0001558370-18-009279.txt : 20181113 0001558370-18-009279.hdr.sgml : 20181113 20181113163116 ACCESSION NUMBER: 0001558370-18-009279 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 46 CONFORMED PERIOD OF REPORT: 20180929 FILED AS OF DATE: 20181113 DATE AS OF CHANGE: 20181113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL MATERIALS CORP CENTRAL INDEX KEY: 0000024104 STANDARD INDUSTRIAL CLASSIFICATION: CONCRETE GYPSUM PLASTER PRODUCTS [3270] IRS NUMBER: 362274391 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03834 FILM NUMBER: 181178426 BUSINESS ADDRESS: STREET 1: 440 S. LASALLE STREET 2: SUITE 3100 CITY: CHICAGO STATE: IL ZIP: 60605 BUSINESS PHONE: 312-541-7200 MAIL ADDRESS: STREET 1: 440 S. LASALLE STREET 2: SUITE 3100 CITY: CHICAGO STATE: IL ZIP: 60605 FORMER COMPANY: FORMER CONFORMED NAME: CONTINENTAL URANIUM INC DATE OF NAME CHANGE: 19660830 10-Q 1 cuo-20180929x10q.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 September 29, 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 every Interactive Data File required to be submitted 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 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 ☒

 

 

 

 

 

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 November 6, 2018: 1,697,855.

 

 


 

PART I — FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 29, 2018 AND DECEMBER 30, 2017

(000’s omitted except share data)

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

SEPTEMBER 29, 2018

 

DECEMBER 30,

 

 

 

(Unaudited)

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

452

 

$

507

 

Receivables, net

 

 

25,710

 

 

24,227

 

Receivable for insured losses

 

 

875

 

 

 —

 

Inventories

 

 

 

 

 

 

 

Finished goods

 

 

5,159

 

 

8,391

 

Work in process

 

 

2,855

 

 

1,198

 

Raw materials and supplies

 

 

13,067

 

 

10,770

 

Prepaid expenses

 

 

2,490

 

 

1,901

 

Refundable income taxes

 

 

996

 

 

57

 

Total current assets

 

 

51,604

 

 

47,051

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

17,220

 

 

22,824

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

7,229

 

 

7,229

 

Deferred income taxes

 

 

2,497

 

 

1,616

 

Other assets

 

 

3,674

 

 

3,769

 

 

 

$

82,224

 

$

82,489

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Revolving bank loan payable

 

$

6,700

 

$

3,500

 

Accounts payable and accrued expenses

 

 

18,849

 

 

18,374

 

Liability for unpaid claims covered by insurance

 

 

875

 

 

 —

 

Total current liabilities

 

 

26,424

 

 

21,874

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

6,484

 

 

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

 

 

61,671

 

 

66,987

 

Treasury shares, 876,409 and 892,097 at cost

 

 

(14,928)

 

 

(15,195)

 

 

 

 

49,316

 

 

54,322

 

 

 

$

82,224

 

$

82,489

 

 

See notes to condensed consolidated financial statements.

2


 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2018 AND SEPTEMBER 30, 2017

(Unaudited)

(000’s omitted except per-share amounts)

 

 

 

 

 

 

 

 

 

 

    

SEPTEMBER 29,

    

SEPTEMBER 30,

 

 

 

2018

 

2017

 

Net sales

 

$

40,978

 

$

38,627

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

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

 

 

34,745

 

 

31,426

 

Depreciation, depletion and amortization

 

 

682

 

 

617

 

Selling and administrative

 

 

7,006

 

 

5,361

 

Gain on disposition of property and equipment

 

 

(3)

 

 

(95)

 

 

 

 

42,430

 

 

37,309

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(1,452)

 

 

1,318

 

 

 

 

 

 

 

 

 

Interest income

 

 

14

 

 

18

 

Interest expense

 

 

(140)

 

 

(98)

 

Other (expense) income, net

 

 

(70)

 

 

28

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(1,648)

 

 

1,266

 

 

 

 

 

 

 

 

 

(Benefit) provision for income taxes

 

 

(412)

 

 

431

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

(1,236)

 

 

835

 

 

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

 

62,907

 

 

65,775

 

 

 

 

 

 

 

 

 

Retained earnings, end of period

 

$

61,671

 

$

66,610

 

 

 

 

 

 

 

 

 

Basic and diluted income per share

 

