UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

 

ý

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

 

For the quarterly period ending September 27, 2003ended April 3, 2004

 

OR

 

o

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)

 

 

 

For the transition period from                           to                          

Commission File number 1-3834

CONTINENTAL MATERIALS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

 

36-2274391

(State or other jurisdiction of
incorporation or organization)

 

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

 

225 West Wacker Drive, Suite 1800, Chicago, Illinois  60606

(Address of principal executive office)
(Zip Code)

 

(312) 541-7200

(Registrant’s telephone number, including area code)

 

 

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

 

Indicate by check mark whether the registrant: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  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o        No ý

 

Number of common shares outstanding at November 3, 2003               1,734,763

Number of common shares outstanding at May 5, 2004

1,701,777

 

 


 

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 27, 2003 and DECEMBER 28, 2002APRIL 3, 2004 AND JANUARY 3, 2004

(000’s (000’s omitted except share data)

 

 

SEPTEMBER 27,
2003

 

DECEMBER 28,
2002

 

 

APRIL 3,
2004

 

JANUARY 3,
2004

 

 

(Unaudited)

 

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,650

 

$

3,536

 

 

$

—

 

$

4,609

 

Receivables, net

 

17,115

 

16,740

 

 

18,653

 

17,054

 

Inventories:

 

 

 

 

 

 

 

 

 

 

Finished goods

 

7,654

 

6,855

 

 

7,169

 

7,163

 

Work in process

 

1,300

 

1,523

 

 

1,508

 

1,486

 

Raw materials and supplies

 

6,059

 

6,214

 

 

9,028

 

7,532

 

Prepaid expenses

 

3,285

 

3,530

 

 

2,885

 

3,064

 

Total current assets

 

39,063

 

38,398

 

 

39,243

 

40,908

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

31,383

 

34,033

 

 

30,585

 

30,873

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

7,374

 

7,374

 

 

7,374

 

7,374

 

Non-compete agreements

 

1,235

 

1,403

 

 

1,122

 

1,178

 

Other assets

 

1,366

 

1,426

 

 

1,536

 

1,493

 

 

 

 

 

 

 

 

 

 

 

 

$

80,421

 

$

82,634

 

 

$

79,860

 

$

81,826

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Bank loan payable

 

$

1,900

 

$

—

 

Current portion of long-term debt

 

$

1,890

 

$

3,300

 

 

1,921

 

1,970

 

Accounts payable and accrued expenses

 

13,869

 

13,358

 

 

11,734

 

13,504

 

Income taxes

 

—

 

308

 

 

—

 

700

 

Total current liabilities

 

15,759

 

16,966

 

 

15,555

 

16,174

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

9,875

 

10,220

 

 

8,500

 

9,000

 

Deferred income taxes

 

3,037

 

3,037

 

 

3,219

 

3,219

 

Other long-term liabilities

 

2,338

 

2,422

 

 

2,555

 

2,576

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

Common shares, $0.25 par value; authorized 3,000,000; issued 2,574,264

 

643

 

643

 

Common shares, $0.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares

 

643

 

643

 

Capital in excess of par value

 

1,982

 

1,982

 

 

1,982

 

1,982

 

Retained earnings

 

58,173

 

57,851

 

 

59,837

 

60,200

 

Accumulated other comprehensive losses net of tax of $174 and $216 (interest rate swap adjustments)

 

(324

)

(404

)

Treasury shares, 830,759 and 790,766 at cost

 

(11,062

)

(10,083

)

Accumulated other comprehensive losses net of tax of $139 and $124 (interest rate swap adjustments)

 

(248

)

(265

)

Treasury shares, 870,937 and 853,901, at cost

 

(12,183

)

(11,703

)

 

49,412

 

49,989

 

 

50,031

 

50,857

 

 

 

 

 

 

 

 

 

 

 

 

$

80,421

 

$

82,634

 

 

$

79,860

 

$

81,826

 

 

See accompanying notes

 

2


CONTINENTAL MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 27, 2003 AND SEPTEMBER 28, 2002

(Unaudited)

