UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the quarterly period ended | ||
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OR | ||
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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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) |
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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large |
| Accelerated |
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| Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.25 par value, shares outstanding at May 5,August 8, 2008 1,598,674
PART I -– FINANCIAL INFORMATION
Item 1. Financial Statements
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 29,JUNE 28, 2008 ANDand DECEMBER 29, 2007
(Unaudited)
(000’s omitted except share data)
|
| MARCH 29, |
| DECEMBER 29, |
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ASSETS |
| 2008 |
| 2007 |
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Current assets: |
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Cash and cash equivalents |
| $ | 2,296 |
| $ | 3,326 |
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Receivables, net |
| 23,955 |
| 22,652 |
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Receivable for insured losses |
| 1,444 |
| 1,548 |
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Inventories: |
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Finished goods |
| 8,858 |
| 7,940 |
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Work in process |
| 1,459 |
| 1,372 |
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Raw materials and supplies |
| 11,389 |
| 9,915 |
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Prepaid expenses |
| 5,656 |
| 5,508 |
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Total current assets |
| 55,057 |
| 52,261 |
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Property, plant and equipment, net |
| 33,458 |
| 34,917 |
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Goodwill |
| 7,829 |
| 7,829 |
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Amortizable intangible assets, net |
| 1,122 |
| 1,198 |
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Other assets |
| 2,403 |
| 2,305 |
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| $ | 99,869 |
| $ | 98,510 |
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LIABILITIES |
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Current liabilities: |
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Current portion of long-term debt |
| $ | 2,400 |
| $ | 2,400 |
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Accounts payable and accrued expenses |
| 19,450 |
| 17,912 |
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Liability for unpaid claims covered by insurance |
| 1,444 |
| 1,548 |
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Income taxes |
| — |
| 19 |
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Total current liabilities |
| 23,294 |
| 21,879 |
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Revolving bank loan payable |
| 9,000 |
| 7,900 |
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Long-term debt |
| 9,800 |
| 10,400 |
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Deferred income taxes |
| 3,773 |
| 3,848 |
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Other long-term liabilities |
| 2,446 |
| 1,796 |
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SHAREHOLDERS’ EQUITY |
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Common shares, $0.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares |
| 643 |
| 643 |
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Capital in excess of par value |
| 1,830 |
| 1,830 |
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Retained earnings |
| 65,679 |
| 66,810 |
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Treasury shares, 975,590 and 972,170, at cost |
| (16,596 | ) | (16,596 | ) | ||
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| 51,556 |
| 52,687 |
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| $ | 99,869 |
| $ | 98,510 |
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| JUNE 28, |
| DECEMBER 29, |
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| 2008 |
| 2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 3,239 |
| $ | 3,326 |
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Receivables, net |
| 25,135 |
| 22,652 |
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Receivable for insured losses |
| 1,454 |
| 1,548 |
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Inventories: |
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Finished goods |
| 9,183 |
| 7,940 |
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Work in process |
| 1,459 |
| 1,372 |
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Raw materials and supplies |
| 12,655 |
| 9,915 |
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Prepaid expenses |
| 5,488 |
| 5,508 |
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Total current assets |
| 58,613 |
| 52,261 |
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Property, plant and equipment, net |
| 32,450 |
| 34,917 |
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Goodwill |
| 7,829 |
| 7,829 |
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Amortizable intangible assets, net |
| 1,049 |
| 1,198 |
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Other assets |
| 2,338 |
| 2,305 |
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| $ | 102,279 |
| $ | 98,510 |
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LIABILITIES |
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Current liabilities: |
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Current portion of long-term debt |
| $ | 1,657 |
| $ | 2,400 |
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Accounts payable and accrued expenses |
| 21,498 |
| 17,912 |
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Liability for unpaid claims covered by insurance |
| 1,454 |
| 1,548 |
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Income taxes |
| — |
| 19 |
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Total current liabilities |
| 24,609 |
| 21,879 |
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Revolving bank loan payable |
| 11,000 |
| 7,900 |
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Long-term debt |
| 9,943 |
| 10,400 |
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Deferred income taxes |
| 3,773 |
| 3,848 |
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Other long-term liabilities |
| 1,684 |
| 1,796 |
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SHAREHOLDERS’ EQUITY |
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Common shares, $0.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares |
| 643 |
| 643 |
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Capital in excess of par value |
| 1,830 |
| 1,830 |
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Retained earnings |
| 65,412 |
| 66,810 |
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Treasury shares, 975,590 and 972,170, at cost |
| (16,615 | ) | (16,596 | ) | ||
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| 51,270 |
| 52,687 |
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| $ | 102,279 |
| $ | 98,510 |
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See accompanying notes
2
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 29,JUNE 28, 2008 AND MARCH 31,JUNE 30, 2007
(Unaudited)
(000’s omitted except per-share amounts)
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| MARCH 29, |
| MARCH 31, |
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Sales |
| $ | 34,512 |
| $ | 40,079 |
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Costs and expenses: |
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Cost of sales (exclusive of depreciation, depletion and amortization) |
| 29,800 |
| 33,794 |
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Depreciation, depletion and amortization |
| 1,335 |
| 1,315 |
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Selling and administrative |
| 5,200 |
| 5,293 |
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Gain on disposition of property and equipment |
| 344 |
| 31 |
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| 35,991 |
| 40,371 |
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Operating loss |
| (1,479 | ) | (292 | ) | ||
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Interest, net |
| (330 | ) | (213 | ) | ||
Other income, net |
| 28 |
| 16 |
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Loss before income taxes |
| (1,781 | ) | (489 | ) | ||
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Benefit from income taxes |
| (650 | ) | (161 | ) | ||
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Net loss |
| (1,131 | ) | (328 | ) | ||
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Retained earnings, beginning of period |
| 66,810 |
| 67,373 |
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Retained earnings, end of period |
| $ | 65,679 |
| $ | 67,045 |
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Basic and diluted loss per share |
| $ | (.71 | ) | $ | (.20 | ) |
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Average shares outstanding |
| 1,599 |
| 1,604 |
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|
| JUNE 28, |
| JUNE 30, |
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| 2008 |
| 2007 |
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Sales |
| $ | 41,761 |
| $ | 45,651 |
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Costs and expenses: |
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Cost of sales (exclusive of depreciation, depletion and amortization) |
| 35,254 |
| 37,253 |
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Depreciation, depletion and amortization |
| 1,318 |
| 1,322 |
