.7% and 9.4%, respectively, in the second quarter of 2018 compared to the second quarter of 2017.  The Evaporative Cooling segment showed a slight decrease in sales, down 0.2%, for the same period comparison.

 

The consolidated gross profit ratio in the second quarter of 2018 was 19.0% compared to 20.4% in the same period of 2017.  The Door segment gross profit ratio was virtually the same in the second quarter of 2018 and the second quarter of 2017. All other segments reported decreases in the 2018 quarter gross profit ratios, more so in the Heating and Cooling and Evaporative Cooling segments and to a lesser degree in the CACS segment.

 

Consolidated selling and administrative expenses were $306,000 lower in the second quarter of 2018 compared to the second quarter of 2017. While the CACS and Evaporative Cooler segments reported the largest dollar decreases in selling and administrative expenses between periods, as a percentage of sales the Heating and Cooling and Door segments reported the greatest decreases between the second quarter of 2018 and the second quarter of 2017. As a percentage of consolidated sales, selling and administrative expenses decreased from 14.7% in the second quarter of 2017 to 12.8% in the second quarter of 2018.

 

The second quarter of 2018 included a $94,000 net reduction to the write-off of deferred development costs associated with a mining property for which the Company had applied to the State of Colorado for the required mining permits. The development costs were written off as of March 31, 2018 and included an estimate for unbilled expenses. During the second quarter of 2018 several final bills were received and one amount billed was voluntarily reduced by a consultant resulting in a net recovery of $94,000 for the current year quarter. See Note 12 to the condensed consolidated financial statements contained in the Quarterly Report for further discussion.

 

Additionally, the second quarter of 2018 included an $889,000 gain on the sale of equipment discussed below in the CACS segment results. Gains on sales of equipment for the second quarter of 2017 were $24,000.

 

The consolidated operating income in the second quarter of 2018 was $2,942,000 compared to $1,655,000 in the second quarter of the prior year. The increase is attributable mainly to the CACS segment which reported an increase of $1,154,000 in the second quarter of 2018 compared to the second quarter of 2017. The Door segment reported operating income higher by $266,000 between the two periods while the Heating and Cooling segment remained the same and the Evaporative Cooing segment reported a decrease of $130,000 between the second quarter of 2018 and 2017.

 

Interest expense in the second quarter of 2018 was $167,000 compared to $108,000 in the second quarter of 2017.  Interest expense includes interest on outstanding funded debt, finance charges on outstanding letters of credit, the fee on the unused revolving credit line and other recurring fees charged by the lending bank. The increase from the prior year second quarter is attributable to rising interest rates combined with higher average borrowings in the current year second quarter. The weighted average interest rate on outstanding funded debt in the second quarter of 2018, including the fee on the unused line of credit and other recurring bank charges but excluding finance charges on letters of credit, was approximately 6.4% compared to 4.9% in the second quarter of 2017. Average outstanding funded debt in the second quarter of 2018 was $7,765,000 compared to $7,408,000 in the second quarter of 2017. At the end of the second quarter of 2018 the outstanding funded debt was $8,000,000 compared to $7,600,000 at the end of the second quarter of 2017.

 

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 estimated effective income tax rate in the second quarter of

15


 

2018 was a benefit of 25.0% compared to a benefit of 34.0% for the second quarter of 2017. The decrease in benefit is primarily attributable to the recently enacted Tax Act which reduced the Company’s Federal Tax Rate from 34.0% to 21.0%.

 

The Company operates four businesses in two industry groups. The businesses are generally 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.

