UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~October 1, 2016~~September 30, 2017


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

For the transition period from to

Commission File number 1-3834

CONTINENTAL MATERIALS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		36-2274391
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

440 South LaSalle Street, Suite 3100, Chicago, Illinois		60605
(Address of principal executive offices)		(Zip Code)

(312) 541-7200

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” ~~and~~ “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated Filer ☐		Accelerated Filer ☐

Non-Accelerated Filer ☐		Smaller reporting company ☒
(Do not check if a smaller reporting company)
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.25 par value, shares outstanding at November 10, ~~2016: 1,671,167.~~

2017: 1,682,167.

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

~~OCTOBER 1, 2016~~SEPTEMBER 30, 2017 AND ~~JANUARY 2,~~DECEMBER 31, 2016

(000’s omitted except share data)



	SEPTEMBER 30, 2017		DECEMBER 31,
	(Unaudited)		2016
ASSETS
Current assets:
Cash and cash equivalents	$	235	$	301
Receivables, net		24,635		22,359
Receivable for insured losses		—		32
Inventories
Finished goods		9,808		8,077
Work in process		1,426		1,433
Raw materials and supplies		11,657		11,135
Prepaid expenses		2,188		1,807
Refundable income taxes		248		739
Total current assets		50,197		45,883

Property, plant and equipment		22,049		19,606

Other assets
Goodwill		7,229		7,229
Deferred income taxes		1,616		1,616
Other assets		4,104		3,674
	$	85,195	$	78,008

LIABILITIES
Current liabilities:
Revolving bank loan payable	$	7,600	$	2,000
Accounts payable and accrued expenses		17,454		17,719
Liability for unpaid claims covered by insurance		—		32
Total current liabilities		25,054		19,751

Other long-term liabilities		6,196		6,053

SHAREHOLDERS’ EQUITY
Common shares, $.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares		643		643
Capital in excess of par value		1,887		1,765
Retained earnings		66,610		65,169
Treasury shares, 892,097 and 903,097, at cost		(15,195)		(15,373)
		53,945		52,204
	$	85,195	$	78,008

OCTOBER 1, 2016

JANUARY 2,

(Unaudited)

2016

ASSETS

Current assets:

Cash and cash equivalents

$
240

$
547

Receivables, net

21,426

22,715

Receivable for insured losses

32

—

Inventories

Finished goods

9,443

7,446

Work in process

1,310

1,459

Raw materials and supplies

9,837

10,741

Prepaid expenses

3,204

2,138

Refundable income taxes

—

70

Total current assets

45,492

45,116

Property, plant and equipment

19,357

17,639

Other assets

Goodwill

7,229

7,229

Amortizable intangible assets, net

—

21

Deferred income taxes

3,329

3,149

Other assets

1,115

2,601

$
76,522

$
75,755

LIABILITIES

Current liabilities:

Revolving bank loan payable

$
1,000

$
6,200

Accounts payable and accrued expenses

16,805

15,267

Liability for unpaid claims covered by insurance

32

—

Income taxes

835

—

Total current liabilities

18,672

21,467

Other long-term liabilities

5,981

5,872

SHAREHOLDERS’ EQUITY

Common shares, $.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares

643

643

Capital in excess of par value

1,765

1,817

Retained earnings

64,834

61,483

Treasury shares, 915,097, at cost

(15,373)

(15,527)

51,869

48,416

$
76,522

$
75,755

See notes to condensed consolidated financial statements.

~~See notes to condensed consolidated financial statements.~~

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AND OCTOBER 1, 2016 ~~AND OCTOBER 3, 2015~~

(Unaudited)

(000’s omitted except per-share amounts)


	OCTOBER 1,		OCTOBER 3,
	2016		2015		SEPTEMBER 30,		OCTOBER 1,
					2017		2016
Net sales	$	37,647	$	36,165	$	38,627	$	37,647

Costs and expenses:
Cost of sales (exclusive of depreciation, depletion and amortization)		29,609		29,257		31,426		29,609
Depreciation, depletion and amortization		607		640		617		607
Selling and administrative		5,527		5,464		5,361		5,527
Charges related to cessation of mining an aggregates deposit		632		—		—		632
Gain on disposition of property and equipment		(89)		(161)		(95)		(89)
		36,286		35,200		37,309		36,286

Operating income		1,361		965		1,318		1,361

Interest income		285		9		18		285
Interest expense		(83)		(111)		(98)		(83)
Other income, net		16		43		28		16

Income before income taxes		1,579		906		1,266		1,579

Provision for income taxes		537		344		431		537

Net income		1,042		562		835		1,042

Retained earnings, beginning of period		63,792		60,220		65,775		63,792

Retained earnings, end of period	$	64,834	$	60,782	$	66,610	$	64,834

Basic and diluted income per share	$	0.62	$	0.34	$	0.50	$	0.62

Average shares outstanding		1,672		1,662		1,682		1,672

See notes to condensed consolidated financial statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND OCTOBER 1, 2016 ~~AND OCTOBER 3, 2015~~

(Unaudited)

(000’s omitted except per-share amounts)


	OCTOBER 1,		OCTOBER 3,		SEPTEMBER 30,		OCTOBER 1,
	2016		2015		2017		2016

Net sales	$	114,596	$	101,715	$	112,617	$	114,596

Costs and expenses:
Cost of sales (exclusive of depreciation, depletion and amortization)		89,899		82,620		91,232		89,899
Depreciation, depletion and amortization		1,897		1,937		1,932		1,897
Selling and administrative		17,406		16,001		17,210		17,406
Charges related to cessation of mining an aggregates deposit		632		—		—		632
Gain on disposition of property and equipment		(281)		(220)		(119)		(281)
		109,553		100,338		110,255		109,553

Operating income		5,043		1,377		2,362		5,043

Interest income		310		28		50		293
Interest expense		(316)		(327)		(272)		(299)
Other income, net		41		70		44		41

Income before income taxes		5,078		1,148		2,184		5,078

Provision for income taxes		1,727		436		743		1,727

Net income		3,351		712		1,441		3,351

Retained earnings, beginning of period		61,483		60,070		65,169		61,483

Retained earnings, end of period	$	64,834	$	60,782	$	66,610	$	64,834

Basic and diluted income per share	$	2.01	$	0.43	$	0.86	$	2.01

Average shares outstanding		1,669		1,661		1,679		1,669

See notes to condensed consolidated financial statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND OCTOBER 1, 2016 ~~AND OCTOBER 3, 2015~~

(Unaudited)

(000’s omitted)


	OCTOBER 1,		OCTOBER 3,		SEPTEMBER 30,		OCTOBER 1,
	2016		2015		2017		2016

Net cash provided (used) by operating activities	$	8,205	$	(1)
Net cash (used) provided by operating activities					$	(1,410)	$	8,205

Investing activities:
Capital expenditures		(3,617)		(1,379)		(4,378)		(3,617)
Cash proceeds from sale of property and equipment		305		220		122		305
Net cash used in investing activities		(3,312)		(1,159)		(4,256)		(3,312)

Financing activities:
(Repayments) borrowings on the revolving bank loan, net		(5,200)		900
Net cash (used) provided by financing activities		(5,200)		900
Borrowings on the revolving bank loan						25,050		23,450
Repayments on the revolving bank loan						(19,450)		(28,650)
Net cash provided by (used in) financing activities						5,600		(5,200)

Net decrease in cash and cash equivalents		(307)		(260)		(66)		(307)

Cash and cash equivalents:
Beginning of period		547		675		301		547

End of period	$	240	$	415	$	235	$	240

Supplemental disclosures of cash flow items:
Cash paid during the nine months for:
Cash paid during the year for:
Interest, net	$	32	$	293	$	339	$	320
Income taxes, net		1,003		3		252		1,003

See notes to condensed consolidated financial statements

CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED ~~OCTOBER 1, 2016~~SEPTEMBER 30, 2017

(Unaudited)

1. Basis of Presentation:

The unaudited interim condensed consolidated financial statements included herein are prepared pursuant to the Securities and Exchange Commission (the “Commission”) rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The condensed consolidated balance sheet of Continental Materials Corporation (the “Company”) as of ~~January 2,~~December 31, 2016 has been derived from the audited consolidated balance sheet of the Company as of that date. The interim condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K. In the opinion of management, the condensed consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods and to ensure the financial statements are not misleading. Certain reclassifications have been made to the ~~2015~~2016 consolidated financial statements to conform to the ~~2016~~2017 presentation. The reclassifications had no effect on the consolidated results of operations, the net decrease in cash or the total assets, liabilities or shareholders’ equity of the Company.

2. Income taxes are accounted for under the asset and liability method that requires deferred income taxes to reflect the future tax consequences attributable to differences between the tax and financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized are based on the tax rates in effect in the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, based on available positive and negative evidence, it is “more likely than not” (greater than a 50% likelihood) that some or all of the net deferred tax assets will not be realized.

