UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007 | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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)
Delaware |
| 36-2274391 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
|
| |
|
200 South Wacker Drive, Suite 4000, Chicago, Illinois 60606 (Address of principal executive offices) (Zip Code) |
(312) 541-7200
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).Act.
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer x |
Yes o No x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act).
Yes o No x
| ||
Common Stock, $0.25 par value, shares outstanding at |
|
PART I -— FINANCIAL INFORMATION
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31,JUNE 30, 2007 ANDand DECEMBER 30, 2006
(Unaudited)
(000’s omitted except share data)
|
| MARCH 31, |
| DECEMBER 30, |
|
| JUNE 30, |
| DECEMBER 30, |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 2,200 |
| $ | 2,770 |
|
| $ | 2,839 |
| $ | 2,770 |
|
Receivables, net |
| 29,066 |
| 24,120 |
|
| 29,596 |
| 24,120 |
| ||||
Receivable for insured losses |
| 1,619 |
| 1,584 |
|
| 1,595 |
| 1,584 |
| ||||
Inventories: |
|
|
|
|
|
|
|
|
|
| ||||
Finished goods |
| 7,401 |
| 7,104 |
|
| 8,544 |
| 7,104 |
| ||||
Work in process |
| 1,480 |
| 1,502 |
|
| 1,441 |
| 1,502 |
| ||||
Raw materials and supplies |
| 9,339 |
| 8,229 |
|
| 9,718 |
| 8,229 |
| ||||
Prepaid expenses |
| 4,263 |
| 4,291 |
|
| 4,245 |
| 4,291 |
| ||||
Total current assets |
| 55,368 |
| 49,600 |
|
| 57,978 |
| 49,600 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Property, plant and equipment, net |
| 34,857 |
| 32,365 |
|
| 34,575 |
| 32,365 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill |
| 7,829 |
| 7,829 |
|
| 7,829 |
| 7,829 |
| ||||
Amortizable intangible assets, net |
| 1,429 |
| 1,517 |
|
| 1,352 |
| 1,517 |
| ||||
Other assets |
| 2,339 |
| 2,394 |
|
| 2,420 |
| 2,394 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 101,822 |
| $ | 93,705 |
|
| $ | 104,154 |
| $ | 93,705 |
|
|
|
|
|
|
| |||||||||
LIABILITIES |
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Bank loan payable |
| $ | 6,000 |
| $ | — |
|
| $ | 6,800 |
| $ | — |
|
Current portion of long-term debt |
| 2,700 |
| 2,866 |
|
| 2,733 |
| 2,866 |
| ||||
Accounts payable and accrued expenses |
| 20,480 |
| 17,060 |
|
| 20,996 |
| 17,060 |
| ||||
Liability for unpaid claims covered by insurance |
| 1,619 |
| 1,584 |
|
| 1,595 |
| 1,584 |
| ||||
Income taxes |
| — |
| 579 |
|
| 384 |
| 579 |
| ||||
Total current liabilities |
| 30,799 |
| 22,089 |
|
| 32,508 |
| 22,089 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Long-term debt |
| 12,300 |
| 12,800 |
|
| 11,600 |
| 12,800 |
| ||||
Deferred income taxes |
| 3,882 |
| 3,883 |
|
| 3,883 |
| 3,883 |
| ||||
Other long-term liabilities |
| 1,872 |
| 1,590 |
|
| 2,032 |
| 1,590 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
| ||||
Common shares, $0.25 par value; authorized |
| 643 |
| 643 |
|
| 643 |
| 643 |
| ||||
Capital in excess of par value |
| 1,830 |
| 1,830 |
|
| 1,830 |
| 1,830 |
| ||||
Retained earnings |
| 67,045 |
| 67,373 |
|
| 68,231 |
| 67,373 |
| ||||
Treasury shares, 971,374 and 968,803, at cost |
| (16,549 | ) | (16,503 | ) | |||||||||
Treasury shares, 971,558 and 968,803, at cost |
| (16,573 | ) | (16,503 | ) | |||||||||
|
| 52,969 |
| 53,343 |
|
| 54,131 |
| 53,343 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 101,822 |
| $ | 93,705 |
|
| $ | 104,154 |
| $ | 93,705 |
|
See accompanying notes
2
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, RETAINED EARNINGS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31,JUNE 30, 2007 AND APRILJULY 1, 2006
(Unaudited)
(000’s omitted except per-share amounts)
|
| MARCH 31, 2007 |
| APRIL 1, 2006 |
| ||
|
|
|
|
|
| ||
Sales |
| $ | 40,079 |
| $ | 33,684 |
|
|
|
|
|
|
| ||
Costs and expenses: |
|
|
|
|
| ||
Cost of sales (exclusive of depreciation, depletion and amortization) |
| 33,794 |
| 27,981 |
| ||
Depreciation, depletion and amortization |
| 1,315 |
| 1,190 |
| ||
Selling and administrative |
| 5,293 |
| 5,007 |
| ||
|
|
|
|
|
| ||
Gain on disposition of property and equipment |
| 31 |
| 74 |
| ||
|
| 40,371 |
| 34,104 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Operating loss |
| (292 | ) | (420 | ) | ||
|
|
|
|
|
| ||
Interest, net |
| (213 | ) | (96 | ) | ||
Other income, net |
| 16 |
| 61 |
| ||
|
|
|
|
|
| ||
Loss before income taxes |
| (489 | ) | (455 | ) | ||
|
|
|
|
|
| ||
Benefit from income taxes |
| (161 | ) | (154 | ) | ||
|
|
|
|
|
| ||
Net loss |
| (328 | ) | (301 | ) | ||
|
|
|
|
|
| ||
Retained earnings, beginning of period |
| 67,373 |
| 65,331 |
| ||
|
|
|
|
|
| ||
Retained earnings, end of period |
| $ | 67,045 |
| $ | 65,030 |
|
|
|
|
|
|
| ||
Basic and diluted loss per share |
| $ | (.20 | ) | $ | (.19 | ) |
|
|
|
|
|
| ||
Average shares outstanding |
| 1,604 |
| 1,605 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Comprehensive (loss) income: |
|
|
|
|
| ||
Net loss |
| $ | (328 | ) | $ | (301 | ) |
Comprehensive income from interest rate swap, net of tax of $1 for three months ended April 1, 2006 |
| — |
| 3 |
| ||
|
| $ | (328 | ) | $ | (298 | ) |
|
| JUNE 30, |
| JULY 1, |
| ||
|
|
|
|
|
| ||
Sales |
| $ | 45,651 |
| $ | 43,704 |
|
|
|
|
|
|
| ||
Costs and expenses: |
|
|
|
|
| ||
Cost of sales (exclusive of depreciation, depletion and amortization) |
| 37,253 |
| 34,957 |
| ||
Depreciation, depletion and amortization |
| 1,322 |
| 1,249 |
| ||
Selling and administrative |
| 5,276 |
| 5,194 |
| ||
|
|
|
|
|
| ||
Gain on disposition of property and equipment |
| 2 |
| 72 |
| ||
|
| 43,849 |
| 41,328 |
| ||
|
|
|
|
|
| ||
Operating income |
| 1,802 |
| 2,376 |
| ||
|
|
|
|
|
| ||
Interest expense |
| (368 | ) | (202 | ) | ||
Other (expense) income, net |
| 263 |
| (9 | ) | ||
|
|
|
|
|
| ||
Income before income taxes |
| 1,697 |
| 2,165 |
| ||
|
|
|
|
|
| ||
Provision for income taxes |
| 511 |
| 735 |
| ||
|
|
|
|
|
| ||
Net income |
| 1,186 |
| 1,430 |
| ||
|
|
|
|
|
| ||
Retained earnings, beginning of period |
| 67,045 |
| 65,030 |
| ||
|
|
|
|
|
| ||
Retained earnings, end of period |
| $ | 68,231 |
| $ | 66,460 |
|
|
|
|
|
|
| ||
Basic and diluted earnings per share |
| $ | .74 |
| $ | .89 |
|
|
|
|
|
|
| ||
Average shares outstanding |
| 1,603 |
| 1,605 |
| ||
|
|
|
|
|
| ||
Comprehensive income: |
|
|
|
|
| ||
Net income |
| $ | 1,186 |
| $ | 1,430 |
|
Comprehensive loss from interest rate swap, net of tax of $0 for the three months ended July 1, 2006 |
| — |
| (1 | ) | ||
|
| $ | 1,186 |
| $ | 1,429 |
|
See accompanying notes
3
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND JULY 1, 2006