 

Construction Products

 

The table below presents a summary of operating information for the two reportable segments within the Construction Products industry group for the quarters ended June 30, 2018 and July 1, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Concrete,

    

 

 

    

 

 

Aggregates and

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Supplies

 

Door

 

 

Three Months ended June 30, 2018

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

19,867

 

$

5,782

 

 

Segment gross profit

 

 

3,153

 

 

1,686

 

 

Gross profit as percent of sales

 

 

15.9

%  

 

29.2

%

 

Segment operating income

 

$

2,620

 

$

918

 

 

Operating income as a percent of sales

 

 

13.2

%

 

15.9

%

 

Segment assets as of June 30, 2018

 

$

37,540

 

$

8,190

 

 

Return on assets

 

 

7.0

%

 

11.2

%

 

 

 

 

 

 

 

 

 

 

Three Months ended July 1, 2017

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

18,113

 

$

4,760

 

 

Segment gross profit

 

 

3,119

 

 

1,383

 

 

Gross profit as percent of sales

 

 

17.2

%  

 

29.1

%

 

Segment operating income

 

$

1,466

 

$

652

 

 

Operating income as a percent of sales

 

 

8.1

%

 

13.7

%

 

Segment assets as of July 1, 2017

 

$

39,736

 

$

7,889

 

 

Return on assets

 

 

3.7

%

 

8.3

%

 

 

 

Concrete, Aggregates and Construction Supplies Segment

 

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 second party suppliers and sold to the construction trades, particularly concrete sub-contractors. During the three months ended June 30, 2018 concrete, aggregates and construction supplies accounted for approximately 77%, 16% and 7% of the sales of the CACS segment, respectively, including aggregates consumed internally in the production of concrete. In the second quarter of 2017, the sales mix between concrete, aggregates and construction supplies was 79%, 15% and 6%, respectively. Sales including aggregates consumed internally increased  $2,370,000 (11.9%) between the second quarter of 2018 and the comparable prior year quarter. Sales to third parties increased by $1,754,000 (9.7%) between the same periods. The gross profit reported by the CACS segment decreased to 15.9% in the second quarter of 2018 from 17.2% in the second quarter of the prior year as decreases in concrete were partially offset by improved results in the aggregates operations.

 

Ready mix concrete sales increased 7.7% in the second quarter of 2018 versus the second quarter of 2017 as both volume and sales prices were higher in the current year quarter compared to the prior year quarter. Concrete volume was 2.3%  higher in the second quarter of 2018 compared to the prior year quarter as weather conditions in the current year were more favorable than the cool, wet conditions experienced in 2017. Concrete prices increased by

16


 

5.3% in the second quarter of the current year compared to the second quarter of the prior year as both Colorado Springs and, to a lesser extent, Pueblo reported higher sales prices. Even though concrete prices have increased, the market remains sharply competitive especially on large construction projects. Material cost per yard increased 12.8% in the second quarter of 2018 compared to the prior year second quarter. Cement is the highest cost raw material used in the production of ready mix concrete. Cement costs per yard increased by 7.0% in the second quarter of the current year compared to the same quarter of 2017.  The higher cement costs, including delivery, combined with an increase in the cost of rock to account for the majority of the material cost increase. Batching cash costs per yard decreased by 15.8% in the second quarter of 2018 compared to the second quarter of 2017.  The second quarter of 2017 included batching costs related to replacement of a Pueblo bridge deck that did not meet specifications. There was no similar event in the second quarter of 2018. Delivery costs per yard increased 4.4% in the current quarter of 2018 compared to the prior year second quarter mostly due to increased fuel costs and repairs and maintenance expense which were partially offset by lower contract trucking costs. The gross profit ratio from concrete decreased to 15.5% for the second quarter 2018 from 17.2% in the second quarter of 2017.

 

The CACS segment also produces and sells sand, crushed limestone and gravel (collectively “aggregates”) from deposits in and around Colorado Springs. Sales volume (tons) of construction aggregates, including those used internally in the production of ready mix concrete, decreased 3.0% in the second quarter of 2018 compared to the comparable 2017 quarter. Average selling prices, excluding freight, increased 7.4% due to the higher ratio of rock to sand sales. The combined aggregates operations reported a second quarter 2018 profit $57,000 higher compared to the second quarter of 2017 primarily due to stronger performance at one mining property nearing conclusion of mining which was partially offset by lower profits at other mining properties.

