UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K10-K/A
(Amendment No. 1)
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 28, 2019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-3834
Continental Materials Corporation
(Exact name of registrant as specified in its charter)
Delaware | 36-2274391 | |
(State or other jurisdiction | (I.R.S. Employer Identification No.) | |
of incorporation or organization) |
440 South La Salle Street, Suite 3100, Chicago, Illinois | 60605 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code312-541-7200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock - $0.25 par value | NYSE American |
Securities registered pursuant to Section 12(g) of the Act:NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐¨ No ☒x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐¨ No ☒x
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 ☒ xNo ☐¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 and Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ xNo ☐¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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 of the Exchange Act). Yes ☐ ¨No ☒x
The aggregate market value (based on the June 28, 2019 closing price) of voting stock held by non-affiliates of registrant was approximately $8,816,000. As of March 13,April 20, 2020, there were 1,675,484 shares of the registrant’s common stock outstanding.
Incorporation by reference: The information contained in Part III hereof is hereby incorporated by reference from the earlier filed of: (i) an amendment
Continental Materials Corporation
Amendment No. 1 to this Annual Report on Form 10 K or (ii) a definitive proxy statement filed pursuant to Regulation 14A, within 120 days of10-K
For the Fiscal Year Ended December 28, 2019.2019
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FORWARD-LOOKING STATEMENTSEXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) amends our Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of Continental Materials Corporation’s (Company) management as well as on assumptions made by and information available to the Company at the time such statements were made. When used in this Annual Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors including but not limited to: the impact of the novel coronavirus on the workforce, the Company’s supply chain and customer demand, the amount of new construction, weather, interest rates, availability of raw materials and their related costs, economic conditions and competitive forces in the regions where the Company does business, changes in governmental regulations and policies and the ability of the Company to obtain credit on commercially reasonable terms. Changes in the income tax code, income tax rates as well as accounting pronouncements could also alter projected results. Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. Forward-looking statements speak only as of the date they were made and we undertake no obligation to publicly update them.
(References to a “Note” are to the Notes to Consolidated Financial Statements contained elsewhere in this report.)
The Company is a Delaware corporation, incorporated in 1954. The Company is a holding company with operations in the Building Products industry group, although it may look to expand outside of that market. Within this industry group the Company has identified three reportable segments: the HVAC segment, the Door segment and the Construction Materials segment.
HVAC Segment
The HVAC segment is comprised of four operating companies and sells a variety of products including residential and commercial wall furnaces, fan coils, evaporative coolers, boiler room equipment, dryer boxes and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (WFC), Phoenix Manufacturing, Inc. (PMI) Global Flow Products (GFP) and InOvate Dryer Technologies (InOvate).
•WFC manufactures residential gas furnaces and commercial fan coil systems. Activities covering the full cycle of product manufacturing, from design to production, are all performed in-house at its Colton, California location. WFC is one of three domestic companies producing wall furnaces (excluding units sold to the recreational vehicle industry) and gas-fired console heaters, which comprise only a small component of the heating industry, and is one of nine domestic companies producing fan coils.
•PMI manufactures residential and commercial evaporative coolers. Activities covering the full cycle of product manufacturing, from design to production, are all performed in-house at its Phoenix, Arizona location. PMI is one of two primary domestic manufacturers of evaporative coolers, although there are other small domestic competitors as well as a number of foreign producers that also distribute evaporative cooling products in the U.S.
•GFP manufactures American Society of Mechanical Engineers (ASME) certified tanks, pressure vessels, valves and other accessories typically found in commercial hydronic systems at its Broken Arrow, Oklahoma locations. GFP is one of many companies manufacturing and distributing valves, accessories and ASME certified tanks to the hydronics market.
•InOvate designs and manufactures a range of air venting and handling products focused on dryer exhaust safety and efficiency. InOvate partners with its supply chain to leverage manufacturing excellence from its location in Jupiter, Florida. InOvate is, we believe, the market leader in manufacturing metal air handling products for the dryer venting marketplace, as the limited competition generally manufactures lower quality products made out of plastic materials, albeit at a lower price point.
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The HVAC segment group markets its products throughout North America through plumbing, heating and air conditioning wholesale distributors as well as directly to major retail home-centers and other retail outlets. Some of the products are also sold to contractors that install HVAC components and equipment manufacturers for commercial applications. The Company contracts with independent manufacturers’ representatives for all of its products while also employing a staff of sales and sales support personnel.
The HVAC segment group maintains several parts departments and help lines to assist its customers in servicing the products. The Company does not currently perform installation services, nor are maintenance or service contracts offered. The HVAC segment group does not derive any revenue from after-sales service and support other than from parts sales. Training and product information sessions for the furnace, fan coil and evaporative cooler product lines are offered at our plants and other sites for distributors, contractors, engineers, utility company employees and other customers.
The heating and cooling industry is dominated by a few manufacturers which are substantially larger than the Company. These manufacturers sell diversified lines of heating and air conditioning units directed primarily toward central heating and cooling systems. Competition in this industry is primarily on a basis of price, product features and performance, service and timeliness of delivery.
The HVAC segment has few direct competitors but there are multiple competitors for each product line.
Door Segment
The Door segment is comprised of three operating companies and sells and installs 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).
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The Door segment’s sales are primarily for commercial and institutional buildings such as schools, healthcare facilities and hospitality buildings. Sales are made to independent installers, general contractors or building owners. Sales include metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems. Certain projects include on site installation services. The Door Segment markets throughout North America primarily through its own staff of industry professionals who specialize in medical, healthcare, hospitality, assisted living and commercial office interior building products.
The acquisition of Fastrac and Serenity in 2019 has increased the range of products and services and expanded its customer base. See Note 18.
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The Door segment sells hollow metal and wood doors, door frames and related hardware, lavatory fixtures and electronic access and security systems throughout the United States. The door industry is highly fragmented and competitive, and includes a number of regional and international competitors. Competition is largely based on the functional and aesthetic quality of products, service quality, distribution capability and price.
Construction Materials Segment
The Construction Materials segment offers a variety of construction related products including limestone, gravel, sand, steel rebar and consumable construction products from facilities in Pueblo and Colorado Springs, Colorado operated by the Company’s wholly-owned subsidiaries, Castle Concrete Company (Aggregates) and Castle Rebar & Supply (Rebar) and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.).
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The Construction Materials segment group markets its products primarily through its own direct sales personnel and confines its sales largely in southern Colorado. The Company competes on price, product availability and customer service.
During 2019, no customer accounted for 10% or more of the total sales of the Company.
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 sold substantially all of the assets of its ready mix concrete and Daniels Sand operations in the first quarter of 2019. See Note 19. During the second quarter of 2019, the Company acquired the assets of four operating businesses through three separate transactions. See Note 18 for additional discussion of these acquisitions. In conjunction with these transactions, management reviewed its segment reporting structure and determined it was no longer appropriate for the consolidated business going forward. The segment reporting was revised to align with the way the Company’s decision makers evaluate, manage and allocate resources to the operating businesses after the sale of the concrete and sand operation assets and the acquisitions discussed in Note 18. Segment information for prior periods has been reclassified to conform to current segment reporting structure.
EMPLOYEES
The Company employed 460 people as of December 28, 2019. Employment varies throughout the year due to the seasonal nature of its businesses. The number of employees was significantly reduced due to the sale of substantially all of the assets of its ready mix concrete and Daniels Sand operations in the first quarter of 2019. This transaction also caused the Company to re-align its segment reporting to align with the way management will measure and evaluate operations going forward. A breakdown of the current and prior year’s employment at year-end by segment was:
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| 2019 |
| 2018 |
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HVAC Segment |
| 350 |
| 337 |
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Door Segment |
| 73 |
| 43 |
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Construction Materials Segment |
| 25 |
| 221 |
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Corporate Office and Other |
| 12 |
| 11 |
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Total |
| 460 |
| 612 |
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The factory employees at the WFC plant are represented by the Carpenters Local 721 Union under a contract that expires December 31, 2022. The Company considers relations with its employees and with their union to be good. There are no unions at any of the Company’s other operations.
ENVIRONMENTAL MATTERS
Our operations involve the use, release, discharge, disposal and clean-up of substances regulated under federal, state and/or local environmental protection laws and regulations, including those related to reclamation of mined areas. Some laws impose obligations on us with respect to the management of waste products. We strive not only to maintain compliance with all applicable environmental laws and regulations, but to exceed the minimum requirements of those laws and regulations where practicable. However, there can be no assurance that the Company will be in compliance with all applicable environmental laws and regulations in the future.
In 2019, our capital expenditures and remediation expenses for environmental matters, except those expenses related to our mining reclamation efforts, were not material to our financial condition. Because of the complexity and ever-changing nature of environmental laws and regulations, it is difficult to predict total reclamation costs.
TENDER OFFER
On February 18, 2020 Bee Street Holdings LLC, an entity controlled by James G. Gidwitz, the Chairman of our board of directors and our Chief Executive Officer, ("Bee Street"), commenced an unsolicited tender offer to acquire all of the outstanding shares of common stock for $9.50 per share in cash.
On March 3, 2020 the Company filed Schedule 14D-9 stating that the Board of Directors had unanimously decided to express no opinion and remain neutral with respect to the offer.
On March 17, 2020, the Bee Street tender offer expired. On March 18, 2020 Bee Street extended the tender offer until April 3, 2020 to allow additional time for stockholders to consider the offer in the light of recent market activity and the developing economic situation stemming from the COVID-19 coronavirus pandemic.
AVAILABLE INFORMATION
The Company electronically files various reports and other information with the Securities and Exchange Commission (SEC) including this annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding the Company. Access to this information is available free of charge at the SEC’s website at http://www.sec.gov. In addition to the SEC site, the Company maintains an internet site which contains SEC filings, SEC filings in XBRL format, Governance documents and Annual Reports. Access to this site and the information therein is available free of charge at www.continental-materials.com. The information on our website is not incorporated by reference into this Annual Report on Form 10-K.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such, is not required to provide information in response to this item. However, in light of recent events, stockholders should be aware of the following risks associated with an investment in the Company:
If Bee Street fails to complete its tender offer for our common stock, our stock price, business, results of operations and financial condition could be adversely affected.
We cannot assure that Bee Street will complete its tender offer for our common stock. If the tender offer is not completed, we will be subject to several risks. Because the current trading price of our common stock may reflect a market assumption that the tender offer will be completed, failure to complete the tender offer could adversely affect the price of our common stock. Also, we have incurred significant, and may incur additional, costs in connection with the tender offer, including the diversion of management resources, for which we will have received little or no benefit if the
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tender offer is not completed. A failed transaction may also result in a negative impression of the Company in the investment community.
The tender offer by Bee Street may increase the volatility of the price of our common stock, which may could result in substantial losses by investors.
The tender offer by Bee Street could affect the trading price of our common stock and increase its volatility, as well as reduce the market liquidity for our common stock. Securities class action litigation is commonly instituted against companies following periods of volatility in the market price of their securities. The commencement of this type of litigation against us in the future could result in substantial costs and a diversion of management’s attention and resources.
The spread of a new strain of coronavirus (also known as COVID-19) may adversely affect our business operations.
In December 2019, a new strain of coronavirus (also known as, and hereinafter referred to as “COVID-19”) originated in Wuhan, China, and quickly spread to infect many people in the city and surrounding area. In some cases, COVID-19 causes severe illness and even death. Since its discovery, COVID-19 has spread throughout China and to several other countries, significantly impacting their economies. Various measures may be taken by countries, including the United States, both on a macro country-wide level and a local level, to combat the virus and its spread. These may include quarantines or bans on public events.
The continued spread of COVID-19 may adversely affect our supply chain, results of operations and business generally, depending on the extent of its spread of the virus, the rate of infection, the severity of illness and the probability of lethality, the relative effect on various portions of the population (such as the aged), the measures taken to combat the virus and their effectiveness, the effect on international trade of any measures taken to combat the virus, any action taken (such as the lowering of interest rates) by government entities to combat the negative macroeconomic effects of these measures, the timing and availability of any vaccine for the virus, and other factors.
The Centers for Disease Control and Prevention has stated a risk exists of a pandemic in the United States, which would mean that the current methods in place to control of the spread of the virus have been ineffective. In such a situation, the effect on the economy and on the public may be severe. There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19 and a potential pandemic, and, as a result, there is considerable uncertainty of its potential effect on our business and results of operations.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
The HVAC segment operates out of owned facilities in Colton, California and Broken Arrow, Oklahoma. These facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs. Production capacity exists at the Colton plant such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery. There is sufficient capacity in Broken Arrow, Oklahoma for the current level of business, however, expansion may be required to support increased business activity levels in future years. Additional facilities include leased facilities in Phoenix, Arizona, Jupiter, Florida and Broken Arrow, Oklahoma. Production capacity exists at the Phoenix facilities such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery. These facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs.
The Door segment operates out of an owned facility in Colorado Springs and leased facilities in Colorado Springs, Colorado and Pueblo, Colorado. Product volumes at all of the facilities of the Company are subject to market fluctuations, but in the opinion of management, the facilities are generally well utilized. The facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs.
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The Construction Materials segment comprises six aggregates locations including Grisenti Farms, Pikeview, Black Canyon (Synder), Pueblo East, Pueblo West, and Barnhart Pit, which are all located in southern Colorado. The previously leased properties of Pueblo East, Pueblo West and Barnhart Pit were part of the legal dispute with Valco, Inc. that was settled in October 2019 (see Note 2) and are now owned by the Company. Following the decision in 2019 to cease mining operations at Pikeview, none of the remaining properties are active in the production of aggregates and are in various states of reclamation under their respective mining permits.
The corporate office operates out of leased office space in Chicago, Illinois.
As previously disclosed, on January 15, 2019, the Company reached an amicable resolution to a business dispute by way of a settlement agreement. Pursuant to the settlement agreement, the Company received $15,000,000. The other party and the Company further agreed to set up a joint escrow account to support certain conditions in the agreement. The Company’s contribution to the escrow account was approximately $218,000. The Settlement Agreement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties.
On October 9, 2019, the Company and Valco filed a Joint Notice of Settlement, regarding the Company’s previously disclosed litigation, stating that the parties had reached a settlement agreement resolving all claims. As part of the $9,000,000 settlement, paid by the Company, we agreed to purchase the previously leased property from Valco. On October 16, 2019, the Company and Valco filed a Stipulated Motion for Dismissal with Prejudice which stated: the parties “agree that this matter, including all claims and counterclaims, dismissed with prejudice and without costs, each party to bear its own attorneys’ fees.” The Court entered the Order of Dismissal with Prejudice on October 16, 2019.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 6.
Item 4. MINE SAFETY DISCLOSURES
The Company’s aggregates mining operations, all of which are surface mines, are subject to regulation by the Federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (as amended, the “Mine Act”). MSHA inspects these operations on a regular basis and issues various citations and orders when it believes a violation of the Mine Act has occurred. Information concerning mine safety violations and other regulatory matters required to be disclosed by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this Annual Report.
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Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common stock of Continental Materials Corporation is traded on the NYSE American stock exchange under the symbol CUO.
The Company currently has fewer than 300 shareholders.
The Company has never paid, nor does it currently intend to declare, any dividends. The Company’s policy of reinvesting earnings from operations is reviewed periodically by the Board of Directors of the Company (the “Board”).
The following sets forth information regarding the Company’s equity plans as of December 28, 2019:
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The Company has an open-ended program to repurchase its common stock under which the Board authorized purchases up to a maximum amount of $1,000,000. Repurchases may be made on the open market or in block trades at the discretion of management. During the 2019 fiscal year, 22,499 shares were repurchased and as of December 28, 2019, $743,467 of the authorized amount remained available for stock repurchases.
On March 16, 2020, the Company entered into a credit agreement with a bank which contains certain restrictions on the Company’s ability to repurchase its stock. See further discussion in the “Financial Condition, Liquidity and Capital Resources” section of Item 7 below.
Item 6. SELECTED FINANCIAL DATA
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and, as such, is not required to provide information in response to this item.
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
The Company experienced various changes in 2019 including the sale of substantially all the assets of its ready-mix concrete and Daniels Sand operations in the first quarter, the acquisition of four new operating businesses in the second quarter, the cessation of mining at Pikeview quarry in the third quarter and the settlement of the Valco litigation in the fourth quarter. In conjunction with this activity, management reviewed its operating and reporting structure and made adjustments to align the structure with how operations will be measured and evaluated going forward, including revisions to the Company’s reporting segments. Segment information for prior periods has been reclassified to conform to current segment reporting structure.
The HVAC segment produces and sells a variety of products including wall furnaces, fan coils, evaporative coolers, boiler room equipment, 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/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.
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, property 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. This classification also holds one property owned by the Company.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations during 2019 was $2,573,000. The increased cash flow compared to 2018 was primarily due to receipt of $14,782,000 from a legal settlement in the first quarter of 2019 offset by a decrease in operating results. See Note 17 for further discussion. Cash used by discontinued operations in 2019 was $2,138,000. The increased use of cash compared to the prior year was mainly due to reduced operating results.
Cash provided by continuing operations in 2018 was $2,061,000. The decline from prior year cash flow was attributable mainly to less favorable operating results partially offset by changes in working capital items, including receivables and inventory. Cash provided by discontinued operations was $631,000 in 2018.
Investing activities provided $886,000 during 2019 compared to $1,270,000 used during 2018. In 2019, the Company received $23,679,000 from the sale of its discontinued operations and used $22,521,000 to acquire assets of four operating businesses. See Note 19 for discussion of the sales of assets and Note 18 for discussion of acquisitions. In 2019, capital expenditures by continuing operations of $2,693,000, primarily in the Construction Materials segment, were offset by $2,593,000 received from the sale of property and equipment, mainly in the Construction Materials segment. Capital expenditures by discontinued operations were $172,000 in 2019. In 2018, capital expenditures by continuing operations were $1,409,000, primarily in the HVAC segment. Capital expenditures by discontinued operations of $1,291,000 were offset by $1,430,000 received for the sale of property and equipment.
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During 2019, the Company repaid $1,400,000 on its revolving credit line while $257,000 was used to repurchase stock of the Company. During 2018, the Company repaid $1,300,000 on its revolving credit line while $5,000 was used to repurchase stock of the Company.
Certain products within the Company’s portfolio are seasonal, primarily furnaces and evaporative coolers in the HVAC segment which are sensitive to weather conditions particularly during their respective peak selling seasons. Other products within the HVAC segment, specifically fan-coils and dryer boxes, and Door segment sales are, to a significant extent, dependent on construction activity. Historically, the Company has experienced operating losses during the first quarter and typically improved in the second and third quarters reflecting more favorable weather conditions for legacy products. Fourth quarter results have typically varied based on weather conditions affecting the Company’s discontinued operations as well as in the principal markets for the Company’s heating equipment. The sale of the Company’s ready-mix and Daniels Sand operations along with the acquisitions completed in the current year are expected to reduce the seasonality of the Company’s operations.