(000’s omitted except per share amounts)

 

 

SEPTEMBER 27,
2003

 

SEPTEMBER 28,
2002

 

 

 

 

 

 

 

Sales

 

$

30,139

 

$

32,503

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

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

 

23,382

 

24,933

 

Depreciation, depletion and amortization

 

1,517

 

1,536

 

Selling and administrative

 

4,036

 

4,303

 

 

 

28,935

 

30,772

 

 

 

 

 

 

 

Operating income

 

1,204

 

1,731

 

 

 

 

 

 

 

Interest

 

(206

)

(223

)

Other income, net

 

91

 

85

 

 

 

 

 

 

 

Income before income taxes

 

1,089

 

1,593

 

 

 

 

 

 

 

Provision for income taxes

 

382

 

557

 

 

 

 

 

 

 

Net income

 

707

 

1,036

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

57,466

 

55,684

 

 

 

 

 

 

 

Retained earnings, end of period

 

$

58,173

 

$

56,720

 

 

 

 

 

 

 

Basic earnings per share

 

$

.41

 

$

.58

 

 

 

 

 

 

 

Average shares outstanding

 

1,744

 

1,787

 

 

 

 

 

 

 

Diluted earnings per share

 

$

.40

 

$

.57

 

 

 

 

 

 

 

Average shares outstanding

 

1,779

 

1,823

 

See accompanying notes

3


 

CONTINENTAL MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE NINETHREE MONTHS ENDED SEPTEMBER 27,APRIL 3, 2004 AND MARCH 29, 2003 AND SEPTEMBER 28, 2002

(Unaudited)

(000’s omitted except per shareper-share amounts)

 

 

SEPTEMBER 27,
2003

 

SEPTEMBER 28,
2002

 

 

APRIL 3,
2004

 

MARCH 29,
2003

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

88,440

 

$

96,529

 

 

$

27,247

 

$

23,681

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

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

 

70,483

 

75,166

 

 

22,171

 

20,407

 

Depreciation, depletion and amortization

 

4,644

 

4,587

 

 

1,368

 

1,532

 

Selling and administrative

 

12,411

 

13,195

 

 

4,124

 

3,878

 

 

87,538

 

92,948

 

 

27,663

 

25,817

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

902

 

3,581

 

 

 

 

 

 

Operating loss

 

(416

)

(2,136

)

 

 

 

 

 

 

 

 

 

 

Interest

 

(565

)

(715

)

 

(156

)

(161

)

Other income, net

 

159

 

432

 

 

5

 

46

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

496

 

3,298

 

Loss before income taxes

 

(567

)

(2,251

)

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

174

 

1,154

 

Benefit from income taxes

 

(204

)

(855

)

 

 

 

 

 

 

 

 

 

 

Net income

 

322

 

2,144

 

Net loss

 

(363

)

(1,396

)

 

 

 

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

57,851

 

54,576

 

 

60,200

 

57,851

 

 

 

 

 

 

 

 

 

 

 

Retained earnings, end of period

 

$

58,173

 

$

56,720

 

 

$

59,837

 

$

56,455

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

.18

 

$

1.19

 

Basic loss per share

 

$

(.21

)

$

(.78

)

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

1,763

 

1,797

 

 

1,714

 

1,781

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

.18

 

$

1.17

 

Diluted loss per share

 

$

(.21

)

$

(.78

)

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

1,798

 

1,832

 

 

1,714

 

1,781

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

Net loss

 

$

(363

)

$

(1,396

)

Comprehensive income from interest rate swap, net of tax of $(15) and $8

 

17

 

12

 

 

$

(346

)

$

(1,384

)

 

See accompanying notes

 

43


 

CONSOLIDATED MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINETHREE MONTHS ENDED SEPTEMBER 27,APRIL 3, 2004 AND MARCH 29, 2003 AND SEPTEMBER 28, 2002

(Unaudited)

(000’s omitted)

 

SEPTEMBER 27,
2003

 

SEPTEMBER 28,
2002

 

 

THREE MONTHS ENDED

 

 

 

 

 

