10-Q 1 cuo-20190629x10q.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 29, 2019

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

CUO

NYSE American

 

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:

 

 

 

 

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 August 6, 2019: 1,712,165.

 

 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 29, 2019 AND DECEMBER 29, 2018

(000’s omitted except share data)

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

JUNE 29, 2019

 

DECEMBER 29,

 

 

 

(Unaudited)

 

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,187

 

$

594

 

Receivables, net

 

 

18,510

 

 

15,321

 

Receivable for insured losses

 

 

887

 

 

874

 

Inventories

 

 

 

 

 

 

 

 Finished goods

 

 

4,519

 

 

5,448

 

 Work in process

 

 

1,600

 

 

1,365

 

 Raw materials and supplies

 

 

6,636

 

 

7,993

 

Prepaid expenses

 

 

2,693

 

 

1,785

 

Refundable income taxes

 

 

109

 

 

494

 

Other current assets

 

 

5,151

 

 

2,500

 

Other current assets held for sale

 

 

 —

 

 

10,968

 

Total current assets

 

 

45,292

 

 

47,342

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

13,059

 

 

10,431

 

 

 

 

 

 

 

 

 

Right-of use assets

 

 

5,487

 

 

 —

 

Intangible assets

 

 

13,465

 

 

 —

 

Goodwill

 

 

5,551

 

 

1,000

 

Deferred income taxes

 

 

2,065

 

 

3,414

 

Other long-term assets

 

 

693

 

 

448

 

Other long-term assets held for sale

 

 

 —

 

 

13,068

 

 

 

$

85,612

 

$

75,703

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Revolving bank loan payable

 

$

300

 

$

2,200

 

Accounts payable and accrued expenses

 

 

13,373

 

 

13,316

 

Short-term lease liabilities

 

 

1,114

 

 

 —

 

Liability for unpaid claims covered by insurance

 

 

887

 

 

874

 

Other current liabilities held for sale

 

 

 —

 

 

3,800

 

Total current liabilities

 

 

15,674

 

 

20,190

 

 

 

 

 

 

 

 

 

Long-term lease liabilities

 

 

4,449

 

 

 —

 

Other long-term liabilities

 

 

7,884

 

 

6,445

 

Other long-term liabilities held for sale

 

 

 —

 

 

292

 

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

 

 

2,013

 

 

1,930

 

Retained earnings

 

 

69,617

 

 

61,131

 

Treasury shares, 860,529 and 876,409 at cost

 

 

(14,668)

 

 

(14,928)

 

 

 

 

57,605

 

 

48,776

 

 

 

$

85,612

 

$

75,703

 

 

See notes to condensed consolidated financial statements.

 

 

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED JUNE 29, 2019 AND JUNE 30, 2018

(Unaudited)

(000’s omitted except per-share amounts)

 

 

 

 

 

 

 

 

 

 

    

JUNE 29,

    

JUNE 30,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

Net sales

 

$

25,257

 

$

25,557

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

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

 

 

21,535

 

 

19,583

 

Depreciation, depletion and amortization

 

 

254

 

 

405

 

Selling and administrative

 

 

9,096

 

 

4,649

 

Charges related to write off of deferred development

 

 

 —

 

 

(94)

 

Loss on legal settlement

 

 

219

 

 

 —

 

Gain on disposition of property and equipment

 

 

(428)

 

 

 —

 

 

 

 

30,676

 

 

24,543

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(5,419)

 

 

1,014

 

 

 

 

 

 

 

 

 

Interest income

 

 

161

 

 

21

 

Interest expense

 

 

(102)

 

 

(167)

 

Other income, net

 

 

45

 

 

22

 

(Loss) income from continuing operations before income taxes

 

 

(5,315)

 

 

890

 

(Benefit) provision for income taxes

 

 

(1,397)

 

 

223

 

(Loss) income from continuing operations

 

 

(3,918)

 

 

667

 

(Loss) income from discontinued operations net of income tax benefit of $307 and provision of $482

 

 

(918)

 

 

1,446

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

(4,836)

 

 

2,113

 

 

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

 

74,453

 

 

60,794

 

 

 

 

 

 

 

 

 