Historically, the Company would typically experience 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 HVAC segment and payment of the prior year’s accrued incentive bonuses and Company profit-sharing contributions, if any. As a result, the Company’s borrowings against its revolving credit facility tended to peak during the second quarter and then decline over the remainder of the year. In the current year, a legal settlement and the sale of TMC assets in the first quarter provided sufficient cash reserves such that borrowings against the revolving credit facility were significantly less than historical experience. The cash reserves allowed the Company to complete the acquisitions of four operating businesses without taking on additional debt. The divestiture and acquisition activity is expected to smooth cash flow over the course of the fiscal year and result in more consistent levels of borrowings throughout future years.
Revolving Credit and Term Loan Agreement
The Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) effective March 16, 2020. 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:
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Definitions under the Credit Agreement as amended are as follows:
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Outstanding funded revolving debt was $800,000 as of December 28, 2019 compared to $2,200,000 as of December 29, 2018. The highest balance outstanding during 2019 and 2018 was $3,700,000 and $9,800,000, respectively. Average outstanding funded debt was $313,000 and $6,058,000 for 2019 and 2018, respectively. At December 28, 2019, the Company had outstanding letters of credit (LOC) totaling $5,620,000. 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 was not in compliance with the Fixed Coverage Charge Ratio as of December 28, 2019. The lender provided a waiver of the covenant violation for the period ended December 28, 2019.
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
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the next twelve months. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.
Insurance Policies
The Company maintains insurance policies with the following per incident deductibles and policy limits:
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| Per Occurrence |
| Policy Aggregate |
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| Deductible |
| Limits |
| Limits |
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Product liability |
| $ | 250,000 |
| $ | 1,000,000 |
| $ | 2,000,000 |
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General liability |
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| 250,000 |
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| 1,000,000 |
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| 5,000,000 |
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Workers’ compensation |
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| 350,000 |
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| 350,000 |
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| Statutory |
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Auto and truck liability |
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| 100,000 |
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| 2,000,000 |
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| No limit |
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Should any or all policy limits be exceeded, the Company maintains umbrella policies which cover the next $25,000,000 of claims.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance sheet arrangements that are likely to have a material current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources other than the effect, during the first quarter of 2019, from the implementation of ASU No. 2016-02, Leases (Topic 842). The implementation of the ASU resulted in the recognition of operating right-of-use assets of $5,353,000 and operating lease liabilities of $5,427,000 as of the adoption date. See Note 9.
Cybersecurity Risks and Incidents
The Company is dependent upon the capacity, reliability and security of our information technology (IT) systems for our manufacturing, sales, financial and administrative functions. We also face the challenge of supporting our IT systems and implementing upgrades when necessary, including the prompt detection and remediation of any cybersecurity breaches.
Our IT systems’ security measures are focused on the prevention, detection and remediation of damage from computer viruses, natural disaster, unauthorized access, cyber-attack and other similar disruptions. However, our IT systems remain vulnerable to intrusion and damage despite our implementation of security measures that we feel protect our IT systems. To date, we are not aware of any cybersecurity breaches that have negatively impacted our manufacturing operations, sales or financial and administrative functions or that resulted in the compromise of personal information of our employees, customers or suppliers. Should we learn of such a breach, the Company would promptly notify the SEC by filing a Form 8-K and notify all insiders that the purchase or sale of the Company’s stock is forbidden until such information has been given adequate time to become available to the trading public.
RESULTS OF OPERATIONS
In the ensuing discussions of the results of operations, we define the term gross profit as the amount determined by deducting cost of sales before depreciation, depletion and amortization from sales. The gross profit ratio is gross profit divided by sales.
DISCUSSION OF CONSOLIDATED RESULTS OF OPERATIONS
2019 vs. 2018
Consolidated sales in 2019 were $113,276,000, an increase of 12,389,000 or 12.3%, compared to 2018 after adjusting for discontinued operations. The increase was directly attributable to the higher sales in the HVAC and Doors segment reflecting the impact of acquisitions in the second quarter of 2019. The HVAC segment reported sales increases of $8,671,000 (11.8%) primarily due to the acquisitions of GFP and InOvate. The Door segment reported a sales increase of
13
$4,211,000 (20.9%) primarily due to the acquisitions of Fastrac and Serenity. The Construction Materials segment reported a small decrease in sales of $399,000 (5.6%) not including approximately $7,156,000 of 2018 former intercompany sales to the ready-mix business that was sold in the first quarter of 2019.
The consolidated gross profit ratio in 2019 was 21.7% compared to 22.7% for 2018. The Door Segment and HVAC segments reported increases in gross profit while the Construction Material segment reported a decrease in gross profit primarily due to the charges associated with the decision to cease mining operations at the Pikeview quarry.
Selling and administrative expenses were $9,483,000 higher in 2019 compared to 2018. The increases were reported primarily in the HVAC segment (up 27.6%) due to the impact of acquisitions and in the Unallocated Corporate expenses (up 33.5%) primarily due to professional services related to acquisition activity. As a percentage of consolidated sales, selling and administrative expenses increased to 28.1% in 2019 compared to 22.5% in 2018.
Depreciation and amortization charges were $1,962,000 in 2019 compared to $1,472,000 in 2018. The increase between years is attributed to the acquisition of the assets of four operating business during the second quarter of 2019.
2019 included an aggregated charge of $22,492,000 to impair mining assets related to the final asset retirement obligations recorded in the Construction Materials segment. 2018 included charges of $6,840,000 and $627,000 to write off deferred development costs and an overpayment of prepaid royalties, also in the Construction Materials segment.
The Company recognized a net $14,781,000 gain from a legal settlement and a $6,800,000 loss on legal settlement for the year ended December 28, 2019. See Note 2 and Note 17 for additional discussion.
2019 included $1,237,000 of gains from the sale of equipment in the Construction Materials segment discussed below. There were no gains or losses from the sale of equipment of continuing operations in 2018. There were $919,000 of gains from the sales of equipment of discontinued operations in 2018.
The Company reported an operating loss in 2019 of $22,845,000 compared to operating loss of $8,764,000 in 2018. Increased selling and administrative costs and impairment costs are driving the overall decrease in operating results.
Interest income in 2019 was $362,000 compared to $76,000 in 2018. The increase was due to interest earned on cash reserves in the first half of 2019. Interest expense in 2019 and 2018 was $371,000 and $539,000, respectively. The decrease was due to lower average borrowings in 2019 compared to 2018. Average outstanding funded debt in 2019 was $313,000 compared to $6,058,000 in 2018.
The Company’s effective income tax rate reflects federal and state statutory income tax rates adjusted for non-deductible expenses, tax credits and other tax items. The effective income tax rate related to the net loss for 2019 and 2018 was a benefit of 23.7% and 27.2%, respectively.
The Company operates businesses within the Building Products industry group. The businesses are grouped into three reportable segments. The following addresses various aspects of operating performance focusing on the reportable segments.
DISCUSSION OF CONSOLIDATED RESULTS OF DISCONTINUED OPERATIONS
The results of discontinued operations reflect the operations of the ready-mix and Daniels Sand businesses of the Company’s former subsidiary, TMC. The Company sold the assets of these business units on February 1, 2019. The 2019 income realized from discontinued operations included a pre-tax loss from operations of $724,000 and a pre-tax gain on the sale of assets of $5,283,000. The pre-tax income from discontinued operations for the year ended December 28, 2018 was $1,161,000.
14
HVAC Segment Group
The table below presents a summary of operating information for the HVAC segment group for the fiscal years 2019 and 2018 (amounts in thousands).
|
|
|
|
|
|
|
|
|
| Year Ended |
| ||||
|
| DECEMBER 28, |
| DECEMBER 29, |
| ||
|
|
| 2019 |
| 2018 | ||
Revenues from external customers |
| $ | 82,149 |
| $ | 73,478 |
|
Segment gross profit |
|
| 19,706 |
|
| 14,876 |
|
Gross profit as percent of sales |
|
| 24.0 | % |
| 20.2 | % |
Segment operating income |
| $ | 948 |
| $ | 931 |
|
Operating income as a percent of sales |
|
| 1.2 | % |
| 1.3 | % |
Segment assets |
| $ | 50,822 |
| $ | 29,003 |
|
Return on assets |
|
| 1.9 | % |
| 3.2 | % |
2019 vs. 2018
Sales in the HVAC segment increased $8,671,000 (11.8%) between 2019 and 2018 reflecting the impact of the acquisitions of GFP and InOvate. The two acquisitions, combined, contributed 14.8% of current year revenue. Sales of furnaces and fan-coils were consistent between years while sales of cooling related equipment declined in the current year from the prior year.
The HVAC segment’s gross profit ratio increased to 24.0% in 2019 from 20.2% in 2018. The increase was primarily due to impact of the acquisitions noted above.
Selling and administrative expenses in 2019 were $4,494,000 higher than the prior year. The acquisition activity noted above was the primary driver behind the increased expense between the two years. Additional investment spending on personnel and processes to stimulate future growth in previously owned lines of business also contributed to the increase between years. As a percentage of sales, such expenses were 21.3% in 2019 compared to 17.7% in 2018.
Certain businesses in the HVAC group are sensitive to changes in the prices for a number of different raw materials, commodities and purchased parts. Prices of steel and copper in particular can have a significant effect on the results of operations of this group. The Company is not currently a party to any hedging arrangements with regard to steel or copper.
Door Segment Group
The table below presents a summary of operating information for the Door Segment group for the fiscal years 2019 and 2018 (amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
| Year Ended |
| ||||
|
|
| DECEMBER 28, |
| DECEMBER 29, |
| ||
|
|
| 2019 |
| 2018 |
| ||
Revenues from external customers |
|
| $ | 24,369 |
|
| 20,158 |
|
Segment gross profit |
|
|
| 7,062 |
|
| 5,656 |
|
Gross profit as percent of sales |
|
|
| 29.0 | % |
| 28.1 | % |
Segment operating income |
|
| $ | 2,174 |
|
| 2,233 |
|
Operating income as a percent of sales |
|
|
| 8.9 | % |
| 11.1 | % |
Segment assets |
|
| $ | 14,248 |
|
| 8,003 |
|
Return on assets |
|
|
| 15.3 | % |
| 27.9 | % |
15
2019 vs. 2018
The Door segment sells hollow metal doors, door frames and related hardware, wood doors, sliding door systems, lavatory fixtures and electronic access and security systems. Nearly all of the Door segments sales are for commercial and institutional buildings such as schools, hotels, and healthcare facilities. Approximately 65% to 70% of the sales of the Door segment are related to jobs obtained through a competitive bidding process. Bid prices may be higher or lower than bid prices on similar jobs in the prior year. The Door segment does not track unit sales of the various products through its accounting or management reporting, but instead tracks gross profit by job. Management relies on the trend in sales and the gross profit rate by job and in the aggregate in managing the business.
Door sales in 2019 were $4,211,000, or 20.9% higher than in 2018. The increase is primarily due to the acquisition of Fastrac and Serenity in the second quarter of the current year. The gross profit ratio in 2019 was 29.0% compared to 28.1% in 2018.
Selling and administrative expenses increased by $1,353,000 (41.6%) in 2019 compared to 2018. The increase was primarily due to acquisition activity noted previously. As a percentage of sales, these expenses were 18.9% and 16.1% in 2019 and 2018, respectively.
Construction Materials Segment Group
The table below presents a summary of operating information for the Construction Materials segment group for the fiscal years 2019 and 2018 (amounts in thousands).
|
|
|
|
|
|
|
|
|
| Year Ended | |||||
|
| DECEMBER 28, | DECEMBER 29, | ||||
|
| 2019 |
| 2018 |
| ||
Revenues from external customers |
| $ | 6,751 |
| $ | 7,150 |
|
Segment gross (loss) profit |
|
| (2,222) |
|
| 2,220 |
|
Gross (loss) profit as percent of sales |
|
| (32.9) | % |
| 31.0 | % |
Segment operating loss |
| $ | (18,492) |
| $ | (7,878) |
|
Operating loss as a percent of sales |
|
| (273.9) | % |
| (110.2) | % |
Segment assets |
| $ | 10,463 |
| $ | 11,315 |
|
Return on assets |
|
| (176.7) | % |
| (69.6) | % |
The ready-mix concrete and Daniels Sand operational assets of TMC were sold on February 1, 2019. The operations of the ready-mix and Daniels Sand businesses were classified as discontinued operations and assets held for sale for all periods presented. The discontinued operations, together with the continuing operations formerly known as the Concrete, Aggregate and Construction Supply (CACS) segment, were reclassified to the Construction Materials segment for current reporting. The product offerings of continuing operations of the former CACS segment consisted of aggregates and construction supplies. 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.
Management made a strategic decision to cease mining operations at the Pikeview quarry at the end of the third quarter of 2019 when it was determined that continued mining was not in the best economic interests of the consolidated portfolio. The third quarter 2019 included a $20,217,000 impairment charge related to the cessation of mining. In the fourth quarter of 2019 the Company, by way of a legal settlement, purchased land it previously leased in Pueblo, Colorado. See Note 2. The Company does not plan to resume mining of the Pueblo property and has recorded an impairment charge of $2,230,000 related to reclamation liabilities associated with the property for the fiscal year ended December 28, 2019. See Note 20. The quarries may continue to report some revenue from dumping fees or for remaining inventory sales, but otherwise will turn to full reclamation status.
Prior to the decision to cease mining operations, the CACS segment produced and sold sand, crushed limestone and gravel (collectively “aggregates”) from deposits in and around Colorado Springs, Colorado. Sales volume of aggregates
16
decreased in 2019 compared to 2018 primarily attributable to the Grisenti pit being fully mined and the ensuing work to complete reclamation with minimal sales. Sales at the Pikeview quarry were nominal in 2019 as the Company prioritized completing the reclamation at Grisenti. In 2018, the aggregate operations supplied the ready-mix business with $7,156,000 of product. These sales reduced with the sale of the ready-mix operations. The reduced sales volumes and additional reclamation related costs, in part, led management to its decision to cease mining operations at the remaining quarries in the current year.
Selling and administrative expenses were $232,000 higher in 2019 compared to 2018. The increase is primarily due to litigation related costs. Legal expenses, including those related to the Pueblo aggregate lease litigation, were $1,757,000 in 2019 compared to $1,603,000 in 2018. As a percentage of sales, selling and administrative expenses were 38.0% in 2019 compared to 32.6% in 2018.
The fiscal year ended December 28, 2019 included a $14,781,000 net gain on legal settlement and a $6,800,000 legal settlement expense related to previously disclosed litigation. See Note 2 and Note 17. The fiscal year ended December 29, 2018 included charges of $6,840,000 and $627,000 related to the write-off of deferred development and prepaid royalties, respectively. See Note 16.
Gains on disposition of assets were $1,231,000 in 2019 due to the disposition of equipment no longer considered useful upon the cessation of mining operations. There were no gains or losses on disposition of assets in 2018.
In connection with the movement to full reclamation status at all mining properties in 2019, management completed an assessment to determine if certain assets should be considered held for sale. Based on this assessment, $896,000 of property previously included in Machinery and equipment on the Consolidated Balance Sheet was classified as Assets held for sale as of December 28, 2019.
OUTLOOK
The Company’s HVAC segment anticipates growth in 2020 sales due to the impact of a full year of the operations acquired in 2019. Fan coil sales are expected to increase due to continued construction spending in the lodging industry and investments made in sales and marketing during 2019. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not heavily reliant on new construction. Sales of these products are generally dependent on the overall strength of the economy, especially employment levels. Sales of ASME tanks, hydronics accessories and dryer related products are dependent on construction levels, which are expected to grow in 2020.
Sales in the Door segment are expected to increase in 2020 due to full year impact of the operations acquired in 2019. Sales are somewhat dependent on the level of commercial construction activity, which is also expected to grow in 2020.
Sales in the Construction Materials segment are expected to remain consistent with 2019. Sales are dependent upon the level of commercial construction activity in the Colorado Springs, Colorado area. As the Company has ceased mining operations it intends to sell off its excess assets, over a period of the next few years, as reclamation is completed. The proceeds from these sales are expected to be available to reduce borrowings by the Company.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission requires all registrants, including the Company, to include a discussion of “critical” accounting policies or methods used in the preparation of financial statements. We believe the following are our critical accounting policies and methods.
Goodwill and Other Intangible Assets
The Company annually assesses goodwill for potential impairment as of the last day of its fiscal year. In addition, to the extent that events occur, either involving the relevant reporting unit or in their industries, the Company revisits its assessment of the recorded goodwill to determine if impairment has occurred and should be recognized. As of December
17
28, 2019, the Company had recorded $5,932,000 of goodwill consisting of $3,198,000 related to the Door segment and $2,734,000 related to the HVAC segment.
In connection with acquisition activity in 2019, the Company recorded $12,809,000 of amortizable intangible assets related to customers, trade names and intellectual property. Recorded amounts were based on valuations performed by an independent business advisory firm. These intangible assets are amortized over their estimated useful lives on a straight-line basis. See Note 4 and Note 18.
The Company follows ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) which simplified the test for goodwill impairment by eliminating the calculation of implied goodwill fair value. Instead, companies compare the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Management prepared a discounted cash flow (DCF) valuation to estimate the fair value of each reporting unit. The DCF valuation was calculated using an appropriate discount rate. The calculated fair values were compared to the reporting unit’s carrying value including goodwill. In each case the fair value exceeded carrying costs resulting in no impairment. See additional discussion in Note 1.
Long-lived Assets (other than Goodwill and Intangible Assets)
The Company reviews long-lived assets by asset group for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the amount and useful life over which cash flows will occur and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available given the Company’s historical experience and internal business plans. In 2019, the Company recognized $22,492,000 of impairment charges related to mining assets in the Construction Materials segment that were simultaneously recorded and impaired as the future undiscounted cash outflows were expected to exceed the current carrying value. See Note 20. In the first two quarters of 2018, the Company wrote off a net $6,840,000 of deferred development costs, previously reported in Property, plant and equipment in the Consolidated Balance Sheet, related to an aggregates property after the necessary mining permits were denied by the State of Colorado for the second time. See Note 16 for further discussion. During the fourth quarter of 2018 the Company wrote-off $627,000 of royalty overpayments related to the aggregate property in that was under litigation at the time.
Liabilities
The Company purchases insurance coverage for workers’ compensation, general product and automobile liability, retaining certain levels of risk (self-insured portion). See the above section titled “Insurance Policies” for information related to per incident deductibles and policy limits. Provision for workers’ compensation claims is estimated by management based on information provided by the independent third party administrator and periodic review of all outstanding claims. The Company’s independent claims administrator tracks all claims and assigns a liability to each individual claim based upon facts known at the time of estimation. In addition, management periodically reviews each individual claim with both the third party claims administrator and legal counsel and the third party administrator revises the estimated liability accordingly. The Company also retains an independent expert who applies actuarial methodology to the claims data provided by the Company’s independent claims administrator to estimate the ultimate aggregate settlement amount of the claims using specific loss development factors based on the Company’s prior experience. The Company then establishes its reserve for workers’ compensation claims based upon the actuarial evaluation and management’s knowledge of the outstanding claims. Management tracks changes to the incurred and paid amounts of individual workers compensation claims up to the date of final closure. In recent years, the net amounts that the claims have ultimately settled for have indicated that the reserve recorded by the Company has been sufficient.