The Company has established a valuation reserve related to the carry-forward of all charitable contributions deductions arising from prior ~~years.~~years as well as for a portion of the California Enterprise Zone credit not expected to be utilized prior to expiration. For Federal tax purposes, net operating losses can be carried forward for a period of 20 years while alternative minimum tax credits can be carried forward indefinitely. For state tax purposes, net operating losses can be carried forward for periods ranging from 5 to 20 years for the states that the Company is required to file in. California Enterprise Zone credits can be ~~carried forward indefinitely~~used through 2023 while Colorado credits can be carried forward for 7 years.

The Company’s income tax returns are subject to audit by the Internal Revenue Service (the “IRS”) and state tax authorities. The amounts recorded for income taxes reflect the Company’s tax positions based on research and interpretations of complex laws and regulations. The Company accrues liabilities related to uncertain tax positions taken or expected to be taken in its tax returns.

3. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:


Level 1	Quoted prices in active markets for identical assets or liabilities.

Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3	Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheet:

Cash and Cash Equivalents: The carrying amount approximates fair value and was valued as Level 1.

Revolving Bank Loan Payable: Fair value is estimated based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of the Revolving Bank Loan Payable represents a reasonable estimate of the corresponding fair value as the Company’s debt is held at variable interest rates and was valued as Level 2.

There were no transfers between fair value measurement levels of any financial instruments in the current quarter.

4. In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance will be adopted in the fourth quarter of fiscal 2017 in connection with our annual impairment testing, though no impairment charges are expected to result from our impairment testing.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new revenue standard creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. Subsequently, the FASB has issued various ASUs to provide further clarification around certain aspects of ASC 606. This standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and the Company will adopt the standard in the first quarter of fiscal 2018. The Company ~~implemented~~has prepared an analysis, by product line, comparing its historical accounting policies and practices regarding revenue recognition to the new standards. The Company believes that adoption of the new standard will not have a material effect on the timing or amount of revenue recognized in a given period. To assure compliance, the Company is developing and implementing internal controls to ensure that the requirements of the new standard are satisfied before revenue is recognized. While the Company believes adoption of ASC 606 will not have a material impact on its financial results, it does acknowledge that the nature and extent of revenue related disclosures will significantly change.

In November 2016, the FASB issued ASU ~~No. 2015-17, Income Taxes~~2016-18, Statement of Cash Flows (Topic ~~740): Balance Sheet Classification~~230), requiring that the statement of ~~Deferred Taxes,~~cash flows explain the change in total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach, which ~~changes how deferred taxes are classified on organizations’ balance sheets. The change has been applied~~requires application of the guidance for all periods presented. The ~~effect~~Company is currently evaluating the impact of ~~implementation is~~this guidance on its consolidated financial statements as well as determining the Company’s planned adoption date.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new standard supersedes existing lease guidance to ~~report a consolidated non-current net asset of $3,329,000~~require lessees to recognize assets and ~~$3,149,000~~liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The standard will be effective for the Company in the ~~condensed~~first quarter of fiscal 2019 and will be adopted using a modified retrospective approach. The Company has begun the task of accumulating information on all of its existing leases. Numerous aspects of ASU 2016-2 are still being discussed such that all guidance has not yet been finalized. The Company anticipates that adoption of ASU 2016-02 will have a significant impact on its consolidated balance sheets ~~as of October 1, 2016~~ and ~~January 2, 2016, respectively.~~disclosures, however; such impact has not been quantified at this time.

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

5. Operating results for the first nine months of ~~2016~~2017 are not necessarily indicative of performance for the entire year due to the seasonality of most of the Company’s products. Historically, sales of the Evaporative Cooling segment are higher in the first and second quarters, sales of the Concrete, Aggregates and Construction Supplies (CACS) 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. Sales of the Door segment are generally more evenly spread throughout the year.

6. There is no difference in the calculation of basic and diluted earnings per share (EPS) for the three-month or nine-month periods ended September 30, 2017 and October 1, 2016 ~~and October 3, 2015~~ as the Company does not have any dilutive instruments.

7. The Company operates primarily in two industry groups, Heating, Ventilation and Air Conditioning (HVAC) and Construction Products. The Company has identified two reportable segments within each of the industry groups: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the CACS segment and the Door segment in the Construction Products industry group.

The Heating and Cooling segment primarily produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co. (WFC) of Colton, California. The Evaporative Cooling segment primarily produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. (PMI) 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 Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co., of Colorado Springs and Transit Mix of Pueblo, Inc. of Pueblo, Colorado (the three companies collectively are referred to as TMC). The Door segment sells hollow metal and wood doors, door frames and related hardware, lavatory fixtures and electronic access and security systems from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI), which operates out of facilities in Pueblo and Colorado Springs, Colorado. Sales of these two segments are highly concentrated in the Southern Front Range of Colorado although door sales are also made throughout the United States.

In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.

The Company 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.

The following table presents information about reported segments for the nine-month and three-month periods ended September 30, 2017 and October 1, 2016 ~~and October 3, 2015~~ along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):


	Construction Products Industry						HVAC Industry										Construction Products Industry						HVAC Industry
	Concrete,																Concrete,
	Aggregates &				Combined		Heating				Combined						Aggregates &				Combined		Heating				Combined
	Construction				Construction		and		Evaporative		HVAC		Unallocated				Construction				Construction		and		Evaporative		HVAC		Unallocated
	Supplies		Doors		Products		Cooling		Cooling		Products		Corporate		Total		Supplies		Doors		Products		Cooling		Cooling		Products		Corporate		Total
Nine Months ended October 1, 2016
Nine Months ended September 30, 2017
Revenues from external customers																	$	49,650	$	13,565	$	63,215	$	27,358	$	22,031	$	49,389	$	13	$	112,617
Depreciation, depletion and amortization																		1,026		111		1,137		449		322		771		24		1,932
Operating income (loss)																		2,484		1,544		4,028		219		579		798		(2,464)		2,362
Segment assets																		40,013		7,617		47,630		24,764		10,461		35,225		2,340		85,195
Capital expenditures (b)																		3,367		131		3,498		650		216		866		14		4,378
Three Months ended September 30, 2017
Revenues from external customers	$	51,267	$	13,212	$	64,479	$	27,390	$	22,715	$	50,105	$	12	$	114,596	$	18,054	$	4,936	$	22,990	$	10,144	$	5,489	$	15,633	$	4	$	38,627
Depreciation, depletion and amortization		1,020		95		1,115		415		356		771		11		1,897		316		39		355		147		107		254		8		617
Operating income (loss)		2,881		1,390		4,271		1,205		2,077		3,282		(2,510)		5,043		1,602		600		2,202		151		(270)		(119)		(765)		1,318
Segment assets		35,205		6,695		41,900		20,563		11,115		31,678		2,944		76,522		40,013		7,617		47,630		24,764		10,461		35,225		2,340		85,195
Capital expenditures		2,798		106		2,904		584		129		713		—		3,617		1,148		12		1,160		285		151		436		(21)		1,575
Three Months ended October 1, 2016
Revenues from external customers	$	18,156	$	4,467	$	22,623	$	9,605	$	5,416	$	15,021	$	3	$	37,647
Depreciation, depletion and amortization		316		32		348		138		118		256		3		607
Operating income (loss)		1,010		543		1,553		408		259		667		(859)		1,361
Segment assets		35,205		6,695		41,900		20,563		11,115		31,678		2,944		76,522
Capital expenditures		565		54		619		208		14		222		—		841


	Construction Products Industry						HVAC Industry										Construction Products Industry						HVAC Industry
	Concrete,																Concrete,
	Aggregates &				Combined		Heating				Combined		Unallocated				Aggregates &				Combined		Heating				Combined
	Construction				Construction		and		Evaporative		HVAC		Corporate				Construction				Construction		and		Evaporative		HVAC		Unallocated
	Supplies		Doors		Products		Cooling		Cooling		Products		(a)		Total		Supplies		Doors		Products		Cooling		Cooling		Products		Corporate		Total
Nine Months ended October 3, 2015
Revenues from external customers	$	41,414	$	13,140	$	54,554	$	24,493	$	22,656	$	47,149	$	12	$	101,715
Depreciation, depletion and amortization		1,007		94		1,101		427		369		796		40		1,937
Operating (loss) income		(170)		1,068		898		994		1,850		2,844		(2,365)		1,377
Segment assets (a)		31,791		6,471		38,262		22,628		12,730		35,358		2,135		75,755
Capital expenditures (b)		825		32		857		355		167		522		—		1,379
Three Months ended October 3, 2015
Nine Months ended October 1, 2016
Revenues from external customers	$	16,759	$	4,271	$	21,030	$	9,473	$	5,658	$	15,131	$	4	$	36,165	$	51,267	$	13,212	$	64,479	$	27,390	$	22,715	$	50,105	$	12	$	114,596
Depreciation, depletion and amortization		330		31		361		142		123		265		14		640		1,020		95		1,115		415		356		771		11		1,897
Operating income (loss)		686		274		960		692		154		846		(841)		965		2,881		1,390		4,271		1,205		2,077		3,282		(2,510)		5,043
Segment assets (a)		31,791		6,471		38,262		22,628		12,730		35,358		2,135		75,755		33,518		6,173		39,691		22,381		12,283		34,664		3,653		78,008
Capital expenditures (b)		647		—		647		146		66		212		—		859		2,798		106		2,904		584		129		713		—		3,617
Three Months ended October 1, 2016
Revenues from external customers																	$	18,156	$	4,467	$	22,623	$	9,605	$	5,416	$	15,021	$	3	$	37,647
Depreciation, depletion and amortization																		316		32		348		138		118		256		3		607
Operating income (loss)																		1,010		543		1,553		408		259		667		(859)		1,361
Segment assets (a)																		33,518		6,173		39,691		22,381		12,283		34,664		3,653		78,008
Capital expenditures (b)																		565		54		619		208		14		222		—		841

(a)

Segment assets are as of ~~January 2,~~December 31, 2016.