Retained earnings, end of period

 

$

69,617

 

$

62,907

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share:

 

 

 

 

 

 

 

  (Loss) income from continuing operations

 

 

(2.28)

 

 

0.39

 

  (Loss) income from discontinued operations

 

 

(0.54)

 

 

0.85

 

  Basic and diluted (loss) income per share

 

$

(2.82)

 

$

1.24

 

Average shares outstanding

 

 

1,715

 

 

1,698

 

 

See notes to condensed consolidated financial statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE SIX MONTHS ENDED JUNE 29, 2019 AND JUNE 30, 2018

(Unaudited)

(000’s omitted except per-share amounts)

 

 

 

 

 

 

 

 

 

 

 

JUNE 29,

 

JUNE 30,

 

 

    

2019

    

2018

 

 

 

 

 

 

 

 

 

Net sales

 

$

47,786

 

$

48,967

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

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

 

 

39,382

 

 

37,988

 

Depreciation, depletion and amortization

 

 

772

 

 

810

 

Selling and administrative

 

 

15,889

 

 

9,839

 

Charges related to write off of deferred development

 

 

 —

 

 

6,840

 

Gain on legal settlement

 

 

(14,781)

 

 

 —

 

Gain on disposition of property and equipment

 

 

(433)

 

 

 —

 

 

 

 

40,829

 

 

55,477

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

6,957

 

 

(6,510)

 

 

 

 

 

 

 

 

 

Interest income

 

 

310

 

 

45

 

Interest expense

 

 

(174)

 

 

(275)

 

Other income, net

 

 

58

 

 

41

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

7,151

 

 

(6,699)

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

 

1,969

 

 

(1,675)

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

 

5,182

 

 

(5,024)

 

Income from discontinued operations net of income tax provision of $1,255 and $315

 

 

3,304

 

 

944

 

Net income (loss)

 

 

8,486

 

 

(4,080)

 

 

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

 

61,131

 

 

66,987

 

 

 

 

 

 

 

 

 

Retained earnings, end of period

 

$

69,617

 

$

62,907

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share:

 

 

 

 

 

 

 

  Income (loss) from continuing operations

 

$

3.03

 

$

(2.96)

 

  Income from discontinued operations

 

 

1.93

 

 

0.56

 

  Basic and diluted income (loss) per share

 

$

4.96

 

$

(2.40)

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

 

1,712

 

 

1,697

 

 

See notes to condensed consolidated financial statements

4

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 29, 2019 AND JUNE 30, 2018

(Unaudited)

(000’s omitted)

 

 

 

 

 

 

 

 

 

 

    

JUNE 29,

    

JUNE 30,

 

 

 

2019

 

2018

 

Net cash provided (used) by continuing operations

 

$

5,913

 

$

(2,977)

 

Net cash provided (used) by discontinued operations

 

 

294

 

 

(1,025)

 

Net cash provided (used) by operating activities

 

 

6,207

 

 

(4,002)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Capital expenditures by continuing operations

 

 

(448)

 

 

(734)

 

Capital expenditures by discontinued operations

 

 

(172)

 

 

(1,414)

 

Payments for acquisitions

 

 

(23,213)

 

 

 —

 

Cash proceeds from sale of discontinued operations

 

 

23,679

 

 

 —

 

Cash proceeds from sale of continuing operations property and equipment

 

 

561

 

 

 —

 

Cash proceeds from sale of discontinued operations property and equipment

 

 

 —

 

 

1,400

 

Net cash provided (used) in investing activities

 

 

407

 

 

(748)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Borrowings on the revolving bank loan

 

 

8,750

 

 

20,500

 

Repayments on the revolving bank loan

 

 

(10,650)

 

 

(16,000)

 

Repayments of finance lease obligations

 

 

(23)

 

 

 —

 

Payments to acquire treasury stock

 

 

(98)

 

 

 —

 

Net cash (used) provided by financing activities

 

 

(2,021)

 

 

4,500

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

4,593

 

 

(250)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

 

594

 

 

507

 

 

 

 

 

 

 

 

 

End of period

 

$

5,187

 

$

257

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow items:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest, net

 

$

179

 

$

259

 