(Unaudited)
(000’s omitted except per-share amounts)
|
| JUNE 30, |
| JULY 1, |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Sales |
| $ | 85,730 |
| $ | 77,388 |
|
|
|
|
|
|
| ||
Costs and expenses: |
|
|
|
|
| ||
Cost of sales (exclusive of depreciation, depletion and amortization) |
| 71,047 |
| 62,938 |
| ||
Depreciation, depletion and amortization |
| 2,637 |
| 2,439 |
| ||
Selling and administrative |
| 10,569 |
| 10,201 |
| ||
|
|
|
|
|
| ||
Gain on disposition of property and equipment |
| 33 |
| 146 |
| ||
|
| 84,220 |
| 75,432 |
| ||
|
|
|
|
|
| ||
Operating income |
| 1,510 |
| 1,956 |
| ||
|
|
|
|
|
| ||
Interest expense |
| (581 | ) | (298 | ) | ||
Other income, net |
| 279 |
| 52 |
| ||
|
|
|
|
|
| ||
Income before income taxes |
| 1,208 |
| 1,710 |
| ||
|
|
|
|
|
| ||
Provision for income taxes |
| 350 |
| 581 |
| ||
|
|
|
|
|
| ||
Net income |
| 858 |
| 1,129 |
| ||
|
|
|
|
|
| ||
Retained earnings, beginning of period |
| 67,373 |
| 65,331 |
| ||
|
|
|
|
|
| ||
Retained earnings, end of period |
| $ | 68,231 |
| $ | 66,460 |
|
|
|
|
|
|
| ||
Basic and diluted earnings per share |
| $ | .53 |
| $ | .70 |
|
|
|
|
|
|
| ||
Average shares outstanding |
| 1,603 |
| 1,605 |
| ||
|
|
|
|
|
| ||
Comprehensive income: |
|
|
|
|
| ||
Net income |
| $ | 858 |
| $ | 1,129 |
|
Comprehensive income from interest rate swap, net of tax of $1 for the six months ended July 1, 2006 |
| — |
| 2 |
| ||
|
| $ | 858 |
| $ | 1,131 |
|
See accompanying notes
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2007 AND APRILJULY 1, 2006
(Unaudited)
(000’s omitted)
|
| MARCH 31, 2007 |
| APRIL 1, 2006 |
|
| JUNE 30, |
| JULY 1, |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net cash used in operating activities |
| $ | (2,358 | ) | $ | (5,684 | ) |
| $ | (1,105 | ) | $ | (2,183 | ) |
|
|
|
|
|
|
|
|
|
|
| ||||
Investing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Purchase of CSSL |
| — |
| (352 | ) | |||||||||
Cash paid for acquisitions of assets of certain businesses |
| — |
| (2,452 | ) | |||||||||
Capital expenditures |
| (3,542 | ) | (1,411 | ) |
| (4,631 | ) | (3,609 | ) | ||||
Proceeds from sale of property and equipment |
| 42 |
| 118 |
| |||||||||
Proceeds from sale of assets |
| 317 |
| 166 |
| |||||||||
Net cash used in investing activities |
| (3,500 | ) | (1,645 | ) |
| (4,314 | ) | (5,895 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Financing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Borrowings under revolving credit facility |
| 6,000 |
| 1,000 |
|
| 6,800 |
| 1,000 |
| ||||
Repayment of long term debt |
| (666 | ) | (500 | ) | |||||||||
Long-term borrowings |
| — |
| 5,000 |
| |||||||||
Repayment of long-term debt |
| (1,333 | ) | (500 | ) | |||||||||
Insurance proceeds for property and equipment damaged by flood |
| 91 |
| — |
| |||||||||
Payment to acquire treasury stock |
| (46 | ) | — |
|
| (70 | ) | — |
| ||||
Net cash provided by financing activities |
| 5,288 |
| 500 |
|
| 5,488 |
| 5,500 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net decrease in cash and cash equivalents |
| (570 | ) | (6,829 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents |
| 69 |
| (2,578 | ) | |||||||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
| ||||
Beginning of period |
| 2,770 |
| 6,829 |
|
| 2,770 |
| 6,829 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
End of period |
| $ | 2,200 |
| $ | — |
|
| $ | 2,839 |
| $ | 4,251 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
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|
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| |||||||||
|
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|
|
| |||||||||
Supplemental disclosures of cash flow items: |
|
|
|
|
|
|
|
|
|
| ||||
Cash paid during the three months for: |
|
|
|
|
| |||||||||
Cash paid during the six months for: |
|
|
|
|
| |||||||||
Interest |
| $ | 293 |
| $ | 18 |
|
| $ | 675 |
| $ | 237 |
|
Income taxes |
| 560 |
| 215 |
|
| 545 |
| 215 |
| ||||
|
|
|
|
|
| |||||||||
Supplemental disclosures of noncash investing activities |
|
|
|
|
| |||||||||
Supplemental disclosures of noncash investing and financing activities |
|
|
|
|
| |||||||||
Note issued as partial consideration for asset purchase |
| $ | — |
| $ | 1,000 |
| |||||||
Capital expenditures purchased on account |
| $ | 187 |
| $ | — |
|
| 105 |
| — |
|
See accompanying notes
45
CONTINENTAL MATERIALS CORPORATION
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
NOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31,JUNE 30, 2007
(Unaudited)
1. The unaudited interim condensed consolidated financial statements included herein are prepared pursuant to the Securities and Exchange Commission rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The interim condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K. As a result of certain organizational changes implemented at the beginning of the 2007 fiscal year, we have reevaluated our reporting segments during the first quarter in accordance with Financial Accounting Standards Board (FASB) Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Although our four reporting segments, see Note 5, have remained the same, the Door Division of Transit Mix Concrete Co., previously reported within the Concrete, Aggregates and Construction Supplies segment is now reported within the Door segment. In the opinion of management, the condensed consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods.
2. Our effective income tax rate is based on expected income, statutory tax rates and tax positions taken in the various jurisdictions in which we operate. For interim financial reporting, we estimate the annual income tax rate based on projected taxable income for the full year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the year progresses, we refine the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to our expected effective income tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual income tax rate. Significant judgment is required in determining our effective income tax rate and in evaluating our tax positions. The effective income tax rate for the quarter ended March 31,June 30, 2007 of 33%30% was down 1%4% from the 34% rate for the three monthmonths ended AprilJuly 1, 2006. The decrease is primarily the result of an anticipated increase in the percentage depletion deduction, and the scheduled increase in the deduction for certain domestic production activities arising under the American Jobs Creation Act of 2004.2004 and the release of tax contingencies that were resolved in favor of the Company.