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Selling and administrative |
| 5,102 |
| 5,276 |
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Gain on disposition of property and equipment |
| 40 |
| 2 |
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| 41,634 |
| 43,849 |
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Operating income |
| 127 |
| 1,802 |
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Interest expense |
| (288 | ) | (368 | ) | ||
Other (expense) income, net |
| (29 | ) | 263 |
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(Loss) income before income taxes |
| (190 | ) | 1,697 |
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Provision for income taxes |
| 77 |
| 511 |
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Net (loss) income |
| (267 | ) | 1,186 |
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Retained earnings, beginning of period |
| 65,679 |
| 67,045 |
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Retained earnings, end of period |
| $ | 65,412 |
| $ | 68,231 |
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Basic and diluted (loss) earnings per share |
| $ | (.17 | ) | $ | .74 |
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Average shares outstanding |
| 1,599 |
| 1,603 |
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See accompanying notes
3
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS AND RETAINED EARNINGS
FOR THE THREESIX MONTHS ENDED MARCH 29,JUNE 28, 2008 AND MARCH 31,JUNE 30, 2007
(Unaudited)
(000’s omitted)omitted except per-share amounts)
|
| MARCH 29, |
| MARCH 31, |
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Net cash (used in) operating activities |
| $ | (1,874 | ) | $ | (2,358 | ) |
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Investing activities: |
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Capital expenditures |
| (176 | ) | (3,542 | ) | ||
Proceeds from sale of property and equipment |
| 520 |
| 42 |
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Net cash provided by (used in) investing activities |
| 344 |
| (3,500 | ) | ||
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Financing activities: |
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Borrowings under revolving credit facility |
| 1,100 |
| 6,000 |
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Repayment of long term debt |
| (600 | ) | (666 | ) | ||
Payment to acquire treasury stock |
| — |
| (46 | ) | ||
Net cash provided by financing activities |
| 500 |
| 5,288 |
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Net decrease in cash and cash equivalents |
| (1,030 | ) | (570 | ) | ||
Cash and cash equivalents: |
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Beginning of period |
| 3,326 |
| 2,770 |
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End of period |
| $ | 2,296 |
| $ | 2,200 |
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Supplemental disclosures of cash flow items: |
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Cash paid during the three months for: |
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Interest |
| $ | 384 |
| $ | 293 |
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Income taxes |
| — |
| 560 |
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Supplemental disclosures of noncash investing activities |
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Capital expenditures purchased on account |
| $ | — |
| $ | 187 |
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Cash receivable as partial consideration on asset sale ($115) |
|
| 203 |
|
| — |
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|
| JUNE 28, |
| JUNE 30, |
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| 2008 |
| 2007 |
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Sales |
| $ | 76,273 |
| $ | 85,730 |
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Costs and expenses: |
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Cost of sales (exclusive of depreciation, depletion and amortization) |
| 65,054 |
| 71,047 |
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Depreciation, depletion and amortization |
| 2,653 |
| 2,637 |
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Selling and administrative |
| 10,302 |
| 10,569 |
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Gain on disposition of property and equipment |
| 384 |
| 33 |
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| 77,625 |
| 84,220 |
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Operating (loss) income |
| (1,352 | ) | 1,510 |
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Interest expense |
| (618 | ) | (581 | ) | ||
Other (loss) income, net |
| (1 | ) | 279 |
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(Loss) Income before income taxes |
| (1,971 | ) | 1,208 |
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(Benefit) provision for income taxes |
| (573 | ) | 350 |
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Net (loss) income |
| (1,398 | ) | 858 |
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Retained earnings, beginning of period |
| 66,810 |
| 67,373 |
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Retained earnings, end of period |
| $ | 65,412 |
| $ | 68,231 |
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Basic and diluted (loss) earnings per share |
| $ | (.87 | ) | $ | .53 |
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Average shares outstanding |
| 1,600 |
| 1,603 |
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See accompanying notes
4
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 28, 2008 AND JUNE 30, 2007
(Unaudited)
(000’s omitted)
|
| JUNE 28, |
| JUNE 30, |
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Net cash used in operating activities |
| $ | (2,239 | ) | $ | (1,105 | ) |
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Investing activities: |
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Capital expenditures |
| (407 | ) | (4,631 | ) | ||
Proceeds from sale of assets |
| 678 |
| 317 |
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Net cash provided by (used in) investing activities |
| 271 |
| (4,314 | ) | ||
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Financing activities: |
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Borrowings under revolving credit facility |
| 3,100 |
| 6,800 |
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Repayment of long-term debt |
| (1,200 | ) | (1,333 | ) | ||
Insurance proceeds for property and equipment damaged by flood |
| — |
| 91 |
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Payment to acquire treasury stock |
| (19 | ) | (70 | ) | ||
Net cash provided by financing activities |
| 1,881 |
| 5,488 |
| ||
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Net increase (decrease) in cash and cash equivalents |
| (87 | ) | 69 |
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Cash and cash equivalents: |
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Beginning of period |
| 3,326 |
| 2,770 |
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End of period |
| $ | 3,239 |
| $ | 2,839 |
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Supplemental disclosures of cash flow items: |
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Cash paid during the six months for: |
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Interest |
| $ | 730 |
| $ | 675 |
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Income taxes |
| — |
| 545 |
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Supplemental disclosures of noncash investing and financing activities |
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Buyer’s assumption of liabilities |
| $ | 85 |
| $ | — |
|
Capital expenditures purchased on account |
| 8 |
| 105 |
|
See accompanying notes
5
CONTINENTAL MATERIALS CORPORATION
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
NOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 29,JUNE 28, 2008
(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. 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 this interim financial period,reporting, we calculatedestimate the annual effective rate based upon bothon the estimated annual income tax rate based on projected taxable income for the full year and the rate that would be effective considering only the first quarter’s operating results. The effectiverecord a quarterly income tax rate based upon the projected taxable income for the full year does not yield a tax benefit that would be meaningful to the Company’s interim financial statements based on the first quarter’s loss. As a result,provision in accordance with FASB Interpretation No. 18: “Accounting for Income Taxes in Interim Periods,” the effective tax rate specific to the first quarter’s operating results was used for purposes of our interim financial statements. This rate is 36.5%.anticipate 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. For the six months ended June 28, 2008, we utilized the effective rate based upon projected operating results for the full year and recorded an income tax provision for the second quarter such that the six month year-to-date rate reflected the estimated annual income tax rate. Significant judgment is required in determining our effective income tax rate and in evaluating our tax positions.
On December 31, 2006, the first day of the 2007 fiscal year, 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 Statement of Financial Accounting Standards (SFAS) 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 29, 2007 was $328,000 of which $74,000 would affect the effective tax rate. No change occurred inThe gross amount of unrecognized tax benefits at June 28, 2008 was $346,000 of which $56,000 would affect the calculation during the first quarter of 2008.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 approximately $107,000 as of June 28, 2008 and $69,000 as of March 29, 2008 and December 29, 2007.