Contingent consideration from acquisitions

 

 

1,787

 

 

 —

 

Income taxes, net

 

 

1,490

 

 

50

 

 

See notes to condensed consolidated financial statements

5

 

 

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(000’s omitted, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 29, 2019

    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

    

 

 

 

 

 

 

 

Common

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

shares

 

in excess

 

Retained

 

Treasury

 

Treasury

 

 

 

 

 

 

shares

 

amount

 

of par

 

earnings

 

shares

 

shares cost

 

Total

 

Balance at December 29, 2018

 

2,574,264

 

$

643

 

$

1,930

 

$

61,131

 

876,409

 

$

(14,928)

 

$

48,776

 

Net income

 

 

 

 —

 

 

 —

 

 

13,322

 

 

 

 —

 

 

13,322

 

Compensation of Board of Directors by issuance  of treasury shares

 

 

 

 —

 

 

83

 

 

 —

 

(21,000)

 

 

358

 

 

441

 

Purchase of treasury shares

 

 

 

 —

 

 

 —

 

 

 —

 

3,368

 

 

(69)

 

 

(69)

 

Balance at March 30, 2019

 

2,574,264

 

$

643

 

$

2,013

 

$

74,453

 

858,777

 

$

(14,639)

 

$

62,470

 

Net loss

 

 

 

 —

 

 

 —

 

 

(4,836)

 

 

 

 —

 

 

(4,836)

 

Purchase of treasury shares

 

 

 

 —

 

 

 —

 

 

 —

 

1,752

 

 

(29)

 

 

(29)

 

Balance at June 29, 2019

 

2,574,264

 

$

643

 

$

2,013

 

$

69,617

 

860,529

 

$

(14,668)

 

$

57,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

    

 

 

 

 

 

 

Common

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

shares

 

in excess

 

Retained

 

Treasury

 

Treasury

 

 

 

 

 

shares

 

amount

 

of par

 

earnings

 

shares

 

shares cost

 

Total

Balance at December 30, 2017

 

2,574,264

 

$

643

 

$

1,887

 

$

66,987

 

892,097

 

$

(15,195)

 

$

54,322

Net loss

 

 

 

 —

 

 

 —

 

 

(6,193)

 

 

 

 

 —

 

 

(6,193)

Compensation of Board of Directors by issuance of treasury shares

 

 

 

 —

 

 

43

 

 

 —

 

(16,000)

 

 

271

 

 

314

Purchase of treasury shares

 

 

 

 —

 

 

 —

 

 

 —

 

112

 

 

 —

 

 

 —

Balance at March 31, 2018

 

2,574,264

 

$

643

 

$

1,930

 

$

60,794

 

876,209

 

$

(14,924)

 

$

48,443

Net income

 

 

 

 —

 

 

 —

 

 

2,113

 

 

 

 

 —

 

 

2,113

Purchase of treasury shares

 

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Balance at June 30, 2018

 

2,574,264

 

$

643

 

$

1,930

 

$

62,907

 

876,209

 

$

(14,924)

 

$

50,556

 

See notes to condensed consolidated financial statements

6

CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED JUNE 29, 2019

(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 29, 2018 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 2018 consolidated financial statements to conform to the 2019 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. During the quarter ended March 30, 2019 the Company sold substantially all of the assets of Transit Mix Concrete Company’s ready-mix business and Daniels sand operation. The assets and liabilities related to these operations are presented as held for sale in accordance with generally accepted accounting principles. See Note 15. Accordingly, the operations of these businesses are presented as discontinued operations for all periods presented.

 

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 reviews warranty and related claims activities and records provisions as necessary.

 

7

The Company performs installation services for certain projects within its Door segment. Management determined there are two performance obligations related to most of these contracts, 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.

 

Leases 

Effective December 30, 2018 (the beginning of fiscal 2019) the Company adopted ASU No. 2016-02, Leases (Topic 842), which superseded Topic 840, “Leases”. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components for asset categories, except office space, and to exclude short-term leases from its Consolidated Balance Sheet. For the office space lease category the election was made to report lease and non-lease components separately as the non-lease components are billed and paid separately and are not a fixed amount over the lease term. The implicit discount rate of leases is used to calculate present values when available. When an implicit discount rate is not readily available an incremental borrowing rate is used to calculate present values.