 

 

APRIL 3,
2004

 

MARCH 29,
2003

 

Net cash provided by operating activities

 

$

4,653

 

$

3,846

 

 

 

 

 

 

Net cash used in operating activities

 

$

(4,470

)

$

(3,106

)

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

Acquisitions of subsidiaries, net of cash received

 

—

 

(2,125

)

Capital expenditures

 

(1,988

)

(6,740

)

 

(1,011

)

(1,027

)

Investment in mining partnership

 

(30

)

—

 

Proceeds from sale of property and equipment

 

213

 

164

 

 

1

 

16

 

Net cash used in investing activities

 

(1,805

)

(8,701

)

 

(1,010

)

(1,011

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

Repayments of long term debt

 

(1,755

)

(1,899

)

Payments to acquire treasury stock

 

(979

)

(548

)

Net cash used in financing activities

 

(2,734

)

(2,447

)

Borrowings under revolving credit facility

 

1,900

 

1,000

 

Repayment of long term debt

 

(549

)

(89

)

Payment to acquire treasury stock

 

(480

)

(319

)

Net cash provided by financing activities

 

871

 

592

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

114

 

(7,302

)

Net decrease in cash and cash equivalents

 

(4,609

)

(3,525

)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

3,536

 

7,579

 

 

4,609

 

3,536

 

 

 

 

 

 

 

 

 

 

 

End of period

 

$

3,650

 

$

277

 

 

$

—

 

$

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow items:

 

 

 

 

 

 

 

 

 

 

Cash paid during the nine months for:

 

 

 

 

 

Cash paid (received) during the three months for:

 

 

 

 

 

Interest

 

$

689

 

$

906

 

 

$

166

 

$

227

 

Income taxes

 

(140

)

812

 

 

501

 

(164

)

 

See accompanying notes

 

54


 

CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 27, 2003APRIL 3, 2004

(Unaudited)

 

1.               The unaudited interim consolidated financial statements included herein are prepared pursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements have been omitted.  The interim financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Reportlatest annual report on Form 10-K for the year ended December 28, 2002, including any amendments thereto (2002 Annual Report).thereto.  In the opinion of management, the consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods.

 

2.               The provision for income taxes is based upon the estimated effective of tax rate of 35%36% for the year.

 

3.               The Company signed a new Revolving Credit and Term Loan Agreement (the “Credit Agreement”) in September 2003 providing for a revolving credit facility in the amount of $10,000,000 and a term loan facility in the original principal amount of $11,500,000.  Both facilities are unsecured.  The term loan is payable in escalating quarterly installments with final payment of all then unpaid principal, on June 30, 2008.  The loan bears interest at prime or an adjusted LIBOR rate. 

The Company is required by the Credit Agreement to maintain certain levels of consolidated tangible net worth, to attain certain levels of cash flow (as defined) on a rolling four-quarter basis, and to maintain certain ratios including consolidated debt to earnings before interest, taxes, depreciation and amortization and excluding extraordinary items.  Additional borrowing, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends are either limited or require prior approval by the lenders. 

The term loan debt matures as follows under the Credit Agreement (amounts in thousands): 

2003

 

$

750

 

2004

 

1,750

 

2005

 

2,000

 

2006

 

2,500

 

2007

 

3,000

 

2008

 

1,500

 

 

 

$

11,500

 

The revolving credit facility is used for short-term cash needs and standby letters of credit.  Interest is charged at prime or adjusted LIBOR rates on cash borrowings.  There was no balance outstanding against the revolving credit facility as of September 27, 2003.

4.Operating results for the first ninethree months of 20032004 are not necessarily indicative of performance for the entire year.  Historically, sales of construction materials are higher in the second and third quarters.  Overall, sales of heating and air conditioning products have not shown strong seasonal fluctuations in recent years although product mix has historically yielded higher gross profit margins in the fourth quarter.  (See Note 1110 of Notes to Consolidated Financial Statements in the Company’s 20022003 Annual Report.Report on Form 10-K.)