On December 31, 2006, the first day of fiscal 2007, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN 48, the financial statement effects of a tax position should initially be 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 was no cumulative adjustment to retained earnings required as a result of the implementation of FIN 48. The gross amount of unrecognized tax benefits at December 31, 2006 was $290,000 of which $79,000 would affect the effective tax rate. The gross amount of unrecognized tax benefits at June 30, 2007 was $287,000 of which $86,000 would affect the effective tax rate.
We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. Accrued interest and penalties included in our total liability for unrecognized tax benefits were $56,000 as of June 30, 2007 and $85,000 as of March 31, 2007 and December 31, 2006.
The U.S. Federal statute of limitations expires during the third quarter of 2007 for our 2003 tax year. Included in the balance at March 31,June 30, 2007 is approximately $24,000$21,000 related to tax positions expected to be resolved within 12 months of this reporting date.
We file income tax returns in the United States federal and various state jurisdictions. Generally, we are not subject to changes in income taxes by any taxing jurisdiction for the years prior to 2002.
3. Operating results for the first threesix months of 2007 are not necessarily indicative of performance for the entire year. Historically, sales of the Evaporative Cooling segment are higher in the first and second quarters, sales of the Concrete, Aggregates and Construction Supplies segment are higher in the second and third quarters and sales of the Heating and Cooling segment are higher in the third and fourth quarters. The salesSales of the Door segment have not shown strong seasonal fluctuations in recent years.
4. There is no difference in the calculation of basic and diluted earnings per share (EPS) for the threesix months ended March 31,June 30, 2007 and AprilJuly 1, 2006.
5. The Company operates primarily in four reportable segments within its two principal industry groups; the Heating and Cooling segment and the Evaporative Cooling segment in the Heating, Ventilation and Air Conditioning (HVAC) industry group and the Concrete, Aggregates and Construction Supplies segment and the Door segment in the Construction Products industry group. The Heating and Cooling segment produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co. of Colton, California. The Evaporative Cooling segment produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona. Sales of these two segments are nationwide, but are concentrated in the southwestern United States. Concrete, Aggregates and Construction Supplies are offered from numerous locations along the Front Range of Colorado operated by the Company’s wholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co. (TMC), of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo and Rocky Mountain Ready Mix Concrete, Inc. of Denver. Doors are fabricated and sold along with the related hardware from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI) of Pueblo, Colorado. Sales of these two segments are highly concentrated in the Front Range area in Colorado although door sales are also made throughout the United States. Prior to the 2007 fiscal year, the Company reported the Door Division of TMC as part of the Concrete, Aggregates and Construction Materials segment. On December 31, 2006, the first day of fiscal 2007, the Door Division was transferred to MDHI and is now reported as part of the Door segment. As required by FASB Statement No. 131, we have restated the 2006 financial information presented in the table below to conform to the current composition of our reportable segments.
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 lossincome/expense 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 and an “Other” classification is used to report a real estate operation. 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 six month and three monthsmonth periods ended March 31,June 30, 2007 and AprilJuly 1, 2006 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):
6
|
| Construction Products |
| HVAC Products |
|
|
|
|
|
|
|
| Construction Products |
| HVAC Products |
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Quarter ended |
| Concrete, |
| Doors |
| Combined |
| Heating |
| Evaporative |
| Combined |
| Unallocated |
| Other |
| Total |
| |||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Concrete, |
|
|
| Combined |
| Heating |
| Evaporative |
| Combined |
| Unallocated |
| Other |
| Total |
| ||||||||||||||||||
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Six Months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Revenues from external customers |
| $ | 19,807 |
| $ | 4,918 |
| $ | 24,725 |
| $ | 9,382 |
| $ | 5,881 |
| $ | 15,263 |
| $ | 5 |
| $ | 86 |
| $ | 40,079 |
|
| $ | 45,525 |
| $ | 9,449 |
| $ | 54,974 |
| $ | 16,176 |
| $ | 14,399 |
| $ | 30,575 |
| $ | 9 |
| $ | 172 |
| $ | 85,730 |
|
Depreciation, depletion and amortization |
| 1,008 |
| 35 |
| 1,043 |
| 105 |
| 150 |
| 255 |
| 17 |
| — |
| 1,315 |
|
| 2,029 |
| 61 |
| 2,090 |
| 211 |
| 300 |
| 511 |
| 36 |
| — |
| 2,637 |
| ||||||||||||||||||
Operating income (loss) |
| (527 | ) | 596 |
| 69 |
| 371 |
| 51 |
| 422 |
| (810 | ) | 27 |
| (292 | ) |
| 2,318 |
| 1,167 |
| 3,485 |
| (679 | ) | 127 |
| (552 | ) | (1,477 | ) | 54 |
| 1,510 |
| ||||||||||||||||||
Segment assets |
| 59,998 |
| 5,847 |
| 65,845 |
| 16,886 |
| 17,111 |
| 33,997 |
| 1,976 |
| 4 |
| 101,822 |
|
| 61,545 |
| 5,804 |
| 67,349 |
| 19,886 |
| 14,426 |
| 34,312 |
| 2,489 |
| 4 |
| 104,154 |
| ||||||||||||||||||
Capital expenditures (a) |
| 3,091 |
| 144 |
| 3,235 |
| 143 |
| 329 |
| 472 |
| 22 |
| — |
| 3,729 |
|
| 3,806 |
| 209 |
| 4,015 |
| 232 |
| 478 |
| 710 |
| 31 |
| — |
| 4,756 |
| ||||||||||||||||||
Quarter ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Revenues from external customers |
| $ | 25,718 |
| $ | 4,531 |
| $ | 30,249 |
| $ | 6,794 |
| $ | 8,518 |
| $ | 15,312 |
| $ | 4 |
| $ | 86 |
| $ | 45,651 |
| ||||||||||||||||||||||||||||
Depreciation, depletion and amortization |
| 1,021 |
| 26 |
| 1,047 |
| 106 |
| 150 |
| 256 |
| 19 |
| — |
| 1,322 |
| |||||||||||||||||||||||||||||||||||||
Operating income (loss) |
| 2,845 |
| 571 |
| 3,416 |
| (1,050 | ) | 76 |
| (974 | ) | (667 | ) | 27 |
| 1,802 |
| |||||||||||||||||||||||||||||||||||||
Segment assets |
| 61,545 |
| 5,804 |
| 67,349 |
| 19,886 |
| 14,426 |
| 34,312 |
| 2,489 |
| 4 |
| 104,154 |
| |||||||||||||||||||||||||||||||||||||
Capital expenditures (a) |
| 715 |
| 65 |
| 780 |
| 89 |
| 149 |
| 238 |
| 9 |
| — |
| 1,027 |
|
(a) Capital expenditures for the Concrete, Aggregates and Construction Supplies segment include $184,000$46,000 of additions purchased on account and capital expenditures for the Evaporative Cooling segment include $3,000$59,000 of additions purchased on account.