(b)

Capital expenditures are presented on the accrual basis of accounting.

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.

8. On September 15, 2016 a Partial Summary Judgment Order was issued regarding the Company’s previously disclosed litigation, Continental Materials Corporation v. Valco, Inc., Civil Action No. 2014-cv-2510, filed in the United States District Court for the District of Colorado. The suit regards a sand and gravel lease between the Company and Valco, Inc. (“Valco”) that calls for the payment of royalties over the life of the lease on an agreed 50,000,000 tons of sand and gravel reserves. In the suit the Company sought, among other things, to reform the sand

and gravel lease in regard to the agreed amount of sand and gravel reserves and to recover approximately $1,282,000 of royalty overpayments included in other long-term assets. Valco asserted counterclaims against the Company alleging breach of contract and declaratory judgment regarding the Company’s refusal to make further royalty payments under the Lease. In the ordinary course of business and absent any breach by Valco, the Company is required to make quarterly royalty payments amounting to not less than $300,000 in a calendar year. In response to Valco’s breaches of contract, the Company stopped making royalty payments at the start of the 2015 calendar year. The Company has asserted partial failure of consideration as an affirmative defense to Valco’s counterclaims to offset the alleged back-due quarterly royalty payments and the amount due on quarterly royalty payments in the future. The Partial Summary Judgment Order resolved many of the Company’s claims in Valco’s favor, but the Company’s claim for the return of royalty overpayments made during the statutorily allowed period is still pending. The ~~Company has concluded that recovery~~Partial Summary Judgment Order did not resolve Valco’s counterclaims or the Company’s affirmative defense. During the third quarter of 2016, the ~~overpayments in excess of approximately $650,000 is not likely due to the statute of limitations and has therefore~~Company recorded a $632,000 write-down representing the portion of the royalty overpayment paid prior to the ~~long-term asset during~~statutorily allowed period because of litigation risk attendant to recovering that amount. The Company sought certification of the ~~third quarter of 2016. The Company~~Partial Summary Judgment Order because it and its legal counsel believe ~~there are~~

~~grounds to appeal the Partial Summary Judgment regarding this and the other claims of the suit as~~ the court improperly resolved factual issues in its Partial Summary Judgment Order that should have been decided by a jury. The Company and its legal counsel believe there is a likelihood that some, or all, of the issues resolved by the Partial Summary Judgment Order may be reversed on appeal and remanded for trial by jury although there can be no assurance that an appeal will result in reversal. The Company paid royalties on approximately 17,700,000 tons, including the overpayments, of the 50,000,000 tons of sand and gravel reserves through the end of the third quarter of 2014. The impact of these proceedings could have a material financial effect ~~although~~on the Company; however, the Company does not believe that there is a reasonable basis for estimating the financial impact, if any, of the final outcome of these proceedings and accordingly no accrual or reserve has been recorded in compliance with accounting principles generally accepted in the United States of America. ~~In addition, on September 30, 2016 Valco~~On February 23, 2017, the Partial Summary Judgment Order was certified for immediate appeal, and all other claims, counterclaims and affirmative defenses were stayed pending the resolution of that appeal. The Company filed a ~~motion seeking to add three new counterclaims alleging damages in excess~~notice of ~~$5,900,000.~~appeal on March 24, 2017. The ~~Company has vigorously opposed the motion which has not yet been ruled upon.~~

9. Identifiable amortizable intangible assets as of October 1, 2016 include a restrictive land covenant and customer relationships. At October 1, 2016, these assets were collectively carried at zero, net of $720,000 accumulated amortization. The pre-tax amortization expense for intangible assets during the quarter ended October 1, 2016 was zero compared to $11,000 for the quarter ended October 3, 2015 and $21,000 and $34,000 for the nine months ended October 1, 2016 and October 3, 2015, respectively.

~~Based upon the intangible assets recorded on the balance sheet at October 1, 2016, amortization expense after the third quarter of 2016 will be zero.~~appeal is currently pending.

~~10.~~9. The Company issued a total of 12,000 shares to the eight eligible board members effective March 8, 2017 as full payment for their 2017 retainer fee. The Company issued at total of 12,000 shares to the eight eligible board members effective April 6, 2016 as full payment for their 2016 retainer fee. ~~The Company issued a total of 12,000 shares to the eight eligible board members effective January 15, 2015 as full payment for their 2015 retainer fee.~~ All shares were issued under the 2010 Non-Employee Directors Stock Plan.

~~11.~~10. The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective November 18, 2011. The Company entered into the ~~Fifth~~Eighth Amendment to Credit Agreement effective ~~March 20, 2015 and the Sixth Amendment to Credit Agreement effective August 10, 2015. Effective March 24, 2016 the Company entered into the Seventh Amendment to Credit Agreement.~~May 26, 2017. The Company had previously entered into ~~four~~seven separate amendments to the Credit Agreement. Cumulatively, the amendments were entered into by the Company to, among other things, (i) modify certain of the financial covenants, (ii) ~~increase~~adjust the amount of the Revolving Commitment, ~~to $20,000,000,~~ (iii) terminate the Term Loan Commitment upon the repayment in full of the outstanding principal balance (and accrued interest thereon) of the Term Loan, (iv) modify the Borrowing Base calculation to provide for borrowing availability in respect of new Capital Expenditures, (v) decrease the interest rates on the Revolving Loans, ~~and~~ (vi) extend the maturity date ~~to May 1, 2018.~~and (vii) decrease the Letter of Credit fee rate. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Credit Agreement bear interest based on a London Interbank Offered Rate (LIBOR) or prime rate based option.

The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period.

The Credit Agreement as amended provides for the following:

The Revolving Commitment is $20,000,000.

Borrowings under the Revolving Commitment are limited to (a) 80% of eligible accounts receivable, (b) the lesser of 50% of eligible inventories and $8,500,000 plus (c) 80% of new Capital Expenditures not to exceed $5,500,000 with respect to each of Fiscal Years 2016 and 2017.

The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.15 to 1.0 for ~~the~~each trailing twelve month period ending ~~October 1, 2016~~September 30, 2017 and each Fiscal Quarter end thereafter.

The Company must not permit Tangible Net Worth as of the last day of any Computation Period to be less than $31,000,000 (provided that the required amount of Tangible Net Worth shall increase (but not decrease) by an amount equal to 50% of the Consolidated Net Income for the immediately preceding Fiscal ~~Year beginning with fiscal 2016)~~Year). Therefore, the required Tangible Net Worth as of ~~October 1, 2016~~September 30, 2017 is ~~$31,707,000.~~$32,843,000.

The Balance Sheet Leverage Ratio as of the last day of any Computation Period may not exceed 1.00 to 1.00.

The maturity date of the credit facility is May 1, ~~2018.~~2020.

Interest rate pricing for the revolving credit facility is currently LIBOR plus ~~2.50%~~2.25% or the prime ~~rate plus .25%.~~rate.

Definitions under the Credit Agreement as amended are as follows:

~~Minimum~~ Tangible Net Worth is defined as net worth plus subordinated debt, minus intangible assets (goodwill, intellectual property, prepaid expenses, deposits and deferred charges), minus all obligations owed to the Company or any of its subsidiaries by any affiliate or any of its subsidiaries and minus all loans owed by its officers, stockholders, subsidiaries or employees.

Fixed Charge Coverage Ratio is defined as, for any computation period, the ratio of (a) the sum for such period of (i) EBITDA, as defined, minus (ii) the sum of income taxes paid in cash and all unfinanced capital expenditures to (b) the sum for such period of interest expense.

Balance Sheet Leverage Ratio is defined as the ratio of Total Debt to Tangible Net Worth.

EBITDA means for any Computation Period (or another time period to the extent expressly provided for in the Credit Agreement) the sum of the following with respect to the Company and its Subsidiaries each as determined in accordance with GAAP: (a) Consolidated Net Income, plus (b) federal, state and other income taxes deducted in the determination of Consolidated Net Income, plus (c) Interest Expense deducted in the determination of Consolidated Net Income, plus (d) depreciation, depletion and amortization expense deducted in the determination of Consolidated Net Income, plus (e) ~~charges deducted in the determination of Consolidated Net Income in~~for 2014, ~~(not to exceed $5,757,000 in the aggregate)~~charges directly related to the closing and reclamation of the Pueblo aggregates mining site, plus (f) any other non-cash charges and any extraordinary charges deducted in the determination of Consolidated Net Income, including any asset impairment charges (including write downs of goodwill), minus (g) any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued operations included in the determination of Consolidated Net Income.