With regard to product liability, provisions for both claims and un-asserted claims that would be covered under the self-insured portion of the policies are reviewed as circumstances dictate, at least annually, and are recorded in accordance
18
with accounting guidance on contingent liabilities provided in the FASB Accounting Standards Codification (Codification). Management also incorporates information from discussions with legal counsel handling the individual claims when revising its estimates. Provision for automobile claims is estimated based upon information provided by the Company’s independent claims administrator and the Company’s own experience. The number of automobile claims and the amounts involved are generally not material. Historically, there have not been many instances of significant variances between actual final settlements and our estimates regarding automobile and product liability claims.
The Company has recorded an estimate of liability for final reclamation of its mining properties in the Colorado Springs, Colorado area per ASC 410-20 guidance on accounting for Asset Retirement Obligations (AROs). An ARO is defined in ASC 410-20-20 as an “obligation associated with the retirement of a tangible long-lived asset”. An ARO should be measured at fair value and should be recognized at the time the obligation is incurred if a reasonable estimate of fair value can be made. ASC 410-20 also says that upon initial recognition of a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. Prior to the third quarter of 2019, the Company had performed reclamation concurrently with mining operations and recognized the related costs in operations. The decision to cease mining operations at Pikeview in the third quarter of 2019 and the acquisition of Valco property in the fourth quarter of 2019 allowed the Company to reasonably estimate the cost of final reclamation at these mining properties. To estimate the fair value of the liabilities, the Company used an expected present value technique. The Company compared its estimates to those prepared by an independent expert to ensure the estimates were reasonable. The related ARO mining assets were considered fully impaired as expected undiscounted future cash outflows exceeded carrying value. Going forward, changes in the ARO due to passage of time will be recognized as an increase in the carrying amount of the liability and as an expense classified as accretion expense. The assessment of adequacy of the ARO is based on management’s assumptions with the assistance of the independent professional. The analysis requires the use of significant assumptions and estimates about timing, third party costs to perform work and method of reclamation to be used.
Management believes that the assumptions and estimates used to determine the reserve are reasonable; however, changes in the aforementioned assumptions and estimates, as well as the effects of unknown future events or circumstances, including legislative requirements, could materially affect estimated costs.
Sales
The Company recognizes revenue as performance obligations to customers are met. Sales are recorded net of estimates of applicable provisions for discounts, volume incentives, returns and allowances based upon current program terms and historical experience. At the time of revenue recognition, the Company also provides an estimate of potential bad debt and warranty expense as well as an amount anticipated to be granted to customers under cooperative advertising programs based upon current program terms and historical experience. Additionally, certain HVAC companies offer discounts for early payment of amounts due under dating and other extended payment programs. The Company records reserves for these items based upon historical experience.
Guidance provided by the Codification mandates that cash consideration (including sales incentives) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services unless both of the following conditions are met: a) the vendor receives an identifiable benefit in exchange for the consideration and b) the vendor can reasonably estimate the fair value of the benefit. Under this guidance, volume incentives and customer discounts provided to our customers are presumed to be a reduction in the selling price of our products and accordingly we record these as a reduction of gross sales. We require that our customers submit proof of both the advertisement and the cost of the advertising expenditure before we allow a deduction for cooperative advertising. Since the Company receives an identifiable and quantifiable benefit, these costs are recorded as selling and administrative expenses. These programs did not have a material effect on operations in 2019 or 2018.
Recently Issued Accounting Standards
The “Recently Issued Accounting Pronouncements” section of Note 1 discusses new accounting policies adopted by the Company since 2018 and the expected impact of accounting pronouncements recently issued but not yet required to be
19
adopted. To the extent the adoption of new accounting standards has an effect on our financial condition, results of operations or liquidity, the impacts are discussed in the applicable notes to the Consolidated Financial Statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and, as such, is not required to provide information in response to this item.
20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| ||
| ||
| ||
| ||
| ||
| ||
| ||
21
Continental Materials Corporation
Consolidated Statements of Operations
For Fiscal Years 2019 and 2018
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
| 2019 |
| 2018 |
| ||
|
|
|
|
|
|
|
|
Net sales |
| $ | 113,276 |
| $ | 100,887 |
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation and amortization) |
|
| 88,723 |
|
| 78,033 |
|
Depreciation and amortization |
|
| 1,962 |
|
| 1,472 |
|
Selling and administrative |
|
| 32,162 |
|
| 22,679 |
|
Charges related to write off of deferred development |
|
| — |
|
| 6,840 |
|
Charges related to write off of overpayment of prepaid royalties |
|
| — |
|
| 627 |
|
Mining asset impairment |
|
| 22,492 |
|
| — |
|
Gain on legal settlement |
|
| (14,781) |
|
| — |
|
Loss on legal settlement |
|
| 6,800 |
|
| — |
|
Gain on disposition of property and equipment |
|
| (1,237) |
|
| — |
|
Operating loss |
|
| (22,845) |
|
| (8,764) |
|
|
|
|
|
|
|
|
|
Interest income |
|
| 362 |
|
| 76 |
|
Interest expense |
|
| (371) |
|
| (539) |
|
Other income, net |
|
| 80 |
|
| 25 |
|
Loss from continuing operations before income taxes |
|
| (22,774) |
|
| (9,202) |
|
Benefit for income taxes |
|
| 5,396 |
|
| 2,500 |
|
Loss from continuing operations |
|
| (17,378) |
|
| (6,702) |
|
Income from discontinued operations net of income tax provision of $1,080 and $315 |
|
| 3,479 |
|
| 846 |
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (13,899) |
| $ | (5,856) |
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share: |
|
|
|
|
|
|
|
Loss from continuing operations |
| $ | (10.15) |
| $ | (3.95) |
|
Income from discontinued operations |
|
| 2.03 |
|
| 0.50 |
|
Basic and diluted loss per share |
|
| (8.12) |
|
| (3.45) |
|
Average shares outstanding |
|
| 1,711 |
|
| 1,697 |
|
The accompanying notes are an integral part of the consolidated financial statements.
22
Continental Materials Corporation
Consolidated Statements of Cash Flows
For Fiscal Years 2019 and 2018
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
| 2019 |
| 2018 |
| ||
Operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
| $ | (13,899) |
| $ | (5,856) |
|
Discontinued operations, net of income tax |
|
|
| (3,479) |
|
| (846) |
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
| 1,962 |
|
| 1,472 |
|
Write-off of deferred development costs |
|
|
| — |
|
| 5,409 |
|
Impairment of mining property assets |
|
|
| 22,492 |
|
| — |
|
Write-off of overpayment of prepaid royalties |
|
|
| — |
|
| 627 |
|
Deferred income tax provision |
|
|
| (4,253) |
|
| (1,798) |
|
Stock based compensation |
|
|
| 204 |
|
| — |
|
Compensation of Board of Directors paid by issuance of treasury shares |
|
|
| 568 |
|
| 315 |
|
Provision for doubtful accounts |
|
|
| 189 |
|
| 165 |
|
Gain on disposition of property and equipment |
|
|
| (1,237) |
|
| — |
|
Changes in working capital items: |
|
|
|
|
|
|
|
|
Receivables |
|
|
| (3,096) |
|
| (1,091) |
|
Inventories |
|
|
| 2,995 |
|
| 3,961 |
|
Prepaid expenses |
|
|
| (256) |
|
| 116 |
|
Accounts payable and accrued expenses |
|
|
| 5,251 |
|
| (282) |
|
Income taxes payable and refundable |
|
|
| (1,903) |
|
| (436) |
|
Other |
|
|
| (2,965) |
|
| 305 |
|
Net cash provided by continuing operations |
|
|
| 2,573 |
|
| 2,061 |
|
Net cash (used) provided by discontinued operations |
|
|
| (2,138) |
|
| 631 |
|
Net cash provided by operating activities |
|
|
| 435 |
|
| 2,692 |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures by continuing operations |
|
|
| (2,693) |
|
| (1,409) |
|
Capital expenditures by discontinued operations |
|
|
| (172) |
|
| (1,291) |
|
Payments for acquisitions |
|
|
| (22,521) |
|
| — |
|
Cash proceeds from sale of discontinued operations |
|
|
| 23,679 |
|
| — |
|
Cash proceeds from sale of continuing operations property and equipment |
|
|
| 2,593 |
|
| — |
|
Cash proceeds from sale of discontinued operations property and equipment |
|
|
| — |
|
| 1,430 |
|
Net cash provided (used) by investing activities |
|
|
| 886 |
|
| (1,270) |
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Borrowings on the revolving bank loan |
|
|
| 21,750 |
|
| 33,100 |
|
Repayments on the revolving bank loan |
|
|
| (23,150) |
|
| (34,400) |
|
Repayments of finance lease obligations |
|
|
| (80) |
|
| (30) |
|
Payments to acquire treasury stock |
|
|
| (257) |
|
| (5) |
|
Net cash used by financing activities |
|
|
| (1,737) |
|
| (1,335) |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
| (416) |
|
| 87 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
| 594 |
|
| 507 |
|
End of period |
|
| $ | 178 |
| $ | 594 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow items: |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest, net |
|
| $ | 333 |
| $ | 468 |
|
Income taxes, net |
|
|
| 1,840 |
|
| 50 |
|
Other Information: |
|
|
|
|
|
|
|
|
Contingent consideration from acquisitions |
|
|
| 1,540 |
|
| — |
|
ARO liabilities and assets recognized |
|
|
| 22,492 |
|
| — |
|
Capital expenditures purchased through capital lease obligation |
|
|
| — |
|
| 200 |
|
Assets reclassified as held for sale |
|
|
| 896 |
|
| 24,036 |
|
Liabilities reclassified as held for sale |
|
|
| — |
|
| 4,092 |
|
Right of use assets obtained in exchange for operating lease liabilities |
|
|
| 587 |
|
| — |
|
The accompanying notes are an integral part of the consolidated financial statements.
23
Continental Materials Corporation
Consolidated Balance Sheets As of December 28, 2019 and December 29, 2018
(Amounts in thousands except share data)
|
|
|
|
|
|
|
|
|
| December 28, 2019 |
| December 29, 2018 |
| ||
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 178 |
| $ | 594 |
|
Receivables less allowance of $494 and $410 for fiscal 2019 and 2018, respectively |
|
| 21,555 |
|
| 15,321 |
|
Receivable for insured losses |
|
| 911 |
|
| 874 |
|
Inventories |
|
| 13,953 |
|
| 14,806 |
|
Prepaid expenses |
|
| 2,171 |
|
| 1,785 |
|
Refundable income taxes |
|
| 2,397 |
|
| 494 |
|
Other current assets |
|
| 4,229 |
|
| 2,500 |
|
Other current assets held for sale |
|
| 896 |
|
| 10,968 |
|
Total current assets |
|
| 46,290 |
|
| 47,342 |
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
|
|
Land and improvements |
|
| 4,072 |
|
| 1,409 |
|
Buildings and improvements |
|
| 14,939 |
|
| 13,451 |
|
Machinery and equipment |
|
| 48,269 |
|
| 48,569 |
|
Mining properties |
|
| 3,770 |
|
| 5,015 |
|
Less accumulated depreciation and depletion |
|
| (59,025) |
|
| (58,013) |
|
|
|
| 12,025 |
|
| 10,431 |
|
Other assets |
|
|
|
|
|
|
|
Right-of use assets |
|
| 4,978 |
|
| — |
|
Goodwill |
|
| 5,932 |
|
| 1,000 |
|
Intangible assets |
|
| 12,437 |
|
| — |
|
Deferred income taxes |
|
| 7,667 |
|
| 3,414 |
|
Other long-term assets |
|
| 654 |
|
| 448 |
|
Other long-term assets held for sale |
|
| — |
|
| 13,068 |
|
|
| $ | 89,983 |
| $ | 75,703 |
|
LIABILITIES |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Revolving bank loan payable |
| $ | 800 |
| $ | 2,200 |
|
Accounts payable |
|
| 8,490 |
|
| 3,234 |
|
Accrued expenses |
|
|
|
|
|
|
|
Compensation |
|
| 2,181 |
|
| 2,638 |
|
Reserve for self-insured losses |
|
| 1,967 |
|
| 2,451 |
|
Liability for unpaid claims covered by insurance |
|
| 911 |
|
| 874 |
|
Profit sharing |
|
| 710 |
|
| 1,065 |
|
Short-term asset retirement obligation |
|
| 4,200 |
|
| 1,017 |
|
Other |
|
| 3,377 |
|
| 2,911 |
|
Short-term lease liabilities |
|
| 1,170 |
|
| — |
|
Other current liabilities held for sale |
|
| — |
|
| 3,800 |
|
Total current liabilities |
|
| 23,806 |
|
| 20,190 |
|
|
|
|
|
|
|
|
|
Long-term lease liabilities |
|
| 3,991 |
|
| — |
|
Long-term compensation liabilities |
|
| 1,842 |
|
| 959 |
|
Asset retirement obligation |
|
| 23,713 |
|
| 5,252 |
|
Other long-term liabilities |
|
| 1,442 |
|
| 234 |
|
Other long-term liabilities held for sale |
|
| — |
|
| 292 |
|
|
|
|
|
|
|
|
|
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 |
|
| 1,853 |
|
| 1,930 |
|
Retained earnings |
|
| 47,232 |
|
| 61,131 |
|
Treasury shares, 860,910 and 876,409 at cost |
|
| (14,539) |
|
| (14,928) |
|
|
|
| 35,189 |
|
| 48,776 |
|
|
| $ | 89,983 |
| $ | 75,703 |
|
The accompanying notes are an integral part of the consolidated financial statements.
24
Continental Materials Corporation
Consolidated Statements of Shareholders’ Equity
For Fiscal Years 2019 and 2018
(Amounts in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common |
| Capital |
|
|
|
|
|
|
| ||||
|
| Common |
| shares |
| in excess |
| Retained |
| Treasury |
| Treasury |
| ||||
|
| shares |
| amount |
| of par |
| earnings |
| shares |
| shares cost |
| ||||
Balance at December 30, 2017 |
| 2,574,264 |
| $ | 643 |
| $ | 1,887 |
| $ | 66,987 |
| 892,097 |
| $ | 15,195 |
|
Net loss |
| — |
|
| — |
|
| — |
|
| (5,856) |
| — |
|
| — |
|
Compensation of Board of Directors by issuance of treasury shares |
| — |
|
| — |
|
| 43 |
|
| — |
| (16,000) |
|
| (272) |
|
Purchase of treasury shares |
| — |
|
| — |
|
| — |
|
| — |
| 312 |
|
| 5 |
|
Balance at December 29, 2018 |
| 2,574,264 |
|
| 643 |
|
| 1,930 |
|
| 61,131 |
| 876,409 |
|
| 14,928 |
|
Net loss |
| — |
|
| — |
|
| — |
|
| (13,899) |
| — |
|
| — |
|
Compensation of Board of Directors by issuance of treasury shares |
| — |
|
| — |
|
| (77) |
|
| — |
| (37,998) |
|
| (645) |
|
Purchase of treasury shares |
| — |
|
| — |
|
| — |
|
| — |
| 22,499 |
|
| 256 |
|
Balance at December 28, 2019 |
| 2,574,264 |
| $ | 643 |
| $ | 1,853 |
| $ | 47,232 |
| 860,910 |
| $ | 14,539 |
|
The accompanying notes are an integral part of the consolidated financial statements.
25
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Continental Materials Corporation (the Company) is a Delaware corporation, incorporated in 1954. The Company experienced various changes in 2019 with the sale of substantially all assets of its ready-mix concrete and Daniels Sand operations in the first quarter of 2019, the acquisition of four new operating businesses in the second quarter of 2019 and the cessation of mining at Pikeview quarry in the third quarter of 2019. In conjunction with this activity, management reviewed its operating and reporting structure and made adjustments to align the structure with how operations will be measured and evaluated going forward including revisions to the Company’s reporting segments. Segment information for prior periods has 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 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” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include Continental Materials Corporation and all of its subsidiaries. Intercompany transactions and balances have been eliminated. All subsidiaries of the Company are wholly-owned.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which removed the requirement to compare the implied fair value of goodwill with its carrying amount as part of Step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss should not exceed the total amount of goodwill allocated to that reporting unit. The pronouncement was adopted by the Company in the fourth quarter of 2017 in connection with annual impairment testing. No impairment charges resulted from our impairment testing.
Effective December 31, 2017 (the beginning of fiscal 2018), the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments, which created a single source of
26
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.
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 2018 and did not have a material impact to the consolidated statement of cash flows.
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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 28, 2019 and December 29, 2018 and the reported amounts of revenues and expenses during both of the two fiscal years in the period ended December 28, 2019. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value. The Company has reclassified negative cash balances to Accounts Payable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.
The following methods were used to estimate the fair value of the financial instruments recognized in the accompanying balance sheet:
27
Cash and Cash Equivalents: The carrying amount approximates fair value and was valued as Level 1.
Revolving Bank Loan Payable: Fair value was estimated based on the borrowing rates then available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of 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.
Lease liabilities: Fair value was estimated based on the borrowing rates then available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of the Lease liabilities represents a reasonable estimate of the corresponding fair value and was valued as Level 2.
Phantom equity and phantom equity appreciation liability awards: Fair value is estimated based on the use of a Black-Scholes option pricing model based on publicly available inputs. The carrying amount of the liability represents a reasonable estimate of the vested portion of the corresponding fair value of the awards granted and was valued as Level 3.
Contingent consideration: Fair value is estimated based on the use of a Monte Carlo Simulation model based on significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.
ARO liability: Fair value is estimated using an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate using significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.
ARO for asset impairment: Fair value is estimated using an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate using significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.
There were no transfers between fair value measurement levels of any financial instruments in the current year.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value and are reviewed periodically for excess or obsolete stock with a provision recorded, where appropriate. Cost for certain inventory at WFC and PMI is determined using the last-in, first-out (LIFO) method. These inventories represent approximately 71% of total inventories at December 28, 2019 and 65% at December 29, 2018. The cost of all other inventory is determined by the first-in, first-out (FIFO) or average cost methods. Some commodity prices such as copper and steel have experienced significant fluctuations in recent years which is principally relevant to the four HVAC businesses. The general effect of using LIFO is that higher prices are not reflected in the inventory carrying value. Current costs are reflected in the cost of sales. Due to the nature of our products, obsolescence is not typically a significant exposure, however certain HVAC businesses will from time to time contend with some slow-moving inventories or parts that are no longer used due to engineering changes. At December 28, 2019 and December 29, 2018, inventory reserves were approximately 6.8% of the total FIFO inventory value.