The United States Federal and various state statutes of limitations expire during the third quarter of 2008 for our 2004 tax year. Included in the balance at March 29,June 28, 2008 is approximately $9,000 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 2003.
5
3. FAIR VALUE MEASUREMENTS
Effective December 30, 2007, the Company adopted SFAS No. 157, “Fair Value Measurements,” which provides a framework for measuring fair value under accounting principles generally accepted in the United
6
States of America. The adoption of this statement had an immaterial impact on our consolidated financial statements. The Company also adopted the deferral provisions of the Financial Accounting Standards Board Staff Position No.FAS 157-2, which delays the effective date of SFAS No. 157 for all nonrecurring fair value measurements of non-financial assets and liabilities until fiscal years beginning after November 15, 2008.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also expands disclosures about instruments measured at fair value and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 —– Quoted prices for identical assets and liabilities in active markets;
Level 2 —– Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 —– Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The Company designates the cash equivalents as Level 1, as they are money market accounts backed by Treasury Bills. As of March 29,June 28, 2008, and December 29, 2007, the Company did not have any cash equivalents, therefore there were no assets measured at fair value.
4. Operating results for the first threesix months of 2008 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.
5. There is no difference in the calculation of basic and diluted earnings per share (EPS) for the three monthsthree-month or six-month periods ended March 29,June 28, 2008 and March 31,June 30, 2007.
6. 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 locations in Pueblo and Colorado Springs by 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.
The Company evaluates the performance of its segments and allocates resources to them based on a number of criteria including operating income, return on investment and other strategic objectives. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest, other income or loss or income taxes.
6
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
7
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 three monthsthree-month and six-month periods ended March 29,June 28, 2008 and March 31,June 30, 2007 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):
|
| Construction Products |
| HVAC Products |
|
|
|
|
|
|
|
| Construction Products |
| HVAC Products |
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
|
| Concrete, Aggregates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Concrete, |
| Doors |
| Combined |
| Heating |
| Evaporative |
| Combined |
| Unallocated |
| Other |
| Total |
| ||||||||||||||||||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Six Months ended June 28, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Revenues from external customers |
| $ | 34,664 |
| $ | 7,625 |
| $ | 42,289 |
| $ | 19,604 |
| $ | 14,199 |
| $ | 33,803 |
| $ | 9 |
| $ | 172 |
| $ | 76,273 |
| ||||||||||||||||||||||||||||
Depreciation, depletion and amortization |
| 2,050 |
| 65 |
| 2,115 |
| 225 |
| 275 |
| 500 |
| 38 |
| — |
| 2,653 |
| |||||||||||||||||||||||||||||||||||||
Operating (loss) income |
| (728 | ) | 786 |
| 58 |
| (422 | ) | 530 |
| 108 |
| (1,572 | ) | 54 |
| (1,352 | ) | |||||||||||||||||||||||||||||||||||||
Segment assets |
| 52,997 |
| 6,774 |
| 59,771 |
| 23,861 |
| 15,437 |
| 39,298 |
| 3,206 |
| 4 |
| 102,279 |
| |||||||||||||||||||||||||||||||||||||
Capital expenditures (a) |
| 191 |
| 100 |
| 291 |
| 51 |
| 68 |
| 119 |
| 5 |
| — |
| 415 |
| |||||||||||||||||||||||||||||||||||||
Quarter ended June 28, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Revenues from external customers |
| $ | 13,789 |
| $ | 3,760 |
| $ | 17,549 |
| $ | 11,523 |
| $ | 5,349 |
| $ | 16,872 |
| $ | 5 |
| $ | 86 |
| $ | 34,512 |
|
| $ | 20,875 |
| $ | 3,865 |
| $ | 24,740 |
| $ | 8,081 |
| $ | 8,850 |
| $ | 16,931 |
| $ | 4 |
| $ | 86 |
| $ | 41,761 |
|
Depreciation, depletion and amortization |
| 1,037 |
| 33 |
| 1,070 |
| 108 |
| 138 |
| 246 |
| 19 |
| — |
| 1,335 |
|
| 1,013 |
| 32 |
| 1,045 |
| 117 |
| 137 |
| 254 |
| 19 |
| — |
| 1,318 |
| ||||||||||||||||||
Operating income (loss) |
| (1,884 | ) | 418 |
| (1,466 | ) | 357 |
| 382 |
| 739 |
| (779 | ) | 27 |
| (1,479 | ) |
| 1,156 |
| 368 |
| 1,524 |
| (779 | ) | 148 |
| (631 | ) | (793 | ) | 27 |
| 127 |
| ||||||||||||||||||
Segment assets |
| 50,265 |
| 6,847 |
| 57,112 |
| 23,222 |
| 16,966 |
| 40,188 |
| 2,510 |
| 59 |
| 99,869 |
|
| 52,997 |
| 6,774 |
| 59,771 |
| 23,861 |
| 15,437 |
| 39,298 |
| 3,206 |
| 4 |
| 102,279 |
| ||||||||||||||||||
Capital expenditures |
| 4 |
| 86 |
| 90 |
| 30 |
| 51 |
| 81 |
| 5 |
| — |
| 176 |
| |||||||||||||||||||||||||||||||||||||
Capital expenditures (a) |
| 187 |
| 14 |
| 201 |
| 21 |
| 17 |
| 38 |
| — |
| — |
| 239 |
|
|
| Construction Products |
| HVAC Products |
|
|
|
|
|
|
|
| Construction Products |
| HVAC Products |
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
|
| Concrete, Aggregates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Concrete, |
| Doors |
| Combined |
| Heating |
| Evaporative |
| Combined |
| Unallocated |
| Other |
| Total |
| ||||||||||||||||||
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Six Months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
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 (a) |
| 53,002 |
| 7,398 |
| 60,400 |
| 22,810 |
| 13,101 |
| 35,911 |
| 2,140 |
| 59 |
| 98,510 |
| |||||||||||||||||||||||||||||||||||||
Capital expenditures (b) |
| 3,091 |
| 144 |
| 3,235 |
| 143 |
| 329 |
| 472 |
| 22 |
| — |
| 3,729 |
| |||||||||||||||||||||||||||||||||||||
Segment assets (b) |
| 53,002 |
| 7,398 |
| 60,400 |
| 22,810 |
| 13,101 |
| 35,911 |
| 2,140 |
| 59 |
| 98,510 |
| |||||||||||||||||||||||||||||||||||||
Capital expenditures (c) |
| 3,806 |
| 209 |
| 4,015 |
| 232 |
| 478 |
| 710 |
| 31 |
| — |
| 4,756 |
| |||||||||||||||||||||||||||||||||||||
Quarter ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
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 (b) |
| 53,002 |
| 7,398 |
| 60,400 |
| 22,810 |
| 13,101 |
| 35,911 |
| 2,140 |
| 59 |
| 98,510 |
| |||||||||||||||||||||||||||||||||||||
Capital expenditures (c) |
| 715 |
| 65 |
| 780 |
| 89 |
| 149 |
| 238 |
| 9 |
| — |
| 1,027 |
|
(a)Capital expenditures for the Evaporative Cooling segment include $8,000 of additions purchased on account.