Outstanding funded revolving debt was ~~$1,000,000~~$7,600,000 as of ~~October 1, 2016~~September 30, 2017 compared to ~~$6,200,000~~$2,000,000 as of ~~January 2,~~December 31, 2016. The highest balance outstanding during the first nine months of 2017 and 2016 was $10,000,000 and ~~2015 was~~ $7,500,000, ~~and $6,800,000,~~ respectively. Average outstanding funded debt was ~~$4,548,000~~$5,834,000 and ~~$4,901,000~~$4,546,000 for the first nine months of ~~2016~~2017 and ~~2015,~~2016, respectively. At ~~October 1, 2016,~~September 30, 2017, the Company had outstanding letters of credit totaling ~~$5,415,000.~~$4,955,000. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the available borrowing capacity exceeded the cash needs of the Company and this situation is expected to continue for the foreseeable future.

The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including planned capital expenditures, for the next twelve months except for the expenditures related to ~~a royalty agreement and~~ the acquisition of the necessary equipment needed to begin mining an aggregates property near Colorado Springs

should ~~Transit Mix~~TMC succeed in obtaining the required mining permits from the State of Colorado and El Paso County. As of ~~October 1, 2016~~September 30, 2017 the Company has invested and capitalized ~~approximately $2,400,000~~$4,352,000 of deferred development expenditures related to this aggregates property. The Company expects to arrange for term or mortgage financing to fund the acquisition of the necessary equipment needed to begin mining the property should the permits be granted. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.

~~12.~~

11. The Company is involved in litigation matters related to its business, principally product liability matters related to the gas-fired heating products and fan coil products in the Heating and Cooling segment. In the Company’s opinion, none of these proceedings, when concluded, will have a material adverse effect on the Company’s consolidated results of operations ~~cash flows~~ or financial condition as the Company has established adequate accruals for matters that are probable and estimable. The Company does not accrue estimated future legal costs related to the defense of ~~theses~~these matters but rather expenses legal costs as incurred. Additionally, see Note 8 for discussion of litigation regarding the Pueblo sand and gravel lease.

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

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help investors understand the Company’s results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report and the Company’s Annual Report on Form 10-K for the fiscal year ended ~~January 2,~~December 31, 2016.

Company Overview

For an overview of the Company’s operations and operating structure, see Note 7 to the condensed consolidated financial statements contained in this Quarterly Report.

Liquidity and Capital Resources

Sales of the Company’s HVAC products are seasonal except for fan coils. Sales of furnaces, heaters and evaporative coolers are sensitive to weather conditions particularly during their respective peak selling seasons. Fan coil sales are, to a significant extent, dependent on commercial construction, particularly of hotels. Revenues in the CACS segment are primarily dependent on the level of construction activity along the Southern Front Range in Colorado. Sales for the Door segment are not as 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 and demand strong along the Southern Front Range. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in southern 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, if any. 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. In the current year, operating results and timing of capital expenditures resulted in higher levels of borrowing continuing into the third quarter.

Cash ~~provided~~used by operations was ~~$8,205,000~~$1,410,000 during the first nine months of ~~2016~~2017 compared to ~~$1,000 used~~$8,205,000 provided during the first nine months of ~~2015. A significant portion of the~~2016. The current year ~~increase in~~use of cash ~~provided~~ is attributable to ~~improved earnings. Changes~~operating results combined with changes in working capital items, primarily ~~decreases in accounts receivable and~~ increases in ~~accounts payable~~receivables and ~~accrued expenses provided additional cash.~~inventory levels. The ~~Company’s~~prior year provision of cash was attributable to improved operating ~~cash flow was slightly negative~~results combined with changes in the first nine months of 2015 despite an operating profit due to significant increases in accounts receivable and inventories. Receivables were higher due to the improved sales while the increase in inventories was

~~primarily due to a planned build-up in anticipation of fourth quarter furnace sales as well as the delay in the receipt of orders from a large customer.~~working capital items.

During the nine months ended ~~October 1, 2016,~~September 30, 2017, investing activities used ~~$3,312,000~~$4,256,000 of cash compared to ~~$1,159,000~~$3,312,000 of cash used in the prior year’s period. Capital expenditures during the first nine months of ~~2016~~2017 were ~~$3,617,000~~$4,378,000 compared to ~~$1,379,000~~$3,617,000 during the first nine months of 2016. ~~Capital~~The primary source of capital spending in both periods was the CACS segment ~~was the primary reason for these increases as the segment~~which added new ~~mixer trucks~~rolling machinery and continued ~~to develop the~~development of an aggregate property ~~that is under option.~~near Colorado Springs. Additionally, 2016 ~~includes~~included $305,000 of cash proceeds from the sale of equipment compared to ~~$220,000~~$122,000 in the first nine months of ~~2015.~~2017.

Financing activities during the first nine months of 2017 provided $5,600,000 as borrowings were used to finance the increase in working capital and capital expenditures. During the first nine months of 2016 financing activities used $5,200,000 asof available cash ~~was used~~ to pay down the revolving bank loan. ~~During the first nine months of 2015 financing activities provided $900,000 as bank borrowings were used to partially finance the increase in working capital.~~ See also the discussion of the Revolving Credit and Term Loan Agreement below.

Revolving Credit and Term Loan Agreement

As discussed in Note 1110 to the condensed consolidated financial statements contained in this Quarterly Report, the Company maintains a Credit Agreement, which, as amended, provides for a Revolving Commitment of $20,000,000. The Revolving Commitment covers the Company’s outstanding letters of credit ($4,955,000 at September 30, 2017) and cash borrowings. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Revolving Commitment are limited to (a) 80% of eligible accounts receivable, (b) the lesser of 50% of eligible inventories and $8,500,000 plus (c) 80% of new Capital Expenditures not to exceed $5,500,000 in the aggregate with respect to each of Fiscal Year 2016 and 2017. Borrowings under the Credit Agreement bear interest based on a LIBOR or prime rate based option.

The Company’s outstanding borrowings against the revolving credit facility were ~~$1,000,000~~$7,600,000 at ~~October 1, 2016.~~September 30, 2017. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the entire revolving credit facility was available to the Company. This situation is expected to continue for the foreseeable future.

As of ~~October 1, 2016~~September 30, 2017 the Company was in compliance with all covenants in the Credit Agreement and expects to be in compliance with all loan covenants, as amended, for the remaining term of the Credit Agreement. The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including planned capital expenditures, for the next twelve months except for the ~~expenditures related to a royalty agreement and the~~ acquisition of the necessary equipment needed to begin mining an aggregates property near Colorado Springs should Transit Mix succeed in obtaining the required mining permits from the State of Colorado and El Paso County. The Company ~~expects to arrange for~~anticipates arranging term or mortgage financing to fund the acquisition of the necessary equipment needed to begin mining the property should the permits be granted. ~~The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.~~

Results of Operations - Comparison of Quarter Ended ~~October 1, 2016~~September 30, 2017 to the Quarter Ended October ~~3, 2015~~1, 2016

(In the ensuing discussions of the results of operations the Company defines the term gross profit as the amount determined by deducting cost of sales before depreciation, depletion and amortization from sales. The gross profit ratio is gross profit divided by sales.)

Consolidated sales in the third quarter of ~~2016~~2017 were ~~$37,647,000,~~$38,627,000, an increase of ~~$1,482,000~~$980,000, or ~~4.1%~~2.6%, compared to the third quarter of ~~2015.~~2016. The ~~CACS segment accounted for a majority of~~improvement was seen mainly in the ~~increase reporting~~Heating and Cooling and Door segments where sales ~~$1,397,000~~were higher ~~than~~by $539,000 and $469,000, respectively, in the third quarter of ~~2015. Smaller increases~~2017 compared to the third quarter of 2016. The Evaporative Cooling sement showed a smaller increase in sales, up 1.4%, while the CACS segment reported a small decrease, 0.6%, in 2017 third quarter sales incompared to the ~~Door and Heating and Cooling segments were partially offset by a slight decline in~~ third quarter ~~sales in the Evaporative Cooler segment.~~of 2016.

The consolidated gross profit ratio in the third quarter of ~~2016~~2017 was ~~21.4%~~18.6% compared to ~~19.1%~~21.4% in the same period of ~~2015. The gross profit ratio improvement~~2016. Virtually all of the decrease was ~~realized in~~attributable to the ~~CACS, Door~~Evaporative Cooling and ~~Evaporative Coolings~~Heating and Cooling segments which reported ~~increases of 3.3%, 5.3%~~gross profit ratios 8.1% and ~~3.6%, respectively.~~6.3% lower, respectively, in the current year third quarter compared to the prior year third quarter. The ~~Heating and Cooling~~CACS segment reported a ~~slight decline, 1.2%~~minimal decrease, 0.1%, in gross profit ~~margin.~~ ratio in the current third quarter compared to the prior year’s third quarter while the Door segment’s gross profit ratio was the same in both quarters.