28
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method as follows:
|
| |
|
| |
|
| |
|
|
The cost of property sold or retired and the related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss is reflected in operating income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized and depreciated over their estimated useful lives.
OTHER ASSETS
The Company annually assesses goodwill for potential impairment at the end of each year. In accordance with ASU 2017-04, the fair value of each reporting unit is compared to its carrying value. Impairment expense would be recognized, limited to the value of the reporting unit’s goodwill, should carrying value exceed fair value. In addition to annual assessment, the Company will reassess the recorded goodwill to determine if impairment has occurred if events arise or circumstances change in the relevant reporting segments or in their industries. No goodwill impairment was recognized for any of the periods presented.
The Company had previously paid $2,500,000 related to an aggregate property near Colorado Springs. During fiscal year 2019, the Company decided to cease negotiations with the State of Colorado to obtain mining permits for the property. The amount, less $325,000 that was not expected to be recovered, was included in other current assets as of December 28, 2019.
Intangible assets with definite lives include trade names, intellectual property, and customer relationships. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value.
RETIREMENT PLANS
The Company and its subsidiaries have a contributory profit sharing retirement plan for specific employees. The plan allows qualified employees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k). The Company may make annual contributions, at its discretion, based primarily on profitability. In addition, any individuals whose compensation was in excess of the amount eligible for the Company matching contribution to the 401(k) plan as established by Section 401 of the Internal Revenue Code are eligible to participate in an unfunded Deferred Compensation Plan. This plan accrues an amount equal to the difference between the amount the person would have received as Company contributions to his/her account under the 401(k) plan had there been no limitations and the amount the person would receive under the 401(k) plan giving effect to the limitations. Costs under the plans are charged to operations as incurred. As of December 28, 2019 and December 29, 2018, the unfunded liabilities related to the Deferred Compensation Plan were $1,250,000 and $1,001,000 respectively.
RESERVE FOR SELF-INSURED AND INSURED LOSSES
The Company’s risk management program provides for certain levels of loss retention for workers’ compensation, automobile liability, healthcare plan coverage and general and product liability claims. The components of the reserve for self-insured losses have been recorded in accordance with GAAP requirements that an estimated loss from a loss contingency shall be accrued if information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably
29
estimated. The recorded reserve represents management’s best estimate of the future liability related to these claims up to the associated deductible.
GAAP also requires an entity to accrue the gross amount of a loss even if the entity has purchased insurance to cover the loss. Therefore the Company has recorded losses for workers’ compensation, automobile liability, medical plan coverage and general and product liability claims in excess of the deductible amounts, i.e., amounts covered by insurance contracts, in “Liability for unpaid claims covered by insurance” with a corresponding “Receivable for insured losses” on the balance sheet. The components of the liability represent both unpaid settlements and management’s best estimate of the future liability related to open claims. Management has evaluated the creditworthiness of our insurance carriers and determined that recovery of the recorded losses is probable and, therefore, the receivable from insurance has been recorded for the full amount of the insured losses. The amount of claims and related insured losses at December 28, 2019 and December 29, 2018 was $911,000 and $874,000, respectively.
RECLAMATION
In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas whether the property is owned or leased. The Company had recorded asset retirement obligations (ARO) and offsetting assets for future reclamation work to be performed at its various aggregate operations based upon an estimate of the total expense that would be paid to a third party to reclaim the properties. The assessment of the reclamation liability may be done more frequently if events or circumstances arise that may indicate a change in estimated costs. The Company has engaged an independent specialist to assist in evaluating the estimates of the cost of reclamation. Prior to the current fiscal year, the reclamation of mining properties was performed concurrently with mining or soon after each section of the deposit was mined. In the current year, in connection with the decision to cease mining operations at its Pikeview quarry and purchase of formerly leased mining property in Pueblo, the Company was able to reasonably estimate the cost of final reclamation of these properties and has recorded ARO liabilities of $27,913,000 at December 28, 2019. Reclamation liabilities were estimated at $6,269,000 as of December 29, 2018. The Company classifies a portion of the reserve as a current liability, specifically $4,200,000 at December 28, 2019 and $1,017,000 at December 29, 2018 based upon anticipated reclamation timeframe. See Note 2 for discussion of acquisition of Pueblo property and Note 20 for additional discussion of AROs.
TREASURY STOCK
Treasury stock is valued at the aggregated average cost that the Company paid for each transaction.
REVENUE RECOGNITION
Effective December 31, 2017, the Company adopted 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.
The Company is applying Topic 606 to the customer contracts in each industry segment to provide assurance of compliance. Using the five-step model the customer contracts in each segment were evaluated on critical aspects of how revenue is reported and recognized in the financial statements i.e. 1) Identify the contract(s) with the customer; 2) Identify the performance obligations; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue as each performance obligation is satisfied. In applying the model to each reporting segment level, the Company is using a portfolio approach which is acceptable because the contracts within each segment are similar with respect to contract attributes, performance obligations, and revenue recognition.
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
30
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. Changes in the aggregated product warranty liability for the fiscal years 2019 and 2018 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
| 2019 |
| 2018 |
| ||
Beginning balance |
| $ | 104 |
| $ | 132 |
|
Warranty related expenditures |
|
| (148) |
|
| (148) |
|
Warranty expense accrued |
|
| 120 |
|
| 120 |
|
Ending balance |
| $ | 76 |
| $ | 104 |
|
The majority of sales within the Door division do not include extended installation components. Most of the sales of MDHI that contain installation are completed within 30 days and contain two specific components, the product and the installation service. The transaction price for these contracts is allocated to each performance obligation based on its stated stand-alone price. Revenue is recognized at a point in time as each performance obligation is completed. The Company does not offer maintenance or service contracts. The acquisition of Fastrac and Serenity in mid-2019 expanded the type of contracts that require analysis under Topic 606 guidelines as these operations may include extended installation services within the contracts. The company negotiates the terms of the contract and prepares a detailed project quote that might include number and type of doors, number and style of hardware, locks, electronic items and estimated installation cost. Contract price for each item of the quote is negotiated and stated in the contract. Modifications are treated as adjustments to an existing contract and are part of the changes in billing invoices. Revenue is recognized as performance obligations, per the contract agreement, are completed. Revenue for product is recognized as shipped. Revenue for installation services is recognized on a percentage of completion method with costs in excess of billings and/or billings in excess of costs being recorded as an asset or liability until recognized. Costs in excess of billings, of approximately $420,000, are included in Prepaid expenses and retainage on contracts of approximately $345,000 is included in Receivables on the Consolidated Balance Sheet as of December 28, 2019.
SHARE-BASED COMPENSATION
Share-based compensation expense is recognized using the fair value method of accounting. Share-based awards are recognized ratably over the requisite service period.
INCOME TAXES
Income taxes are accounted for under the asset and liability method that requires deferred income taxes to reflect the future tax consequences attributable to differences between the tax and financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized are based on the tax rates in effect in the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, based on available positive and negative evidence, it is “more likely than not” (greater than a 50% likelihood) that some or all of the net deferred tax assets will not be realized.
The 2017 Tax Cuts and Jobs Act (Tax Act) repealed 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.
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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 (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 December 28, 2019 or December 29, 2018.
CONCENTRATIONS
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables and temporary cash investments. The Company did not have any temporary cash investments in either fiscal 2019 or 2018.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. In some Door segment and HVAC segment (as it relates to the fan coil product line) transactions, the Company retains lien rights on the properties served until the receivable is collected. The Company writes off accounts when all efforts to collect the receivable have been exhausted. The Company maintains allowances for potential credit losses based upon the aging of accounts receivable, management’s assessment of individual accounts and historical experience. Such losses have been within management’s expectations. See Note 15 for a description of the Company’s customer base.
All long-lived assets are in the United States. No customer accounted for 10% or more of total sales of the Company in fiscal 2019 or 2018. One customer in the HVAC segment accounted for 15.9% and 16.1% of consolidated accounts receivable at December 28, 2019 and at December 29, 2018, respectively.
Substantially all of the HVAC Segment’s factory employees are covered by a collective bargaining agreement through the Carpenters Local 721 Union under a contract that expires on December 31, 2022. The Company considers relations with its employees and with their union to be good.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to fair value is required. In the fiscal quarters ended March 31, 2018 and June 30, 2018 the Company wrote off a total of $6,840,000 of deferred development related to a granite mining property south of Colorado Springs. See Note 16 for additional discussion.
In the third quarter of 2019 the Company made a strategic decision to cease mining operations at its Pikeview quarry in Colorado Springs, Colorado as it was no longer in the best economic interest of the consolidated portfolio to continue operations. The Company recorded an ARO liability and offsetting asset of $20,715,000 which represented the estimated fair value of the total reclamation costs. The related ARO asset was considered fully impaired as the total future estimated cash flows exceeded the carrying value. Therefore, the Company also recorded an impairment charge of $20,217,000 related to the asset. In the fourth quarter of 2019, the Pikeview ARO was increased by a $45,000 change in estimate. The related ARO asset was considered fully impaired due to the same reason noted in the third quarter of 2019. Additionally in the fourth quarter, the Company purchased formerly leased mining property in Pueblo, Colorado as part of a legal settlement. See Note 2. With no intention to resume mining of this property, the Company was able to reasonably estimate the cost of final reclamation and recorded an ARO liability and offsetting asset of $6,660,000 related to this property. The related mining asset was considered fully impaired as total estimated cash flows exceeded the
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carrying value. Therefore, the Company recorded a net impairment charge, related to the Pueblo property, of $2,230,000 for the year ended December 28, 2019. See Note 20.
FISCAL YEAR END
The Company’s fiscal year-end is the Saturday nearest December 31. Fiscal 2019 and fiscal 2018 each consisted of 52 weeks.
2. CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE
Subsequent to the end of the third quarter, on October 9, 2019, the Company and Valco filed a Joint Notice of Settlement 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 Settlement stated that the parties had reached a settlement agreement resolving all claims. Trial had previously been scheduled for October 21, 2019. On October 16, 2019, the Company and Valco filed a Stipulated Motion for Dismissal with Prejudice which stated: the parties “agree that this matter, including all claims and counterclaims, dismissed with prejudice and without costs, each party to bear its own attorneys’ fees.” The Court entered the Order of Dismissal with Prejudice on October 16, 2019.
As part of the Settlement, the Company agreed to pay Valco $9,000,000, which included purchase of previously leased land. There is no intention to resume mining of the property that ceased several years prior when litigation began. As the litigation claim was a known event prior to the third quarter balance sheet date, the Company recognized the portion of the agreement related to the legal settlement in its financial statements for the period ended September 28, 2019. Since the asset purchase agreement was not a known event prior to the balance sheet date it was not recorded in the financial statements for the period ended September 28, 2019. The Company used its best estimate, based on currently available information, to record an estimated loss on litigation settlement of $6,400,000 for the third quarter of 2019. During the fourth quarter of 2019, a third-party appraisal of the property was obtained which valued the land at $2,200,000. Using this valuation, the Company recorded the property purchase in the fourth quarter and revised the loss on litigation settlement to $6,800,000 for the year-ended December 28, 2019. See Note 20 for discussion of asset retirement obligation and related asset impairment related to the purchased property.
3. INVENTORIES
Inventories consisted of the following (amounts in thousands):
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| December 28, 2019 |
| December 29, 2018 |
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Finished goods |
| $ | 6,419 |
| $ | 5,448 |
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Work in process |
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| 1,061 |
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| 1,365 |
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Raw materials and supplies |
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| 6,473 |
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| 7,993 |
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| $ | 13,953 |
| $ | 14,806 |
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If inventories valued on the LIFO basis were valued at current costs, inventories would be higher by $6,618,000 and $7,176,000 at December 28, 2019 and December 29, 2018, respectively. Reductions in inventories during 2018 resulted in liquidations of LIFO quantities by charging cost of goods sold with LIFO costs significantly below current costs. By matching these older costs with current revenues, 2018 net loss decreased by approximately $968,000, net of tax. There was not a similar significant reduction in inventory levels in 2019.
Inventory valuation reserves at December 28, 2019 and December 29, 2018 were $1,023,000 and $1,747,000, respectively. The decrease between years is due to progress made in streamlining products sold reducing the risk of excess and obsolete inventory.
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4. GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS
As of December 29, 2018 the Company had recorded $1,000,000 of goodwill, not including discontinued operations goodwill of $6,229,000 that was eliminated with the sale of the ready-mix and Daniels Sand operations, related to the Door segment. During the second quarter of 2019, the Company recorded approximately $4,932,000 of goodwill related to the acquisitions of four operating businesses. See Note 18. As of December 28, 2019, the Company has recorded $5,932,000 of goodwill comprised of $3,198,000 or 54% related to the Door segment and $2,734,000 or 46% related to the HVAC segment. The Company assesses goodwill for potential impairment at the end of each year. The Company prepared a discounted cash flow analysis, based on a third party valuation of the Company’s operating units, to estimate the fair value of each reporting unit. The fair value was compared to the carrying value for each reporting unit. There was no goodwill impairment recorded, for any of the periods reported, as fair value exceeded carrying cost for each unit. If events occur or circumstances change in the relevant reporting segments or in their industries, the Company will reassess the recorded goodwill to determine if impairment has occurred. The valuation of goodwill and other intangibles is considered a significant estimate. Future economic conditions could negatively impact the value of the business which could trigger an impairment that would materially impact earnings.
Intangible assets with definite lives include trade names, intellectual property, and customer relationships. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value. There were no amortizable intangible assets as of December 29, 2018. See Note 18 for additional discussion of intangible assets acquired during the current fiscal year. Amortizable intangible assets on the Consolidated Balance Sheet as of December 28, 2019 were as follows (amounts in thousands):
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Trade names |
| $ | 3,590 |
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| 119 |
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| 15 years |
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Intellectual property |
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| 1,449 |
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| 102 |
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| 11.5 and 12.5 years |
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Customer related intangible |
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| 7,769 |
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| 150 |
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| 10.5 and 30.5 years |
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| $ | 12,808 |
| $ | 371 |
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Amortization Expense for the fiscal year ended December 28, 2019, which was $371,000. The estimated amortization expense for eachoriginally filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2020 (the “Original Filing”). In accordance with paragraph (3) of General Instruction G to Form 10-K, we are filing this Amendment No. 1 to include the next five yearsinformation that is $664,000. required by Part III of Form 10-K and which was not included in the Original Filing.
5. REVOLVING BANK LOAN
The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective March 16 2020. BorrowingsIn addition, as required by Rule 12b-15 under the Credit Agreement are securedSecurities Exchange Act of 1934, as amended, new certifications by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certainprincipal executive officer and principal financial officer are filed as Exhibits 31.3 and 31.4 to this Amendment No. 1 as required by Section 302 of the Sarbanes-Oxley Act of 2002. Because no financial statements have been included in this Amendment No. 1 and this Amendment No. 1 does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 3, 4, and 5 of the certifications have been omitted.
No attempt has been made to update the Original Filing other than the furnishing of additional Exhibits 31.3 and 31.4 in Item 15 herein. Except as expressly noted in this Amendment No. 1, this Amendment No. 1 does not reflect events that may have occurred subsequent to the Original Filing date, including, without limitation, the financial statements included in the Original Filing. Accordingly, this Amendment No. 1 should be read together with the Original Filing and with the Company’s other filings with the SEC.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board Composition and Qualifications
Name | Served as Director Since | Position with the Company or Committee Memberships | Age | |||||||
Directors Continuing in Office Until the 2022 Annual Meeting of Stockholders | ||||||||||
Steve Gidwitz | 2018 | Director, Member of the Compensation Committee and Nominating Committee | 62 | |||||||
James G. Gidwitz | 1978 | Chairman of the Board, Chief Executive Officer | 73 | |||||||
Director Continuing in Office Until the 2021 Annual Meeting of Stockholders | ||||||||||
Scott Gidwitz | 2018 | Director, Member of the Audit Committee and Nominating Committee | 32 | |||||||
Directors Continuing in Office Until the 2020 Annual Meeting of Stockholders | ||||||||||
Ralph W. Gidwitz | 1984 | Director, Member of the Compensation Committee | 84 | |||||||
Theodore R. Tetzlaff | 1981 | Director | 76 |
Steve Gidwitz has served on the Board since 2018. Steve began his career in 1980 after graduating from Tulane University in New Orleans with a B.A. in Business Management. He worked for Consolidated Packaging for several years in various positions before becoming an administrative manager at Riverwood International, a global leader in developing innovative packaging solutions. In 1991, Steve worked for Corson Manufacturing as vice president of operations, then as president, before becoming vice president of NCAComp in 2002, Chief Operating Officer in 2011 and President in 2014. Over the course of his career, his job responsibilities have included: human resources, purchasing, inside sales, sales management, quality control, accident prevention, plant management, and full company management. In addition, Steve has served as a board member and vice president of the Group Self-Insurance Association of New York (“GSIANY”) and served on a WCB/GSIANY committee to assist in rewriting the rules and regulations of self-insurance groups in the state of New York. Mr. Gidwitz is also a member of the board of managers of Bee Street Holdings LLC (“Bee Street”), the Company’s majority stockholder.
James G. Gidwitz is the son of one of the founders of the Company and has served on the Board since 1978. He has served as the Chairman of the Board and its Chief Executive Officer since 1983. Mr. Gidwitz also serves on the Boards of several non-profit institutions involved in such diverse activities as medical research and political analysis. Mr. Gidwitz served as Chairman of the Endowment Committee of The Hotchkiss School where he continues to serve on the Committee. Mr. Gidwitz also formerly served on the Board of the Hoover Institution, an organization associated with Stanford University. The Board has concluded that Mr. Gidwitz possesses strong leadership experience and knowledge of the Company and its business obtained through his long tenure with the Company. Mr. Gidwitz is also a member of the board of managers of Bee Street.
Scott Gidwitzhas served on the Board since 2018. Scott is a Senior Vice President of the investments group at The John Buck Company and serves as a member of the Investment Committee. His primary responsibilities include the evaluation, underwriting, and due diligence of new residential and commercial acquisition and development opportunities. Currently, Mr. Gidwitz serves as asset manager for 3Eleven, a 245-unit residential development opening in Chicago’s River North neighborhood, and 333 S. Wabash Ave., a 1.2 million square foot office tower in Chicago’s East Loop. Prior to joining The John Buck Company, Mr. Gidwitz was an Analyst at Siebert Branford Shank, L.L.C., a boutique investment bank specializing in municipal finance. While at Siebert, Mr. Gidwitz provided quantitative and analytical support to senior bankers, as well as technical support on over $210 million in senior managed financings, and over $3 billion of co-senior and co-managed transactions. Mr. Gidwitz earned his J.D. from Northwestern University School of Law, M.B.A. from Northwestern University’s Kellogg School of Management, and B.A. from University of Pennsylvania.Mr. Gidwitz is also a member of the board of managers of Bee Street.