(b) Segment assets are as of December 29, 2007.
(b)(c) 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.
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.Annual Report on Form 10-K.
8
7. Identifiable amortizable intangible assets as of March 29,June 28, 2008 include five non-compete agreements, a restrictive land covenant and customer relations. Collectively, these assets were carried at $1,122,000,$1,049,000, net of $1,488,000$1,562,000 accumulated amortization. The pre-tax amortization expense for intangible assets during the quarter ended March 29,June 28, 2008 was $76,000$74,000 compared to $88,000$76,000 for the quarter ended March 31, 2007.June 30, 2007 and $150,000 and $165,000 for the six months ended June 28, 2008 and June 30, 2007, respectively. Based upon the intangible assets recorded on the balance sheet at March 29,June 28, 2008, amortization expense for the next five years is estimated to be as follows: 2008 —– $300,000, 2009 —– $294,000, 2010 —– $262,000, 2011 —– $101,000 and 2012 —– $65,000.
78.At June 28, 2008, the Company was not in compliance with the Cash Flow (EBITDA) requirement or the Leverage 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 entered into a First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement (First Amendment) dated August 12, 2008. The First Amendment waives the Events of Default previously noted. Repayment of the Term Loan ($11,600,000 at the time of the signing) will be repayable in quarterly installments of $414,286 with final payment of all outstanding Term Loan indebtedness on March 31, 2011. The First Amendment also extends the amount of availability under the revolving credit facility of $18,000,000 to December 31, 2008 at which time the amount is decreased to $15,000,000 to the termination date of June 30, 2009. The revolving credit line is used for seasonal or short-term cash needs and stand-by letter of credit. At June 28, 2008, the Company had outstanding stand-by letters of credit to insurance carriers totaling approximately $4,510,000 that collateralize the self-insured amounts under the Company’s risk management program. There was $11,000,000 of outstanding borrowings under the revolving credit line at June 28, 2008. The amounts outstanding under the First Amendment are collateralized by the Company’s accounts receivable, inventories, machinery and equipment (excluding licensed vehicles) and other assets (excluding real estate). The First Amendment established certain financial covenants similar in nature to those existing under the predecessor loan document. At the Company’s option, the term loan and revolving credit facility will bear interest at prime or a performance- based LIBOR rate. Based on the terms of the First Amendment and the Company’s performance for the twelve months ended June 28, 2008, the performance based rate will be LIBOR plus 3% or Prime plus 1% for both the Term Loan and borrowings under the revolving credit facility. The Company expects to be in compliance with the new covenants in future quarters.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Colorado Springs and Pueblo through 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, Liquidity and Capital Resources
Sales of the Company’s HVAC products, other than fan coils, are seasonal and weather sensitive except for fan coils.sensitive. Revenues in the Company’s Concrete, Aggregates and Construction Supplies segment are influenced by the level of
9
construction activity and weather conditions along the Front Range of Colorado. Sales for the Door segment are not as stronglygenerally seasonal nor are they affected significantly by weather conditions. Historically, the Company has experienced operating losses during the first quarter except when construction activity is strong along the Front Range of Colorado and the weather is mild. 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. Although this trend was not followed throughout 2007, the results during the first quarterhalf of 2008 have begun inmore closely resembled the historical manner.trend.
As expected, the Company’s cash flow from operations during the first quartersix months of 2008 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 2007 bonus awards.line. Operations for the first three months of 2008 used $1,874,000$2,239,000 of cash compared to $2,358,000the $1,105,000 of cash used during the first threesix months of 2007. The improvedincreased use of cash flow required during the first quartersix months of 2008 was primarilydue to the result ofdecline in operating results partially offset by changes in working capital accounts primarily a smaller increase in receivables and annet increase in accounts payablereceivable and accrued expensesinventories during the first six months of 2008 as compared to the first quarter of 2007. The change2007 period. Receivables declined due to the lower sales. Partially offsetting the decline in receivables was largelyan increase in inventories due to the reducedlower sales while the increase in accounts payable and accrued expenses was due to the timing of payments.receipt and higher prices of raw material prices.
On MarchDuring the six months ended June 28, 2008, the Company entered into an Amended and Restated Term Loan and Revolving Credit Agreement (the Amended Credit Agreement). This Amended Credit Agreement increased the revolving credit facility from $15,000,000investing activities provided $271,000 of cash compared to $18,000,000 until September 30, 2008. On September 30, 2008, the revolving credit facility is reduced back to $15,000,000. The temporary increaseusing $4,314,000 in the revolving credit facility is to provide additional liquidity during the Company’s peak seasonal credit need. The Company was in compliance with the loan covenants as of the quarter ended March 29, 2008.
The Amended Credit Agreement provides that, at the Company’s option, the term loan and revolving credit facility will bear interest at prime or a performance-based LIBOR rate. Based on the terms of the Amended Credit Agreement and the Company’s performance for the twelve months ended December 29, 2007, the
8
performance based rate would be LIBOR plus 2.50% for both the term loan and for borrowings under the revolving credit facility.Such rate is subject to adjustment depending upon the Company’s performance. Payment of accrued interest is due and payable quarterly by the Company. Payments of principal under the term loan are payable on a quarterly basis, ending on March 31, 2011. The Amended Credit Agreement extends the Revolving Credit facility until June 30, 2009 and accordingly, the outstanding revolving credit balance at March 29, 2008 and December 29, 2007 was classified as a long-term obligation.
prior year’s period. Capital expenditures were held to a minimum during the first quarterhalf of 2008 due to the decline in sales and were primarily for routine replacements of equipment and the completion of improvements to the building purchased for the Door segment during 2007.
Scheduled debt repayments were made during the first quarter of both 2008 and 2007. As expected, the Company borrowed against its revolving credit facility during the first quarter of 2008. The highest amount of Company borrowings outstanding under the revolving credit agreement during the first quarter of 2008 was the $9,100,000 and the average amount outstanding during the first quarter was $7,865,000.