$

(0.73)

 

$

0.50

 

Average shares outstanding

 

 

1,698

 

 

1,682

 

 

See notes to condensed consolidated financial statements

3


 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2018 AND SEPTEMBER 30, 2017

(Unaudited)

(000’s omitted except per-share amounts)

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 29,

 

SEPTEMBER 30,

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Net sales

 

$

121,151

 

$

112,617

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

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

 

 

101,185

 

 

91,232

 

Depreciation, depletion and amortization

 

 

2,065

 

 

1,932

 

Selling and administrative

 

 

18,656

 

 

17,210

 

Charges related to write off of deferred development

 

 

6,840

 

 

 —

 

Gain on disposition of property and equipment

 

 

(892)

 

 

(119)

 

 

 

 

127,854

 

 

110,255

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(6,703)

 

 

2,362

 

 

 

 

 

 

 

 

 

Interest income

 

 

59

 

 

50

 

Interest expense

 

 

(415)

 

 

(272)

 

Other (expense) income, net

 

 

(29)

 

 

44

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(7,088)

 

 

2,184

 

 

 

 

 

 

 

 

 

Benefit (provision) for income taxes

 

 

1,772

 

 

(743)

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

(5,316)

 

 

1,441

 

 

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

 

66,987

 

 

65,169

 

 

 

 

 

 

 

 

 

Retained earnings, end of period

 

$

61,671

 

$

66,610

 

 

 

 

 

 

 

 

 

Basic and diluted (loss) income per share

 

$

(3.13)

 

$

0.86

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

 

1,697

 

 

1,679

 

 

See notes to condensed consolidated financial statements

4


 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2018 AND SEPTEMBER 30, 2017

(Unaudited)

(000’s omitted)

 

 

 

 

 

 

 

 

 

 

    

SEPTEMBER 29,

    

SEPTEMBER 30,

 

 

 

2018

 

2017

 

Net cash used by operating activities

 

$

(2,256)

 

$

(1,410)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,402)

 

 

(4,378)

 

Cash proceeds from sale of property and equipment

 

 

1,403

 

 

122

 

Net cash used in investing activities

 

 

(999)

 

 

(4,256)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Borrowings on the revolving bank loan

 

 

27,600

 

 

25,050

 

Repayments on the revolving bank loan

 

 

(24,400)

 

 

(19,450)

 

Net cash provided by financing activities

 

 

3,200

 

 

5,600

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(55)

 

 

(66)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

 

507

 

 

301

 

 

 

 

 

 

 

 

 

End of period

 

$

452

 

$

235

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow items:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest, net

 

$

404

 

$

339

 

Income taxes, net

 

 

50

 

 

252

 

 

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 SEPTEMBER 29, 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 generally recognizes revenue from the sale of products at the time the products are shipped.

 

While the return of products is generally not allowed, some large customers have been granted the right to return a certain amount at the end of the normal selling season for seasonal products. 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.

 

The Company is responsible for warranties related to the manufacture of its HVAC products and 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.

 

6


 

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 September 29, 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.

 

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 created a single source of revenue guidance for all companies in all industries and is more

7


 

principles-based than prior 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 in 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which includes new transition guidance for the adoption of ASU 2016-02. Such guidance creates an additional transition method allowing entities to use the effective date of ASU 2016-02 as the date of initial application on transition. Under this method, entities will not be required to recast comparative periods when transitioning to the new guidance. Entities will also not be required to present comparative period disclosures under the new guidance in the period of adoption. The Company expects to select this new transition method upon its adoption in the first quarter of 2019. The Company has begun its evaluation of the new standard as well as accumulating relevant documents. This process is expected to continue through the effective date and will include analysis of contractual arrangements, evaluation of related disclosures and, potentially, changes/modifications to processes, accounting systems, and internal controls to ensure compliance. 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 nine 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 nine month periods ended September 29, 2018 and September 30, 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 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

8


 

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 nine-month and three-month periods ended September 29, 2018 and September 30, 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

 

Nine Months ended September 29, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

53,965

 

$

14,824

 

$

68,789

 

$

29,314

 

$

22,980

 

$

52,294

 

$

68

 

$

121,151

 

Depreciation, depletion and amortization

 

 

1,100

 

 

123

 

 

1,223

 

 

487

 

 

322

 

 

809

 

 

33

 

 

2,065

 

Operating (loss) income

 