Ralph W. Gidwitz is the son of one of the founders of the Company and has served on the Board since 1984. Mr. Gidwitz is retired having previously started Capital Results LLC, a financial consulting company, for which he also served as the Managing Partner and Chief Executive Officer until 2009. Mr. Gidwitz has also served as the President and Chief Executive Officer of a private company engaged in manufacturing. Mr. Gidwitz served on the Board of Trustees for a local college as well as serving as its Treasurer and Chairman of its Finance and Investment Committees from 2006 to 2013. He currently serves on the Executive Committee of the Board of Governors of the City of Hope, a large research driven hospital and health care organization, and as 1st Vice President of a Los Angeles based cultural group. He also served as a Director for three community associations and as Chairman and a Governor for a Chicago cultural group. The Board has concluded that Mr. Gidwitz adds invaluable and extensive business and financial experience as well as possessing experience in mergers and acquisitions. Mr. Gidwitz is also a member of the board of managers of Bee Street.
Theodore R. Tetzlaff has served on the Board since 1981. Mr. Tetzlaff is an attorney at law and principal of Tetzlaff Law Offices, LLC. He was previously of counsel to the law firm of Ungaretti & Harris LLP from 2005 to 2012. He has also been a partner at other law firms where he served as the Managing Partner of one firm’s Chicago office and as a member of another firm’s Executive Committee. He served as General Counsel of Tenneco, Inc., a large publicly traded oil and gas company from 1992 to 1999 and General Counsel for Peoples Energy Corporation, a large publicly traded diversified energy company from 2003 to 2006. Mr. Tetzlaff has also served as Chairman of the Board of a large Chicago civic organization. The Board has concluded that Mr. Tetzlaff’s experience adds invaluable and extensive business experience as well as an in-depth understanding of legal issues that have affected or may affect the Company.
Until his resignation effective April 18, 2020, Peter E. Thieriot had served on the Board since 2001. He is currently the Managing Member of Elk Mountain Holdings, a Delaware LLC and a privately owned land and livestock company. He has served in that capacity since 2006 and from 1993 to 2006 for its predecessor company, Elk Mountain Ranch Company, LLC. Mr. Thieriot possesses extensive and diverse experience having served in numerous capacities for The Chronicle Publishing Company (“The Chronicle”), a closely held, family, national media company. His roles have included President, Vice President, Publisher and Station Manager for newspapers and television stations owned by The Chronicle. Over the years, Mr. Thieriot has served as a director or trustee for numerous cultural, civic and other types of non-profit organizations as well as serving as a director of The Chronicle from 1977 to 1993. Prior to his resignation, the Board had concluded that Mr. Thieriot’s diverse experience in various industries, including The Chronicle, adds a unique perspective to many of the issues and tasks that are the responsibility of the Company’s Board.
Until his resignation effective April 18, 2020, Darrell M. Trent had served on the Board since 1997. Mr. Trent has served as Chairman of the Board of Directors and Chief Executive Officer of Acton Development Company, Inc., a privately held real estate development and property management company since 1988. Mr. Trent was also Chairman of the common stockBoard and Chief Executive Officer of Clean Earth Technologies, Inc., an environmental management venture from 1992 to 1994. Mr. Trent took a leave of absence for part of 2003 to serve as a volunteer with the Coalition Provisional Authority in Iraq. Mr. Trent, a former U.S. Undersecretary of Transportation, was in Iraq to oversee the re-creation of Iraq’s Ministry of Transportation. Prior to his resignation, the Board had concluded that Mr. Trent brings invaluable and extensive business experience in real estate development, a segment of the economy that directly impacts the Company’s Construction Materials segment business as well as affecting other products offered by the Company. He also provides a unique insider’s experience with the federal government.
Until his resignation effective November 18, 2019, Thomas H. Carmody had served on the Board since 1994. Mr. Carmody is the Chief Executive Officer of Summit International, LLC, a sports marketing and distribution company he founded in 1999. He has also served as the Chairman of the Board of Ameridream, a charitable organization providing housing down payment assistance for qualifying individuals, since 2003. Mr. Carmody has also served as Vice President of U.S. Operations and Vice President of the Sports Division of Reebok International, Ltd., a publicly traded footwear, apparel and fitness company. Prior to his resignation, the Board had concluded that Mr. Carmody adds invaluable and extensive marketing and business experience, as well as adding an entrepreneurial approach to situations that the Company has faced or may face in the future.
Family Relationships
James G. Gidwitz and Ralph W. Gidwitz are cousins. Steve Gidwitz and Scott Gidwitz are both nephews of James G. Gidwitz. James G. Gidwitz, together with his siblings and all descendants, and Ralph W. Gidwitz, together with all descendants, including those of their deceased sibling, are herein referred to as the “Gidwitz Family.”
Code of Ethics
In furtherance of its corporate governance responsibilities, during April 2004, the Board adopted a formal Code of Ethics for the Chief Executive Officer and Senior Financial Officers and a formal General Code of Business Conduct and Ethics which is intended to provide guidelines regarding the actions of all of the Company’s subsidiaries. Borrowings underdirectors, officers and employees. A copy of the Credit Agreement bear interest basedCode of Ethics for the Chief Executive Officer and Senior Financial Officers, as well as the Code of Business Conduct and Ethics, are available free of charge at the Company’s website atwww.continental-materials.com in the Investors section. Should an amendment to or a waiver from the provisions of the Code of Ethics for the Chief Executive Officer and Senior Financial Officers that apply to its executive officers occur, the Company intends to satisfy the disclosure requirements by posting such information on a London Interbank Offered Rate (LIBOR) or prime rate based option.its website atwww.continental-materials.com.
Audit Committee
The Credit Agreement either limits or requires prior approvalBoard has established an Audit Committee in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Thomas H. Carmody was, until his resignation effective November 18, 2019, and Peter E. Thieriot and Darrell M. Trent were, until their resignations effective April 18, 2020, the only members of the Audit Committee. After Messrs. Thieriot’s and Trent’s resignations, the Board elected Scott Gidwitz, effective April 20, 2020, as the sole member of the Audit Committee pursuant to an exemption from the NYSE American requirement that the Audit Committee include only directors whom have been affirmatively determined to be independent as defined by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury sharesNYSE American corporate governance rules. The Board had determined that, until his resignation effective April 18, 2020, Mr. Thieriot qualified as an "audit committee financial expert" as defined by the Securities and payment of cash dividends. Payment of accrued interest is due monthly or atExchange Commission. Since Mr. Thieriot’s resignation, the endBoard has determined it does not have such an “audit committee financial expert” serving on the Audit Committee because the Nominating Committee has had insufficient time since Mr. Thieriot’s resignation on April 18, 2020, to identify and interview potential director candidates who would be qualified to serve in that role.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the applicable LIBOR period.Exchange Act generally requires the Company’s directors, executive officers and owners of more than 10% of a registered class of the Company’s equity securities to file with the Securities and Exchange Commission (the “Commission”) reports of beneficial ownership and changes in ownership, on Forms 3, 4 and 5, generally within two business days of the date of a purchase or sale transaction. Such officers, directors and 10% owners are required by Commission regulations to furnish to the Company copies of all Section 16(a) reports that they file. To the Company’s knowledge, based solely on review of copies of such reports furnished to the Company and representations that no other reports were required to be filed during the fiscal year ended December 28, 2019, all executive officers, directors and 10% owners of the Company complied with the Section 16(a) filing requirements during fiscal year 2019.
Executive Officers and Qualifications
Name | Positions and Offices; Term of Office | Age | ||||
James G. Gidwitz | Chairman and Chief Executive Officer (since 1983) | 73 | ||||
Ryan M. Sullivan | President and Chief Operating Officer (since 2018) | 46 | ||||
Paul A. Ainsworth | Vice President, Chief Financial Officer and Secretary (since 2018) | 49 |
Please see above, under ‘Board Composition and Qualifications’, for Mr. Gidwitz’s background and qualifications.
Ryan M. Sullivan has served as the President and Chief Operating Officer of the Company since 2018. Mr. Sullivan has over twenty years of professional engineering experience in manufacturing operations and other industries. From 2017 until joining the Company, Mr. Sullivan served as the North American President and Managing Director of Kingspan Insulation LLC, a manufacturer of energy efficiency and moisture management products. Prior to Kingspan Insulation LLC, from 2004 until 2016, Mr. Sullivan was with James Hardie Building Products, Inc., a manufacturer of fiber-cement building materials for new home construction projects and home remodeling. At James Hardie Building Products, Inc., Mr. Sullivan held various management positions including serving as the President of the North America division from 2015 until 2016, the Executive General Manager, Southern Division from 2013 until 2015 and the General Manager, ColorPlus Business Unit from 2011 until 2013. Mr. Sullivan graduated from Carnegie Mellon in 1995 earning a Bachelor’s of Science in Mechanical Engineering. He also earned a Master of Science in Electrical Engineering in 1999 and a Master of Business Administration in 2004 from the University of Pittsburgh.
Paul A. Ainsworth has served as Vice President, Chief Financial Officer and Secretary of the Company since 2018. Mr. Ainsworth has over twenty years of professional finance and accounting experience in manufacturing operations and other industries. From 2014 until he joined the Company, Mr. Ainsworth served as the Chief Financial Officer of Precision Holding LLC, an engineering group providing precision machining services to the oil and gas, rail, armaments, and heavy-duty engine sectors. Prior to his role at Precision Holding LLC, Mr. Ainsworth was the Chief Financial Officer and President of MD SolarSciences Corp., a manufacturer of luxury skincare products. Mr. Ainsworth has also served as Vice President of Corporate Development at HomeServe PLC, a public marketer of consumer warranty products, and as an Investment Director at Barclays Bank PLC. Mr. Ainsworth spent nearly 10 years as a Senior Manager and Director of Arthur Andersen LLP. Ainsworth earned his B.S. in Molecular Biology and Biochemistry from Durham University in Durham, United Kingdom in 1992 and became a Chartered Accountant, the British equivalent of a CPA, in 1996. In 1998 he earned his Securities and Investments Diploma from the Securities Institute, the British equivalent of a CFA, in 1999 he earned his Advanced Corporate Finance Diploma from INSEAD, and was awarded the Business and Finance Professional qualification in 2019. He has been a member of the AICPA since 2013.
Item 11. EXECUTIVE COMPENSATION
EXECUTIVE SUMMARY COMPENSATION TABLE
The Credit Agreement as amended provides forfollowing table summarizes the following:
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Definitions under the Credit Agreement as amended are as follows:
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Outstanding funded revolving debt was $800,000 as of December 28, 2019 compared to $2,200,000 as of December 29, 2018. The highest balance outstanding during 2019Company’s principal executive officer and 2018 was $3,700,000 and $9,800,000 respectively. Average outstanding funded debt was $313,000 and $6,058,000its other named executive officers for 2019 and 2018, respectively. At
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December 28, 2019, the Company had outstanding letters of credit (LOC) totaling $5,620,000. At2018. The amounts shown include 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 ofcompensation for services to the Company and this situation is expectedits subsidiaries in all capacities.
Name and | Stock | Option | All Other | |||||||||||||||||||||||||
Principal Position | Year | Salary | Bonus | Awards (1) | Awards (2) | Compensation (3) | Total | |||||||||||||||||||||
James G. Gidwitz | 2019 | $ | 602,500 | 75,000 | - | 645,587 | 27,731 | $ | 1,350,818 | |||||||||||||||||||
Chairman and Chief | 2018 | 595,500 | - | - | - | 53,941 | 649,441 | |||||||||||||||||||||
Executive Officer | ||||||||||||||||||||||||||||
Ryan M. Sullivan | 2019 | 334,077 | 170,000 | 1,388,050 | 645,587 | 37,290 | 2,575,004 | |||||||||||||||||||||
President and Chief | 2018 | 168,541 | 138,462 | - | - | 51,669 | 358,672 | |||||||||||||||||||||
Operating Officer | ||||||||||||||||||||||||||||
Paul A. Ainsworth | 2019 | 292,500 | 85,000 | - | 239,181 | 25,774 | 642,455 | |||||||||||||||||||||
Vice President and | 2018 | 60,741 | 39,462 | - | - | 1,500 | 101,703 | |||||||||||||||||||||
Chief Financial Officer |
(1) | For Mr. Sullivan, represents the grant date fair value of 85,000 units of Phantom Equity granted under the VCIP. Refer to footnote 22 ‘Fair Value Measurement’ to the financial statements included in Item 8 of this Annual Report regarding the assumptions made in the valuation of such units of Phantom Equity. |
(2) | For each of Mr. Gidwitz and Mr. Sullivan, represents the grant date fair value of 85,000 units of Phantom Equity Appreciation Rights granted under the VCIP. For Mr. Ainsworth, represents the grant date fair value of 34,000 units of Phantom Equity Appreciation Rights granted under the VCIP. Refer to footnote 22 ‘Fair Value Measurement’ to the financial statements included in Item 8 of this Annual Report regarding the assumptions made in the valuation of such units of Phantom Equity Appreciation Rights. |
(3) | All Other Compensation includes other compensation not required to be included in any other column. The items comprised by these totals are set forth in the following table: |
Name | Year | Contributions to 401(k) Plan | Contributions to Supplemental Profit Sharing Plan (1) | Company Provided Auto or Auto Allowance (2) | Total | ||||||||||
James G. Gidwitz | 2019 | $ | 11,200 | 16,531 | - | 27,731 | |||||||||
2018 | 8,250 | 13,200 | $ | 32,491 | 53,941 | ||||||||||
Ryan M. Sullivan | 2019 | 11,200 | 11,690 | 14,400 | 37,290 | ||||||||||
2018 | - | 43,269 | 8,400 | 51,669 | |||||||||||
Paul A. Ainsworth | 2019 | 11,200 | 5,874 | 8,700 | 25,774 | ||||||||||
2018 | - | - | 1,500 | 1,500 |
(1) | The contributions made to Mr. Sullivan of $43,269 relate to the 2018 year but were paid into the Supplemental Profit Sharing Plan in March 2019 |
(2) | The amounts paid to Mr. Gidwitz represent payments to him from which he, in turn, reimbursed the Company for the annual amount expended for the leased cars, and, the 2018, the amount includes a gross-up for taxes of $14,393. |
NARRATIVE DISCLOSURE OF EXECUTIVE COMPENSATION
Compensation Committee Governance and Compensation Philosophy
The Compensation Committee makes recommendations to continuethe Board concerning compensation for the foreseeable future.named executive officers and determines compensation for other officers. The Company was notCompensation Committee also oversees benefit plans in compliance withwhich the Fixed Coverage Charge Ratio as of December 28, 2019. The lender provided a waiver of the covenant violation for the period ended December 28, 2019.named executive officers participate.
The Company believes that executive compensation should be closely linked to corporate performance. Accordingly, in years in which performance goals are achieved or exceeded, executive compensation should be higher than in years in which the performance is below expectations. At the same time, the Compensation Committee is cognizant of its existing cash balance, anticipated cash flowneed to offer compensation that is competitive. By providing the opportunity for compensation that is comparable to the levels offered by other similarly situated companies, the Company is able to attract and retain key executives. The Compensation Committee regularly reviews the Company’s compensation programs to ensure that pay levels and incentive opportunities are competitive and reflect the performance of the Company. The Committee periodically engages an independent compensation consulting firm to assist it in determining the competitiveness of the Company’s overall compensation structure. Compensation is reviewed from operationsa base salary standpoint as well as considering the total compensation package received by each executive. A written report of the conclusions of the independent compensation consulting firm is provided to management and borrowings available under the Credit Agreement will be sufficientCompensation Committee. In years that compensation is not reviewed by an independent compensation consultant, the Compensation Committee tends to cover expected cash needs, including planned capital expenditures,consider the consumer price index as a benchmark for base salary increases.
Compensation Program Components
To achieve its compensation goals, the executive compensation program consists primarily of the following components:
· | base salary; |
· | short term cash bonus; |
· | long term value creation plan; |
· | defined contribution profit sharing plan; and |
· | perquisites and other benefits. |
All components are reviewed annually, individually and in the aggregate, considering corporate performance and individual initiative and performance. While each component is discussed in more detail below, the Compensation Committee considers base salaries commensurate with those paid by companies of similar size and complexity, while providing the named executive officers with the ability to receive a significant portion of their total compensation through the Company’s bonus program, which is contingent on meeting corporate and personal performance goals related to the Company’s operations. This places a large percentage of their compensation at risk while more closely aligning their interests with the interests of the Company’s stockholders. The employee benefits and perquisites offered by the Company have generally been established in response to competitive offerings and also with the goal of enabling the executives to focus on their job duties. As noted above, the Compensation Committee considers the written report from the independent compensation consulting firm in years when a formal review is performed although the recommendations of the Chief Executive Officer and the Compensation Committee’s own discretion are the primary considerations in establishing both the base salaries and total compensation packages for the next twelve months. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.executives.
6. COMMITMENTS AND CONTINGENCIESBase Salaries
Base salaries are used to provide annual cash income to executives to compensate them for services rendered during the fiscal year. The Compensation Committee establishes salaries annually based on a review of each officer’s individual responsibilities, performance and through comparisons with companies of similar size and complexity. Officer salaries are typically reviewed and adjusted each year at the Compensation Committee’s meeting in either March or May. The Compensation Committee awarded salary increases of $15,000 to the Chief Executive Officer, $20,000 to the Chief Operating Officer and $15,000 to the Chief Financial Officer, all with effect from July 1, 2019. The last independent compensation review commissioned by the Committee was delivered to the Company in April 2019 and included a formal review of the base salaries and total compensation levels of three management personnel at the Company.
Cash Bonuses
The Companyannual bonus program is involved in litigation matters relatedintended to its business. Inprovide an opportunity to receive additional cash compensation but only if it is earned through achievement of specified performance goals. At the beginning of each year, the Compensation Committee establishes the annual target goals for earnings and return on net investment considering the Company’s opinion, none of these proceedings, when concluded, will have a material adverse effect onannual business plan and the Company’s consolidated resultsprior year’s performance. In this context, “return on net investment” is defined as earnings before interest and income taxes as a percentage of operations, cash flows or financial condition as the Company has established adequate accrualssum of the average shareholders’ equity plus the average funded debt for matters that are probablethe year. Other Company-wide goals and estimable.personal goals may also be considered to the extent these goals further the objectives of the Company. The Company does not accrue estimated future legal costsCommittee relies primarily on mathematical formulae in calculating the portion of the bonuses to be granted related to the defensegoals established for earnings and return on net investment. The level of achievement of personal goals, if considered, is more subjective and is often based on the successful achievement of certain transactions or other goals which may be measured by the Committee on a discretionary, non-quantifiable basis. The Committee also considers the Company’s liquidity and capital resources. The Committee believes that these matters but rather expenses legal costs as incurred. Also see Note 2 for discussionperformance measures serve to align the interests of litigation settlement regardingexecutives with the Pueblo sand and gravel lease.
7. SHAREHOLDERS’ EQUITY
Four hundred thousand sharesinterests of preferred stock ($.50 par value) are authorized and unissued.stockholders.