We believe that the anticipated cash flow from operations, supplemented by seasonal borrowings against the revolving line of credit as amended, (which balance was $9,000,000 at March 29, 2008) 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 29, 2008 to Quarter Ended March 31, 2007
Consolidated sales during the first quarter of 2008 were $34,512,000 resulting in a $1,479,000 operating loss. In the first quarter of 2007 sales were $40,079,000 with an operating loss of $292,000. 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.
All segments reported decreased sales except the Heating and Cooling segment which reported a 22.8% increase due to fan coil sales. The declines in sales in the other segments were either due to lower demand or timing of orders and are discussed below. Cost of sales as a percentage of sales increased from 84.3% to 86.3%. The increase in cost of sales was primarily due to a change in product mix and the decrease in sales as many costs are somewhat fixed. Selling and administrative costs decreased $93,000 largely due to the decrease in sales. The Concrete, Aggregates and Construction Materials segment sold the assets of a small aggregate operation (Table Mountain), during the first quarter of 2008 quarter for approximately $714,000$720,000 (including the buyer’s assumption of just over $85,000 of liabilities associated with the property) resulting in a pre-tax gain of approximately $338,000.about $344,000. Table Mountain did not provide aggregates to the Company’s ready-mix operations and management did not consider it to be a strategic part of its business. DespiteThe proceeds from the sale of assets for 2007 included $230,000 received from the June sale of stock received from the demutualization of an insurance company that provides life insurance benefits to our employees.
Financing activities provided $1,881,000 during the first six months of 2008 compared to $5,488,000 provided during the first six months of 2007. All scheduled debt repayments were made during the first six months of both 2008 and 2007. As expected, the Company borrowed against its revolving credit facility during the first six months of 2008. During the first six months of 2008, the highest amount of Company borrowings outstanding under the revolving credit agreement was $12,500,000 and the average amount outstanding was $9,355,000. See footnote 8 for details regarding the First Amendment to the loan agreement signed August 11, 2008.
The Company believes that anticipated cash flow from operations, supplemented by seasonal borrowings against the revolving line of credit, (of which $11,000,000 was outstanding at June 28, 2008) will be sufficient to cover expected cash needs, including servicing debt and planned capital expenditures for at least the next twelve months.
Operations – Comparison of Quarter Ended June 28, 2008 to Quarter Ended June 30, 2007
Historically, the Company has experienced improved operating results during the second quarter as sales in the Concrete, Aggregates and Construction Supplies segment increase due to weather more conducive to construction activity. The 2008 operating results, although still reporting a loss, were consistent with this gain,trend. Consolidated sales during the second quarter of 2008 were $41,761,000 compared to $45,651,000 in the second quarter of 2007.
The Heating and Cooling and the Evaporative Cooling segments both reported increased sales for the quarter while the Concrete, Aggregates and Construction Supplies segment and the Door segment reported declines.
10
Cost of sales as a percentage of sales increased from 81.6% to 84.4% primarily due to narrower margins in the Concrete, Aggregates and Construction Supplies segment although the Evaporative Cooling segment also reported a modest decline in margins. Selling and administrative costs decreased 3.3% but increased as a percentage of sales, from 11.6% to 12.2%, due to the lower sales volume. The reduction in selling and administrative costs was largely due to the lower sales volume. Costs related to implementation of the provisions of the Sarbanes-Oxley of 2002 and consulting fees, particularly at the Corporate Office, partially offset the reduction. The resulting operating income of $127,000 lagged behind the $1,802,000 reported for the second quarter of 2007.
Interest expense decreased from $368,000 for the second quarter of 2007 to $288,000 in the 2008 first quarter operating lossdue lower interest rates.
The decrease in other income was due to a $230,000 gain during the second quarter of $1,479,000 increased significantly2007 on the sale of stock received from the prior year’s operating loss of $292,000. demutualization an insurance company that provides life insurance to our employees.
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 industry group for the quarters ended March 29,June 28, 2008 and March 31,July 30, 2007 (dollar amounts(amounts in thousands):
|
| Concrete, |
|
|
| ||
Quarter ended March 29, 2008 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 13,789 |
| $ | 3,760 |
|
Segment operating (loss) income |
| (1,884 | ) | 418 |
| ||
Operating (loss) income as a percent of sales |
| (13.7 | )% | 11.1 | % | ||
Segment assets as of March 29, 2008 |
| $ | 50,265 |
| $ | 6,847 |
|
Return on assets |
| (3.7 | )% | 6.1 | % | ||
|
|
|
|
|
| ||
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 | % |
|
| Concrete, |
| Doors |
| ||
Quarter ended June 28, 2008 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 20,875 |
| $ | 3,865 |
|
Segment operating income |
| 1,156 |
| 368 |
| ||
Operating income as a percent of sales |
| 5.5 | % | 9.5 | % | ||
Segment assets as of June 28, 2008 |
| $ | 52,997 |
| $ | 6,774 |
|
Return on assets |
| 2.2 | % | 5.4 | % | ||
|
|
|
|
|
| ||
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 | % |
9
Concrete, Aggregates and Construction Supplies Segment
Sales in the Concrete, Aggregates and Construction Supplies segment for the firstsecond quarter of 2008 decreased 30.4%declined 18.8% from the prior year’s comparable quarter. All three product lines of this segment reported lower sales for the quarter as a resultended June 28, 2008 compared to the second quarter of lower concrete and aggregate volumes, a direct result of2007 due to the decline inreduced construction activity along the Front Range of Colorado, especially housing construction. Both concreteProfit margins for the segment declined as material and aggregate marginsdelivery costs, including fuel, continued to rise. Selling prices were negative largelyunable to recapture these increases due to competitive pressures created by the lower volumereduced construction activity. In addition, the 2007 second quarter results were aided by the recovery of $725,000 from our insurance carrier as settlement of flood claims that occurred during the third quarter of 2006. All expenses incurred to repair the damage and resume production had been recognized in cost of sales as incurred. Both quarries were back in operation by the fixed natureend of many2006 although some measures to mitigate future vulnerability were performed in 2007. No recovery was anticipated or recorded prior to receipt of the costs in this segment, most notably batching and delivery costs. Construction supplies volume also declined insettlement during the second quarter of 2007.
Operating income for the second quarter of 2008 quarterwas $1,156,000 compared toto$2,845,000 for the comparable 2007 quarter primarily due to the reduced construction activity in Colorado Springs although margins were maintained.