 

(5,365)

 

 

1,787

 

 

(3,578)

 

 

(21)

 

 

104

 

 

83

 

 

(3,208)

 

 

(6,703)

 

Segment assets

 

 

37,754

 

 

7,806

 

 

45,560

 

 

23,010

 

 

9,655

 

 

32,665

 

 

3,999

 

 

82,224

 

Capital expenditures (b)

 

 

1,620

 

 

94

 

 

1,714

 

 

346

 

 

296

 

 

642

 

 

46

 

 

2,402

 

Three Months ended September 29, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

19,034

 

$

4,746

 

$

23,780

 

$

10,909

 

$

6,254

 

$

17,163

 

$

35

 

$

40,978

 

Depreciation, depletion and amortization

 

 

362

 

 

41

 

 

403

 

 

162

 

 

107

 

 

269

 

 

10

 

 

682

 

Operating income (loss)

 

 

(63)

 

 

431

 

 

368

 

 

(95)

 

 

(416)

 

 

(511)

 

 

(1,309)

 

 

(1,452)

 

Segment assets

 

 

37,754

 

 

7,806

 

 

45,560

 

 

23,010

 

 

9,655

 

 

32,665

 

 

3,999

 

 

82,224

 

Capital expenditures  (b)

 

 

1,269

 

 

61

 

 

1,330

 

 

146

 

 

231

 

 

377

 

 

(5)

 

 

1,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction Products Industry

 

HVAC Industry

 

 

 

 

 

 

    

Concrete,

    

 

    

 

    

 

    

 

    

 

    

 

    

 

 

 

 

Aggregates &

 

 

 

Combined

 

Heating

 

 

 

Combined

 

 

 

 

 

 

 

Construction

 

 

 

Construction

 

and

 

Evaporative

 

HVAC

 

Unallocated

 

 

 

 

 

Supplies

 

Doors

 

Products

 

Cooling

 

Cooling

 

Products

 

Corporate

 

Total

 

Nine Months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

49,650

 

$

13,565

 

$

63,215

 

$

27,358

 

$

22,031

 

$

49,389

 

$

13

 

$

112,617

 

Depreciation, depletion and amortization

 

 

1,026

 

 

111

 

 

1,137

 

 

449

 

 

322

 

 

771

 

 

24

 

 

1,932

 

Operating income (loss)

 

 

2,484

 

 

1,544

 

 

4,028

 

 

219

 

 

579

 

 

798

 

 

(2,464)

 

 

2,362

 

Segment assets (a)

 

 

39,020

 

 

7,360

 

 

46,380

 

 

21,543

 

 

11,896

 

 

33,439

 

 

2,670

 

 

82,489

 

Capital expenditures (b)

 

 

3,367

 

 

131

 

 

3,498

 

 

650

 

 

216

 

 

866

 

 

14

 

 

4,378

 

Three Months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

18,054

 

$

4,936

 

$

22,990

 

$

10,144

 

$

5,489

 

$

15,633

 

$

 4

 

$

38,627

 

Depreciation, depletion and amortization

 

 

316

 

 

39

 

 

355

 

 

147

 

 

107

 

 

254

 

 

 8

 

 

617

 

Operating income (loss)

 

 

1,602

 

 

600

 

 

2,202

 

 

151

 

 

(270)

 

 

(119)

 

 

(765)

 

 

1,318

 

Segment assets (a)

 

 

39,020

 

 

7,360

 

 

46,380

 

 

21,543

 

 

11,896

 

 

33,439

 

 

2,670

 

 

82,489

 

Capital expenditures (b)

 

 

1,148

 

 

12

 

 

1,160

 

 

285

 

 

151

 

 

436

 

 

(21)

 

 

1,575

 

 


(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

10


 

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 Company alleging breach of contract and seeking 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. Subsequently, the trial court vacated its Partial Summary Judgment Order and set the matter for trial by jury on all issues on January 28, 2019. 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 a 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 September 29, 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 $6,700,000 as of September 29, 2018 compared to $3,500,000 as of December 30, 2017. The highest balance outstanding during the first nine months of 2018 and 2017 was $9,800,000 and $10,000,000, respectively. Average outstanding funded debt was $6,188,000 and $5,834,000 for the first nine months of 2018 and 2017, respectively. At September 29, 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 Division of Reclamation, Mining and Safety (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 the second quarter of 2018, final billings and adjustments related to the permit application resulted in a net recovery of $94,000 reducing the total write-off to $6,840,000 as of June 30, 2018.