|
| Construction Products |
| HVAC Products |
|
|
|
|
|
|
|
| Construction Products |
| HVAC Products |
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Quarter ended |
| Concrete, |
| Doors |
| Combined |
| Heating |
| Evaporative |
| Combined |
| Unallocated |
| Other |
| Total |
| |||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Concrete, |
| Doors |
| Combined |
| Heating |
| Evaporative |
| Combined |
| Unallocated |
| Other |
|
|
| ||||||||||||||||||
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Six Months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Revenues from external customers |
| $ | 18,959 |
| $ | 3,265 |
| $ | 22,224 |
| $ | 6,586 |
| $ | 4,788 |
| $ | 11,374 |
| $ | — |
| $ | 86 |
| $ | 33,684 |
|
| $ | 45,071 |
| $ | 6,552 |
| $ | 51,623 |
| $ | 11,631 |
| $ | 13,959 |
| $ | 25,590 |
| $ | 3 |
| $ | 172 |
| $ | 77,388 |
|
Depreciation, depletion and amortization |
| 887 |
| 37 |
| 924 |
| 98 |
| 150 |
| 248 |
| 18 |
| — |
| 1,190 |
|
| 1,829 |
| 74 |
| 1,903 |
| 198 |
| 300 |
| 498 |
| 38 |
| — |
| 2,439 |
| ||||||||||||||||||
Operating income (loss) |
| (121 | ) | 334 |
| 213 |
| 205 |
| (27 | ) | 178 |
| (838 | ) | 27 |
| (420 | ) |
| 2,746 |
| 659 |
| 3,405 |
| (149 | ) | 331 |
| 182 |
| (1,685 | ) | 54 |
| 1,956 |
| ||||||||||||||||||
Segment assets (b) |
| 54,470 |
| 4,750 |
| 59,220 |
| 18,303 |
| 12,651 |
| 30,954 |
| 3,468 |
| 63 |
| 93,705 |
| |||||||||||||||||||||||||||||||||||||
Capital expenditures |
| 1,214 |
| 65 |
| 1,279 |
| 5 |
| 125 |
| 130 |
| 2 |
| — |
| 1,411 |
| |||||||||||||||||||||||||||||||||||||
Segment assets (a) |
| 54,470 |
| 4,750 |
| 59,220 |
| 18,303 |
| 12,651 |
| 30,954 |
| 3,468 |
| 63 |
| 93,705 |
| |||||||||||||||||||||||||||||||||||||
Capital expenditures (b) |
| 5,067 |
| 65 |
| 5,132 |
| 102 |
| 162 |
| 264 |
| 2 |
| — |
| 5,398 |
| |||||||||||||||||||||||||||||||||||||
Quarter ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Revenues from external customers |
| $ | 26,112 |
| $ | 3,287 |
| $ | 29,399 |
| $ | 5,045 |
| $ | 9,171 |
| $ | 14,216 |
| $ | 3 |
| $ | 86 |
| $ | 43,704 |
| ||||||||||||||||||||||||||||
Depreciation, depletion and amortization |
| 942 |
| 37 |
| 979 |
| 100 |
| 150 |
| 250 |
| 20 |
| — |
| 1,249 |
| |||||||||||||||||||||||||||||||||||||
Operating income (loss) |
| 2,867 |
| 325 |
| 3,192 |
| (354 | ) | 358 |
| 4 |
| (847 | ) | 27 |
| 2,376 |
| |||||||||||||||||||||||||||||||||||||
Segment assets (a) |
| 54,470 |
| 4,750 |
| 59,220 |
| 18,303 |
| 12,651 |
| 30,954 |
| 3,468 |
| 63 |
| 93,705 |
| |||||||||||||||||||||||||||||||||||||
Capital expenditures (b) |
| 3,799 |
| — |
| 3,799 |
| 97 |
| 37 |
| 134 |
| — |
| — |
| 3,933 |
|
(b)(a) Segment assets are as of December 30, 2006.
(b)Capital expenditures for the Concrete, Aggregates and Construction Supplies segment include $1,735,000 million purchased on June 30, 2006 as part of the purchase of certain assets of a concrete producer in Colorado Springs. Capital expenditures for the Door segment include $54,000 purchased on January 1, 2006 as part of the purchase of the assets of CSSL. Also see Note 6.
There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the last annual report except as discussed above.
6. On June 30, 2006 the Company purchased certain assets of ASCI, a concrete producer in Colorado Springs, Colorado for $2,100,000 of cash and a $1,000,000 Note. The assets were acquired by TMC in the Concrete, Aggregates and Construction Supplies segment. The final purchase price allocation included $1,735,000 of plant and equipment, $290,000 for a non-compete agreement, $350,000 for a restriction of use covenant, $370,000 for existing customer relations and $355,000 of goodwill, all of which is amortizable over 15 years for tax purposes. For book purposes, the non-compete is being amortized over its five-year term, the restriction of land use covenant is being amortized over its ten-year term and the customer relations intangible is being amortized over its estimated useful life of ten years.
The purchase was accounted for as an acquisition of a business under SFAS No. 141, “Standards of Accounting for Business Combinations.” The goodwill related to the above purchase represents the only change to the Company’s recorded goodwill during the period from the April 1, 2006 through March 31, 2007.
8
The following unaudited pro forma summary financial information summarizes the estimated combined results of operations of the Company and ASCI assuming that the acquisition of ASCI had taken place on January 1, 2006. The unaudited pro forma combined results of operations were prepared on the basis of information provided to the Company by the former management of ASCI and no representation is made by the Company with respect to the accuracy of such information. The pro forma combinedfinancial information for the six months ended July 1, 2006 includes the results of operations reflect adjustmentsASCI from January 1, 2006 through April 30, 2006, and have been adjusted for interest expense, additional depreciation based on the fair market value of plant and equipment, amortization of identifiable intangibles and income tax expense. Interim financial information for the six month periods ended July 1, 2006 was not made available to the Company. Amounts are in thousands except per share amounts.
| Three Months Ended |
|
| Six Months Ended |
| |||
Net sales |
| $ | 35,337 |
|
| $ | 79,684 |
|
Net loss |
| (307 | ) |
| 1,156 |
| ||
Basic and diluted loss per share |
| (.19 | ) |
| .72 |
|
The unaudited pro forma combined results of operations are not necessarily indicative of, and do not purport to represent, what the Company’s results of operations or financial condition actually would have been had the acquisitions been made as of January 1, 2006. Due to competitive conditions, the Company did not expect to, and has not, retained all of the concrete volume or market share previously attained by ASCI.
7. Identifiable intangible assets as of March 31,June 30, 2007 include five amortizable non-compete agreements, including the non-compete agreement related to ASCI acquired during the second quarter of 2006 (see Note 6). Identifiable intangible assets also include a restrictive land covenant and customer relations value, both related to the ASCI acquisition. Collectively, these assets were carried at $1,429,000,$1,352,000, net of $1,181,000$1,258,000 accumulated amortization. The pre-tax amortization expense for intangible assets during the quarter ended March 31,June 30, 2007 was $88,000.$77,000. Based upon the intangible assets recorded on the balance sheet at March 31,June 30, 2007, amortization expense for the next five years is estimated to be as follows: 2007 — $320,000, 2008 — $300,000, 2009 — $293,000, 2010 — $262,000 and 2011 — $101,000.
8. At June 30, 2007, the Company was not in compliance with the Cash Flow Ratio as defined in the Company’s loan agreement dated September 5, 2003 with LaSalle Bank National Association and Fifth Third Bank. The Company has obtained waivers of the requirement for the quarter and is in discussions with the banks to establish revised requirements such that the Company would expect to be in compliance with the covenant in future quarters. A principal reason for not meeting the required ratio was the high level of capital expenditures during the past twelve months.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis gives effect to the restatement discussed in Note 5.