The operating loss increased insales and the 2008 quarter from the 2007 quarter as a result of the reduced volumes.narrower margins. Selling and administrative costs remained relatively constantdeclined in line with the decrease in sales, therefore remaining at approximately the same percentage of sales between the two periods.quarters. As a result, both the operating lossincome as a percent of sales and the negative return on assets increased significantlydeclined in the second quarter of 2008 from the second quarter comparedof 2007. Segment assets declined $8,548,000 from June 30, 2007 to June 28, 2008 due to a lower receivables balance as a result of the prior year’s quarter.reduced sales and lower net property, plant and equipment due to depreciation that outpaced capital expenditures.
11
Door Segment
SalesDoor segment sales declined $666,000, or 14.7%, during the firstsecond quarter of 2008 in the Door segment decreased $1,158 or 23.5% from the comparable 2007 quarter due primarily to the timing of shipments.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. March 2008Sales are also influenced by the level of construction activity but the effect is generally slower to appear as the products supplied by this segment, when sold for new construction, are some of the last items installed on a project. The reduction in sales, were adversely affected by one electronics job scheduled to ship duringtherefore, reflects both the first quarter that was delayed untileffect of the second quarter. Thedecline in construction activity over the past year and the timing of shipments as the backlog has grown sinceonly declined approximately 3% from the 2007 year-end and is comparable to the backloglevel at the end of the 2007 first quarter. Sales prices were increased in response to increased costs but failed to fully recover the increased costsMargins declined principally due to pricing pressures from competitors.the lower sales volume.
Operating income declined from $596,000 for$571,000 during the second quarter of 2007 quarter to $418,000$368,000 for the 2008 quarter primarily as a result of the decreasedlower sales and increased material cost of sales as a percentage of sales. Although sellingvolume. Selling and administrative costs declined, these costs increased as a percentage of salesapproximately 16% during the 2008 quarter due to expenses related to the fixed natureconsolidation of manythe Colorado Springs operations into the new facility and the addition of these costs.two employees. As a result, both operating income as a percent of sales and return on assets declined in the second quarter of 2008 quarter compared tofrom the prior year’s quarter. The return on assets for the 2008 quarter declined at a higher rate due to the purchase and renovation of an existing building in Colorado Springs to replace a smaller and older facility which added a total of $1,908,000 to the asset base for the 2008 quarter. The building was purchased during the third quarter of 2007 and renovations were completed in early 2008.
HVAC Products
The table below presents a summary of operating information for the two reportable segments within the HVAC products industry group for the quarters ended March 29,June 28, 2008 and March 31,June 30, 2007 (dollar amounts(amounts in thousands):
|
| Heating and |
| Evaporative |
| ||
Quarter ended March 29, 2008 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 11,523 |
| $ | 5,349 |
|
Segment operating income |
| 357 |
| 382 |
| ||
Operating income as a percent of sales |
| 3.1 | % | 7.1 | % | ||
Segment assets as of March 29, 2008 |
| $ | 23,222 |
| $ | 16,966 |
|
Return on assets |
| 1.5 | % | 2.3 | % | ||
|
|
|
|
|
| ||
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 | % |
|
| Heating and Cooling |
| Evaporative Cooling |
| ||
Quarter ended June 28, 2008 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 8,081 |
| $ | 8,850 |
|
Segment operating (loss) income |
| (779 | ) | 148 |
| ||
Operating (loss) income as a percent of sales |
| (9.6 | )% | 1.7 | % | ||
Segment assets as of June 28, 2008 |
| $ | 23,861 |
| $ | 15,437 |
|
Return on assets |
| (3.3 | )% | 1.0 | % | ||
|
|
|
|
|
| ||
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 | % |
Heating and Cooling Segment
Sales in the Heating and Cooling segment were $8,081,000 for the second quarter of 2008, an increase of $1,287,000, or 18.9%, from the comparable 2007 quarter. Fan coil volume accounted for the increase with sales rising nearly 31% from the prior year’s quarter. This increase was the result of the continuing beneficial effect of the restructured sales representative network which was completed in late 2005 and favorable market conditions. Furnace volume remained relatively flat. Cost of sales as a percentage of sales decreased during the second quarter of 2008 to 88.2% from 90.6% for the comparable quarter of 2007 as pricing began to catch up with the rise in commodity prices, notably copper and steel. Partially offsetting this improvement was steel costs which soared during the quarter. Already announced sales price increases should recover some of these higher costs as the units are sold over the next two quarters.
The operating loss for the 2008 quarter was reduced from $1,050,000 during the second quarter of 2007 to $779,000. Selling and administrative expenses were slightly higher primarily due to increased legal, audit and other professional services; however they were lower as a percentage of sales. As a result of the reduced loss, both operating loss as a percent of sales and return on assets improved in the 2008 quarter from the prior year’s quarter.
Evaporative Cooling Segment
Sales in the Evaporative Cooling segment improved slightly to $8,850,000, or 3.9%, during the second quarter of 2008 from the comparable 2007 quarter. Slow sales during April and May due to cool weather in the markets served was somewhat offset by hotter temperatures in June when sales exceeded June, 2007 sales.
12
Operating income improved to $148,000 compared to $76,000 for the second quarter of 2007. The improvement was the result of a reduction of some manufacturing costs, including workers compensation claims. The above savings were largely offset by increased steel prices which occurred after 2008 product prices were established. Competitive pressures restricted the company’s ability to fully increase selling prices in response to the cost increases. Both operating income as a percent of sales and return on assets improved in the 2008 quarter from the prior year’s quarter.
Operations - Comparison of Six Months Ended June 28, 2008 to Six Months Ended June 30, 2007
Consolidated sales during the first half of 2008 were $76,273,000 compared to $85,730,000 during the first half of 2007. The decline was largely due to the decrease in the Concrete, Aggregates and Construction Supplies segment although the Door and Evaporative Cooling segments also experienced declining sales. The Heating and Cooling segment reported increased sales for the six months ended June 28, 2008 compared to the six months ended June 30, 2007. Cost of sales as a percentage of sales increased from 82.9% for the first half of 2007 to 85.3% during the first half of 2008. The increased cost of sales ratio was largely due to lower volume in the Concrete, Aggregates and Construction Supplies segment and the recovery of $725,000 from an insurance claim during the 2007 period as noted in the discussion of the second quarter results above. Selling and administrative costs declined primarily related to the decrease in sales but increased as a percentage of sales due to increased costs related to the implementation of the provisions of the Sarbanes-Oxley Act of 2002 and consulting fees, particularly at the Corporate Office. The above factors resulted in an operating loss of $1,352,000 for the first six months of 2008 compared to operating income of $1,510,000 reported for the first six months of 2007. As noted above, other income for the first half of 2007 included a $230,000 gain on the sale of stock received from the demutualization of an insurance company that provides life insurance benefits to our employees.