 

6


5.4.               The following is a reconciliation of the calculation of basic and diluted earnings per share (EPS) for the three and nine months ended September 27,April 3, 2004 and March 29, 2003 and September 28, 2002 (amounts in thousands, except per share data). per-share amounts):

 

 

Three months ended

 

Nine months ended

 

 

Income
(Loss)

 

Shares

 

Per-share
(loss) earnings

 

 

Income

 

Shares

 

Per-share
earnings

 

Income

 

Shares

 

Per-share
earnings

 

September 27, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

April 3, 2004

 

 

 

 

 

 

 

Basic EPS

 

$

707

 

1,744

 

$

.41

 

$

322

 

1,763

 

$

.18

 

 

$

(363

)

1,714

 

$

(.21

)

Effect of dilutive options

 

—

 

35

 

 

 

—

 

35

 

 

 

 

—

 

—

 

 

 

Diluted EPS

 

$

707

 

1,779

 

$

.40

 

$

322

 

1,798

 

$

.18

 

 

$

(363

)

1,714

 

$

(.21

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 28, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29, 2003

 

 

 

 

 

 

 

Basic EPS

 

$

1,036

 

1,787

 

$

.58

 

$

2,144

 

1,797

 

$

1.19

 

 

$

(1,396

)

1,781

 

$

(.78

)

Effect of dilutive options

 

—

 

36

 

 

 

—

 

35

 

 

 

 

—

 

—

 

 

 

Diluted EPS

 

$

1,036

 

1,823

 

$

.57

 

$

2,144

 

1,832

 

$

1.17

 

 

$

(1,396

)

1,781

 

$

(.78

)

 

6.5.               The following table presents information about the Company’s reported segments for the nine-monththree months ended April 3, 2004 and three-month periods ended September 27,March 29, 2003 and September 28, 2002 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands).:

 

 

 

Heating and Air
Conditioning

 

Construction
Materials

 

All Other

 

Unallocated
Corporate

 

Total

 

2003
Nine Months

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

34,627

 

$

53,569

 

$

242

 

$

2

 

$

88,440

 

Operating income

 

2,405

 

607

 

2

 

(2,112

)

902

 

Assets

 

25,007

 

49,179

 

132

 

6,103

 

80,421

 

Three Months

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

10,024

 

20,028

 

86

 

1

 

30,139

 

Operating income

 

661

 

1,235

 

10

 

(702

)

1,204

 

 

 

 

 

 

 

 

 

 

 

 

 

2002
Nine Months

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

38,266

 

$

58,152

 

$

109

 

$

2

 

$

96,529

 

Operating income

 

2,919

 

3,138

 

(98

)

(2,378

)

3,581

 

Assets

 

30,289

 

52,989

 

74

 

1,274

 

84,626

 

Three Months

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

11,121

 

21,345

 

36

 

1

 

32,503

 

Operating income

 

724

 

1,843

 

(9

)

(827

)

1,731

 

5


 

 

 

Heating and Air
Conditioning

 

Construction
Materials

 

All Other

 

Unallocated
Corporate

 

Total

 

2004

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

11,669

 

$

15,490

 

$

86

 

$

2

 

$

27,247

 

Segment operating (loss) income

 

1,108

 

(664

)

12

 

(872

)

(416

)

Segment assets

 

30,240

 

47,759

 

260

 

1,601

 

79,860

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

10,260

 

$

13,350

 

$

70

 

$

1

 

$

23,681

 

Segment operating (loss) income

 

813

 

(2,175

)

(13

)

(761

)

(2,136

)

Segment assets

 

29,354

 

47,332

 

102

 

2,742

 

79,530

 

There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the 2002 Annual Report.

7


7.               On April 1, 2002, the Company acquired all of the stock of McKinney Door and Hardware, Inc. (MDHI), a refabricator and distributor of metal doors, wood doors and related hardware.  MDHI operates from one facility in Pueblo, Colorado.  The $2,125,000 purchase price, net of cash received and $1,129,000 of liabilities and debt, was funded by available cash balances and credit sources.  The unallocated excess purchase price over fair value of net assets acquired of $900,000 has been classified as goodwill.  The acquisition has been accounted for under the purchase method and accordingly, the operating results of MDHI have been included in the consolidated results since the date of acquisition.last annual report.