 

 

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. 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 payments of the prior year’s accrued incentive bonuses and Company profit-sharing contributions, if any. As a

13


 

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 $2,256,000 during the first nine months of 2018 compared to $1,410,000 during the first nine months of 2017.  The current year use of cash is attributable to the reduced operating results and changes in working capital items,  primarily receivables,  inventory levels and prepaid expenses, which all increased from the 2017 year-end levels. The prior year use of cash was attributable increases in working capital items, primarily receivables and inventory levels.

 

During the nine months ended September 29, 2018, investing activities used $999,000 of cash compared to $4,256,000 of cash used in the prior year’s period. Capital expenditures during the first nine months of 2018 were $2,402,000 compared to $4,378,000 during the first nine 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 nine 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 to the Quarterly Condensed Consolidated Financial Statements for further discussion. The nine months ended September 29,  2018 included  $1,403,000 of cash proceeds from the sale of equipment in the CACS segment discussed in the nine month results. The first nine months of 2017 included $122,000 of cash proceeds from the sale of equipment.

 

Financing activities during the first nine months of 2018 provided  $3,200,000 of cash as borrowings against the Company’s revolving bank loan were used primarily to finance the increase in working capital.  During the first nine 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 to the Quarterly Condensed Consolidated Financial Statements. 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 Quarterly Condensed Consolidated Financial Statements, 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 September 29, 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 $6,700,000 at September 29, 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 September 29, 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 September 29, 2018 to the Quarter Ended September 30, 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 third quarter of 2018 were $40,978,000, an increase of $2,351,000, or 6.1%, compared to the third quarter of 2017.  The Evaporative Cooling segment reported sales up 13.9% over the third quarter of the prior year. The Heating and Cooling segment reported sales up 7.5% compared to the prior year third quarter as fan coil sales increased over the prior year third quarter. Sales in the CACS segment were higher by 5.4% in the third quarter of 2018 compared to the prior year third quarter attributable to the concrete and supply divisions. The Door segment reported sales in the third quarter of 2018 down 3.8% compared to the third quarter of the previous year.

 

The consolidated gross profit ratio in the third quarter of 2018 was 15.2% compared to 18.6% in the same period of 2017 driven by cost increases in the CACS and Evaporative Cooling segments and to a lesser extent in the Door segment.

 

Consolidated selling and administrative expenses were $1,645,000 higher in the third quarter of 2018 compared to the third quarter of 2017.  The increase between years is primarily due to recent investments  in the Heating and Cooling and Evaporative Cooling segments, as well as at the Corporate level, to stimulate growth of the Company. The investments include key personnel, sales and marketing enhancements, consulting, research and development and travel. As a percentage of consolidated sales, selling and administrative expenses increased to 17.1% in the third quarter of 2018 from 13.9% in the third quarter of 2017.

 

The third quarter of 2018 included a $3,000 gain on the sale of equipment, discussed below in the CACS segment results. Gains on sales of equipment for the third quarter of 2017 were $95,000.

 

The consolidated operating loss for the third quarter of 2018 was $1,452,000 compared to operating income of $1,318,000 in the third quarter of the prior year. The decreased performance is primarily attributable to the CACS segment which reported a current quarter operating loss of $63,000 compared to operating income of $1,602,000 for the third quarter of 2017. The Corporate office also contributed to the decline as the addition of a Chief Operating Officer position and consulting expenses resulted in an increase of $544,000 in operating expenses in the third quarter of 2018 compared to the third quarter of 2017. Individual segment performance is discussed further below.

 

Interest expense in the third quarter of 2018 was $140,000 compared to $98,000 in the third 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 third quarter is attributable to rising interest rates.  The weighted average interest rate on outstanding funded debt in the third 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 5.6% compared to 4.0%  in the third quarter of 2017. Average outstanding funded debt in the third quarter of 2018 was $7,007,000 compared to $8,199,000 in the third quarter of 2017. At the end of the third quarter of 2018 the outstanding funded debt was $6,700,000 compared to $7,600,000 at the end of the third 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 third quarter of 2018 was 25.0% compared to 34.0% for the third quarter of 2017. The decrease in rate 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.