Company Overview
The Company operates in four reportable segments within its two principal industry groups; the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the Concrete, Aggregates and Construction Supplies segment and the Door segment in the Construction Products industry group.
The Heating and Cooling segment produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co. of Colton, California. The Evaporative Cooling segment produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona. Concrete, Aggregates and Construction Supplies are offered from numerous locations along the Front Range of Colorado operated by the Company’s wholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co., of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo and Rocky Mountain Ready Mix Concrete, Inc. of Denver. Doors are fabricated and sold along with the related hardware from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, 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 and tax services as well as strategic business planning and general management services and an “Other” classification is used to report a real estate operation. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
Financial Condition
Sales of the Company’s HVAC products are seasonal and weather sensitive except for fan coils. Revenues in the Company’s Concrete, Aggregates and Construction Supplies segment are influenced by the level of construction activity and weather conditions along the Front Range of Colorado. Sales for the Door segment are not as strongly seasonal nor are they much affected by weather conditions. Historically, the Company has experienced operating losses during the first quarter except when the weather is mild along the Front Range. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in Colorado and the seasonal sales of the Evaporative Cooling segment. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. The Company typically experiences operating cash flow deficits during the first half of the year reflecting operating results, the use of sales dating programs (extended payment terms)
related to the Evaporative Cooling segment and payments of the prior year’s accrued incentive bonuses and Company profit-sharing contributions. As a result, the Company’s borrowings against its revolving credit facility tend to peak during the second quarter and then decline over the remainder of the year. This trend has continued thus far in 2007.
As expected, the Company’s cash flow during the first quartersix months of 2007 was negative due to the seasonality of sales, production schedules and the sales dating programs related to the evaporative cooler product line and the payment of 2006 bonus awards.line. Operations for the first three months of 2007 used $2,358,000$1,105,000 of cash compared to $5,684,000the $2,183,000 of cash used during the first threesix months of 2006. The reducedimproved cash flow required during the first quarter of 2007 was due to changes in working capital accounts primarily the result of ana larger increase in accounts payable and accrued expenses as well as long term liabilities,during the first six months of 2007 as compared to the first quarter2006 period.
During the six months ended June 30, 2007, investing activities used $4,314,000 of 2006. This change was largely duecash compared to $5,895,000 in the timing of payments.
prior year’s period. Capital expenditures of $4,631,000 during the first six months of 2007, primarily for the Concrete, Aggregates and Construction Supplies segment, were significantly higher than the expenditures during the 2007 quarter compared the prior year’s quarter due to the timing of the purchases.comparable 2006 period. The replacement of two loaders and a scraper for the quarry operations and the construction and installation of an industrial sand plant all occurred during the first quarter. Completionsix months of 2007. The proceeds from the industrial sand plant is plannedsale of assets for 2007 include $230,000 received from the June sale of stock received from the demutualization of a mutual insurance company. Investing activities during the first half of 2006 included $2,452,000 for the second quarter.acquisition of certain assets of two companies.
ScheduledFinancing activities provided $5,488,000 during the first six months of 2007 compared to $5,500,000 provided during the first six months of 2006. All scheduled debt repayments were made during the first quartersix months of both 2007 and 2006. As expected, the Company borrowed against its revolving credit facility during the second quarter of 2007. During the first six months of 2007, quarter. Thethe highest amount of Company borrowings outstanding under the revolving credit agreement during the first quarter of 2007 was the $6,000,000 outstanding at March 31, 2007$8,600,000 and the average amount outstanding was $3,687,000. At June 30, 2007, the Company was not in compliance with the Cash Flow Ratio as defined in the loan agreement. The Company has obtained waivers of the requirement for the quarter and is in discussions with the banks to establish revised requirements such that the Company would expect to be in compliance with the covenant in future quarters. A principal reason for not meeting the required ratio was the high level of capital expenditures during the first quarter was $1,255,000.past twelve months.
We believeThe Company believes that the anticipated cash flow from operations, supplemented by seasonal borrowings against the revolving line of credit, (which balance(of which $6,800,000 was $6,000,000outstanding at March 31,June 30, 2007) will be sufficient to cover expected cash needs, including business expansion, servicing debt and planned capital expenditures for at least the next twelve months.
Results of Operations -— Comparison of Quarter Ended March 31,June 30, 2007 to Quarter Ended AprilJuly 1, 2006
Consolidated sales during the first quarter of 2007 were $40,079,000 resulting in a $292,000 operating loss. In the first quarter of 2006 sales were $33,684,000 with an operating loss of $420,000. Historically, the Company has experienced improved operating lossesresults during the firstsecond quarter except whenas sales in the Concrete, Aggregates and Construction Supplies segment increase due to weather more conducive to construction activity is strongactivity. The 2007 operating results were consistent with this trend. Consolidated sales during the second quarter of 2007 were $45,651,000 compared to $43,704,000 in the second quarter of 2006.
The Heating and Cooling segment and the weather is mild along the Front Range in Colorado.
All segmentsDoor segment both reported increased sales however much offor the increase was due to price increases implemented in response to increased costs.quarter while the Concrete, Aggregates and Construction Supplies segment and the Evaporative Cooling segment reported declines. Cost of sales as a percentage of sales increased slightly from 83.1%80.0% to 84.3%. The increase in cost of sales was81.6% primarily due to cementnarrower margins in the Heating and aggregate price increases that slightly outpaced our ability to increase concrete prices and the lingering effects from 2006 of increased copper, aluminum and steel costs and pricing decisions made to retain a national home center account.Cooling segment. Selling and administrative costs increased $286,000 largely1.6% but decreased as a percentage of sales. An increase in selling and administrative costs at the subsidiary level was partially offset by a reduction at the Corporate office resulting from adjustments to accrued incentive based compensation. Depreciation, depletion and amortization for the 2007 quarter increased $73,000 over the prior year’s quarter due to increased capital expenditures during 2006 and 2007 and amortization of intangible assets associated with the increase in sales.ASCI acquisition. The resulting operating lossincome of $292,000 improved$1,802,000 lagged behind the $2,376,000 reported for the second quarter of 2006.
Interest expense increased from $202,000 for the second quarter of 2006 to $368,000 in the 2007 quarter due to increased average debt and higher interest rates.
Other income for the 2007 quarter includes a $230,000 gain on the sale of stock received from the prior year’s operating lossdemutualization of $420,000.a mutual insurance company.
A discussion of operations by segment follows.
Construction Products
As discussed in Note 5, as a result of certain organizational changes, we have reevaluated our segment reporting under FASB Statement No. 131. The Door Division of TMC, previously reported within the Concrete, Aggregates and Construction Supplies segment is now reported within the Door segment. Accordingly, the 2006 information presented in the table below has been restated to conform to the current year’s segment composition.