 

6.Identifiable intangibleintangible assets as of September 27, 2003April 3, 2004 consist of three amortizable non-compete agreements andthat were carried at $1,235,000$1,122,000 net of $765,000$878,000 accumulated amortization.  The pre-tax amortization expense for intangible assets during the nine-month and three-month periodsquarter ended September 27, 2003April 3, 2004 was $168,000 and $57,000, respectively.$57,000.  Based upon the intangible assets recorded on the balance sheet at September 27, 2003,April 3, 2004, amortization expense for the next five years is estimated to be as follows: 2003 - $225,000, 2004 - $225,000, 2005 - $225,000, 2006 - $216,000, and 2007 - $137,000.$138,000, and 2008 - $125,000.

 

8.7.               The interest rate swap agreement is reported consistent with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related amendment, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” which require recognition of derivatives as either assets or liabilities and measurement at fair value.  During the three-month and nine-month periodsthree months ended September 27, 2003, pre-tax gainsApril 3, 2004, a gain of $120,000 and $123,000, respectively, are$17,000 (net of a tax benefit of $15,000) is reported under comprehensive income as a result of the cash flow hedgehedge.  The tax benefit is primarily due to the use of an estimated tax rate of 36% during 2004 compared to the 31.9% actual rate used for 2003).  The change in accumulated other comprehensive losses is as follows (amounts in thousands):

 

 

 

Three Months Ended
September 27, 2003

 

Nine Months Ended
September 27, 2003

 

Net Income, as reported

 

$

707

 

$

322

 

Swap agreement gain, net of tax effect of $40 and $43, respectively, for the three months and nine months ended September 27, 2003

 

80

 

80

 

Comprehensive net income

 

$

787

 

$

402

 

Balance at January 3, 2004

 

$

(265

)

Comprehensive income from interest rate swap, net of tax effect of $(15), for the three months ended April 3, 2004

 

17

 

Comprehensive net loss

 

$

(248

)

 

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

 

Financial Condition (See pages 2, 4 and 5)Company Overview

 

The Company operates primarily in two industry segments, the heating and air conditioning segment and the construction materials segment.  The primary products manufactured by the heating and air conditioning segment are gas-fired wall furnaces, console heaters, evaporative coolers and fan coils.  Gas-fired wall furnaces, console heaters and fan coil products are manufactured at Williams Furnace Co., headquartered

6


in Colton, California.  Evaporative coolers are manufactured at Phoenix Manufacturing, Inc., headquartered in Phoenix, Arizona.  The primary products of the construction materials segment are ready mix concrete, construction aggregates, building supplies and doors, which are offered by Transit Mix Concrete Co. and Castle Concrete Company in Colorado Springs, Colorado and Transit Mix of Pueblo, Inc. and McKinney Door and Hardware, Inc. in Pueblo, Colorado.  Currently, Rocky Mountain Ready Mix Concrete, Inc. of Denver, Colorado, only offers ready mix concrete.

Financial Condition

A significant portion of the Company’s business tends to seasonally fluctuate.  Historically, the Company has experienced operating losses during the first quarter except when the weather is mild along the Front Range in Colorado.  Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in Colorado and the seasonal sales of evaporative coolers.  Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment.  Sales of fan coils are generally not subject to seasonal variation.  Reflecting the Company’s operating results and the use of sales dating programs related to the evaporative cooler product line, the cash balance is normally depleted during the first or second quarter of the year.  TheAs a result, the Company’s borrowings against theits revolving credit facility tend to peak during the second quarter and then decline over the remainder of the year. This trend has continued thus far in 2003.2004.