Under the 2010 Non-Employee Directors Stock Plan (the “Plan”)bonus program effective for 2019, the Company reserved 150,000 treasury shares representing the maximum numberbonus criteria were weighted as follows: earnings goal – 60%; return on net investment goal – 40%. The three executives were eligible to earn bonus awards as a percentage of shares allowed to be granted to non-employee directors in lieutheir base salaries as follows:
Name | Threshold | Target | Maximum | |||||||||
James G. Gidwitz | 30 | % | 60 | % | 120 | % | ||||||
Ryan M. Sullivan | 30 | % | 60 | % | 120 | % | ||||||
Paul A. Ainsworth | 30 | % | 60 | % | 120 | % |
To illustrate hypothetically by way of example, assuming achievement of the base director retainer fee. The Company issuedthreshold level for the earnings goal and target level on the net investment goal, Mr. Gidwitz’ bonus would be calculated as follows: 30% x 60%, or 18% awarded for the earnings performance and 60% x 40%, or 24%, for the net investment goal. This would yield a total award of 16,998 shares to the six eligible board members effective December 13,42% of Mr. Gidwitz’s 2019 as partial payment for their 2020 retainer fee. 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.
8. EARNINGS PER SHAREbase salary.
The Company does notCommittee’s policy and belief is that eligible employees should have any common stock equivalents, warrantsa reasonable likelihood of achieving the target level of performance such that, over time, the bonuses paid should be at or other convertible securities outstanding; therefore, there are no differences betweennear the calculation of basictarget level. In early 2020, the Committee reviewed the Company’s performance against the established targets for earnings and diluted EPS for the reported fiscal years 2019 or 2018.
9. RENTAL EXPENSE, LEASES AND COMMITMENTS
The Company adopted ASU No. 2016-02 Leases (Topic 842)percentage return on December 30, 2018 (the beginning of fiscal 2019), resulting innet investment for the recognition of operating right-of-use assets of $5,353,000prior year and operating lease liabilities of $5,427,000. The Company has entered into lease arrangements for office space, manufacturing facilities, water rightsconcluded that the return on net investment goal 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 leasesearnings goal targets were not material as of December 28, 2019 or for the year ended December 28, 2019. The following table displays the undiscounted cash flows
36
related to operating leases as of December 28, 2019, along with a reconciliation to the discounted amount recorded on the December 28, 2019 Consolidated Balance Sheet (amounts in thousands):
|
|
|
|
|
|
| OPERATING |
| |
|
| LEASE |
| |
|
| LIABILITIES |
| |
2020 |
| $ | 1,402 |
|
2021 |
|
| 1,389 |
|
2022 |
|
| 1,307 |
|
2023 |
|
| 761 |
|
2024 |
|
| 255 |
|
Thereafter |
|
| 655 |
|
Total lease payments |
|
| 5,769 |
|
Less: interest |
|
| (608) |
|
Present value of operating lease liabilities |
| $ | 5,161 |
|
Short-term lease cost represents the Company’s cost with respect to leases with a duration of 12 months or less and are not reflected on the Company’s Consolidated Balance Sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For the year ended December 28, 2019 operating lease cost was $1,979,000, including $623,000 of short-term lease costs.
New leases entered into during the year ended December 28, 2019 resulted in the recognition of operating right-of-use assets and lease liabilities of $665,000 and $572,000, respectively. At December 28, 2019 the weighted-average remaining lease term and discount rate for operating leases was 4.65 years and 6.02%, respectively.
The commitments include amounts expected to be reimbursed to the Company by related party tenants as discussed in Note 13. These related party amounts for 2020 through 2024 are as follows: 2020 – $67,000; 2021 – $68,000; 2022 – $69,000; 2023 – $70,000 and 2024 - $71,000.
10. RETIREMENT PLANS
met. As discussed in Note 1, the Company maintains a defined contribution retirement benefit plan for eligible employees. Total plan expenses charged to continuing operations were $945,000 and $951,000 in 2019 and 2018, respectively.
11. CURRENT ECONOMIC CONDITIONS
The markets for products manufactured or fabricated by the HVAC and Door segments are expected to remain fairly constant compared with the 2019 levels although sales of fan coils in the HVAC segment are anticipated to grow as construction spending continues to increase during 2020. While general economic indicators are favorable for growth there are significant uncertainties around global trade and public health, particularly with COVID-19 impact uncertainties, which may adversely impact 2020 sales.
As has historically been the case, sales of all segments, other than the Door segment, are influenced by weather conditions.
12. INCOME TAXES
Income taxes are accounted forcalculated under the asset and liability method which requires deferred income taxesformula, the Committee awarded no bonus 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
37
negative evidence, it is “more likely than not” (greater than a 50% likelihood) that someMr. Gidwitz, Mr. Sullivan or all of the net deferred tax assets will not be realized.
The (benefit) provision for income taxes is summarized as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
| 2019 |
| 2018 |
| ||
Federal: Current |
| $ | (66) |
| $ | (387) |
|
Deferred |
|
| (3,449) |
|
| (1,454) |
|
State: Current |
|
| 3 |
|
| 1 |
|
Deferred |
|
| (804) |
|
| (345) |
|
|
| $ | (4,316) |
| $ | (2,185) |
|
The benefit for income taxes for 2019 and 2018 included a benefit of $5,396,000 and $2,500,000 for continuing operations and a provision of $1,080,000 and $315,000, respectively, for discontinued operations.
The percentage effect of an item on the statutory tax rate in a given year will fluctuate based upon the magnitude of the pre-tax profit or loss in that year. The difference between the tax rate on income for financial statement purposes and the federal statutory tax rate was as follows:
|
|
|
|
|
|
|
| 2019 |
| 2018 |
|
Statutory tax rate |
| (21.0) | % | (21.0) | % |
Percentage depletion |
| — |
| (0.9) |
|
Non-deductible expenses |
| 0.1 |
| 0.4 |
|
Valuation allowance for tax assets |
| 0.5 |
| 1.2 |
|
State income taxes, net of federal benefit |
| (4.5) |
| (4.5) |
|
Other |
| 1.2 |
| (2.4) |
|
|
| (23.7) | % | (27.2) | % |
38
For financial statement purposes, deferred tax assets and liabilities are recorded at 25.74%, which represents a blend of the current statutory federal and states’ tax rates. The principal temporary differences and their related deferred taxes are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
| 2019 |
| 2018 |
| ||
Deferred tax assets |
|
|
|
|
|
|
|
Reserves for self-insured losses |
| $ | 417 |
| $ | 466 |
|
Accrued reclamation |
|
| 1,972 |
|
| 1,445 |
|
Unfunded supplemental profit sharing plan liability |
|
| 431 |
|
| 263 |
|
Asset valuation reserves |
|
| 439 |
|
| 685 |
|
Future state tax credits |
|
| 833 |
|
| 833 |
|
Net state operating loss carryforwards |
|
| 812 |
|
| 226 |
|
Federal AMT carryforward |
|
| 116 |
|
| 387 |
|
Federal NOL carryforward |
|
| 3,226 |
|
| 468 |
|
Other |
|
| 939 |
|
| 700 |
|
|
|
| 9,185 |
|
| 5,473 |
|
Deferred tax liabilities |
|
|
|
|
|
|
|
Depreciation |
|
| 833 |
|
| 1,200 |
|
Deferred development |
|
| — |
|
| 116 |
|
Other |
|
| 285 |
|
| 443 |
|
|
|
| 1,118 |
|
| 1,759 |
|
Net deferred tax asset before valuation allowance |
|
| 8,067 |
|
| 3,714 |
|
Valuation allowance |
|
|
|
|
|
|
|
Beginning balance |
|
| (300) |
|
| (200) |
|
(Increase) decrease during the period |
|
| (100) |
|
| (100) |
|
Ending Balance |
|
| (400) |
|
| (300) |
|
Net deferred tax asset |
| $ | 7,667 |
| $ | 3,414 |
|
The deduction of charitable contributions made during 2019 and 2018 was limited by the level of taxable income; however, no valuation reserve was established for the amount carried forward as the Company expects to be able to utilize these deductions in future years. The Tax Act repealed AMT and allows any existing AMT credit carryforwards to be used to offset regular tax obligations for a three year period beginning in 2018. Any AMT credit carryforwards that are not utilized to offset regular tax obligations will be 100 percent refundable by 2021. For State purposes, net operating losses can be carried forward for various periods for the states that the Company is required to file in. Of the $833,000 of state tax credits recorded by the Company at December 28, 2019 and December 29, 2018, $797,000 relates to California Enterprise Zone hiring credits earned in prior years. California has repealed the credit and limited its use to tax years through 2023. At December 28, 2019 and December 29, 2018 the Company carried a valuation reserve of $556,000 ($400,000 tax effected) and $430,000 ($300,000 tax effected), respectively, related to the carry forward of the California Enterprise Zone hiring credits due to the uncertainty that the Company will be able to utilize the credits prior to their expiration in 2023.
The realization of the deferred tax assets is subject to our ability to generate sufficient taxable income during the periods in which the temporary differences become realizable. In evaluating whether a valuation allowance is required, we consider all available positive and negative evidence, including prior operating results, the nature and reason of any losses, our forecast of future taxable income and the dates, if any, on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. The estimates are based on our best judgment at the time made based on current and projected circumstances and conditions.
As a result of the evaluation of the ability to realize our deferred tax assets as of December 28, 2019, we concluded that it was more likely than not that all of our deferred tax assets would be realized to the extent not reserved for by a valuation allowance.
The Company accounts for uncertainty in income taxes recognized in its financial statements by applying GAAP’s recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax
39
position taken or expected to be taken in a tax return. The financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold should initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon effective settlement with a taxing authority. There were no unrecognized tax benefits at either December 28, 2019 or December 29, 2018.
We file income tax returns in the United States at the Federal level and with various state jurisdictions. Federal and state income tax returns are subject to examination based upon the statute of limitations in effect for the various jurisdictions.
13. RELATED PARTY TRANSACTIONS
A director of the Company is a partner in a law firm engaged to represent the Company in various legal matters including the lawsuit filed by the Company related to the sand and gravel lease which settled in October 2019. See Note 2. For the year ending December 28, 2019 the Company paid the director’s firm $826,000 for services rendered. During fiscal 2018 the same director’s firm was paid $474,000 for services rendered.
The corporate office leases space in Chicago, Illinois that is shared with another organization related to the Company’s principal shareholders. Each of the organizations pays its pro-rata share of rent and other expenses based on a square footage allocation. See Note 9 for additional discussion. Furthermore, the Company purchases certain insurance together with another company controlled by the Company’s principal shareholders to minimize insurance costs. Allocation of the expense of the program is either provided by the underwriter or based upon a formula that considers, among other things, sales levels, loss exposure and claim experience. Claims under the self-insured portion of the policies are charged directly to the incurring party. Amounts receivable from related organizations at December 28, 2019 and December 29, 2018 were $13,000 and $28,000, respectively.
14. UNAUDITED QUARTERLY FINANCIAL DATA
The following table and footnotes provide summarized unaudited fiscal quarterly financial data for 2019 and 2018 (amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
| First |
| Second |
| Third |
| Fourth |
| ||||
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
| $ | 22,528 |
| $ | 25,257 |
| $ | 31,987 |
| $ | 33,504 |
|
Gross profit |
|
| 4,681 |
|
| 3,722 |
|
| 7,535 |
|
| 8,615 |
|
Depreciation, depletion and amortization |
|
| 519 |
|
| 254 |
|
| 597 |
|
| 592 |
|
Net income (loss) |
|
| 13,322 |
|
| (4,836) |
|
| (20,284) |
|
| (2,100) |
|
Basic and diluted income (loss) per share |
|
| 7.80 |
|
| (2.82) |
|
| (11.85) |
|
| (1.23) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
| First |
| Second |
| Third |
| Fourth |
| ||||
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
| $ | 23,410 |
| $ | 25,557 |
| $ | 23,965 |
| $ | 27,955 |
|
Gross profit |
|
| 5,006 |
|
| 5,974 |
|
| 5,225 |
|
| 6,649 |
|
Depreciation, depletion and amortization |
|
| 405 |
|
| 405 |
|
| 393 |
|
| 269 |
|
Net (loss) income |
|
| (6,193) |
|
| 2,113 |
|
| (1,236) |
|
| (540) |
|
Basic and diluted (loss) income per share |
|
| (3.65) |
|
| 1.24 |
|
| (0.73) |
|
| (0.32) |
|
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total for the year.
40
15. INDUSTRY SEGMENT INFORMATION
In the first quarter of 2019, the Company reviewed its reporting structure in connection with the sale of the TMC ready-mix and Daniels Sand operating assets. Reporting segments were modified to conform to the way management measures and evaluates Company performance post-sale. The Company operates primarily in the Building Supplies industry group and has identified three reporting segments within this industry group. 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 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). During the quarter ended September 28, 2019 the Company determined to cease mining operations at its Pikeview aggregates quarry, which is part of the Construction Materials segment, as continuing mining operations was no longer in the best interest of the consolidated portfolio. During the fourth quarter of 2019, the Company purchased a formerly leased mining property in Pueblo, Colorado as part of a legal settlement. See Note 2 for further discussion of the legal settlement. In conjunction with both of these events, the Company recognized charges to record additional asset retirement liabilities and impairment of related assets associated with the properties. See Note 20 for further discussion. The Company expects an outside party to complete most of the remaining reclamation over approximately the next five years.
The Company evaluates the performance of its segments and allocates resources to them based on a number of criteria including operating income, return on investment and other strategic objectives. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest, other income or loss or income taxes.
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
The following table presents information about reported segments for the fiscal years 2019 and 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 |
|
|
| ||||||
Year Ended December 28, 2019 |
| HVAC |
| Doors |
| Materials |
| Corporate (a) |
| Sale |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
| $ | 82,149 |
| $ | 24,369 |
| $ | 6,751 |
| $ | 7 |
|
|
|
| $ | 113,276 |
|
Depreciation, depletion and amortization |
|
| 1,272 |
|
| 285 |
|
| 321 |
|
| 84 |
|
|
|
|
| 1,962 |
|
Operating income (loss) |
|
| 948 |
|
| 2,174 |
|
| (18,492) |
|
| (7,475) |
|
|
|
|
| (22,845) |
|
Segment assets |
|
| 50,822 |
|
| 14,248 |
|
| 10,463 |
|
| 13,554 |
|
| 896 |
|
| 89,983 |
|
Capital expenditures |
|
| 342 |
|
| 79 |
|
| 2,257 |
|
| 15 |
|
|
|
|
| 2,693 |
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
| Construction |
| Unallocated |
| Held for |
|
|
| ||||||
Year Ended December 29, 2018 |
| HVAC |
| Doors |
| Materials |
| Corporate (a) |
| Sale |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
| $ | 73,478 |
| $ | 20,158 |
| $ | 7,150 |
| $ | 101 |
|
|
|
| $ | 100,887 |
|
Depreciation, depletion and amortization |
|
| 949 |
|
| 171 |
|
| 301 |
|
| 51 |
|
|
|
|
| 1,472 |
|
Operating income (loss) |
|
| 931 |
|
| 2,233 |
|
| (7,878) |
|
| (4,050) |
|
|
|
|
| (8,764) |
|
Segment assets |
|
| 29,003 |
|
| 8,003 |
|
| 11,315 |
|
| 3,346 |
|
| 24,036 |
|
| 75,703 |
|
Capital expenditures |
|
| 1,064 |
|
| 119 |
|
| 181 |
|
| 45 |
|
|
|
|
| 1,409 |
|
|
|
16. WRITE OFF OF DEFERRED DEVELOPMENT
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 an 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 half of 2018, a total of $6,840,000.
As of December 28, 2019 and December 29, 2018 the 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.
17. SETTLEMENT RECEIPT
As previously disclosed, on January 15, 2019, the Company reached an amicable resolution to a business dispute by way of a settlement agreement. Pursuant to the settlement agreement, the Company received $15,000,000. The other party and the Company further agreed to set up a joint escrow account to support certain conditions in the agreement. The Company’s contribution to the escrow account was $218,000. The Settlement Agreement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties.
18. ACQUISITIONSMr. Ainsworth.
During the year, ended December 28, 2019 the Company completed three different asset purchase transactions, acquiring the assetsCommittee approved discretionary bonuses relating to exceptional personal performance of four operating businesses. On May 20, 2019 the Company acquired the assets of Serenity$75,000 to Mr. Gidwitz, $170,000 to Mr. Sullivan and Fastrac, both based in Colorado Springs, Colorado, using available cash reserves. Serenity is a proprietary sliding door system providing superior sound attenuation, sold primarily into healthcare markets across the country. Fastrac is a leading supplier of commercial doors and hardware$85,000 to healthcare and hospitality customers across the country. Serenity continues to operate as a stand-alone business while Fastrac operations were consolidated with the Company’s existing portfolio company, McKinney Door and Hardware, which has similar operations. The results of the acquisition of Serenity and Fastrac are included in the Company’s Consolidated Financial Statements from the date of acquisition. Both companies are included in the Door segment for reporting purposes.Mr. Ainsworth.
On June 3, 2019 the Company acquired the assets of American Wheatley HVAC and Global Flow Products (together “GFP”), based in Broken Arrow, Oklahoma using available cash reserves. GFP sells American Wheatley HVAC branded products, including a broad line of ASME pressure vessels, custom fabricated products, valves, strainers and other hydronic accessories to commercial HVAC customers. The results of the acquisition of GFP are included in the Company’s Consolidated Financial Statements from the date of acquisition. GFP is included in the HVAC segment for reporting purposes.
42
These two transactions are not considered material individually. However, they are considered material in the aggregate. The total purchase price paid for these transactions was $12,855,000, which included a traditional post-closing working capital adjustment for $608,000, with approximately $12,163,000 paid in cash at closing. The Company will pay additional contingent consideration, if earned, in the form of an earn out amount pursuant to the terms of earn out agreements in amounts of up to $4,300,000, the payment of which is subject to certain conditions and the successful achievement of gross profit growth targets for the acquired businesses following the closing of the transactions over a period of twenty-four (24) to thirty-six (36) months. Approximately $1,300,000 has been accrued based on estimated fair values of these earn out agreements. We acquired trade receivables of $1,916,000, inventory of $1,745,000, property and equipment of $2,530,000, other assets of $256,000, intangibles of $4,000,000 and goodwill of $3,614,000 and retained liabilities of $1,205,000. The current value assigned to trade receivables represents fair market value. The working capital adjustment has been finalized on both transactions and final valuation of the fair value of assets and liabilities including receivables, inventory, fixed assets, intangibles, goodwill and accounts payable has been recorded as of December 28, 2019. Transaction costs included in Selling and administrative expenses on the Consolidated Statements of Operations for the year ended December 28, 2019 was $1,229,000.