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 28, 2008 and June 30, 2007 (amounts in thousands):
|
| Concrete, |
| Doors |
| ||
Six Months ended June 28, 2008 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 34,664 |
| $ | 7,625 |
|
Segment operating (loss) income |
| (728 | ) | 786 |
| ||
Operating (loss) income as a percent of sales |
| (2.1 | )% | 10.3 | % | ||
Segment assets as of June 28, 2008 |
| $ | 52,997 |
| $ | 6,774 |
|
Return on assets |
| (1.4 | )% | 11.6 | % | ||
|
|
|
|
|
| ||
Six Months ended June 30, 2007 |
|
|
|
|
| ||
Revenues from external customers | �� | $ | 45,525 |
| $ | 9,449 |
|
Segment operating income |
| 2,318 |
| 1,167 |
| ||
Operating 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 | % |
Concrete, Aggregates and Construction Supplies Segment
Sales in the Concrete, Aggregates and Construction Supplies segment for the first six months of 2008 decreased 23.9% from the comparable 2007 period. As with the second quarter, all three product lines of this segment reported lower sales for the first six months of 2008 compared to the comparable 2007 period for the reasons noted in the discussion of the second quarter’s results above. Similar to the results of the second quarter, margins declined due to the decreased volume and the fixed nature of many of the costs in this segment, most notably batching and delivery costs. Margins during the first quarter of both 2007 and 2008 were actually negative due to the above factors. As noted above, margins for the construction supply products improved despite the decline in sales.
13
Operating results declined to a loss of $728,000 during the 2008 period from a profit of $2,318,000 during the comparable 2007 period. The decline was due to the reduced sales volume and margins for the concrete and aggregates lines. In addition, the recovery of the $725,000 insurance claim during the 2007 period, discussed above, was a factor in the decrease in 2008 operating results. For the first six months of 2008, selling and administrative expenses were reduced but increased as a percent of sales. As a result, both operating results as a percent of sales and return on assets declined for the six months ended June 28, 2008 compared to the six months ended June 30, 2007.
Door Segment
Sales in the Door segment for the first six months of 2008 decreased $1,824,000 from the comparable 2007 period due to the lower construction activity and the timing of shipments as described in the above discussion for the current quarter.
Operating income also declined from $1,167,000 during the first half of 2007 to $786,000 for the first half of 2008 due to lower sales volume and the expenses associated with the consolidation of the Colorado Springs operations into the new facility. As a result, both operating income as a percent of sales and the return on assets declined during the six months ended June 28, 2008 compared to the six months ended June 30, 2007.
HVAC Products
The table below presents a summary of operating information for the two reportable segments within the HVAC products group for the six months ended June 28, 2008 and June 30, 2007 (amounts in thousands):
|
| Heating and |
| Evaporative |
| ||
Six Months ended June 28, 2008 |
|
|
|
|
| ||
Revenues from external customers |
| $ | 19,604 |
| $ | 14,199 |
|
Segment operating (loss) income |
| (422 | ) | 530 |
| ||
Operating (loss) income as a percent of sales |
| (2.2 | )% | 3.7 | % | ||
Segment assets as of June 28, 2008 |
| $ | 23,861 |
| $ | 15,437 |
|
Return on assets |
| (1.8 | )% | 3.4 | % | ||
|
|
|
|
|
| ||
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 | % |
Heating and Cooling Segment
Sales in the Heating and Cooling segment increased $2,141,000,$3,428,000, or 22.8%21.2%, during the first quartersix months of 2008 over the comparable 2007 quarter. Furnace sales dollars andperiod. As with the quarter’s results above, fan coil volume was responsible for the increase as furnace volume for the six months trailed the 2007 period by approximately 6% due to milder weather during the first quarter of 2008 declined from the 2007 results due to milder weather. Fan coil sales again improved more than doubling the amount achieved in the prior year’s quarter. A large commercial job was largely responsible for the increase although bidding activity on the whole continues to improve due to favorable market conditions, the restructured sales representative network and the introduction of a web based design and pricing program which aids our customers in the design of the systems. Overall, pricing for this segment showed mixed results due to competitive pressures and a change in product mix.2008.
10
Operating income declined slightlyThe operating loss narrowed from $371,000$679,000 during the first quartersix months of 2007 to $357,000a loss of $422,000 for the 2008 quarter as a result of the change in product mix and the lingering effect of the higher copper, aluminum and steel materials costs. As a result of these factors, costperiod. Cost of sales as a percent of sales increased from 77.5% for83% to 84.9% due to the first quarter of 2007 to 81.5% forreasons noted in the comparable 2008 quarter.quarter’s discussion above. Selling and administrative expensescosts increased $60,000slightly due to higher marketing costs associated with the fan coil line but decreaseddeclined over 3% as a percentage of sales by 2.7% largely due tosales. As a result of the increased sales. Bothimproved margins, both operating incomeloss as a percent of sales and the return on assets declined dueimproved for the first six months of 2008 compared to the increased cost of sales in the 2008 quarter over the prior year’s quarter. The return on assets declined at a higher rate due to an increase in assets largely due to increased receivables and inventories related to the increase in sales.period.
Evaporative Cooling Segment
Sales in the Evaporative Cooling segment declined $532,000,$200,000, or 9.9%1.4%, during the first quartersix months of 2008 fromover the comparable 2007 quarter.period. The decrease in sales was almost entirely due to slow sales during March and is likely due to the timing of orders which have been affected by aApril resulting from milder Marchweather during 2008 compared to 2007. Orders from a national home center account wereHotter, less than had been received during the first quarter of 2007.humid weather arrived in May and June but it was too late to reach last year’s sales level.
14
The segment reported operating income of $382,000$530,000 for the first six months of 2008 quarter compared to $51,000$127,000 for the comparable 2007 quarter.period. The improved operating results were the result of improved labor efficiencies in the plant and the reduction of workers’ compensation expense due to improved experiencefewer new claims and closing of some open claims at lower amounts than anticipated. Increased steel prices partially offset these gains. Selling and administrative expenses declined during the first six months of 2008 quarter both in real dollars and as a percentage of sales compared to the first quarter ofcomparable 2007 period largely due to the decreased sales.lower advertising and compensation costs. As a result, both operating results as a percent of sales and return on assets increased in the first six months of 2008 quarter from 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 29,June 28, 2008 and December 29, 2007 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 29, 2007.