 

8


TheAs expected, the Company’s cash balance increased consistent withduring the normal trendfirst quarter decreased due to the seasonality of sales, as well as the collection of evaporative cooler receivablescorresponding production schedules and the sales dating programs related to the sales dating programs.evaporative cooler product line.  Operations provided $4,653,000 in cash flow infor the first ninethree months of 20032004 used $4,470,000 of cash compared to $3,846,000$3,106,000 in 2003.  Despite the first nine months of 2002.  Relative changes in accounts payable and accruals (including income taxes) between the periods were responsible for approximately $1,300,000 of the increase.  The increase in inventoriesreduced loss, operations used more cash during the first nine monthsquarter of 2003 used approximately $1,200,000 less cash than had been used2004 primarily due to an increase in receivables as compared to the decrease in receivables during the first nine monthsquarter of 2002.2003.  The decline in 2003 net earnings comparedincreased receivable balance is due to 2002 ($1,822,000) partially offset the positive cash flow effects of inventories, accounts payable and accruals.improved sales volume.

 

The Company acquired MDHI for $2,125,000 atconstruction materials segment typically requires large capital investments, particularly when sales volume and demand are strong.  Reflecting the beginning ofmore modest demand in the secondconstruction materials segment during the past two years, capital spending was much lower during the first quarter of 2002.  Short term borrowings used for a portion of the purchase were repaid during the third quarter of 2002 from operating cash flow.

Capital expenditures in the first nine months ofboth 2004 and 2003 were $1,988,000as compared to $6,740,000 inexpenditures from the first nine months of 2002.  The majority of the capital spending in 2003 wasmid-1990’s through 2001.  Current expenditures were primarily in the construction materials segment and related toincluded the openingcompletion of the Brighton, Colorado batch plant during March 2003 and several projects associated with the new aggregates and concrete batching operations on the east side ofmaintenance facility in Pueblo. The unusually high level of capital spending

Scheduled debt repayments were made during the first nine monthsquarter of 2002 related to four major projects as describedboth 2004 and 2003.  The increase in the Management’s Discussion and Analysis section of2004 payments reflects the quarterly payback schedule under the Company’s 2002 Annual Report.  The Company has reduced the level of capital spending innew Revolving Credit and Term Loan Agreement signed during September 2003 in responseas opposed to the decline in sales and production volume especially insemi-annual payment schedule under the construction materials segment.previous agreement..

 

The Company expectsbelieves that the operatinganticipated cash flow from its subsidiaries,operations, supplemented by seasonal borrowings against the revolving line of credit, (of which none$1,900,000 was outstanding at September 27, 2003)April 3, 2004) will be sufficient to cover anticipatedexpected cash requirements,needs, including servicing debt service and planned capital expenditures for at least the next twelve months.

 

Operations - Comparison of Quarter Ended September 27, 2003April 3, 2004 to Quarter Ended September 28, 2002 (See page 3)March 29, 2003

 

Consolidated sales during the first quarter ended September 27, 2003 declined $2,364,000 (7.3%)of 2004 improved $3,566,000 to $27,247,000 when compared to the first quarter ended September 28, 2002.of 2003.  Sales decreased $1,317,000 (6.2%) in the construction materials segment. segment

7


The reduced level of

increased $2,140,000, or 16%.  Milder weather in Colorado during March 2004 compared to 2003 was the primary reason for the improved sales volume.  Offsetting this favorable factor was the persistent reduction in construction activity along the Front Range in Colorado leadColorado.  The ensuing lower demand for concrete continues to lower volumes andsustain the increased price competition resulting in lower ready-mixedready mix concrete prices most notablyespecially in the Denver metropolitan area.  The reduced volume combined with the lower prices account for the diminished sales level.  Sales in the heating and air conditioning segment declined $1,097,000 (9.9%)reported a $1,319,000 increase in sales, or 12.9%.  A sharp declineEvaporative cooler sales increased reflecting hot weather in fan coilthe markets served, notably in March, and the addition of some new wholesale accounts.  Furnace sales combined with modestly lower furnace sales was responsible for the lower sales.volume also improved, aided by wet cool weather in Southern California during January and February.  Fan coil sales continueimproved although the sales level continues to reflect the nationwide slump in commercial construction, notably hotel construction.  Partially offsetting the decline in fan coil and furnace sales was an increase in evaporative cooler sales driven primarily by hot, dry weather that persisted later in the year than normal. 