Consolidated selling and administrative expenses were ~~$63,000 higher than~~$166,000 lower in the ~~comparable prior year quarter.~~

~~However,~~third quarter of 2017 compared to the third quarter of 2016 as a large decrease in the Heating and Cooling segment was partially offset by smaller increases in all other segments. As a percentage of consolidated sales, selling and administrative expenses decreased ~~between quarters at~~from 14.7% ~~and 15.1% for~~in the third quarter of 2016 ~~and 2015, respectively.~~to 13.9% in the third quarter of 2017.

As discussed in Note 8 above, the ~~current~~third quarter ~~includes~~of 2016 included a $632,000 write-down related to an overpayment of prepaid ~~royalties claim which~~royalties. There was ~~previously included within other long-term assets.~~

~~Consolidated depreciation and amortization charges declined $33,000 between the third quarter of 2016 and the third quarter of 2015.~~no similar item in 2017.

The consolidated operating income in the third quarter of ~~2016~~2017 was ~~$1,361,000~~$1,318,000 compared to ~~$965,000~~$1,361,000 in the third quarter of the prior year. ~~The majority of the improvement was seen~~Declines in the ~~CACS~~Heating and Cooling and Evaporative Cooling segments more than offset improvements in the other two segments combined. Individual segment ~~which reported a current quarter operating~~results are discussed below.

Interest income ~~of $1,010,000 compared to $686,000~~ in the third quarter of ~~2015. The Door and Evaporative Cooler segments also reported improved operating income up $269,000 and $105,000, respectively. The Heating and Cooling segment reported a decline of $284,000~~2017 was $18,000 compared to $285,000 in ~~operating income between~~ the third quarter of 2016. The 2016 ~~and the same period in 2015.~~

~~Interest income for the third~~ quarter ~~2016 is $285,000 compared to $9,000 for the third quarter of 2015. The current year quarter includes~~included $252,000 of preferred interest income recorded with the redemption of a preferred ~~investment previously classified in other assets as of January 2, 2016.~~investment. Interest expense includes interest on outstanding funded debt, finance charges on outstanding letters of credit, the fee on the unused revolving credit line and other recurring fees charged by the lending bank. Interest expense in the third quarter of ~~2016~~2017 was ~~$83,000~~$98,000 compared to ~~$111,000~~$83,000 in the third quarter of ~~2015.~~2016. The ~~decline~~increase from the prior year third quarter is attributable to ~~improved earnings,~~ lower ~~average borrowings and inclusion of $17,000 capitalized~~ interest ~~associated with expenditures related to a royalty~~rates per the amended debt agreement discussed in Note ~~11 above.~~10 combined with higher average borrowings in the current year third quarter. The weighted average interest rate on outstanding funded debt in the third quarter of ~~2016,~~2017, including the fee on the unused line of credit and other recurring bank charges but excluding finance charges on letters of credit, was approximately ~~6.5%~~4.0% compared to ~~4.7%~~6.5% in the third quarter of ~~2015.~~2016. Average outstanding funded debt in the third quarter of ~~2016~~2017 was ~~$2,779,000~~$8,199,000 compared to ~~$4,940,000~~$2,779,000 in the third quarter of ~~2015.~~2016. At the end of the third quarter of ~~2016~~2017 the outstanding funded debt was ~~$1,000,000~~$7,600,000 compared to ~~$6,700,000~~$1,000,000 at the end of the third quarter of ~~2015.~~2016.

The Company’s effective income tax rate reflects federal and state statutory income tax rates adjusted for non-deductible expenses, tax credits and other tax items. The estimated effective income tax rate in the third quarter of 2017 and 2016 was 34.0% ~~compared to 38.0% for the third quarter of 2015.~~.

The Company operates four businesses in two industry groups. The businesses are generally seasonal, weather sensitive and subject to cyclical factors. The following addresses various aspects of operating performance focusing on the reportable segments within each of the two industry groups.

1314

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 September 30, 2017 and October 1, 2016 ~~and October 3, 2015~~ (dollar amounts in thousands):


	Concrete,						Concrete,
	Aggregates and						Aggregates and
	Construction						Construction
							Supplies			Door
Three Months ended September 30, 2017
Revenues from external customers							$	18,054		$	4,936
Segment gross profit								3,050			1,367
Gross profit as percent of sales								16.9	%		27.7	%
Segment operating income								1,602			600
Operating income as a percent of sales								8.9	%		12.2	%
Segment assets as of September 30, 2017							$	40,013		$	7,617
Return on assets								4.0	%		7.9	%
	Supplies			Door
Three Months ended October 1, 2016
Revenues from external customers	$	18,156		$	4,467		$	18,156		$	4,467
Segment gross profit		3,080			1,239			3,080			1,239
Gross profit as percent of sales		17.0	%		27.7	%		17.0	%		27.7	%
Segment operating income		1,010			543			1,010			543
Operating income as a percent of sales		5.6	%		12.2	%		5.6	%		12.2	%
Segment assets as of October 1, 2016	$	35,205		$	6,695		$	35,205		$	6,695
Return on assets		2.9	%		8.1	%		2.9	%		8.1	%

Three Months ended October 3, 2015
Revenues from external customers	$	16,759		$	4,271
Segment gross profit		2,298			958
Gross profit as percent of sales		13.7	%		22.4	%
Segment operating income		686			274
Operating income as a percent of sales		4.1	%		6.4	%
Segment assets as of October 3, 2015	$	33,814		$	7,031
Return on assets		2.0	%		3.9	%

Concrete, Aggregates and Construction Supplies Segment

The product offerings of the CACS segment consist of ready mix concrete, aggregates and construction supplies. Ready mix concrete and aggregates are produced at multiple locations in or near Colorado Springs and Pueblo, Colorado. Construction supplies encompass numerous products purchased from third party suppliers and sold to the construction trades, particularly concrete sub-contractors. During the three months ended ~~October 1, 2016,~~September 30, 2017, concrete, aggregates and construction supplies accounted for approximately 77%, ~~17%~~18% and 6%5% of the sales of the CACS segment, respectively, including aggregates consumed internally in the production of concrete. In the third quarter of ~~2015,~~2016, the sales mix between concrete, aggregates and construction supplies was ~~72%~~77%, ~~20%~~17% and 8%6%, respectively. Sales including aggregates consumed internally increased ~~$1,553,000 (8.8%~~$259,000 (1.3%) between the third quarter of ~~2016~~2017 and the comparable prior year quarter. Sales to third parties ~~increased~~decreased by ~~$1,397,000 (8.3%~~$102,000 (0.6%) between the same periods. The gross profit reported by the CACS segment ~~improved~~decreased to ~~17.0%~~16.9% in the third quarter of ~~2016~~2017 from ~~13.7%~~17.0% in the third quarter of the prior ~~year. The enhanced performance of the segment is attributable to sustained improvement~~year as dereases in concrete and other operations were partially offset by improved results in the ~~construction market in the Colorado Springs area, an improving Pueblo market and increased pricing in both markets.~~aggregates operations.

~~Excluding a flow fill project during 2015, ready~~Ready mix concrete sales increased ~~17.4%~~1.9% in the third quarter of ~~2016~~2017 versus the third quarter of ~~2015.~~2016 as lower volume was more than offset by higher sales prices. Concrete volume ~~on the same basis,~~ was ~~9.4% higher~~5.8% lower in the third quarter of ~~2016~~2017 compared to the prior year quarter ~~while average concrete~~as wet weather during much of the quarter impacted the ability to pour concrete. Concrete prices ~~for~~increased by 8.2% in the third quarter of ~~2016 increased by approximately 7.3% over~~ the ~~comparable 2015 quarter.~~current year compared to the third quarter of the prior year as both Colorado Springs and, to a lesser extent, Pueblo reported higher sales prices. Even though concrete prices have increased, the market remains sharply competitive especially on large construction projects. Material cost per yard ~~remained fairly consistent, increasing less than 1%,~~increased 9.8% in the third quarter of ~~2016~~2017 compared to the prior year third quarter. Cement is the highest cost raw material used in the production of ready mix concrete. Cement costs per yard increased by ~~5.5%~~7.0% in the third quarter of the current year compared to the same quarter of ~~2015. Higher~~2016. The higher cement costs, including delivery, ~~were partially offset by lower fly ash and other admixture costs.~~combined with increased cost for rock to account for the majority of the material cost increase. Batching cash costs per yard increased by ~~6.2% while delivery cash~~14.7% in the third quarter of 2017 compared to the third quarter of 2016. Higher repair and maintenance costs ~~per yard decreased by 2.3%. Batching~~and equipment rental costs ~~increased primarily due~~contributed to ~~higher labor costs associated with additional personnel and overtime required for several more technical jobs.~~the current quarter increase. Delivery costs

1415

~~declined largely~~increased 23.3% in the current quarter of 2017 compared to the prior year third quarter mostly due to ~~reduced repairs~~higher labor costs, including overtime, and ~~maintenance costs as well as lower diesel fuel costs which more than offset an increase in~~the use of contract ~~trucking expense.~~truckers. The gross profit ratio from concrete ~~increased~~decreased to ~~20.1%~~16.2% for the third quarter ~~2016~~2017 from ~~14.6%~~20.3% in the third quarter of ~~2015.~~2016.