OUTLOOK
With regard to the Concrete, Aggregates and aggregate volumes are expected to remain depressed forConstruction Supplies segment, the near term untilsoftening of construction activity nationwide, and notably along the Front Range of Colorado improves.which our companies serve, continues with no clear indication as to when the recovery might begin. Concrete and aggregates volume and pricing throughout our Colorado markets will remain under pressure for the foreseeable future as aggressive competition vies for volume. The sales volume and pricing in the Door division is also beginning to feel the effects of the construction slow-down. Although the backlog for the door segment remainremains strong, but may be expected to decline if the nationwide construction slow-down continues.bidding on recent jobs indicates that pricing is becoming more competitive with narrower margins.
Sales of the evaporative coolingEvaporative Cooling segment are not expected to grow significantly and will remain weather sensitive. However,The recent increase in steel prices has reduced margins.
The Heating and Cooling segment expects to continue at roughly its current sales volume however, increased steel prices may also affect the margins of this product line. Sales of fan coil products in the heating and cooling segment are expected to continue to grow as a result of favorable market conditions (commercial and industrial construction throughout the country has not declined to the extent that housing construction has) and the restructured sales representative network and marketing efforts.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)SFAS No. 157, Fair Value Measurements. This statement defines fair value in generally accepted accounting principles and expands disclosures about fair value measurements that are required or permitted under other accounting pronouncements. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company’s adoption of this statement had an immaterial impact on its consolidated financial position, results of operations and cash flows. The Company also adopted the deferral provisions of SFAS No.FASB Staff Position (FSP) FAS 157-2, which delayed the effective date of SFAS No. 157 for all nonrecurring fair value measurements of non-financial assets and liabilities until fiscal years beginning after November 15, 2008.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other
11
items at fair value. This statement was effective as of the beginning of the first fiscal year beginning after
15
November 15, 2007. Upon the Company’s adoption of SFAS No. 159 it did not elect the fair value option for any assets or liabilities. Therefore this statement had no impact on the Company’s consolidated financial position, results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of WFASSFAS No. 133,” which requires enhanced disclosures for derivative and hedging activities. SFAS No. 161 becomes effective in the first quarter of 2009 and is not expected to have any impact on the Company’s consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position (FSP)FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.”
The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (Revised 2007), “Business Combinations” and other U.S. generally accepted accounting principles (GAAP). This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is in the process of determining the impact of adopting this new accounting position on its consolidated financial position.
The Company discusses other 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 2007. Other than as discussed above and 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.
MATERIAL CHANGES TO CONTRACTUAL OBLITATIONSOBLIGATIONS
There were no material changes to contractual obligations that occurred during the quarter ended March 29,June 28, 2008. Subsequent to the end of the quarter, the Company entered into a First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated August 11, 2008 as more fully described in Note 8 above. The First Amendment is filed as Exhibit 10.1 to this report on Form 10-Q.
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 and cost 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 2007 Annual Report on Form 10-K. Changes in accounting 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.
Item 3.Quantitative And Qualitative Disclosures About Market Risk
There were no material changes in the market risks nor legal proceedings that the Company is exposed to since those discussed in the Company’s 2007 Annual Report on Form 10-K.
16
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 29,June 28, 2008. 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
12
including (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.
As noted above, theThe Company continually reassesses our internal control over financial reporting and makes changes as deemed prudent. We did not identify any material weaknesses in our review of internal controls,control, and no significant changes in the Company’s internal controlscontrol over financial reporting occurred during the quarter ended March 29,June 28, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controlscontrol 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 29, 2007March 30, 2008 through March 29,June 28, 2008. NoThe shares were purchased duringfrom the current quarter.Continental Materials Corporation Employees Profit Sharing Retirement Plan. The shares became available due to changes in participants’ accounts. The Company purchased the shares as an alternative to the Plan Administrator selling the shares on the open market.
Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities |
| Issuer Purchases of Equity Securities |
| ||||||||||||||||||
|
| (a) Total |
|
|
| (c) Total Number of |
| (d) Maximum Dollar |
|
| (a) Total |
| (b) Average |
| (c) Total Number of |
| (d) Maximum Dollar |
| ||||
December 30, 2007 — January 26, 2008 |
| — |
| $ | — |
| — |
| $ | 1,326,116 |
| |||||||||||
January 27 — |
| — |
| — |
| — |
| 1,326,116 |
| |||||||||||||
February 23 — |
| — |
| — |
| — |
| 1,326,116 |
| |||||||||||||
March 30 – April 26, 2008 |
| — |
| $ | — |
| — |
| $ | 1,349,255 |
| |||||||||||
April 27 – May 24, 2008 |
| 810 |
| 23.10 |
| 810 |
| 1,330,544 |
| |||||||||||||
May 25 – June 28, 2008 |
| — |
| — |
| — |
| 1,330,544 |
| |||||||||||||
Total |
| — |
| $ | — |
| — |
| $ | 1,326,116 |
|
| 810 |
| $ | 23.10 |
| 810 |
| $ | 1,330,544 |
|
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 Amended and Restated Revolving Credit and Term Loan Agreement dated as of March 28, 2008 provides that the Company may make purchases of its own stock in an amount not to exceed $1,438,000. Since the 2005 tender offer, management has not actively sought to repurchase shares.
13Item 4. Submission of Matters to a Vote of Security Holders
(a)The 2008 Annual Meeting of the Stockholders of the Company was held on May 28, 2008.
17
(b)At that meeting, three individuals, all of whom are current directors, were elected to serve until the 2011 Annual Meeting by the following votes:
Director |
| Shares For |
| Shares Against |
| Shares Withheld |
|
Ralph W. Gidwitz |
| 1,481,649 |
| — |
| 80,984 |
|
Peter E. Thieriot |
| 1,551,709 |
| — |
| 10,924 |
|
Theodore R. Tetzlaff |
| 1,369,109 |
| — |
| 193,524 |
|
There were no broker non-votes.
The following directors’ terms of office continued after the 2008 Meeting until the Annual Meetings of the respective years as set forth opposite their names below:
Directors | Expiration of Term | |
Thomas H. Carmody | 2009 | |
Ronald J. Gidwitz | 2009 | |
Darrell M. Trent | 2009 | |
William D. Andrews | 2010 | |
Betsy R. Gidwitz | 2010 | |
James G. Gidwitz | 2010 |
(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 |
|
1,561,334 |
| — |
| 1,160 |
|
There were no broker non-votes.
(d)Not applicable.
Item 6. Exhibits
| ||
Exhibit No. |
| Description |
|
|
|
10.1 |
| First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of |
|
|
|
31.1 |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) and Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes |
|
|
|
31.2 |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) and Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes |
|
|
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32 |
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes |
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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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| By: | /s/ Joseph J. Sum | |||
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| Joseph J. Sum, Vice President | ||||
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| and Chief Financial Officer |
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