15


 

 

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 September 29, 2018 and September 30, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Concrete,

    

 

 

    

 

 

Aggregates and

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Supplies

 

Door

 

 

Three Months ended September 29, 2018

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

19,034

 

$

4,746

 

 

Segment gross profit

 

 

1,877

 

 

1,244

 

 

Gross profit as percent of sales

 

 

9.9

%  

 

26.2

%

 

Segment operating (loss) income

 

$

(63)

 

$

431

 

 

Operating (loss) income as a percent of sales

 

 

(0.3)

%

 

9.1

%

 

Segment assets as of September 29, 2018

 

$

37,754

 

$

7,806

 

 

Return on assets

 

 

(0.2)

%

 

5.5

%

 

 

 

 

 

 

 

 

 

 

Three Months ended September 30, 2017

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

18,054

 

$

4,936

 

 

Segment gross profit

 

 

3,050

 

 

1,367

 

 

Gross profit as percent of sales

 

 

16.9

%  

 

27.7

%

 

Segment operating income

 

$

1,602

 

$

600

 

 

Operating income as a percent of sales

 

 

8.9

%

 

12.2

%

 

Segment assets as of September 30, 2017

 

$

40,013

 

$

7,617

 

 

Return on assets

 

 

4.0

%

 

7.9

%

 

 

 

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 third party suppliers and sold to the construction trades, particularly concrete sub-contractors. During the three months ended September 29, 2018 concrete, aggregates and construction supplies accounted for approximately 79%, 14% and 7% of the sales of the CACS segment, respectively, including aggregates consumed internally in the production of concrete. In the third quarter of 2017, the sales mix between concrete, aggregates and construction supplies was 77%, 18% and 5%, respectively. Sales including aggregates consumed internally increased  $520,000 (2.5%) between the third quarter of 2018 and the comparable prior year quarter. Sales to third parties increased by $980,000 (5.4%) between the same periods. The gross profit reported by the CACS segment decreased to 9.9% in the third quarter of 2018 from 16.9% in the third quarter of the prior year as decreases in concrete and aggregates were partially offset by improved results in the construction supplies division.

 

Ready mix concrete sales increased 6.4% in the third quarter of 2018 versus the third 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 3.0%  higher in the third 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.  The gross profit ratio from concrete decreased to 9.1% for the third quarter 2018 from 16.2% in the third quarter of 2017, driven by increases in material costs (up 10.1% per yard) and increased labor and delivery expenses.

 

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 20.9% in the third quarter of 2018 compared to the comparable 2017 quarter. The decreased volume is attributable to an unplanned temporary shut-down at one

16


 

property and completion of mining at one property.  Average selling prices, excluding freight, decreased 3.3% due to the higher ratio of sand to rock sales. The combined aggregates operations reported a loss of $2,200 in the third quarter of 2018 compared to a  profit of $413,000 in the third quarter of 2017.  The decline in operating results is attributed to lower sales, increased labor costs and higher repairs and maintenance and equipment rental costs.

 

Sales of construction supplies increased  $449,000 (41.3%) in the third quarter of 2018 compared to the prior year third quarter due to several new jobs in the current year quarter. The gross profit increased to 15.9% from 4.5% in 2017 as management focuses on improving project bidding and pricing.

 

Selling and administrative expenses were $354,000 higher in the third quarter of 2018 compared to the same period in 2017 primarily due increased compensation related costs and increased legal fees unrelated to the Pueblo litigation.  Litigation fees related to the Pueblo aggregate lease were $223,000 during the third quarter of 2018 compared to $260,000 incurred during the comparable period of 2017. As a percentage of sales, selling and administrative expenses were 8.3% in the third quarter of 2018 compared to 6.8% in the third quarter of 2017.

 

The third quarter of 2018 included a gain of $3,000 on the sale of equipment. The third quarter of 2017 included a gain of $95,000 on the sale of equipment.

 

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.

 

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 third quarter of 2018 were $190,000 (3.8%) less than in the third quarter of the previous year primarily due to timing of shipment of certain jobs. Bidding prices remain competitive. The gross profit ratio in the third quarter of 2018 and 2017 was  26.2% versus 27.7%, respectively, as competitive pricing on certain larger jobs and increased labor costs resulted in lower margins.

 

Selling and administrative expenses were $44,000 higher in the third quarter of 2018 compared to the third quarter of 2017 mainly due to increased compensation related costs. As a percentage of sales, these expenses increased to 16.3%  in the third quarter of 2018 from 14.8% in the comparable 2017 quarter.