 

Sales of construction supplies increased  $499,000 (45.2%) in the second quarter of 2018 compared to the prior year second quarter due to a significant job shipped in the 2018 quarter. The gross profit increased to 10.2% from 9.7% in 2017.  Profit from the increased sales was tempered by lower margins attributable to higher material costs.

 

Selling and administrative expenses were $146,000 lower in the second quarter of 2018 compared to the same period in 2017 primarily due to lower legal fees. Litigation fees related to the Pueblo aggregate lease were $21,000 during the second quarter of 2018 compared to $209,000 incurred during the comparable period of 2017. As a percentage of sales, selling and administrative expenses were 5.7% in 2018 compared to 7.1% in 2017. 

 

The second quarter of 2018 included a $94,000 net reduction to the write-off of deferred development costs associated with a mining property for which the Company was denied the required mining permits by the state of Colorado. The development costs were written off as of March 31, 2018 and included an estimate for unbilled expenses. During the second quarter of 2018 several final bills were received and one amount owed was voluntarily reduced by a consultant resulting in a net recovery of $94,000 for the current year quarter. See Note 12 to the condensed consolidated financial statements contained in the Quarterly Report for further discussion.

 

The second quarter of 2018 also included an $889,000 gain on the sale of equipment. The CACS segment sold its Industrial Sand Plant to an unrelated party that will continue to operate the plant at its current location having entered into a land lease agreement with the Company. There were no such gains reported by the CACS segment during the second quarter of 2017.

 

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 the Company serves. 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 has not hedged 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 the Company to adjust its selling prices to recover such increases.

 

17


 

Door Segment

 

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 segment’s 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. As the product components of any one job likely vary significantly from any other job, the Door segment does not track unit sales of the various products through its accounting or management reporting systems. Management focuses on the level of the sales backlog, the trend in sales and the gross profit rate in managing the business.

 

Door sales in the second quarter of 2018 were $1,022,000 (21.5%) greater than in the second quarter of the previous year as bidding opportunities and backlog in the current year have increased over the prior year. Bidding prices remain competitive. The gross profit ratio in the second quarter of 2018 and 2017 was level, 29.2% versus 29.1%, as competitive pricing on certain larger jobs resulted in lower contribution margins.

 

Selling and administrative expenses were $8,000 higher in the second quarter of 2018 compared to the second quarter of 2017. As a percentage of sales, these expenses decreased to 12.6%  in the second quarter of 2018 from 15.1% in the comparable 2017 quarter.

 

The Door segment sales backlog at the end of the second quarter of 2018 was $6,169,000 compared to $4,975,000 at the end of the same quarter of 2017.

 

HVAC Products

 

The table below presents a summary of operating information for the two reportable segments within the HVAC products industry group for the quarters ended June 30, 2018 and July 1, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Heating and

    

Evaporative

 

    

 

 

Cooling

 

Cooling

 

 

Three Months ended June 30, 2018

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

7,412

 

$

10,210

 

 

Segment gross profit

 

 

1,252

 

 

2,085

 

 

Gross profit as percent of sales

 

 

16.9

%  

 

20.4

%

 

Segment operating (loss) income

 

$

(497)

 

$

776

 

 

Operating (loss) income as a percent of sales

 

 

(6.7)

%  

 

7.6

%

 

Segment assets as of June 30, 2018

 

$

19,346

 

$

12,854

 

 

Return on assets

 

 

(2.6)

%  

 

6.0

%

 

 

 

 

 

 

 

 

 

 

Three Months ended July 1, 2017

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

6,778

 

$

10,233

 

 

Segment gross profit

 

 

1,291

 

 

2,357

 

 

Gross profit as percent of sales

 

 

19.0

%  

 

23.0

%

 

Segment operating (loss) income

 

$

(497)

 

$

906

 

 

Operating (loss) income as a percent of sales

 

 

(7.3)

%  

 