 

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.

 

The Tax Cuts and Jobs Act, enacted December 22, 2017, elimintated the corporate Alternative Minimum Tax (“AMT”) and allows for all existing credit carryforwards to be used to offset regular tax liability for tax years beginning after December 31, 2017. Additionally, for tax years 2018, 2019 and 2020, to the extent that the AMT credit carryover exceeds the regular tax liability, 50% of the excess AMT credit is refundable. Any remaining credits will be fully refundable in 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 29, 2019 or December 29, 2018.

 

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.

8

 

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 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), which superseded Leases (Topic 840). The new accounting standard was effective for the Company beginning on December 30, 2018 (the beginning of fiscal 2019) and required the recognition on the balance sheet of right-of-use assets (ROU) and lease liabilities for all long-term leases, including operating leases. The Company elected the optional transition method and adopted the new guidance on December 30, 2018 on a modified retrospective basis with no restatement of prior period amounts. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components for most asset categories and to exclude short-term leases from its Consolidated Balance Sheet. The Company’s adoption of the new standard resulted in the recognition of ROUs of $5,353,000 and liabilities of $5,427,000 related to operating leases, with no material cumulative effect adjustment to equity as of the date of adoption. In connection with the adoption of this guidance, as required, the Company reclassified deferred rent liabilities as reductions to lease assets. Adoption of the new standard did not have a material impact on the Company’s Consolidated Statements of Income or Cash Flows. See Note 13.

 

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

 

5.    Historically, operating results of the Company for the first half of the year were not necessarily indicative of performance for the entire year due to the seasonality of most of the Company’s products. Management believes the recent disposal and acquisition activity should help smooth the seasonality of the Company’s portfolio and make operating results more consistent.

 

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 29, 2019 and June 30, 2018 as the Company does not have any dilutive instruments.

 

7.    The Company sold substantially all of the assets of its ready mix concrete and Daniels sand operations in the first quarter of 2019. See Note 15. During the second quarter of 2019, the Company acquired the assets of four operating businesses through three separate transactions. See Note 16 for additional discussion of the acquisitions. In conjunction with these transactions management reviewed its segment reporting structure and determined it was no

9

longer appropriate for the consolidated business going forward. The segment reporting was revised to align with the way the operating businesses are being managed and measured by management after the sale of TMC’s assets and the acquisitions discussed below. Prior year amounts have been reclassified to conform to current segment reporting structure.

 

The Company operates primarily in the Building Products industry group. Within this industry group the Company has identified three reportable segments: the HVAC segment, the Door segment and the Construction Materials segment.

 

The HVAC segment produces and sells a variety of products including wall furnaces, fan coils, evaporative coolers, boiler room equipment and dryer boxes and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (“WFC”) of Colton, California, Phoenix Manufacturing, Inc. (“PMI”) of Phoenix, Arizona, Global Flow Products /American HVAC (“GFP”) of Broken Arrow, Oklahoma, and Inovate Dryer Technologies (“Inovate”) of Jupiter, Florida. Sales of this segment are nationwide although WFC and PMI sales are more concentrated in the southwestern United States. The Door segment sells hollow metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems from the Company’s wholly-owned subsidiaries; McKinney Door and Hardware, Inc. (“MDHI”), Fastrac Building Supply (“Fastrac”) and Serenity Sliding Door Systems (“Serenity”), which operate out of facilities in Pueblo and Colorado Springs, Colorado. Sales of this segment are concentrated in Colorado, California and the Northwestern United States although door sales are also made throughout the United States. The Construction Materials segment offers aggregates and construction supplies from locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries Castle Aggregates and Castle Rebar & Supply, of Colorado Springs and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.) of Pueblo, Colorado (the three companies collectively are referred to as the Castle Companies).

 

In addition to the above reporting segments, an “Unallocated Corporate and Other” 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 classification also includes expenses related to a property held by the Company which are not material to the consolidated Company.

 

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.