On June 17, 2019 the Company acquired the assets of InOvate, a supplier of commercial and residential dryer and HVAC venting systems and components. The total purchase price for the net assets acquired was $11,206,000, including a post-closing working capital adjustment of $84,000, with approximately $11,050,000 paid in cash at closing, using available cash reserves. The Company will pay additional contingent consideration, if earned, in the form of an earn out amount pursuant to the terms of an earn out agreement in an amount of up to $1,250,000, the payment of which is subject to certain conditions and the successful achievement of gross profit growth targets for the acquired business following the closing of the transaction over a period of twelve (12) months. Approximately $240,000 has been accrued based on an estimated fair value of this earn out agreement. The results of the acquisition of InOvate are included in the Company’s Consolidated Financial Statements from the date of acquisition. Transaction costs included in Selling and administrative expense on the Consolidated Statement of Operations for the year ended December 28, 2019 were $536,000.
In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on their fair values. The working capital adjustment was finalized in the fourth quarter of 2019. The condensed balance sheet of InOvate at the acquisition date was as follows:
|
|
|
|
Purchase price |
| $ | 11,206 |
|
|
|
|
Accounts receivable, net |
|
| 1,448 |
Other tangible assets |
|
| 984 |
Intangible assets |
|
| 8,808 |
Right of use asset |
|
| 387 |
Accounts payable and accrued expenses |
|
| (1,353) |
Right of use liability |
|
| (387) |
Total identifiable net assets |
|
| 9,887 |
Goodwill |
| $ | 1,319 |
Accounts receivable are valued at anticipated fair market value and are not materially different from contracted value.
The following table presents selected unaudited pro forma information for the Company assuming the acquisition of InOvate had occurred as of December 31, 2017. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.
|
|
|
|
|
|
|
|
| Year Ended | ||||
|
| DECEMBER 28, |
| DECEMBER 29, | ||
|
| 2019 |
| 2018 | ||
Revenue |
| $ | 120,439 |
| $ | 114,535 |
Pre-tax loss from continuing operations |
| $ | (21,505) |
| $ | (7,127) |
Basic and diluted loss per share: |
|
|
|
|
|
|
Loss from continuing operations |
| $ | (9.59) |
| $ | (3.04) |
Average shares outstanding |
|
| 1,711 |
|
| 1,697 |
43
Per ASC 805, the chart below summarizes the comparative financial statements for revenue and earnings as if all the acquisitions occurred at the beginning of the respective period.
|
|
|
|
|
|
|
|
| Year Ended | ||||
|
| DECEMBER 28, |
| DECEMBER 29, | ||
|
| 2019 |
| 2018 | ||
Revenue |
| $ | 129,615 |
| $ | 126,613 |
Pre-tax loss from continuing operations |
| $ | (19,325) |
| $ | (4,838) |
Revenue of the acquired companies’ increased total revenue by 18.5% for the year ended 2019. The impact of the acquired companies on earnings for the current year was not material. Total goodwill added to the Consolidated Balance Sheet due to acquisition activity during fiscal 2019 was $4,932,000. The goodwill is attributable to the skills and technical talent of the established work force at each of the acquired businesses and synergies expected to be achieved from integrating the individual acquired business operations in to the Company’s existing consolidated business portfolio. This amount is attributable to the HVAC and Door segments in the amounts of $2,734,000 and $2,198,000, respectively. Goodwill that is deductible for tax purposes, over the next fifteen years, is $3,092,000. The goodwill amounts were finalized in the fourth quarter of 2019.
19. DISPOSITIONS OF ASSETS
On February 1, 2019, the Company and certain of its subsidiaries sold substantially all of the real property, tangible personal property and executory contracts of TMC’s ready-mix business and the operations of Daniels Sand Company (Daniels) to Aggregate Industries — WCR, Inc. (the Buyer), a Colorado corporation, for $27,129,000. The purchase price was paid to the Company on February 1, 2019 less certain amounts to be held in escrow, as provided in the Asset Purchase Agreement among the Company parties and the Buyer (Purchase Agreement), to secure the Company’s obligations to pay its working capital adjustment and indemnification obligations under the Purchase Agreement. The escrow also retained amounts to be held pending the subdivision of certain real property to be sold to the Buyer at a subsequent date as included in the Purchase Agreement. Combined escrow amounts of $2,049,000 were included in Other current assets in the Consolidated Balance Sheet at December 28, 2019.
The Company retained the aggregates operations and retail building materials business of TMC and all related assets and liabilities. These operations include the Pikeview quarry business located in Colorado Springs (see Note 20), the aggregates mining business located in Pueblo, the sand and gravel mining business located in Fremont County, and the retail building materials business at sites located in Colorado Springs and Pueblo.
In the quarter ended March 30, 2019, the Company recorded a $6,508,000 pre-tax gain on the sale of TMC assets. During the quarter ending June 29, 2019 the working capital adjustment was finalized and resulted in the Company paying a net $1,248,000 to the Buyer. This adjustment, plus an adjustment to transaction fees, reduced the pre-tax gain on the sale to $5,283,000. The operations of the ready-mix and Daniels Sand businesses were classified as discontinued
operations and assets held for sale for all periods presented. General corporate overhead charges were not allocated to discontinued operations. Revenue, expenses and pre-tax income reclassified to discontinued operations were as follows (amounts in thousands):
|
|
|
|
|
|
|
| Year Ended |
| ||||
| DECEMBER 28, |
| DECEMBER 29, |
| ||
| 2019 |
| 2018 |
| ||
Revenue | $ | 4,058 |
| $ | 63,096 |
|
Costs and expenses |
| 3,900 |
|
| 58,143 |
|
Depreciation, depletion and amortization |
| 578 |
|
| 1,161 |
|
Selling and administrative |
| 304 |
|
| 3,550 |
|
Gain on sales of equipment |
| - |
|
| 919 |
|
Gain on sale of assets |
| 5,283 |
|
| - |
|
Pre-tax income | $ | 4,559 |
| $ | 1,161 |
|
44
The results of discontinued operations are summarized as follows:
|
|
|
|
|
|
| Year Ended | ||||
| DECEMBER 28, |
| DECEMBER 29, | ||
| 2019 |
| 2018 | ||
Operating (loss) income | $ | (724) |
| $ | 1,161 |
Gain on sale of assets |
| 5,283 |
|
| — |
Income tax provision |
| (1,080) |
|
| (315) |
Income from discontinued operations | $ | 3,479 |
| $ | 846 |
The assets and liabilities held for sale related to TMC’s ready-mix and Daniels Sand businesses were as follows:
|
|
|
|
|
|
|
| DECEMBER 28, |
| DECEMBER 29, |
| ||
| 2019 |
| 2018 |
| ||
Accounts receivable, net | $ | — |
| $ | 9,054 |
|
Inventory |
| — |
|
| 1,914 |
|
Property, plant and equipment, net |
| — |
|
| 6,741 |
|
Other assets |
| — |
|
| 6,327 |
|
Total assets held for sale | $ | — |
| $ | 24,036 |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses | $ |
|
| $ | 3,800 |
|
Other long-term liabilities |
| — |
|
| 292 |
|
Total liabilities held for sale | $ | — |
| $ | 4,092 |
|
20. ARO ASSET/LIABILITY
During the third quarter of fiscal year ended December 28, 2019, the Company made a strategic decision to cease mining operations at its Pikeview quarry in Colorado Springs, Colorado, as it was no longer in the best economic interest of the consolidated portfolio to continue operations. The Company has a legal obligation to complete reclamation of the property as required by its mining permits with the State of Colorado. GAAP requires the recognition of a liability in the period in which it is incurred if a reasonable estimate of fair value can be made. Prior to the cessation of mining operations, reclamation was performed concurrently by backfilling mined areas with overfill from current mining. The reclamation costs were reported as operating expense as the Company could not reasonably estimate the ultimate liability of final reclamation. Once the Company ceased mining operations and could reasonably estimate the cost of final reclamation, an asset retirement obligation (ARO), was recorded as of September 29, 2019 and revised at December 28, 2019. The ARO liability of $20,804,000 represents the estimated fair value of total reclamation costs using Level 3 inputs. The fair value of the liability was calculated by applying an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate. The related ARO asset was considered 100% impaired as total carrying value including future costs to maintain and dispose of the asset will exceed the fair value. Therefore, the Company also recorded an impairment charge of $20,217,000 related to the asset.
In the fourth quarter of 2019, the Company settled its litigation with Valco regarding the Transit Mix of Pueblo (TMOP) mining operation. See Note 2 for discussion of the settlement. As part of the settlement agreement, the Company purchased the land it previously leased from Valco. Once the Company took possession of the property with no plan to resume mining it was able to reasonably estimate the final cost of reclamation. A valuation was completed and resulted in the Company recording a $6,660,000 ARO liability and offsetting ARO asset during the fourth quarter of 2019. The asset was considered fully impaired as its carrying value exceeded the estimated undiscounted future cash inflows. The Company had previously recorded a $4,430,000 accrual for reclamation at TMOP which was eliminated. Therefore, the net impact of the impairment on the Consolidated Statement of Operations for the year ended December 28, 2019 was $2,230,000.
45
The following table details activity related to the Company’s ARO liabilities for fiscal years 2019 and 2018 (amounts in thousands):
|
|
|
|
|
|
|
| DECEMBER 28, |
| DECEMBER 29, |
| ||
| 2019 |
| 2018 |
| ||
Beginning balance | $ | 6,269 |
| $ | 6,166 |
|
Obligations incurred |
| 21,455 |
|
| 103 |
|
Accretion expense |
| 189 |
|
| - |
|
Ending balance |
| 27,913 |
|
| 6,269 |
|
Less current portion |
| 4,200 |
|
| 1,017 |
|
Long-term portion | $ | 23,713 |
| $ | 5,252 |
|
In connection with the Company’s decision to cease mining activities, management performed a review of remaining assets to determine which, if any, should be classified as assets held for sale (AHS). Based on this review a total of $896,000, previously reported as Machinery and equipment on the Consolidated Balance Sheet, has been reclassified as AHS as of December 28, 2019. The net book value of the AHS was considered to be at or below fair market value, thus there was no impact to the Consolidated Statement of Operations from the reclassification.
21. VALUE CREATION INCENTIVE PLANLong Term Value Creation Plan
The Company adopted the Continental Materials Corporation Value Creation Incentive Plan (VCIP)(“VCIP”) effective July 1, 2019. The VCIP is designed to attract and retain key management personnel by providing an incentive and reward for selected executive officers and employees of the Company. The VCIP involves only the payment of cash, not the issuance of common stock, based on appreciationvalue of the Phantom Equity or Phantom Equity Appreciation Rights (PE(“PE” or PEARs,“PEAR”s, respectively) of the defined business unit,Company, over a certain period of time. Fair value of the PE or PEAR awards was measured as of the balance sheet date presented. The awards vest over a period of four or five years and are payable over a three-year period following vesting. At December 28, 2019 total future compensation expense related to unvested awards yet to be recognized by
The Committee sets the entry valuation level for the PEARs, based on a combination of the average stock price for the Company was approximately $1,635,000. This expense is expected to be recognized over a weighted-average remaining vesting periodin the 30 days following the end of approximately 4.1 years.
The Company used the Black-Scholes option pricing model as its method for determining fairfiscal year and the enterprise value of the awards. The compensation expense related to the awards is recognized over the vesting period for each award. For the year ended December 28,Company’s future cash flows, conducted by an independent financial advisor annually.
With effect from July 1, 2019, the Company’s net loss included $204,000Committee awarded Phantom Equity Appreciation Rights with an entry price of stock-based compensation. The total liability related to the PE and PEAR awards was $496,000, which includes $292,000 from an acquisition recorded at the opening balance sheet date, and is included$15.56/unit as Long-term compensation on the Consolidated Balance Sheet as of December 28, 2019.follows:
Mr. Gidwitz 85,000 units with a five year ratable vesting period
Mr. Sullivan 85,000 units with a five year ratable vesting period
Mr. Ainsworth 34,000 units with a four year ratable vesting period
22. FAIR VALUE MEASUREMENTWith effect from July 1, 2019, the Committee awarded Phantom Equity as follows:
Mr. Sullivan 85,000 units with four year ratable vesting period
PEProfit Sharing Plan, Benefits and PEAR awards were recorded at fair value using the Black-Scholes option pricing model. There were no PE or PEAR appreciation awards at December 29, 2018. The following assumptions were used in determining the fair value of the award liability as of December 28, 2019:Perquisites
|
| |||
|
| |||
|
| |||
|
|
The following tablenamed executive officers participate in each of the benefit plans or arrangements that are made available to all salaried employees generally, including health club allowances, cell phone reimbursement, medical and dental benefits, disability insurance, and the profit sharing plan, which is qualified under Internal Revenue Code Section 401(k). The Compensation Committee considers all of these plans and benefits when reviewing total compensation of the named executive officers. With respect to life insurance, the named executive officers also receive coverage of three and a reconciliationhalf times their salaries to a maximum of $650,000. The premium associated with this coverage is added to the individual’s taxable wages. Life insurance in excess of those amounts is at the discretion of the employee and the associated premiums are paid by the employee. Prior to and including fiscal year 2018, any employee whose compensation is in excess of the amount eligible for the PECompany’s matching contribution to the profit sharing plan, as established by the Internal Revenue Service, participated in an unfunded supplemental profit sharing plan (the “Supplemental Plan”) as described in more detail below. As described below, the Supplemental Plan was ‘frozen’ to new credits in lieu of Company profit sharing contributions at the end of 2018, and PEAR liability measured at fair value using Level 3 unobservable inputs (in thousands):the Compensation Committee determined for fiscal year 2019 to replace such credits to the Supplemental Plan with an annually-determined, unfunded discretionary credit to the named executive officers’ accounts under the Company’s Deferred Compensation Plan (described below).
|
|
|
|
|
Balance at December 29, 2018 |
| $ | - |
|
Awards related to acquired companies |
|
| 300 |
|
Change due to vesting of awards granted |
|
| 331 |
|
Change in fair value measurement of liability |
|
| (135) |
|
Balance at December 28, 2019 |
| $ | 496 |
|
46
Contingent consideration was recorded at fair value usingnormal business hours when other forms of transportation were less available or convenient. Mr. Sullivan and Mr. Ainsworth received a Monte Carlo Simulation model. There was no contingent consideration liability at December 29, 2018. The following assumptions were usedcar allowance in determining the fair valuelieu of contingent consideration at December 28, 2019:a company-leased car.
|
| |||
|
|
The following table is a reconciliation forCompany has, on occasion, provided the contingent consideration liability measured at fair value using Level 3 unobservable inputs (in thousands):
|
|
|
|
|
Balance at December 29, 2018 |
| $ | - |
|
Contingent consideration granted with acquisitions |
|
| 1,540 |
|
Change in fair value measurement of liability |
|
| (58) |
|
Balance at December 28, 2019 |
| $ | 1,482 |
|
The ARO liabilitiesnamed executive officers with an insignificant amount of tax or legal services. During 2019, no such services were recorded at fair value using an expected present value technique. The following assumptions were used in determining the fair valueincurred by any of the ARO liabilities at December 28, 2019:
|
| |||
|
|
named officers. The Company does not provide any other perquisites to the named executive officers such as country club memberships or personal travel.
23. SUBSEQUENT EVENTStock Option and Long-Term Equity Plans
On February 18, 2020, Bee Street Holdings LLC (Bee Street), commenced an unsolicited tender offer for all outstanding shares of Common Stock of the Company (Common Stock)There are no equity compensation plans, whether approved by security holders or not, already owned by Bee Street. Bee Street is an entity controlled by James G. Gidwitz, our chairman and Chief Executive Officer, and other members of Mr. Gidwitz’ s family. As of February 17, 2020, Bee Street beneficially owned 1,027,171, or approximately 61.3%, of the outstanding shares of Common Stock. Bee Street is offering to purchase all outstanding shares of Common Stock that Bee Street does not already own for $9.50 per share, net to the seller in cash, without interest, subject to applicable withholding taxes. Additional information about the tender offer is available in Bee Street’s and the Company’s SEC filings, including the Company’s Schedule 14D-9 filed on March 3, 2020. The offer is subject to certain conditions set forth in Bee Street’s tender offer documents. Bee Street has stated that if it purchases shares of Common Stock in the tender offer such that it will own at least 90% of the issued and outstanding Common Stock, Bee Street (or its affiliate), intends to merge with the Company (the “Merger”). As a result of the Merger, each then issued and outstanding share of Common Stock (other than Common Stock held by Bee Street and held by stockholders who validly perfect their dissenters’ rights under the Delaware General Corporation Law) would be cancelled and converted into and represent the right to receive $9.50 per share.
47
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
Continental Materials Corporation
Chicago, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Continental Materials Corporationexisting as of December 28, 2019 related to the named executive officers. The Compensation Committee believes that equity compensation plans are not a necessary component of executive compensation at the present time due to the number of shares currently held by affiliates of the Company and the limited market liquidity for the Company’s Common Stock.
The Committee further believes that the implementation of the VCIP (noted above) provides a long term incentive for executive officers to be aligned with the shareholders of the Company.
Retirement Benefits
Profit Sharing Plan: The Company has a contributory profit sharing retirement plan qualified pursuant to Internal Revenue Code Section 401(k) for the benefit of qualifying employees, including the named executives. Company contributions, if any, are determined at the discretion of the Compensation Committee together with management after the review of all the relevant factors, primarily profitability, at year-end.
Unfunded Supplemental Profit Sharing Plan: The Company also maintains the Supplemental Plan for salaried employees which enables the Company to pay to any person whose contribution to the Profit Sharing Plan has been restricted as a result of the limitations imposed by Section 401 of the Internal Revenue Code, an amount equal to the difference between the amount the person would have received as Company matching contributions to his/her account under the Profit Sharing Plan had there been no limitations and the amount the person will actually receive under the Profit Sharing Plan giving effect to the limitations. Qualifying employees can elect to defer receipt of a portion of their compensation, which is treated as an unfunded obligation of the Company under the Plan.
The Supplemental Plan provides for the employees’ balances to be credited or charged with a gain or loss determined by applying the same rate of return to the deferred balances as the employees realized on their Profit Sharing Plan investments.
The Supplemental Plan is unfunded and amounts owed to the employees covered thereby are considered to be general obligations of the Company. The Supplemental Plan was ‘frozen’, and participants’ accounts ceased to accrue new credits in lieu of matching contributions from the Company, on December 31, 2018, but participants’ existing balances under the Supplemental Plan at the time of such freeze have continued and will continue to be credited or charged with gain or loss in reference to the participants’ respective deferred balances under their Profit Sharing Plan investments.
Deferred Compensation Plan: On January 1, 2019, the Company established a Deferred Compensation Plan for qualified employees that enables the Company to credit the participants’ deferred compensation account on a discretionary basis in accordance with Section 409A of the Internal Revenue Code and the regulations promulgated thereunder. In addition, qualifying employees can elect to defer receipt of a portion of their compensation, which is treated as an unfunded obligation of the Company under the Plan.
The Deferred Compensation Plan provides for the employees’ balances to be credited or charged with a gain or loss determined by applying the same rate of return to the deferred balances as the employees realized on their Profit Sharing Plan investments. The Deferred Compensation Plan is unfunded and amounts owed to the employees covered thereby are considered to be general obligations of the Company.