The table below presents a summary of operating information for the two reportable segments within the Construction Products industry group for the quarters ended March 31,June 30, 2007 and AprilJuly 1, 2006 (dollar amounts(amounts in thousands):
9
| Concrete, |
| Doors |
| |||
Quarter ended March 31, 2007 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 19,807 |
| $ | 4,918 |
|
Segment operating (loss) income |
| (527 | ) | 596 |
| ||
Operating (loss) income as a percent of sales |
| (2.7 | )% | 12.1 | % | ||
Segment assets as of March 31, 2007 |
| $ | 59,998 |
| $ | 5,847 |
|
Return on assets |
| (.9 | )% | 10.2 | % | ||
|
|
|
|
|
| ||
Quarter ended April 1, 2006 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 18,959 |
| $ | 3,265 |
|
Segment operating (loss) income |
| (121 | ) | 334 |
| ||
Operating (loss) income as a percent of sales |
| (.6 | )% | 10.2 | % | ||
Segment assets as of April 1, 2006 |
| $ | 47,389 |
| $ | 4,511 |
|
Return on assets |
| (.3 | )% | 7.4 | % |
|
| Concrete, |
| Doors |
| ||
Quarter ended June 30, 2007 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 25,718 |
| $ | 4,531 |
|
Segment operating income |
| 2,845 |
| 571 |
| ||
Operating income as a percent of sales |
| 11.1 | % | 12.6 | % | ||
Segment assets as of June 30, 2007 |
| $ | 61,545 |
| $ | 5,804 |
|
Return on assets |
| 4.6 | % | 9.8 | % | ||
|
|
|
|
|
| ||
Quarter ended July 1, 2006 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 26,112 |
| $ | 3,287 |
|
Segment operating income |
| 2,867 |
| 325 |
| ||
Operating income as a percent of sales |
| 11.0 | % | 9.9 | % | ||
Segment assets as of July 1, 2006 |
| $ | 55,777 |
| $ | 4,587 |
|
Return on assets |
| 5.2 | % | 7.1 | % |
Concrete, Aggregates and Construction Supplies Segment
Sales in the Concrete, Aggregates and Construction Supplies segment for the firstsecond quarter of 2007 increased 4.5% overdeclined 1.5% from the prior year’s comparable quarter as a result of increased pricing in response to increased material costs.quarter. Concrete volume improved; however margins deteriorated as pricing decisions made in order to protect our market share were insufficient to fully recover higher material and delivery costs, including fuel. Aggregate volumes declined slightly3% as construction activity along the Front Range of Colorado, especially housing construction, declined. Concrete margins narrowedMargins, however, improved as pricing decisions madeproduction efficiency improved. In addition, the recovery of $725,000 from our insurance carrier as settlement of flood claims at our two Arkansas River operations during the third quarter of 2006, further enhanced aggregates margins. All expenses incurred to repair the damage and resume production had been recognized in ordercost of sales as incurred. Both quarries were back in operation by the end of 2006 although some measures to protect our market sharemitigate future vulnerability were unableperformed in 2007. No recovery had been recorded prior to fully recover higher material and delivery costs, including fuel. Aggregates volumes improved in the 2007settlement during the second quarter despite the decline in concrete volume as the sale of some bulk product, including fill sand, added to sales. Construction supplies volume declined in2007.
Operating income remained relatively constant for the 2007 quarter compared to the 2006 quarter primarily due toquarter. The improved aggregates operations including the reduced construction activity in Colorado Springs.
The operating loss declined ininsurance recovery largely offset the 2007 quarter from the 2006 quarter as a resultdeterioration of the reduced concrete margins and volume.margins. Depreciation, depletion and amortization increased because of the higher capital spending during 2006 and 2007 to date, including the addition of $1,010,000 of amortizable intangibles. Offsetting this increase was a reduction in sellingSelling and administrative costs attributablerose moderately during the second quarter of 2007 compared to the consolidation of administrative functions into the Colorado Springs office.2006 quarter. As a result, both operating lossincome as a percent of sales andimproved modestly while the return on assets declined in the 2007 quarter compared tofrom the prior year’s quarter.quarter largely due to an increase in segment assets. The increase in segment assets is attributable to the higher level of capital spending and receivables.
Door Segment
SalesDoor segment sales rose $1,244,000, or 38%, during the firstsecond quarter of 2007 in the Door segment rose 50.6% over the comparable 2006 quarter due to the timing of shipments and some growth.quarter. Sales during a specific quarter can be heavily influenced by customer requests to either accelerate or delay shipments of jobs to better coincide with their own construction schedules. The backlog which had grown overduring the past year and, although it remains quite strong, itlatter part of 2006 has declined during the 2007 quarter as a number of jobs were shipped. The June 2007 backlog is at approximately the same level as it was at the end of June 2006. Sales prices increased in response to increased costs while also recovering some ofcosts. Margin improved principally due to the margin lost in the 2006 quarter which was the result of pricing decisions made in response to more competitive bidding on available jobs.higher volume.
Operating income improved from $334,000$325,000 during the firstsecond quarter of 2006 to $596,000$571,000 for the 2007 quarter as a result of the higher sales volume, increased salesprices and improved pricing. Slightly offsettingan improvement in the improvement were increased sellingelectronics business (acquired at the beginning of 2006). Selling and administrative costs increased during the 2007 quarter primarily due to
the addition of TMC’s door division in 2007.increased sales. As a result, both operating income as a percent of sales and return on assets improved in the 2007 quarter from the prior year’s quarter.
HVAC Products
The table below presents a summary of operating information for the two reportable segments within the HVAC products group for the quarters ended June 30, 2007 and July 1, 2006 (amounts in thousands):
|
| Heating and |
| Evaporative |
| ||
Quarter ended June 30, 2007 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 6,794 |
| $ | 8,518 |
|
Segment operating (loss) income |
| (1,050 | ) | 76 |
| ||
Operating (loss) income as a percent of sales |
| (15.5 | )% | .9 | % | ||
Segment assets as of June 30, 2007 |
| $ | 19,886 |
| $ | 14,426 |
|
Return on assets |
| (5.3 | )% | .5 | % | ||
|
|
|
|
|
| ||
Quarter ended July 1, 2006 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 5,045 |
| $ | 9,171 |
|
Segment operating (loss) income |
| (354 | ) | 358 |
| ||
Operating (loss) income as a percent of sales |
| (7.0 | )% | 3.9 | % | ||
Segment assets as of July 1, 2006 |
| $ | 17,418 |
| $ | 14,563 |
|
Return on assets |
| (2.0 | )% | 2.5 | % |
Heating and Cooling Segment
Sales in the Heating and Cooling segment were $6,794,000 for the second quarter of 2007, an increase of $1,749,000, or 34.7%, from the comparable 2006 quarter. Fan coil volume accounted for the increase with sales surging nearly 87% from the prior year’s quarter. This increase was the result of favorable market conditions and the restructured sales representative network which was completed in late 2005. Pricing remained relatively flat. Partially offsetting this increase was an 11% decline in furnace volume after a particularly strong first quarter. Cost of sales as a percentage of sales increased during the second quarter of 2007 to 90.6% from 75.0% for the comparable quarter of 2006. Higher material and manufacturing costs contributed to this increase.
The operating loss for the 2007 quarter was $1,050,000 compared to the loss of $354,000 incurred during the second quarter of 2006. Selling and administrative expenses were higher primarily due to the addition of personnel in the sales and engineering departments. Also contributing to the increase in selling costs were higher sales incentives and other related expenses incurred on sales to a national home center. A larger share of wall furnace sales during the second quarter of 2007 as compared to 2006, were made to this national home center account. As a result, both operating loss as a percent of sales and return on assets declined in the 2007 quarter from the prior year’s quarter.
Evaporative Cooling Segment
Sales in the Evaporative Cooling segment declined $653,000, or 7.7%, during the second quarter of 2007 from the comparable 2006 quarter. Cool weather in the markets served, especially during May, caused the decline.