The CACS segment also produces and sells sand, crushed limestone and gravel (collectively “aggregates”) from deposits in and around Colorado Springs. Sales volume (tons) of construction aggregates, including those used internally in the production of ready mix concrete, decreased ~~10.3%~~15.0% in the third quarter of ~~2016~~2017 compared to the comparable ~~2015~~2016 quarter. Average selling prices, excluding freight, increased ~~13.1%~~23.4% due to the higher ratio of ~~concrete sand~~rock to ~~fill~~ sand sales. Although the sand operation reported an improved gross profit for the third quarter of 2016 compared to the same period in 2015, mining challenges at two of the quarries and carrying costs related to the closed Pueblo quarryImproved performance by all aggregates operations contributed to the current quarter results. The aggregates operations reported a third quarter 2017 profit of $413,000 compared to a $215,000 loss ~~reported by the aggregates operations~~ in the third quarter of ~~2016 compared to a $30,000 profit for the third quarter of 2015.~~2016.

Sales of construction supplies decreased ~~by $367,000 (24.9%~~$23,000 (2.1%) in the third quarter of ~~2016~~2017 compared to the prior year third quarter. The gross profit declined to 4.5% from 12.4% ~~from 15.1%~~ in ~~2015.~~2016. Higher ~~labor~~material costs, including steel rebar, and both production and delivery labor costs, combined ~~with the decrease in sales volume~~ to account for the decline in gross profit.

Depreciation and amortization charges ~~decreased by $14,000~~remained level at $316,000 in the third ~~quarter~~quarters of ~~2016 compared to the third quarter of 2015.~~both 2017 and 2016.

Selling and administrative expenses were ~~$232,000 lower~~$15,000 higher in the third quarter of ~~2016~~2017 compared to the same period in ~~2015. Increased compensation related expenses were more than offset by reduced~~2016 primarily due to higher legal fees. Litigation fees related to the Pueblo aggregate lease were ~~$138,000~~$260,000 during the third quarter of ~~2016~~2017 compared to ~~$453,000~~$138,000 incurred during the comparable period of ~~2015.~~2016. As a percentage of sales, selling and administrative expenses were 6.8% in 2017 compared to 6.7% in ~~2016 compared to 8.6% in 2015.~~2016.

In addition, the third quarter of 2016 ~~includes a write-down of $632,000 related to prepaid royalties discussed in Note 8 and~~included $252,000 of preferred interest ~~income~~ received with the redemption of a preferred ~~investment discussed in Results of Operations.~~investment.

The prices of two commodities, cement and diesel fuel, can have a significant effect on the results of operations of this segment. Management negotiates cement prices with producers who have production facilities in or near the concrete markets that the Company serves. Management may negotiate separate cement prices for large construction projects depending on the demand for and availability of cement from the local producers. The Company buys diesel fuel from local distributors and occasionally enters into a short term arrangement with a distributor whereby the price of diesel fuel is fixed for a period of up to six months. In the past year the Company has not hedged diesel fuel prices. Increases in the cost of these two commodities have a direct effect on the results of operations depending upon whether competitive conditions prevailing in the marketplace enable the ~~company~~Company to adjust its selling prices to recover such increases.

Door Segment

The Door segment sells hollow metal doors, door frames and related hardware, wood doors, lavatory fixtures and electronic access and security systems. Nearly all of the Door ~~segments~~segment’s sales are for commercial and institutional buildings such as schools and healthcare facilities. Approximately 65% to 70% of the sales of the Door segment are related to jobs obtained through a competitive bidding process. Bid prices may be higher or lower than bid prices on similar jobs in the prior year. The Door segment does not track unit sales of the various products through its accounting or management reporting systems. Management focuses on the level of the sales backlog, the trend in sales and the gross profit rate in managing the business.

Door sales in the third quarter of ~~2016~~2017 were ~~$196,000 (4.6%~~$469,000 (10.5%) ~~more~~greater than in the third quarter of the previous year. Bidding prices remain competitive. The gross profit ratio in the third quarter of both 2017 and 2016 was 27.7%~~, up from 22.4% in the comparable quarter of 2015. The improvement in the gross profit ratio is principally due to better~~ as increased labor costs were offset by lower overhead expenses and improved pricing on ~~some of the~~certain bid jobs shipped during the third quarter of ~~2016.~~

2017.

Sales and administrative expenses were ~~$11,000~~$64,000 higher in the third quarter of ~~2016~~2017 compared to the third quarter of ~~2015.~~2016. As a percentage of sales, these expenses decreased to ~~14.9% from 15.3%~~14.8% in the third ~~quarters~~quarter of 2017 from 14.9% in the comparable 2016 ~~and 2015, respectively.~~quarter.

The Door segment sales backlog at the end of the third quarter of ~~2016~~2017 was ~~$5,572,000~~$6,112,000 compared to ~~$4,373,000 a year ago.~~$5,572,000 at the end of the same quarter of 2016.

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 September 30, 2017 and October 1, 2016 ~~and October 3, 2015~~ (dollar amounts in thousands):


	Heating and			Evaporative			Heating and			Evaporative
							Cooling			Cooling
Three Months ended September 30, 2017
Revenues from external customers							$	10,144		$	5,489
Segment gross profit								1,867			913
Gross profit as percent of sales								18.4	%		16.6	%
Segment operating income (loss)								151			(270)
Operating income (loss) as a percent of sales								1.5	%		(4.9)	%
Segment assets as of September 30, 2017							$	24,764		$	10,461
Return on assets								0.6	%		(2.6)	%
	Cooling			Cooling
Three Months ended October 1, 2016
Revenues from external customers	$	9,605		$	5,416		$	9,605		$	5,416
Segment gross profit		2,376			1,340			2,376			1,340
Gross profit as percent of sales		24.7	%		24.7	%		24.7	%		24.7	%
Segment operating income		408			259			408			259
Operating income as a percent of sales		4.2	%		4.8	%		4.2	%		4.8	%
Segment assets as of October 1, 2016	$	20,563		$	11,115		$	20,563		$	11,115
Return on assets		2.0	%		2.3	%		2.0	%		2.3	%

Three Months ended October 3, 2015
Revenues from external customers	$	9,473		$	5,658
Segment gross profit		2,454			1,194
Gross profit as percent of sales		25.9	%		21.1	%
Segment operating income		692			154
Operating income as a percent of sales		7.3	%		2.7	%
Segment assets as of October 3, 2015	$	22,286		$	11,864
Return on assets		3.1	%		1.3	%

Heating and Cooling Segment

In the third quarter of ~~2016,~~2017, approximately ~~72%~~65% of sales in the Heating and Cooling segment consisted of wall furnaces and heaters. Fan coils accounted for ~~27%~~33% of the segment’s sales and other products were about ~~1%.~~2% of the segment’s sales. In the third quarter of ~~2015~~2016 these shares of total segment sales were ~~62%~~72%, ~~38%~~27% and ~~less than~~ 1%, respectively. Overall sales in the Heating and Cooling segment in the third quarter of ~~2016~~2017 increased by ~~$132,000 (1.4%~~$539,000 (5.6%) compared to the same period in ~~2015.~~2016.

Sales of furnaces and heaters ~~increased 22.9%~~declined 7.3% in the three months ended ~~October 1, 2016~~September 30, 2017 compared to the three months ended October ~~3, 2015.~~1, 2016. Unit shipments of furnaces and heaters were ~~17.8% higher~~8.9% lower in the third quarter of ~~2016. Prior year third quarter shipments were lower than usual, something management attributed to customers delaying orders for the upcoming season.~~2017. Average sales prices for furnaces and heaters were about ~~4.3%~~1.7% higher compared to a year ago as a result of ~~price increases instituted during the third quarter of 2015 and~~ changes in product mix. Sales incentive discounts and production levels in relation to sales volume contributed to a lower gross profit margin in the furnace and heater product line in the third quarter of 2016 compard to the prior year third quarter.

Sales of fan coils during the third quarter of ~~2016 declined by 23.6% over~~2017 improved 25% compared to the ~~comparable 2015~~third quarter ~~due to a recent slow down in order activity.~~2016. The fan coil sales backlog at September 30, 2017 was $2,447,000 compared to $2,738,000 at October 1, ~~2016 was $2,738,000 compared to $3,278,000 at October 3, 2015.~~2016. Typically, approximately 90% of the sales of fan coils are custom-made systems for hotels and other commercial buildings. Fan coil jobs are obtained through a competitive bidding process. Since

every bid job is a unique configuration of materials and parts, the ~~company~~Company does not track ~~units of~~unit sales or production as such unit volume data would not be useful in managing the business. Management focuses on the contribution margin by job, the current level of sales and the sales backlog in managing the fan coil business. Contribution margin is measured by deducting variable manufacturing costs and variable selling expenses from sales for a particular product line and is used as an internal measure of profitability for a product or product line. The fan coil contribution margin percentage in the third quarter of ~~2016~~2017 was ~~29.8%~~24.9%, updown from ~~28.0%~~29.8% in the third quarter of ~~2015. Both quarters’ margins were considered~~2016. The decrease in margin in the third quarter of 2017 can be attributed to ~~be acceptable performance levels.~~higher labor, freight and material costs.