OUTSTANDING EQUITY AWARDS AT DECEMBER 28, 2019
Option awards | Stock awards | |||||||||||||||||||
Name | Number of securities underlying unexercised options (#) unexercisable (1) | Option exercise price ($) (2) | Option expiration date | Number of shares or units of stock that have not vested (#) (3) | Market value of shares of units of stock that have not vested ($) (4) | |||||||||||||||
James G. Gidwitz | 85,000 | $ | 15.56 | n/a | - | - | ||||||||||||||
Ryan M. Sullivan | 85,000 | $ | 15.56 | n/a | 85,000 | $ | 637,500 | |||||||||||||
Paul A. Ainsworth | 34,000 | $ | 15.56 | n/a | - | - |
(1) | For each named executive officer, awards reported are units of Phantom Equity Appreciation Rights (PEARs) under the VCIP. Mr. Gidwitz’s 85,000 units and Mr. Sullivan’s 85,000 units vest ratably over five years from the grant date (7/1/2019). Mr. Ainsworth’s 34,000 units vest ratably over four years from the grant date (7/1/2019). PEARs are not exercisable at the respective executive’s discretion but, instead, are payable over a three-year period following vesting. |
(2) | Represents the entry price for the respective award of PEARs under the VCIP. |
(3) | Mr. Sullivan’s awards reported are units of Phantom Equity under the VCIP and vest ratably over four years from the grant date (7/1/2019). |
(4) | Phantom Equity under the VCIP valued at a per-unit price equal to the closing price of $7.50 per share of Common Stock on December 28, 2019. |
Equity Compensation Plans
The Company has no equity compensation plans for its employees, whether approved by security holders or not, existing as of December 29, 2018, and2018; however effective December 30, 2010, the related consolidated statements of operations, shareholders' equity and cash flows for each2010 Non-Employee Directors Stock Plan was established after being approved by a majority of the years insecurity holders. The principal features of the two-year periodplan are described below.
11
DIRECTOR COMPENSATION
The table below summarizes the compensation paid by the Company to non-employee directors for the fiscal year ended December 28, 2019, and2019. The Company does not currently compensate the related notes and schedule listed in the Form 10-K index at Part IV, item 15 (a)2 (collectively referredBoard members except as discussed below.
Name (1) | Total Fees Earned or Paid in Cash (2) | Total Fees Earned or Paid in Stock (3) | Total | |||||||||
Thomas H. Carmody | 9,750 | 62,970 | $ | 72,720 | ||||||||
Ralph W. Gidwitz | 30,250 | 84,218 | 114,468 | |||||||||
Theodore R. Tetzlaff | 39,250 | 84,218 | 123,468 | |||||||||
Peter E. Thieriot | 40,000 | 84,218 | 124,218 | |||||||||
Darrell M. Trent | 39,250 | 84,218 | 123,468 | |||||||||
Steve Gidwitz | 30,250 | 84,218 | 114,468 | |||||||||
Scott Gidwitz | 30,250 | 84,218 | 114,468 |
(1) | James G. Gidwitz, Chief Executive Officer and Chairman of the Board, is not included in this table as he is an employee of the Company and receives no additional compensation for his service as director. Mr. Gidwitz’s compensation is shown in the above Executive Summary Compensation Table. |
(2) | None of the directors received perquisites or other personal benefits. |
(3) | Represents 3,000 shares at $20.99 per share issued February 7th, 2019 and 2,833 shares at $7.50 per share issued December 13th, 2019. |
The Board’s policy is to as the financial statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positionpay each director who is not an officer or employee of the Company asan annual retainer (as described below) plus the following fees:
· | $750 for each Board meeting attended; |
· | $750 for each committee meeting attended; |
· | $6,000 Audit Committee chair retainer fee; and |
· | $3,000 retainer fee for all other committee chairs. |
In December 2010, the holders of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for eachshares representing a majority of the yearsvoting power of the Common Stock gave their written consent to a resolution by the Company’s Board of Directors adopting the Company’s Non-Employee Director Stock Plan (the “Plan”), pursuant to which the non-employee directors of the Company receive their annual base retainer payment in the two-year period ended December 28, 2019, in conformity with accounting principles generally accepted inform of Common Stock, instead of cash. Notice of this resolution was sent to all shareholders by the United Statesmailing of America.
Basis for Opinion
These financial statements are the responsibilitya copy of the Company's management. Our responsibility is“Information Statement Pursuant to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulationsSection 14 of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BKD, LLP
We have served as the Company’s auditor since 2009.
Indianapolis, Indiana
March 23, 2020
48
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d‑15(e) under the Securities Exchange Act of 1934 and Regulation 14C and Schedule 14C Thereunder” together with a cover letter on December 10, 2010. The Plan, which became effective December 30th, 2010, reserved 150,000 treasury shares as amended (Exchange Act)the maximum number of shares that could be issued under the Plan.
In March 2019, the Compensation Committee approved a grant of 3,000 shares of Common Stock to each qualifying director for 2019 service. The grant date was set as February 7th, 2019. The fair market value of this grant, determined by reference to the closing price of the Common Stock as quoted on the NYSE American exchange as of February 7th, 2019, was $62,970.
In December 2019, the Compensation Committee approved an additional grant of 2,833 shares of Common Stock to each qualifying director for 2020 service. The grant date was set as December 13th, 2019. The fair market value of this grant, determined by reference to the closing price of the Common Stock as quoted on the NYSE American exchange as of December 28, 2019. The Chief Executive Officer13th, 2019, was $21,248. A total of 2 shares remain available for issuance under the Plan.
In December 2019 the Compensation Committee also approved an additional cash bonus of $25,000 to each qualifying director and Chief Financial Officer, based on that evaluation, concluded that our disclosure controls and procedures are effective and were reasonably designed to ensure that all material information relating to the Company (including its subsidiaries) requireda $50,000 annual cash supplemental retainer, to be disclosedpaid quarterly, commencing in our reports filed and submitted by the Company under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Commission.2020.
Management’s Annual Report on Internal Control Over Financial ReportingItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RESLATED STOCKHOLDER MATTERS
The Company’s managementfollowing information is responsible for establishingfurnished as to the Common Stock of the Company owned beneficially as of April 20, 2020 by (i) each director, (ii) the named executive officers, (iii) directors and maintaining an adequate systemnamed executive officers as a group, and (iv) persons that have reported beneficial ownership of internal control over financial reporting as defined in Rule 13a-15(f)more than 5% of the Common Stock.
Name and Address of Beneficial Owner | No. of Shares | Percent of Class (1) | ||||||||
Bee Street Holding LLC | 1,494,511 | (2) | 89.2 | % | ||||||
James G. Gidwitz | 1,494,511 | (3) | 89.2 | % | ||||||
Nancy Gidwitz | 1,494,511 | (3) | 89.2 | % | ||||||
Scott Gidwitz | 1,494,511 | (3) | 89.2 | % | ||||||
Steven B. Gidwitz | 1,494,511 | (3) | 89.2 | % | ||||||
Ralph W. Gidwitz | 1,494,511 | (3) | 89.2 | % | ||||||
Theodore R. Tetzlaff | 0 | 0.0 | % | |||||||
Paul Ainsworth | 0 | 0.0 | % | |||||||
Ryan Sullivan | 0 | 0.0 | % | |||||||
All directors and named officers as a group (includes 7 persons) | 1,494,511 | 89.2 | % |
(1) | Calculations are based on 1,675,484 shares of Common Stock outstanding as of April 20, 2020. |
(2) | Bee Street has pledged all of its shares of Common Stock on customary terms as security for its revolving credit facility with Wintrust Bank, N.A. |
(3) | Includes the 1,494,511 Shares owned by Bee Street. Beneficial ownership of such shares is disclaimed except to the extent of such person’s authority as a member of the board of managers of Bee Street, which authority and such reporting person’s capacity as a member of the board of managers is subject to the terms and provisions of the limited liability company agreement of Bee Street, as it may be amended from time to time. The board of managers of Bee Street has sole voting power and sole dispositive power with respect to the Shares which Bee Street owns. The members of the board of managers of Bee Street are James G. Gidwitz, Nancy Gidwitz, Ralph W. Gidwitz, Steven B. Gidwitz and Scott Gidwitz, none of whom has any individual voting power or dispositive power with respect to the Shares owned by Bee Street. |
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and 15d-15f underRelated Transactions
Bee Street, itself controlled by the Exchange Act. The Company’s internal control over financial reportingGidwitz Family, is designed to provide reasonable assurance regarding the reliabilityparent company of financial reportingthe Company and owns approximately 89.2% of the voting securities of the Company. As affiliates, Bee Street and the preparationCompany are insured under a joint program of financial statementsdirectors and officers insurance. At the commencement of such joint program, Bee Street prepaid in full the entire incremental annual premium of approximately $130,000 in connection with such joint program of insurance.
The Company has historically purchased insurance coverage for external purposes in accordanceworkers’ compensation, property and excess liability with GAAP. Becauseanother company controlled by the Gidwitz Family to minimize insurance costs and to obtain other more favorable terms. The cost of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionssuch insurance is allocated based upon a formula that considers, among other things, nature of any evaluationrisk, loss history and size of effectivenessoperations. From time to future periods are subjecttime, the Company will advance payments to the risk that controls may become inadequate becauseinsurance carriers on behalf of changesthe other company. The Company invoices the other company its respective share of each payment. This arrangement ended in conditions, or thatMarch 2019. In the degreeperiod since the beginning of compliance withfiscal year 2018, the policies or procedures may deteriorate.other company generally paid its respective share within thirty days of the date the Company invoiced them.
Management conducted an assessmentThe Company leases office space at 440 South LaSalle Street, Chicago, Illinois that is used as its corporate headquarters. In the period since the beginning of fiscal year 2018, the Company subleased some of the effectivenessoffice space to two companies controlled by the Gidwitz Family as well as one of the Company’s internal control over financial reportingdirectors. The office address of Bee Street, the Company’s largest stockholder, is in care of one of those companies. The lease expense is allocated using a formula based primarily upon the square footage occupied by each of the tenants. Common space within the office is allocated based upon the ratio of the square footage occupied by each of the tenants to the total square footage under lease. In management’s opinion, the Company participation in this lease arrangement has resulted in its ability to lease space at more favorable rates than had it sought to lease a smaller space on its own.
Theodore R. Tetzlaff has served as a director of the Company since 1981. Mr. Tetzlaff formed Tetzlaff Law Offices, LLC in April 2012 and has been engaged to represent the Company in various legal matters since that time. In fiscal years 2018 and 2019, Tetzlaff Law Offices represented the Company in its lawsuit against Valco, Inc. seeking, among other things, to rescind its Pueblo, Colorado sand and gravel lease. The suit against Valco, Inc. was settled in October 2019. During 2018 and 2019 fiscal years, the Company was billed approximately $474,000 and $826,000 respectively for services provided by Tetzlaff Law Offices, LLC.
Director Independence
Under NYSE American rules, no director qualifies as independent until the Board makes an affirmative determination to that effect. In making this determination, the Board must affirmatively conclude that the director does not have a material relationship with the Company that would interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a director. The Board considers, among other factors: (a) the director’s current and historic relationships with the Company and its competitors, suppliers, customers and auditors, including compensation directly or indirectly paid to the director; (b) the director’s professional and family relationships with management and other directors; and (c) the relationships that the director’s current and former employers may have with the Company.
The Company qualifies as a “controlled company” under the NYSE American corporate governance listing standards because more than 50% of the voting power is held by Bee Street, itself controlled by the Gidwitz Family, and the Company has elected controlled company status.
As a controlled company, the Company is exempted from certain rules otherwise applicable to companies whose securities are listed on NYSE American stock exchange, including: (a) the requirement that the Company have a majority of independent directors; (b) the requirement that nominations to the Company’s Board be either selected or recommended by a nominating committee consisting solely of independent directors; and (c) the requirement that the Company’s officers’ compensation be either determined or recommended by a compensation committee consisting solely of independent directors. In reliance on the framework establishedexemption for controlled companies, Steve Gidwitz and Ralph Gidwitz are, and Theodore Tetzlaff has been, members of the Compensation Committee, and Steve Gidwitz and Scott Gidwitz are members of the Nominating Committee, but have not been affirmatively determined to be independent as defined by the CommitteeNYSE American corporate governance rules.
The Board had affirmatively determined that Thomas H. Carmody was, until his resignation effective November 18, 2019, and Peter E. Thieriot and Darrell M. Trent were, until their resignations effective April 18, 2020, independent directors as defined by the NYSE American corporate governance rules. After Messrs. Thieriot’s and Trent’s resignations, the Board elected Scott Gidwitz, effective April 20, 2020, as the sole member of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (1992). Based on this assessment, management concluded that, as of December 28, 2019, the Company’s internal control over financial reporting is effective. Management reviewed the results of its assessment with the Audit Committee pursuant to an exemption from the NYSE American requirement that the Audit Committee include only directors whom have been affirmatively determined to be independent as defined by the NYSE American corporate governance rules. Mr. Gidwitz is a member and board member of Bee Street, our largest shareholder, and the nephew of James Gidwitz, our Chairman and Chief Executive Officer. Because of those relationships, the Board has not affirmatively determined that Scott Gidwitz is independent as defined by the NYSE American corporate governance standards. Nevertheless, the Board determined, under the exceptional and limited circumstances arising from Messrs. Thieriot’s and Trent’s resignations, that Mr. Gidwitz’s membership on the Audit Committee is required by the best interests of the Company’s Board of Directors.Company and its shareholders.
Remediation of a Material WeaknessItem 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
We previously reported a material weakness inFees for services performed by BKD and related expenses for the effectiveness of the Company’s internal control over financial reporting2019 and 2018 fiscal years were as of September 28, 2019. Specifically, the lack of formalized processes and technical resources available to handle the increased volume of the complex non-routine transactions resulted in several material adjustments being recorded. Based on this material weakness, management concluded that our disclosure controls and procedures were not effective as of September 28, 2019.follows:
2019 | 2018 | |||||||
Audit Fees (1) | $ | 587,817 | $ | 408,642 | ||||
Audit Related Fees (2) | 40,750 | 34,037 | ||||||
Tax Fees (3) | 98,260 | 43,560 | ||||||
All Other Fees (4) | — | — | ||||||
Total | $ | 726,827 | $ | 486,239 |
(1) | Consists of fees for the audit of our financial statements and the review of the financial statements included in the quarterly reports on Form 10-Q and the provision of attestation services in connection with statutory and regulatory filings or engagements. |
(2) | Consists of fees for services relating to the audit of the consolidated annual financial statements including discussions of topics initiated by management. |
(3) | Consists of fees for services related to tax compliance, tax advice and tax planning. |
(4) | There were no fees incurred during either 2019 or 2018 that would be classified in the All Other Fees category. |
In the fourth quarter of 2019, management formalized internal control processes and enhanced the level of technical resources available to address non-routine complex transactions, in order to record and report these transactions timely and appropriately in accordance with generally accepted accounting principles in each reporting period. We hired an interim financial reporting manager to assist with research of transactions outside the ordinary course of business. We enhanced research tools available to assist with research of non-routine complex transactions. We prepared formal accounting memoranda to support our conclusions on technical accounting matters and related disclosures. As a resultapplicable rules of the remediation activitiesCommission, the Audit Committee has established policies and controls in place asprocedures for pre-approval of December 28, 2019, management determinedall audit and permitted non-audit services to be provided by its independent registered public accounting firm. The Audit Committee must separately pre-approve the material weakness had been remediated asengagement of December 28, 2019.
As of December 28, 2019, the Company was not an “accelerated filer” as defined in Rule 12b-2 under the Exchange Act. Accordingly, pursuant to SEC rules and regulations, the Company is not required to include, and this Annual Report on Form 10-K does not include, an attestation report of our independent registered public accounting firm regarding internal
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control overto audit the Company’s consolidated financial reporting. We are required to annually reassess our status asstatements. The Audit Committee has established a “smaller reporting company” as ofpre-approval policy for engaging the end of our fiscal year to determine whether we will be required to provide Management’s Annual Report on Internal Control Over Financial Reporting and the associated report of our independent registered public accounting firm for other audit and permissible non-audit services. Under the policy, the Audit Committee has specified audit, audit-related, tax and regulatory services that may be performed by the independent registered public accounting firm. The engagement for those services specified in our Annual Report.the policy requires the further, separate pre-approval of the Chairman of the Audit Committee or the entire Audit Committee, if specific dollar thresholds set forth in the policy are exceeded. Services not specified in the policy will require separate pre-approval by the Audit Committee. The audit, audit-related, tax and other services provided by BKD in 2019 and 2018, described above, were all approved by the Audit Committee in accordance with this policy.
Changes in Internal Control Over Financial ReportingPART IV
There have been no changes in our internal control over financial reporting during the fourth quarter of fiscal 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as disclosed in Remediation of a Material Weaknessabove.
The Company does not have any information, not already reported, that is required to be reported on Form 8-K during the fourth quarter of the year covered by this Form 10-K.
The information required by items 10 through 14 of Form 10‑K is hereby incorporated by reference from the earlier filed of: (i) an amendment to this Annual Report on Form 10‑K or (ii) a definitive proxy statement filed pursuant to Regulation 14A within 120 days of December 28, 2019.
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* Compensatory plan or arrangement
None.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL MATERIALS CORPORATION | ||
Registrant | ||
By: | /S/Paul Ainsworth | |
Paul Ainsworth, Vice President, Secretary and Chief Financial Officer |
Date: March 23,April 27, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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CONTINENTAL MATERIALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (e)
for the fiscal years 2019 and 2018
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COLUMN A |
| COLUMN B |
| COLUMN C(1) |
| COLUMN D |
| COLUMN E |
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| Additions |
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| Charged to Costs |
| Deductions - |
| Balance at End of |
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Description |
| Period |
| and Expenses |
| Describe |
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Year 2019 |
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Allowance for doubtful accounts (c) |
| $ | 410,000 |
| $ | 189,000 |
| $ | 105,000 | (a) | $ | 494,000 |
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Inventory valuation reserve (c) |
| $ | 1,747,000 |
| $ | 138,000 |
| $ | 862,000 | (b) | $ | 1,023,000 |
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Reserve for self-insured losses |
| $ | 2,451,000 |
| $ | 3,261,000 |
| $ | 3,745,000 | (d) | $ | 1,967,000 |
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Year 2018 |
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Allowance for doubtful accounts (c) |
| $ | 140,000 |
| $ | 68,000 |
| $ | (202,000) | (a) | $ | 410,000 |
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Inventory valuation reserve (c) |
| $ | 518,000 |
| $ | 1,544,000 |
| $ | 315,000 | (b) | $ | 1,747,000 |
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Reserve for self-insured losses |
| $ | 1,881,000 |
| $ | 5,483,000 |
| $ | 4,913,000 | (d) | $ | 2,451,000 |
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