Operating income also declined $282,000, or 79% from the same quarter in 2006. The decline resulted from of an increase in cost of sales as a percentage of sales which was due to the reduced sales volume, competitive pressures that restricted price increases in response to cost increases and an additional accrual for workers compensation claims. Depreciation and amortization remained constant between the periods. The reduction of selling and administrative expenses was related to the decline in sales as these expenses as a percentage of sales stayed relatively constant compared to the second quarter of 2006. As a result, both operating income as a percent of sales and return on assets declined in the 2007 quarter from the prior year’s quarter.
12
Operations - Comparison of Six Months Ended June 30, 2007 to Six Months Ended July 1, 2006
Consolidated sales during the first half of 2007 were $85,730,000 compared to $77,388,000 during the first half of 2006. The improvement was led by the Heating and Cooling segment, although all segments reported increased sales for the six months ended June 30, 2007 compared to the six months ended July 1, 2006 except for the Concrete, Aggregates and Construction Supplies segment. Cost of sales as a percentage of sales increased from 81.3% for the 2006 period to 82.9% during the 2007 period. Depreciation, depletion and amortization increased $198,000 over the prior year’s period due to increased capital expenditures during 2006 and 2007 and amortization of intangible assets associated with the ASCI acquisition. Selling and administrative costs declined as a percentage of sales. The resulting operating income of $1,510,000 was less than the $1,956,000 reported for the first six months of 2006. As noted above, other income for the first half of 2007 includes a $230,000 gain on the sale of stock received from the demutualization of a mutual insurance company.
A discussion of operations by segment follows.
Construction Products
The table below presents a summary of operating information for the two reportable segments within the Construction Products group for the six months ended June 30, 2007 and July 1, 2006 (amounts in thousands):
|
| Concrete, |
|
|
| ||
Six Months ended June 30, 2007 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 45,525 |
| $ | 9,449 |
|
Segment operating income |
| 2,318 |
| 1,167 |
| ||
Operating (loss) income as a percent of sales |
| 5.1 | % | 12.4 | % | ||
Segment assets as of June 30, 2007 |
| $ | 61,545 |
| $ | 5,804 |
|
Return on assets |
| 3.8 | % | 20.1 | % | ||
|
|
|
|
|
| ||
Six Months ended July 1, 2006 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 45,071 |
| $ | 6,552 |
|
Segment operating (loss) income |
| 2,746 |
| 659 |
| ||
Operating (loss) income as a percent of sales |
| 6.1 | % | 10.0 | % | ||
Segment assets as of July 1, 2006 |
| $ | 55,777 |
| $ | 4,587 |
|
Return on assets |
| 4.9 | % | 14.3 | % |
Concrete, Aggregates and Construction Supplies Segment
Sales in the Concrete, Aggregates and Construction Supplies segment for the first six months of 2007 increased slightly over the prior year’s comparable period. Concrete volume declined but sales dollars increased due to increased prices in response to higher material and delivery costs, including fuel. Margins, however, deteriorated as pricing increases did not keep pace with higher cement, fuel and other costs. Aggregate volumes increased primarily due to the sale of some bulk product, including fill sand, during the first quarter of 2007. Aggregate margins improved as a result of the production efficiencies and insurance settlement as described above for the current quarter. Construction supplies sales declined during the first six months of 2007 as compared to the 2006 period due to the slow-down in construction.
Operating income declined to $2,318,000 during the 2007 period from $2,746,000 for the 2006 period. The decline was due to the reduced concrete volume and margins. Partially offsetting this decline was the improved aggregate margins for the reasons noted above. Depreciation, depletion and amortization increased during the 2007 period for the reasons noted for the quarter. For the 2007 six month period, the lower selling and administrative expenses were attributable to the consolidation of administrative functions into the Colorado Springs office. As a result, both operating income as a percent of sales and return on assets declined for the six months ended June 30, 2007 compared to the six months ended July 1, 2006.
Door Segment
Sales in the Door segment for the first six months of 2007 increased $2,897,000 over the comparable 2006 period due to the timing of shipments as described in the discussion for the current quarter.
Operating income improved from $659,000 during the first half of 2006 to $1,167,000 for the 2007 period due to higher sales volume, increased prices and an improvement in the electronics business. The backlog was also reduced during the first quarter of 2007. As a result, both operating income as a percent of sales and the return on assets improved in the six months ended June 30, 2007 compared to the six months ended July 1, 2006.
HVAC Products
The table below presents a summary of operating information for the two reportable segments within the HVAC products industry group for the quarterssix months ended March 31,June 30, 2007 and AprilJuly 1, 2006 (dollar amounts(amounts in thousands):
| Heating andCooling |
| Evaporative Cooling |
| |||
Quarter ended March 31, 2007 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 9,382 |
| $ | 5,881 |
|
Segment operating income |
| 371 |
| 51 |
| ||
Operating income as a percent of sales |
| 4.0 | % | .9 | % | ||
Segment assets as of March 31, 2007 |
| $ | 16,886 |
| $ | 17,111 |
|
Return on assets |
| 2.2 | % | .3 | % | ||
|
|
|
|
|
| ||
Quarter ended April 1, 2006 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 6,586 |
| $ | 4,788 |
|
Segment operating income (loss) |
| 205 |
| (27 | ) | ||
Operating income (loss) as a percent of sales |
| 3.1 | % | (.6 | )% | ||
Segment assets as of April 1, 2006 |
| $ | 16,134 |
| $ | 15,832 |
|
Return on assets |
| 1.3 | % | (.2 | )% |
|
| Heating and |
| Evaporative |
| ||
Six Months ended June 30, 2007 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 16,176 |
| $ | 14,399 |
|
Segment operating (loss) income |
| (679 | ) | 127 |
| ||
Operating (loss) income as a percent of sales |
| (4.2 | )% | .9 | % | ||
Segment assets as of June 30, 2007 |
| $ | 19,886 |
| $ | 14,426 |
|
Return on assets |
| (3.4 | )% | .9 | % | ||
|
|
|
|
|
| ||
Six Months ended July 1, 2006 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 11,631 |
| $ | 13,959 |
|
Segment operating (loss) income |
| (149 | ) | 331 |
| ||
Operating (loss) income as a percent of sales |
| (1.3 | )% | 2.4 | % | ||
Segment assets as of July 1, 2006 |
| $ | 17,418 |
| $ | 14,563 |
|
Return on assets |
| (.9 | )% | 2.3 | % |
Heating and Cooling Segment
Sales in the Heating and Cooling segment increased $2,796,000,$4,545,000, or 42.5%39%, during the first quartersix months of 2007 over the comparable 2006 quarter. Furnaceperiod. Fan coil volume (both unitwas responsible for the majority of the increase although furnace volume and sales dollars) improved roughly 28%was higher on the strength of January sales which were aided by cold weather in the areas served. Fan coil volume surged nearly 87% from the low volume in the prior year’s quarter as a result of favorable market conditions and the restructured sales representative network which was completed in late 2005. Pricing improved during the 2007 quarter.
Operating income improved from $205,000 during the first quarter, largely in January. For the first six months of 2007, fan coil sales increased 87% due to the reasons cited for the quarter above.
The operating loss increased from $149,000 during the first six months of 2006 to $371,000a loss of $679,000 for the 2007 quarter as a result ofperiod despite the increasedincrease in sales. Partially offsetting the improvement was the rise in costCost of sales as a percent of sales which increased from 72.2%73.4% to 77.5% as a result of83% due to the lingering effect of the higher copper, aluminum and steel materials costs experienced in the second and third quarters of 2006. Areasons noted above. In addition, pricing decisiondecisions made to retain a national home center account during the second quarter of 2006 also decreased the margins. Selling and administrative costs were higher due to reasons noted above. As a result, both operating income as a percent of sales and the return on assets improved indeclined for the first six months of 2007 quarter overfrom the prior year’s quarter.period.