The Heating and Cooling segment’s gross profit ratio for the third quarter of ~~2016~~2017 was ~~24.7%~~18.4% compared to ~~25.9%~~24.7% in the third quarter of ~~2015.~~2016. The lower gross profit ratio is attributable ~~primarily~~ to the ~~reduced gross profit margins of the furnace and heater lines discussed above.~~same increased costs noted for fan coils.

Selling and administrative expenses in the third quarter of ~~2016~~2017 were ~~$209,000 higher~~$261,000 lower than the third quarter of the previous year. The ~~increase~~decrease was ~~mainly~~ attributable to ~~increased~~lower compensation ~~costs.~~related expenses and reduced legal fees. As a percentage of sales, selling and administrative expenses were 15.5% in the third quarter of 2017 and 19.1% in the third quarter of ~~2016 and 17.1% in the third quarter of 2015.~~2016.

Evaporative Cooling Segment

Sales of evaporative coolers ~~declined $242,000 (4.3%~~increased $73,000 (1.4%) in the third quarter of ~~2016~~2017 compared to the third quarter of ~~2015.~~2016. Unit sales of evaporative coolers increased less than 1% in the current third quarter ~~of 2016 were approximately 14.3% lower than in~~compared to the prior year third ~~quarter of 2015.~~quarter. Average selling prices were up ~~about 12.3%~~0.7% between the third quarter of ~~2016~~2017 and ~~2015. There was~~2016. The increased average selling prices are attributed to a higher ~~ratio~~volume of ~~single inlet and~~ commercial and industrial units sold ~~to standard residential units sold~~combined with increased parts sales in the ~~third quarter of 2016 compared to the prior~~current year ~~same period. The single inlet and commercial and industrial units are higher priced compared to the standard residential models.~~quarter. The gross profit ratio in the third quarter of ~~2016~~2017 was ~~24.7%~~16.6% compared to ~~21.1%~~24.7% a year ago. The ~~improved~~decrease in gross profit ratio is mainly attributable to ~~the~~ higher ~~average price combined with lower~~labor costs and increased material costs, notably steel.

Selling and administrative expenses were ~~$46,000 (5.0%~~$113,000 (11.7%) higher in the third quarter of ~~2016~~2017 mainly due to increased ~~spending on advertising.~~compensation and professional service related costs. As a percentage of sales, selling and administrative expenses increased to ~~17.8%~~19.6% in the current quarter of ~~2016~~2017 from ~~16.2%~~17.8% in the prior year quarter.

Both businesses in the HVAC group are sensitive to changes in prices for a number of different raw materials, commodities and purchased parts. Prices of steel and copper in particular can have a significant effect on the results of operations of this group. Neither company is currently a party to any hedging arrangements with regard to steel or copper.

Results of Operations - Comparison of Nine Months Ended ~~October 1, 2016~~September 30, 2017 to Nine Months Ended October ~~3, 2015~~1, 2016

Consolidated sales in the first nine months of ~~2016~~2017 were ~~$114,569,000, an increase~~$112,617,000, a decrease of ~~$12,881,000~~$1,979,000 or ~~12.7%~~1.7% compared to the first nine months of ~~2015. All segments~~2016. The Door segment reported ~~increased~~an increase in sales in the current period of $353,000 (2.7%) mainly due to strong third quarter performance. All three other segments reported lower sales in the third quarter of the current year compared to the third quarter of the prior year. Sales in the CACS segment ~~increased $9,853,000 (23.8%~~decreased $1,617,000 (3.2%) ~~attributable~~due, in part, to ~~strenghthening construction activity in both the Colorado Springs and Pueblo markets, increased pricing in both markets and~~ a windmill job serviced by a portable plant which provided $2,837,000 in ~~revenue.~~revenue in 2016. There was no similar project in 2017. Excluding this job, sales in the CACS segment increased $1,220,000 (2.5%) in the first nine months of 2017 compared to the prior year period. Sales in the Evaporative Cooling segment decreased by $684,000 (3.0%) due to lower unit volume. Sales in the Heating and Cooling segment ~~increased by $2,897,000 (11.8%~~decreased $32,000 (less than 1%) as ~~both~~ furnace ~~and~~sales improved, but fan coil sales ~~exceeded~~lagged prior year levels. ~~Sales in the Door segment increased by $72,000 (0.6%) while sales in the Evaporative Cooling segment increased $59,000 (0.3%).~~

The consolidated gross profit ratio in the first nine months of ~~2016~~2017 was ~~21.6%~~19.0% compared to ~~18.8%~~21.6% in the first nine months of ~~2015. The gross profit ratio in the CACS improved by 5.5 points.~~2016. The gross profit ratios in the Door segment improved by ~~2.8 points while~~1.0 points. All other segments reported decreases in the gross profit ratio. The Evaporative Cooling segment ~~improved by~~reported the largest decrease in gross profit margin, 5.4 points. The Heating and Cooling and CACS segments reported decreases of 3.7 points and 1.8 points, ~~and the Heating~~

~~and Cooling segment improved 0.6 points.~~respectively. The changes are addressed in more detail in the discussion by segment below.

Selling and administrative expenses in the first nine months of ~~2016~~2017 were ~~$1,405,000 (8.8%~~$196,000 (1.1%) ~~higher~~lower compared to the same period of the prior year. ~~Selling~~Increased selling and administrative expenses in the Door and Evaporative Cooling

segments were ~~higher~~more than offset by decreases in ~~all segments primarily due to increased compensation costs.~~the CACS and Heating and Cooling segments. As a percentage of consolidated sales, selling and administrative expenses ~~declined to 15.2%~~remained consistent at 15.3% the first nine months of ~~2016~~2017 compared to ~~15.7%~~15.2% in the same period of the prior year.

Depreciation and amortization charges in the first nine months of ~~2016 and 2015 were comparable at $1,897,000 in 2016 and $1,937,000 in 2015.~~2017 increased $35,000 (1.9%) compared to the first nine months of 2016. Capital expenditures, which had been lower for several years, increased in the first nine months of ~~2016~~2017 versus the prior year period primarily in the CACS segment with the purchase of new mixer ~~trucks and the continued development of an aggregates property under option.~~trucks.

Consolidated operating income in the first nine months of ~~2016~~2017 was ~~$5,043,000~~$2,362,000 compared to ~~$1,377,000~~$5,043,000 in the first nine months of the prior year. ~~The improved~~A decline in operating results ~~are primarily attributable to~~was reported by all segments except the ~~CACS~~Door segment which reported an increase of $3,051,000. This improvement was the result of increased concrete sales volume and higher sales prices. Each of the other segments reported improvements as well. The Door, Evaporative Cooling and Heating and Cooling segments had increases of $322,000, $227,000 and $211,000, respectively11.1% in operating income in the first nine months of ~~2016~~2017 compared to the first nine months of ~~2015.~~

~~In the first nine months~~2016. The Evaporative Cooling, Heating and Cooling and CACS segments reported decreases in operating income of ~~2016 interest income was $310,000 compared to $28,000~~$1,498,000, $986,000 and $397,000, respectively, in the first nine months of ~~2015.~~2017 compared to the first nine months of 2016. See further details in the discussion of segments below.

Interest income for the first nine months of 2017 was $50,000 compared to $293,000 in the first nine months of 2016. The first nine months of 2016 included $252,000 of preferred interest recorded with redemption of a preferred investment in the CACS segment. Interest expense for the first nine months of ~~2016~~2017 declined to ~~$316,000~~$272,000 from ~~$327,000~~$299,000 in the first nine months of ~~2015 for reasons~~2016 as higher average borrowings benefited from lower interest rates per the amended debt agreement discussed in ~~the quarter results.~~Note 10. The weighted average interest rate on outstanding funded debt, including the availability fee on the unused line of credit and other recurring bank charges but excluding finance charges on letters of credit, was approximately ~~5.4%~~4.9% for the first nine months of ~~2016~~2017 compared to ~~5.0%~~5.4% for the same period in ~~2015.~~2016. Average outstanding funded debt in the first nine months of ~~2016~~2017 was ~~$4,548,000~~$5,834,000 compared to ~~$4,901,000~~$4,548,000 in the first nine months of ~~2015.~~2016.

The Company’s effective income tax rate reflects federal and state statutory income tax rates adjusted for non-deductible expenses, tax credits and other tax items. The estimated effective income tax rate in the first nine months of 2017 and 2016 was 34.0% ~~compared to 38.0% for the first nine months of 2015.~~.