10

The following table presents information about reported segments for the six-month and three-month periods ended June 29, 2019 and June 30, 2018 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

 

 

    

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

Unallocated

 

Held for

 

 

 

 

 

HVAC

 

Doors

 

Materials

 

Corporate

 

Sale

 

Total

 

Six Months Ended June 29, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

34,010

 

$

10,696

 

$

3,064

 

$

16

 

$

 —

 

$

47,786

 

Depreciation, depletion and amortization

 

 

522

 

 

89

 

 

134

 

 

28

 

 

 —

 

 

772

 

Operating income (loss)

 

 

(2,336)

 

 

993

 

 

13,183

 

 

(4,883)

 

 

 —

 

 

6,957

 

Segment assets

 

 

45,984

 

 

13,783

 

 

11,407

 

 

14,438

 

 

 —

 

 

85,612

 

Capital expenditures

 

 

193

 

 

108

 

 

132

 

 

15

 

 

 —

 

 

448

 

Three Months ended June 29, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

17,289

 

$

6,454

 

$

1,509

 

$

 5

 

$

 —

 

$

25,257

 

Depreciation, depletion and amortization

 

 

112

 

 

46

 

 

82

 

 

15

 

 

 —

 

 

254

 

Operating income (loss)

 

 

(1,858)

 

 

614

 

 

(861)

 

 

(3,314)

 

 

 —

 

 

(5,419)

 

Segment assets

 

 

45,984

 

 

13,783

 

 

11,407

 

 

14,438

 

 

 —

 

 

85,612

 

Capital expenditures  (b)

 

 

149

 

 

89

 

 

132

 

 

15

 

 

 —

 

 

385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

Unallocated

 

Held for

 

 

 

 

 

HVAC

 

Doors

 

Materials

 

Corporate

 

Sale

 

Total

 

Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

35,131

 

$

10,078

 

$

3,725

 

$

33

 

$

 —

 

$

48,967

 

Depreciation, depletion and amortization

 

 

540

 

 

82

 

 

165

 

 

23

 

 

 —

 

 

810

 

Operating income (loss)

 

 

594

 

 

1,356

 

 

(6,561)

 

 

(1,899)

 

 

 —

 

 

(6,510)

 

Segment assets (a)

 

 

29,003

 

 

8,003

 

 

11,315

 

 

3,346

 

 

24,036

 

 

75,703

 

Capital expenditures

 

 

545

 

 

79

 

 

64

 

 

46

 

 

 —

 

 

734

 

Three Months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

17,622

 

$

5,782

 

$

2,124

 

$

29

 

$

 —

 

$

25,557

 

Depreciation, depletion and amortization

 

 

271

 

 

42

 

 

80

 

 

12

 

 

 —

 

 

405

 

Operating income (loss)

 

 

279

 

 

918

 

 

692

 

 

(875)

 

 

 —

 

 

1,014

 

Segment assets (a)

 

 

29,003

 

 

8,003

 

 

11,315

 

 

3,346

 

 

24,036

 

 

75,703

 

Capital expenditures (b)

 

 

280

 

 

46

 

 

 —

 

 

(5)

 

 

 —

 

 

321

 

 


(a)

Segment assets are as of December 29, 2018.

(b)

Capital expenditures are presented on the accrual basis of accounting.

 

 

 

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 Fee Sand and Gravel Lease (“Lease”) between the Company as Lessee and Valco, Inc. (“Valco”) as Lessor 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 declaratory judgment and damages pursuant to the Lease on the grounds that Agreed Sand and Gravel Reserves of 50 million tons did not exist, and for other relief including return of approximately $1,470,000 in royalty payments made by the Company to Valco in excess of tonnage actually produced (“Prepayments”). Based on information obtained through discovery, the Company alleges, in addition to the abovementioned claims, nondisclosure or concealment by Valco of material facts concerning the existence of Agreed Sand and Gravel Reserves of 50 million tons, and breach of warranty concerning the same. 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