Evaporative Cooling Segment
Sales in the Evaporative Cooling segment increased $1,093,000,$440,000, or 22.8%3.2%, during the first quartersix months of 2007 over the comparable 2006 quarter. The increase in sales is attributable to earlyperiod. Early shipments to a national home center account as a result of a warm March and two new customers.customers increased sales during the first quarter of 2007. The increased first quarter sales turned out largely to be a timing difference between quarters as a milder April and May, noted above, caused the sales for the second quarter to lag behind the prior year.
The segment reported operating incomeprofit declined from $331,000 during the first six months of $51,0002006 to $127,000 for the first six months of 2007. Cost of sales as a percentage of sales increased to 85.5% in 2007 from 83.7% for the comparable 2006 period due to the reasons cited above. Depreciation and amortization remained constant between the periods while selling and administrative expenses, although modestly higher during the first six months of 2007 compared to the 2006 quarter’s loss of $27,000 primarily due to the increase in sales. The improved operating results were partially offset by higher raw material costs. Selling and administrative expenses increased modestly during the 2007 quarter butperiod, declined as a percentage of sales compared to the first quarter of 2006.sales. As a result, both operating resultsincome as a percent of sales and the return on assets increased indecreased during the 2007 quarter fromfirst six months of 2007from the prior year’s quarter.period.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The condensed 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 assets and liabilities and disclosure of contingent assets and liabilities as of March 31,June 30, 2007 and December 30, 2006 and affect the reported amounts of revenues and expenses for the periods reported. Actual results could differ from those estimates.
Information with respect to 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 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 December 30, 2006.
OUTLOOK
Concrete prices throughout our Colorado markets have improved compared to 2006, however not enough to recover the higher prices paid for cement and increased delivery costs. The pressure on pricing has come from aggressive competition, especially from a small new concrete producer in Colorado Springs, in response to a softening in construction activity along the Front Range of Colorado. The sales volume and backlog for the doorDoor segment remain strong.
Sales of the evaporative coolingEvaporative Cooling segment are not expected to grow significantly and will remain weather sensitive. However, sales of fan coil products in the heating and cooling segment are expected to grow as a result of favorable market conditions and the restructured sales representative network and marketing efforts.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 for discussion of the accounting standards adopted in 2007.
The Company discusses recently issued accounting standards and tax law changes in the Critical Accounting Policies section under Item 7 and in Note 1 to Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year 2006. Other than as discussed in those sections, the Company does not currently have any transactions or circumstances that have been addressed by recently issued accounting pronouncements. Therefore, adoption of any of these statements or pronouncements would not have a material impact on the Company’s results of operations, 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, national and local economic conditions and competitive forces. Some of these factors are discussed in more detail in the Company’s 2006 Annual Report on Form 10-K. Changes in accounting rules and pronouncements could also alter projected results. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.them, except as required by law.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
There have been no material changes in the market risks that the Company is exposed to since those discussed in the Company’s 2006 Annual Report on Form 10-K.
Item 4. Controls and Procedures
(a) 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, as amended) as of March 31,June 30, 2007. Based on that evaluation, they have concluded that the Company’s disclosure controls and procedures as of such date are effective and are reasonably designed to ensure that all material information relating to the Company (including its subsidiaries) is accumulated and communicated to management to allow timely decisions regarding required disclosure and to ensure that all material information required to be disclosed in this quarterly report is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
(b) Changes in Internal Control Over Financial Reporting.
12
There have been 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.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to purchases made by the Company of its common stock to become treasury stock for the period December 31, 2006April 1, 2007 through March 31,June 30, 2007. The shares were purchased from the Continental Materials Corporation Employees Profit Sharing Retirement Plan. The shares became available
due to changes in participants’ accounts. The Company purchased the shares rather than having the Plan Administrator sell the shares on the open market.
Issuer Purchases of Equity Securities
Period |
| (a) Total |
| (b) Average |
| (c) Total Number of |
| (d) Maximum Dollar |
| ||
December 31, 2006 — January 27, 2007 |
| 1,714 |
| $ | 26.35 |
| 1,714 |
| $ | 1,373,774 |
|
January 28 — |
| — |
| — |
| — |
| 1,373,774 |
| ||
February 25 — |
| — |
| — |
| — |
| 1,373,774 |
| ||
Total |
| 1,714 |
| $ | 26.35 |
| 1,714 |
| $ | 1,373,774 |
|
Period |
| (a) Total |
| (b) Average |
| (c) Total Number of |
| (d) Maximum Dollar |
| ||
April 1 - April 28,2007 |
| 857 |
| $ | 28.61 |
| 857 |
| $ | 1,349,255 |
|
April 29 - May 26, 2007 |
| — |
| — |
| — |
| 1,349,255 |
| ||
May 27 - June 30, 2007 |
| — |
| — |
| — |
| 1,349,255 |
| ||
Total |
| 857 |
| $ | 28.61 |
| 857 |
| $ | 1,349,255 |
|
On January 19, 1999, the Company initiated purchases under the current open-ended program to repurchase its common stock. Purchases are made on the open market or in block trades at the discretion of management. The dollar amount authorized for the program has been periodically increased by the Board of Directors and approved by the Company’s two banks as required by the Company’s Revolving Credit and Term Loan Agreement. The June 28, 2005 amendment to the Loan Agreement provides that the Company may make purchases of its own stock in an amount not to exceed $1,438,000, separate from purchases made in connection with the 2005 tender offer and the exercise of cash-lesscashless stock options. Since the 2005 tender offer, management has not actively sought to repurchase shares.
Item 4. Submission of Matters to a Vote of Security Holders
(a) | The 2007 Annual Meeting of the Stockholders of the Company was held on May 23, 2007. | |||
(b) | At that meeting, three individuals, all of whom are current directors, were elected to serve until the 2010 Annual Meeting by the following votes: |
Director |
| Shares For |
| Shares Against |
| Shares Withheld |
William D. Andrews |
| 1,440,151 |
| — |
| 2,140 |
Betsy R. Gidwitz |
| 1,429,811 |
| — |
| 12,480 |
James G. Gidwitz |
| 1,429,931 |
| — |
| 12,360 |
There were no broker non-votes.
The following directors’ terms of office continued after the 2007 Meeting until the Annual Meetings of the respective years as set forth opposite their names below:
Directors | Expiration of Term | |||
Ralph W. Gidwitz | 2008 | |||
Peter E. Thieriot | 2008 | |||
Theodore R. Tetzlaff | 2008 | |||
Thomas H. Carmody | 2009 | |||
Ronald J. Gidwitz | 2009 | |||
Darrell M. Trent | 2009 |
(c) | In addition to the above election, the appointment of the independent registered public accounting firm of Deloitte & Touche LLP was ratified by the following vote: |
For |
| Against |
| Abstain |
| |
| 1,441,091 |
| 800 |
| 400 |
|
There were no broker non-votes.
(d) | Not applicable. |
16
|
| Description | |
|
|
| |
|
| ||
31.1 |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) and | |
|
|
| |
31.2 |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) and | |
|
|
| |
32 |
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 |
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 | ||||||||||
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| |||||
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| |||||
Date: |
|
| By: | | /S/ Joseph J. Sum | ||||||
|
|
|
| Joseph J. Sum, Vice President | |||||||
|
|
|
| and Chief Financial Officer | |||||||
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18