 

Consolidated cost of sales (exclusive of depreciation and depletion), as a percentage of sales increased 0.9% to 77.6%declined from 86.2% for the first quarter ended September 27,of 2003 as compared to 81.4% for the 2002 quarter.same period of 2004.  The increasedecrease was incurred exclusivelyexperienced by both segments, although the construction materials segment.segment reported a more significant improvement.  The higherreduced cost ratio in the construction materials segment was the result of the reducedincreased sales volume, lower selling prices and higher operating costs, particularly maintenance.maintenance, and increased labor efficiency.  The cost of sales percentage forimprovement in the heating and air conditioning segment was virtually unchanged.

9


Selling and administrative expenses declined slightly in tandem with the diminished sales. 

Operations - Comparison of Nine Months Ended September 27, 2003 to Nine Months Ended September 28, 2002 (See page 4)

Consolidated sales for the nine months ended September 27, 2003 decreased $8,089,000 (8.4%) when compared to the nine months ended September 28, 2002.  Sales in the construction materials segment declined $4,583,000 (7.9%) despite the acquisition of McKinney Door and Hardware, Inc. on April 1, 2002.  The decline was due to the reasons noted above.  In addition, inclement weather during the first quarter of 2003, including a near record snowfall on March 17th along Colorado’s Front Range, hampered sales.  The heating and air conditioning segment reported a $3,639,000 (9.5%) decrease in sales.  The decline was primarily due to the depressed fan coil market.

Cost of sales (exclusive of depreciation and depletion) as a percentage of sales increased from 77.9% for the nine months ended September 28, 2002 to 79.7% for the nine months ended September 27, 2003.  The cost of sales percentage in the construction materials segment increased for the reasons noted above.  In addition, the aforementioned inclement weather during the first quarter of 2003 adversely affected production.  The heating and air conditioning segment reported an increase in the cost offurnace sales percentage due to the reduced production levels of fan coils, which increased unit costs, and a change in product mix of sales in the evaporative cooler line to lower margin items.volume.

 

Selling and administrative expenses during the first quarter of 2004 increased $246,000 over the same period in 2003; however, as a percentage of sales, selling and administrative expenses declined slightlyfrom 16.4% to 15.1% for the current quarter.  The decrease as a percentage of sales was due to the increase in tandem withsales and the diminished sales.fixed nature of some of the expenses.

The reduction in depreciation, depletion and amortization expense from $1,532,000 to $1,368,000 is the direct result of the decreased capital spending levels since 2002.

 

Net interest expense declined primarily due to the lower term loan balanceremained relatively constant.  The effect of decreased levels of debt on interest expense in 2003, lower borrowings against the revolving credit facility during the second quarter of 2003 and receipt2004 was largely offset by interest received on a state tax refund during the first quarter of 20032003.

Historically, the Company has experienced operating losses during the first quarter except when the construction activity is strong and the weather is mild along the Front Range in Colorado.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The condensed and consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require the Company to make estimates and assumptions that affect the reported amounts of approximately $62,000assets and liabilities and disclosure of interest relatedcontingent assets and liabilities as of April 3, 2004 and January 3, 2004 and affect the reported amounts of revenues and expenses for the periods reported. Actual results could differ from those estimates.  Information with respect to state tax refunds.the Company’s critical accounting policies which the Company believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained on pages 13 and 14 in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004.

8


 

OUTLOOK

 

The weak construction market in Colorado and the depressed commercial construction market nationwide, notably hotel construction, along with their above noted effects on the Company, areis expected to continue for at least the balancenear future.  The construction market in Colorado is showing some signs of 2003.stabilizing but still remains considerably weaker than the conditions that prevailed three to five years ago.