8.9

%

 

Segment assets as of July 1, 2017

 

$

21,728

 

$

13,619

 

 

Return on assets

 

 

(2.3)

%  

 

6.7

%

 

 

 

Heating and Cooling Segment

 

In the second quarter of 2018,  approximately 51% of sales in the Heating and Cooling segment consisted of wall furnaces and heaters. Fan coils accounted for 47% of the segment’s sales and other products were about 2% of the segment’s sales. In the second quarter of 2017 these shares of total segment sales were 46%, 50% and 4%,

18


 

respectively. Overall sales in the Heating and Cooling segment in the second quarter of 2018 increased by $634,000 (9.4%) compared to the same period in 2017.

 

Sales of furnaces and heaters increased 18.8% in the three months ended June 30, 2018 compared to the three months ended July 1, 2017. Unit shipments of furnaces and heaters were 15.1% higher in the second quarter of 2018. Management believes a price increase that was realized mid-quarter 2018 may have impacted sales as customers placed orders prior to the implementation date. Average sales prices for furnaces and heaters were about 3.2% higher compared to a year ago due to changes in product mix and the aforementioned price increase.

 

Sales of fan coils during the second quarter of 2018 decreased 1.2% compared to the second quarter 2017. The fan coil sales backlog at June 30, 2018 was $2,642,000 compared to $4,037,000 at July 1, 2017. Typically, approximately 90% of the sales of fan coils are custom-made systems for hotels and other commercial buildings. Fan coil jobs are obtained through a competitive bidding process. Since every bid job is a unique configuration of materials and parts, the Company does not track unit sales or production as such unit volume data would not be useful in managing the business. Management focuses on the contribution margin by job, the current level of sales and the sales backlog in managing the fan coil business. Contribution margin is measured 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 in the second quarter of 2018 increased to 28.9% from 23.4% in the second quarter of 2017. The increase in margin in the second quarter of 2018 can be attributed to more favorable pricing in the current year versus aggressive pricing in early 2017 to build sales volume and backlog.

 

The Heating and Cooling segment’s gross profit ratio for the second quarter of 2018 was 16.9% compared to 19.0% in the second quarter of 2017. The lower gross profit ratio is attributable to increased material costs, most notably steel, in the furnace product line and the scrapping of certain units returned by a customer.

 

Selling and administrative expenses in the second quarter of 2018 were $51,000 lower than the second quarter of the previous year. The decrease was attributable to lower compensation related expenses. As a percentage of sales, selling and administrative expenses were 21.4% in the second quarter of 2018 and 24.2% in the second quarter of 2017.

 

Evaporative Cooling Segment

 

Sales of evaporative coolers were virtually the same in the second quarter of 2018 compared to the second quarter of 2017. Unit sales of evaporative coolers decreased 8.8% in the current second quarter compared to the prior year second quarter. Average selling prices were up 9.5% between the second quarter of 2018 and 2017. The increased average selling prices are attributed to a price increase announced by PMI earlier in 2018. The gross profit ratio in the second quarter of 2018 was 20.4% compared to 23.0%  a year ago. The decrease in gross profit ratio is mainly attributable to increased material costs, notably steel, and costs associated with the planned elimination of a mobile cooler line.

 

Selling and administrative expenses were $142,000 (10.6%) lower in the second quarter of 2018 mainly due to decreased consulting costs and the streamlining of certain sales incentive programs. As a percentage of sales, selling and administrative expenses decreased to 11.8% in the current quarter of 2018 from 13.1% in the prior year quarter.

 

Both businesses in the HVAC group are sensitive to changes in 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. Neither company is currently a party to any hedging arrangements with regard to steel or copper.

 

 

19


 

Results of Operations - Comparison of Six Months Ended June 30, 2018 to Six Months Ended July 1, 2017

 

In the ensuing discussions of the results of operations the Company defines 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.