 

 

17


 

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 September 29, 2018 and September 30, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Heating and

    

Evaporative

 

    

 

 

Cooling

 

Cooling

 

 

Three Months ended September 29, 2018

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

10,909

 

$

6,254

 

 

Segment gross profit

 

 

2,250

 

 

827

 

 

Gross profit as percent of sales

 

 

20.6

%  

 

13.2

%

 

Segment operating (loss) income

 

$

(95)

 

$

(416)

 

 

Operating (loss) income as a percent of sales

 

 

(0.9)

%  

 

(6.7)

%

 

Segment assets as of September 29, 2018

 

$

23,010

 

$

9,655

 

 

Return on assets

 

 

(0.4)

%  

 

(4.3)

%

 

 

 

 

 

 

 

 

 

 

Three Months ended September 30, 2017

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

10,144

 

$

5,489

 

 

Segment gross profit

 

 

1,867

 

 

913

 

 

Gross profit as percent of sales

 

 

18.4

%  

 

16.6

%

 

Segment operating income

 

$

151

 

$

(270)

 

 

Operating income as a percent of sales

 

 

1.5

%  

 

(4.9)

%

 

Segment assets as of September 30, 2017

 

$

24,764

 

$

10,461

 

 

Return on assets

 

 

0.6

%  

 

(2.6)

%

 

 

 

Heating and Cooling Segment

 

In the third quarter of 2018, approximately 60% of sales in the Heating and Cooling segment consisted of wall furnaces and heaters. Fan coils accounted for 39% of the segment’s sales and other products were about 1% of the segment’s sales. In the third quarter of 2017 these shares of total segment sales were 65%, 33% and 2%, respectively. Overall sales in the Heating and Cooling segment in the third quarter of 2018 increased by $765,000 (7.5%) compared to the same period in 2017.

 

Sales of furnaces and heaters increased less than 1% in the three months ended September 29, 2018 compared to the three months ended September 30, 2017. Unit shipments of furnaces and heaters were 4.4%  lower in the third quarter of 2018 compared to the prior year third quarter. Management believes a price increase that was implemented in the second quarter of 2018 may have pushed sales from the third quarter into the second quarter as customers placed orders prior to the implementation date. Average sales prices for furnaces and heaters were about 5.1% higher compared to a year ago due to changes in product mix and the price increase.

 

Sales of fan coils during the third quarter of 2018 increased 27.5% compared to the third quarter 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 third quarter of 2018 increased to 32.2% from 24.9%  in the third quarter of 2017. The increase in margin in the third quarter of 2018 can be attributed to more favorable pricing in the current year. 

 

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The Heating and Cooling segment’s gross profit ratio for the third quarter of 2018 was 20.6% compared to 18.4% in the third quarter of 2017. The increase in gross profit ratio is attributable to increased margins in the fan coil product line noted above tempered by increased material costs, most notably steel, in the furnace product line.

 

Selling and administrative expenses in the third quarter of 2018 were $614,000 higher than the third quarter of the previous year. The increase was attributable to investments being made to stimulate future growth. These increased costs included compensation related expenses, sales and marketing related expenses and research and developmental related expenses. As a percentage of sales, selling and administrative expenses were 20.0% in the third quarter of 2018 and 15.5% in the third quarter of 2017.

 

Evaporative Cooling Segment

 

Sales of evaporative coolers increased 13.9%  in the third quarter of 2018 compared to the third quarter of 2017. Unit sales of evaporative coolers were virtually the same in both quarters.  Average selling prices increased 13.1%  between the third quarter of 2018 and the third quarter of 2017, attributed to a price increase implemented earlier in 2018 and increased parts sales in the current quarter. The gross profit ratio in the third quarter of 2018 was 13.2% compared to 16.6% a year ago. The decrease in gross profit ratio is mainly attributable to increased material costs, notably steel.

 

Selling and administrative expenses were $60,000 (5.6%) higher in the third quarter of 2018 mainly due to increased compensation related costs. As a percentage of sales, selling and administrative expenses decreased to 18.2% in the current quarter of 2018 from 19.6% 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. 