 

NEWRECENTLY ISSUED ACCOUNTING STANDARDS

 

On December 30, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” This standard requires recording the fair value of a liability for an asset retirement obligation in the period in which it is incurred. In connection with permits to mine aggregate deposits in Colorado, the Company is obligated to reclaim the mined areas.  The Company records a reserve for future reclamation work to be performed at its various aggregate operations based upon estimatesdoes not currently have any transactions or circumstances that have been addressed by recently issued accounting pronouncements.  Therefore, adoption of the recoverable quantities of rock and sand available in each location combined with an estimate of the total expense that will be incurred to reclaim a property.  Provision is made based upon the units of production method.  Reclamation costs are charged to operations as the properties are mined.  Actual reclamation costs are charged against the reserve.  The adequacy of the recorded reserve is assessed annually.  Estimates of both the quantities of recoverable material and the cost of reclamation are periodically updated with the assistance of an independent professional.  Reclamation on any mining property is performed soon after each section of the deposit is mined.  Reclamation is substantially complete by the time the entire deposit is depleted.  The Company believes that this approach, which had been previously used to establish the annual expense and the reserve recorded for future reclamation obligations, continues

10


to provide the best estimate of the fair value of these obligations.   Therefore the adoption of SFAS No. 143 didstatements or pronouncements would not have ana material impact on the Company’s consolidated balance sheet or consolidated statementresults of operations, as of December 30, 2002.

If the provisions of Statement 143 had been adopted effective December 30, 2001, there would have been no impact on earnings per share, net of income tax effect. Since a change in earnings per share would not have occurred, proforma earnings per share disclosures are not presented.financial position or liquidity.

 

FORWARD-LOOKING STATEMENTS

 

The foregoing discussion 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 the Company’s 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 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 factors including but not limited to: weather, interest rates, availability of raw materials and their related costs, economic conditions and competitive forces.  Changes in accounting pronouncements could also alter projected results.  Forward-looking statements speak only as of the date they were made, and we undertakethe Company undertakes no obligation to publicly update them.

 

Item 3.    Quantitative And Qualitative Disclosures About Market Risk

There have been no changes in the market risks that the Company is exposed to since those discussed in the Company’s 20022003 Annual Report on Form 10-K.  At September 27, 2003,April 3, 2004, the amount subject to the interest rate swap agreement was $10,500,000.$9,000,000.  Also see Note 8 above in7 to the notes toquarterly financial statements.statements above.

 

Item 4.    Disclosure Controls and Procedures

(a)            Evaluation of 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’sour “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, they have concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its subsidiaries) required to be disclosed in this quarterly report and no changes are required at this time.

 

(b)           Changes in internal controls over financial reporting.controls.

 

There were no significant changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.reporting.

 

119


 

PART II - Other Information

 

Item 6.

Item 6.    Exhibits and Reports on Form 8-K

(a)

Exhibits

Exhibit No.

Description

10    Revolving Credit and Term Loan Agreement, dated as of September 5, 2003, by and among the Company and LaSalle Bank National Association and Fifth Third Bank.

31.1  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Registrant filed one report on Form 8-K during the quarter ended September 27, 2003.  The report, dated August 8, 2003, related to the press release disclosing the results of the registrant’s operations for the second quarter of 2003 issued July 29, 2003.

 

SIGNATURE(a) Exhibits

 

Pursuant to the requirement 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

Date:

November 5, 2003

By:

/S/ Joseph J. Sum

Joseph J. Sum, Vice President
and Chief Financial Officer

12


Exhibit Index

Exhibit No.

 

Description

 

 

 

10

Revolving Credit and Term Loan Agreement, dated as of September 5, 2003, by and among the Company and LaSalle Bank National Association and Fifth Third Bank.

31.1

 

Certification of Chief Executive Officer pursuant to Section 302906 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302906 of the Sarbanes-Oxley Act of 2002

 

 

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

13(b) The Company filed one report on Form 8-K during the quarter ended April 3, 2004.  The report, dated March 17, 2004, related to the press release disclosing the results of the Company’s operations for the 2003 fourth quarter and full year issued March 15, 2004.

SIGNATURE

Pursuant to the requirements 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

Date:

May 12, 2004

By:

/S/ Joseph J. Sum

Joseph J. Sum, Vice President
and Chief Financial Officer

10