11

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 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 September 15, 2016 Partial Summary Judgment Order and set the matter for trial by jury on all issues on January 28, 2019. The Company filed its Third Amended Complaint on November 16, 2018 in which it dropped its claim to recover royalty overpayments but continued to seek to recover $1,470,000 in Prepayments. The Company wrote off the remaining royalty overpayment of $627,000, previously reported as Other assets on the Consolidated Balance Sheet, as of December 29, 2018 due to filing of the Third Amended Complaint. At the trial preparation conference on January 18, 2019, the court informed the parties that the trial would be rescheduled due to an ongoing shutdown of the federal government. The jury trial on all issues was then rescheduled for May 13, 2019. On April 30, 2019 the court entered an order stating: “Due to a conflict in the Court’s calendar, the trial preparation conference set for May 3, 2019 and the May 13, 2019, trial date are vacated.” On May 30, 2019, the case was reassigned to a different District Court Judge. A trial preparation conference was held on August 8, 2019. The trial has been rescheduled to October 21, 2019.

 

The Company has paid royalties on approximately 17,700,000 tons, including the Prepayments, 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 21,000 shares to the seven eligible board members effective February 7, 2019 as full payment for their 2019 retainer fee. 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. All shares were issued under the 2010 Non-Employee Directors Stock Plan and pursuant to private offering exemptions available under Regulation D or Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

 

10.  The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective November 18, 2011. The Company entered into the Tenth Amendment to Credit Agreement effective March 22, 2019. The Company had previously entered into nine 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 Company was not in complicance with the Fixed Coverage Charge Ratio as of June 29, 2019. The lender has provided a waiver of the covenant violation for the

12

period ended June 29, 2019. The Company and the lender will work to address terms of the existing loan agreement prior to the end of the third quarter of 2019. 

 

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 qualifying 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).

·

The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.06 to 1.0 for each trailing twelve month period measured at the end of each Fiscal Quarter.

·

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:

 

·

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.

·

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) non-recurring fees and costs paid by the Company in respect of the following: (i) fees and due diligence costs associated with the Company’s permitted acquisitions; (ii) legal fees and costs associated with the Valco trial preparation; (iii) executive recruitment fees for the Company’s new Chief Financial Officer and Chief Operating Officer; and (iv) additional fees and costs associated with the exploration of the Company’s Hitch Rack Ranch facility in Colorado Springs, Colorado to determine the suitability for mining and the pursuit of mining permits, 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 $300,000 as of June 29, 2019 compared to $2,200,000 as of December 29, 2018. The highest balance outstanding during the first six months of 2019 and 2018 was $2,200,000 and $9,800,000, respectively. Average outstanding funded debt was $407,000 and $5,779,000 for the first six months of 2019 and 2018, respectively. At June 29, 2019, 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.

13

 

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 the Valco litigation.

 

12.   During July 2015, TMC began development of a granite mining property south of Colorado Springs. Prior to beginning the development process, the Company deposited $2,500,000 in an escrow account per agreement with the land owner. This amount was previously included in Other long-term assets on the Consolidated Balance Sheet. The development 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. TMC filed its second application to the state in November 2017, which was rejected on April 26, 2018. The Company wrote off all capitalized costs associated with the permit application in the first quarter of 2018, a total of $6,934,000.

 

As of June 29, 2019 and December 29, 2018 the $2,500,000 escrow balance mentioned above was included in Other current assets as the Company has begun the process to settle the account and recover the funds.

 

13.   The Company adopted ASU No. 2016-02 Leases (Topic 842) on December 30, 2018 (the beginning of fiscal 2019), resulting in the recognition of operating right-of-use assets of $5,353,000 and operating lease liabilities of $5,427,000. The Company has entered into lease arrangements for office space, manufacturing facilities, water rights and certain equipment. A number of the leases include one or more options to renew the lease terms, purchase the leased property or terminate the lease. The exercise of these options is at the Company’s discretion and is therefore recognized on the balance sheet when it is reasonably certain the Company will exercise such options.

 

Substantially all of the Company’s leases are considered operating leases. Finance leases were not material as of June 29, 2019 or for the three months ended June 29, 2019. The following table displays the undiscounted cash flows related to operating leases as of June 29, 2019, along with a reconciliation to the discounted amount recorded on the June 29, 2019 Consolidated Balance Sheet (amounts in thousands):

 

 

 

 

 

 

 

    

OPERATING

    

 

 

LEASE

 

 

 

LIABILITIES

 

2019