 

 

Results of Operations - Comparison of Nine Months Ended September 29, 2018 to Nine Months Ended September 30, 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 nine months of 2018 were $121,151,000, an increase of $8,534,000 or 7.6% compared to the first nine months of 2017. All segments contributed to the increase in sales.  The CACS segment sales increased $4,315,000 (8.7%) in the first nine months of 2018 compared to the first nine months of 2017 as current weather patterns were more favorable than the cool, wet weather experienced in the first nine months of 2017. The Door segment reported an increase in sales in the current nine-month period of $1,259,000 (9.3%) compared to the prior year mainly due to strong second quarter performance. The Heating and Cooling segment reported a $1,956,000 increase in sales in the first nine months of 2018 compared to the first nine months of 2017 as furnace sales continue to remain strong and fan coil sales exceeded prior year levels. The Evaporative Cooling segment also reported increased sales, up $949,000 in the current nine-month period,  primarily due to the sales price increase implemented earlier in the year.

 

The consolidated gross profit ratio in the first nine months of 2018 was 16.5% compared to 19.0% in the first nine months of 2017.  The gross profit ratio in the Door segment remained relatively constant between the two periods while all other segments reported decreases in the gross profit ratio.  The CACS segment reported a decrease of 3.9% due to increased material, labor and equipment related costs in multiple divisions. The Evaporative Cooling segment reported a decline of 3.0% mainly due to increased material costs. While smaller, the Heating and Cooling segment also reported a decrease in gross profit ratio, down 0.9% in the first nine months of 2018 compared to the first nine months of 2017. The changes are addressed in more detail in the discussion by segment below.

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Depreciation and amortization charges in the first nine months of 2018 increased $133,000 (6.9%) compared to the first nine months of 2017.

 

Selling and administrative expenses in the first nine months of 2018 were $1,446,000 (8.4%) higher compared to the same period of the prior year. The primary source of the increase is in the Unallocated Corporate expenses. The addition of a new Chief Operating Officer and increased professional fees related to efforts to increase future growth are the reasons behind the $790,000 increase in unallocated corporate expenses during the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017. Selling and administrative expenses also increased in all other segments, except the Evaporative Cooling segment, as addressed in the discussion by segment below. As a percentage of consolidated sales, selling and administrative expenses remained relatively stable at 15.4%  in the first nine months of 2018 compared to 15.3% in the same period of the prior year.

 

The first nine 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 Quarterly Condensed Consolidated Financial Statements for further discussion. The first nine months of 2018 also included an $892,000 gain from the sale of equipment in the CACS segment discussed below.

 

The Company reported a $6,703,000 consolidated operating loss in the first nine months of 2018 compared to consolidated operating income of  $2,362,000 in the first nine months of the prior year. Excluding the write-off of deferred development costs,  the Company would have reported operating income of $137,000 for the first nine months of 2018. Only the Door segment reported an increase in operating income in the first nine months of 2018 compared to the first nine months of 2017, up $243,000. The CACS segment operating income, excluding the deferred development write-off, decreased  $1,009,000 in the first nine months of 2018 compared to the same period in 2017. The unallocated Corporate expenses discussed above also contributed significantly to the reduced operating performance in the 2018 period.  The Evaporative Cooling segment reported  a decrease of $475,000 in operating income in the current nine month period compared to the same period in the prior year. The Heating and Cooling segment reported an operating loss of $21,000 in the first nine months of 2018 compared to operating income of $219,000 for the first nine months of 2017. See further details in the discussion of segments below.

 

Interest expense for the first nine months of 2018 was  $415,000 compared to $272,000 in the first nine 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 6.2% for the first nine months of 2018 compared to 4.9% for the same period in 2017. Average outstanding funded debt in the first nine months of 2018 was $6,188,000 compared to $5,834,000 in the first nine months 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 first nine months of 2018 was a benefit of 25.0% compared to a provision of 34.0% for the first nine 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.

 

20


 

Construction Products

 

The table below presents a summary of operating information for the two reportable segments within the Construction Products industry group for the nine months ended September 29, 2018 and September 30, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Concrete,

    

 

 

 

 

 

Aggregates and

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Supplies

 

Door

 

 

Nine Months ended September 29, 2018

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

53,965

 

$

14,824

 

 

Segment gross profit

 

 

5,722

 

 

4,141

 

 

Gross profit as percent of sales

 

 

10.6

%  

 

27.9

%

 

Segment operating (loss) income

 

 

(5,365)

 

 

1,787

 

 

Operating (loss) income as a percent of sales