 

Consolidated sales in the first six months of 2018 were $80,173,000, an increase of $6,183,000 or 8.4% compared to the first six months of 2017. All segments contributed to the increase in sales. The Door segment reported an increase in sales in the current period of $1,449,000 (16.8%) mainly due to strong second quarter performance. The CACS segment sales increased $3,335,000 (10.6%) in the first half of 2018 compared to the first half of 2017 as current weather patterns were more favorable than the cool, wet weather experienced in the first half of 2017. The Heating and Cooling and Evaporative Cooling segments also reported increased sales, up $1,191,000 and $184,000, respectively.

 

The consolidated gross profit ratio in the first six months of 2018 was 17.1% compared to 19.2% in the first six months of 2017.  The gross profit ratio in the Door segment improved by just under one point. All other segments reported decreases in the gross profit ratio. The Heating and Cooling and Evaporative Cooling segments each reported a 2.7 point decrease in gross profit margin while the CACS segment reported a decrease of 2.2 points. The changes are addressed in more detail in the discussion by segment below.

 

Depreciation and amortization charges in the first six months of 2018 increased $68,000 (5.2%) compared to the first six months of 2017.

 

Selling and administrative expenses in the first six months of 2018 were $199,000 (1.7%) lower compared to the same period of the prior year. The Door segment reported an increase of less than one percent in selling and administrative expenses while all other segments reported a decrease in such expenses between the first half of 2018 and the prior year comparable period. As a percentage of consolidated sales, selling and administrative expenses decreased to 14.5% the first six months of 2018 compared to 16.0% in the same period of the prior year.

 

The first six months of 2018 included the net write-off of $6,840,000 of deferred development costs previously capitalized in property, plant and equipment on the consolidated balance sheet or incurred in the current fiscal year. These costs included exploration of a property south of Colorado Springs to determine suitability for mining as well as costs associated with the Company’s pursuit of mining permits for the property.  In April 2018 the permits were denied by the State of Colorado for the second time. See Note 12 to the condensed consolidated financial statements contained in this Quarterly Report for further discussion. The first six months of 2018 also included an $889,000 gain from the sale of equipment in the CACS segment discussed in the quarterly results above.

 

The Company reported a $5,251,000 consolidated operating loss in the first six months of 2018 compared to consolidated operating income of  $1,044,000 in the first six months of the prior year. Excluding the write-off of deferred development costs, operating income for the first half of 2018 would be $1,589,000. Excluding the write-off, the CACS segment operating income increased $656,000 in the first half of 2018 compared to the first half of 2017. The Door segment reported an increase of $412,000 in operating income the same comparison period. The Heating and Cooling segment reported a lesser increase, $6,000, while the Evaporative Cooling segment reported a decline of $329,000 in operating income for the first six months of the current year compared to the first six months of the prior year. See further details in the discussion of segments below.

 

Interest expense for the first six months of 2018 was  $275,000 compared to $174,000 in the first six months of 2017 due to a higher weighted average interest rate on higher average outstanding debt. 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 6.5% for the first six months of 2018 compared to 5.8% for the same period in 2017. Average outstanding funded debt in the first six months of 2018 was $5,779,000 compared to $4,651,000 in the first six months of 2017.

 

20


 

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 estimated effective income tax rate in the first six months of 2018 was a benefit of 25.0% compared to a benefit of 34.0% for the first six months of 2017. The decrease in benefit is attributable to the recently enacted Tax Act which reduced the Company’s Federal Tax Rate from 34.0% to 21.0%.

 

A discussion of operations by segment follows.

 

Construction Products

 

The table below presents a summary of operating information for the two reportable segments within the Construction Products industry group for the six months ended June 30, 2018 and July 1, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Concrete,

    

 

 

 

 

 

Aggregates and

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Supplies

 

Door

 

 

Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

34,931

 

$

10,078

 

 

Segment gross profit

 

 

3,845

 

 

2,897

 

 

Gross profit as percent of sales

 

 

11.0

%  

 

28.7

%

 

Segment operating (loss) income