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 nine months ended September 30, 2017 and October 1, 2016 ~~and October 3, 2015~~ (dollar amounts in thousands):


	Concrete,
	Aggregates and
	Construction
	Supplies			Door
Nine Months ended September 30, 2017
Revenues from external customers	$	49,650		$	13,565
Segment gross profit		7,219			3,775
Gross profit as percent of sales		14.5	%		27.8	%
Segment operating income		2,484			1,544
Operating income as a percent of sales		5.0	%		11.4	%
Segment assets as of September 30, 2017	$	40,013		$	7,617
Return on assets		6.2	%		20.3	%

Nine Months ended October 1, 2016
Revenues from external customers	$	51,267		$	13,212
Segment gross profit		8,364			3,538
Gross profit as percent of sales		16.3	%		26.8	%
Segment operating income		2,881			1,390
Operating income as a percent of sales		5.6	%		10.5	%
Segment assets as of October 1, 2016	$	35,205		$	6,695
Return on assets		8.2	%		20.8	%

Concrete,


Aggregates and

Construction

Supplies

Door

Nine Months ended October 1, 2016

Revenues from external customers

$
51,267

$
13,212

Segment gross profit

8,364

3,538

Gross profit as percent of sales

16.3
%

26.8
%
Segment operating income

2,881

1,390

Operating income as a percent of sales

5.6
%

10.5
%
Segment assets as of October 1, 2016

$
35,205

$
6,695

Return on assets

8.2
%

20.8
%

Nine Months ended October 3, 2015

Revenues from external customers

$
41,414

$
13,140

Segment gross profit

4,469

3,151

Gross profit as percent of sales

10.8
%

24.0
%
Segment operating (loss) income

(170)

1,068

Operating (loss) income as a percent of sales

(0.4)
%

8.1
%
Segment assets as of October 3, 2015

$
33,814

$
7,031

Return on assets

(0.5)
%

15.2
%

Concrete, Aggregates and Construction Supplies Segment

In the first nine months of ~~2016~~2017 concrete, aggregates and construction supplies accounted for approximately ~~77%~~78%, ~~17%~~16% and 6% of sales of the CACS segment, respectively, including aggregates consumed internally in the production of concrete. In the first nine months of ~~2015~~2016 the sales mix among concrete, aggregates and construction supplies was ~~72%~~77%, ~~20%~~17% and 8%6%, respectively. Sales, including aggregates consumed internally, ~~increased~~decreased by ~~$10,432,000 (22.1%~~$1,821,000 (3.2%) and sales to third parties ~~increased $9,853,000 (23.8%~~decreased $1,617,000 (3.2%). The increase is attributable to sustained improvement in the construction market in the Colorado Spring, an improving Pueblo market and increased pricing in both markets. Additionally, current year results include $2,837,000 in revenue associated withfirst nine months of 2016 included a windmill ~~project~~job serviced by a portable ~~plant.~~plant which provided $2,837,000 in revenue. There was no similar project in ~~2015.~~2017. Excluding this job, sales in the CACS segment increased $1,220,000 (2.5%) in the first nine months of 2017 compared to the prior year period.

Ready mix concrete sales, excluding flow fill material and the 2016 windmill job, improved by ~~$10,417,000 (33.5%~~$2,752,000 (7.1%) in the first nine months of ~~2016~~2017 over the comparable ~~2015~~2016 period primarily due to ~~an improved Pueblo~~a sustained improvement in the Colorado Springs market ~~the windmill project serviced by the portable plant~~ and improved ~~pricing. Concrete volume increased by 18.4%.~~pricing in both the Colorado Springs and Pueblo markets. Exclusive of the 2016 windmill project, ready mix volume increased by ~~12.5%.~~1.4% in the first nine months of 2017 compared to the first half of 2016. Average concrete prices for the first nine months of ~~2016,~~2017, excluding the windmill project and flow fill material, increased by ~~10.6%~~5.6% compared to the first nine months of ~~2015.~~2016. While concrete prices have increased, the market remains sharply competitive especially on large construction projects. Material costs per yard, including cement, increased by ~~3.3%~~5.0% in the first nine months of ~~2016~~2017 compared to the same period in ~~2015 as~~2016 primarily due to higher cement ~~rock and sand costs were partially offset by lower admixture expenses.~~costs. Batching costs per yard increased ~~2.9%~~19.5%, in the first nine months of ~~2016~~2017 compared to ~~the~~ the first nine months of ~~2015~~2016 for reasons discussed above in the quarter ~~results.~~results as well as costs associated with the replacement of a Pueblo bridge deck that did not meet strength specifications. Delivery costs per yard ~~were relatively flat. The gross profit ratio from concrete~~ increased ~~from 13.1%~~15.6% in the first nine months of ~~2015~~2017 compared to ~~19.2% in 2016. The windmill project was a significant contributor to the increase in volume, sales and gross profit during~~ the first nine months of 2016. This increase is attributable to higher labor costs and the use of more contract truckers. Exclusive of the 2016 windmill project, the gross profit ratio from concrete declined to 15.6% in the first nine months of 2017 from 18.3% in 2017.

Sales volume (tons) of construction aggregates, including those used internally in the production of ready mix concrete, ~~increased 17.7%~~decreased 25.4% during the first nine months of ~~2016~~2017 compared to the first nine months of ~~2015.~~2016. The ~~increase~~decrease was due to ~~expanded~~lower output by ~~the sand division in response to the higher concrete volume.~~all aggregate operations. Average selling prices ~~declined 3.4%~~increased 24.6%, attributable to price increases and the ~~higher~~greater sales ratio of cement sand to ~~rock sold.~~fill sand. While operating challenges at the Pikeview Quarry, a limestone quarry located near Colorado Springs, continue to dampen overall results, improvement was seen in all other aggregate operations in the current year compared to the prior year. The gross profit, before depreciation, from all aggregate operations in the first nine months of ~~2016~~2017 was a profit of $190,000 compared to a loss of $320,000 ~~compared to a profit of $60,000~~ in the first nine months of ~~2015. The loss was due to the mining challenges at two quarries and the carrying costs related to the closed Pueblo quarry noted in the discussion of the third quarter results above.~~2016.

Sales of construction supplies decreased by ~~$227,000 (6.6%~~$182,000 (5.7%) in the first nine months of ~~2016~~2017 compared to the same period in ~~2015 largely due to lower third quarter 2016 sales volume.~~2016. The gross profit ratio ~~improved~~declined to ~~12.9%~~3.8% from ~~10.2%~~12.9% due to reasons discussed in the ~~lower cost of materials, notably steel rebar.~~quarter results.

Depreciation expenses increased by ~~$13,000 (1.3%~~$6,000 (0.6%) in the first nine months of ~~2016~~2017 compared to the first nine months of ~~2015 as capital spending has increased in recent months.~~2016.

Selling and administrative expenses were ~~$260,000 higher~~$303,000 lower in the first nine months of ~~2016~~2017 compared to the same period in ~~2015.~~2016. The ~~increase~~decrease was ~~largely~~ due to ~~increased accruals~~lower compensation related ~~to incentive compensation programs which were partially offset by lower~~and legal ~~fees.~~expenses. Litigation fees related to the Pueblo aggregate lease were $645,000 during the nine months ended September 30, 2017 compared to $759,000 incurred during the nine months ended October 1, ~~2016 compared to $978,000 incurred during the nine months ended October 3, 2015.~~2016. See Note 8 to the financial statements.

~~In addition,~~Results for the first nine months of 2017 include $95,000 of gains on the sale of equipment. The first nine months of 2016 ~~includes a write-down~~included $276,000 of ~~$632,000 related to prepaid royalties and~~such gains. Additionally, the first nine months of 2016 included $252,000 of preferred interest income ~~recorded with the redemption of a preferred investment as~~ discussed in the ~~quarter’s results above.~~quarter results.

Door Segment

Door sales in the first nine months of ~~2016 were marginally higher, less than one percent, than in~~2017 increased $353,000 (2.7%) compared to the first nine months of the previous year. The gross profit ratio increased to ~~26.8%~~27.8% in the first ~~nine~~six months of ~~2016~~2017 compared to ~~24.0%~~26.8% in ~~2015.~~2016. The improved gross profit is attributable to better pricing combined with lower material costs.

Sales and administrative expenses in the first nine months of ~~2016~~2017 increased by ~~$69,000~~$86,000 compared to the first nine months of ~~2015~~2016 primarily due to increased compensation costs. As a percentage of sales, these expenses were ~~15.6%~~15.8% and ~~15.1%~~15.6%, respectively, in the first nine months of ~~2016~~2017 and ~~2015.~~2016.

HVAC Products

The table below presents a summary of operating information for the two reportable segments within the HVAC products industry group for the nine months ended September 30, 2017 and October 1, 2016 ~~and October 3, 2015~~ (dollar amounts in thousands).


	Heating and			Evaporative			Heating and			Evaporative
	Cooling			Cooling			Cooling			Cooling
Nine Months ended September 30, 2017
Revenues from external customers							$	27,358		$	22,031
Segment gross profit								5,953			4,425
Gross profit as percent of sales								21.8	%		20.1	%
Segment operating income								219			579
Operating income as a percent of sales								0.8	%		2.6	%
Segment assets as of September 30, 2017							$	24,764		$	10,461
Return on assets								0.9	%		5.5	%

Nine Months ended October 1, 2016
Revenues from external customers	$	27,390		$	22,715		$	27,390		$	22,715
Segment gross profit		6,980			5,803			6,980			5,803
Gross profit as percent of sales		25.5	%		25.5	%		25.5	%		25.5	%
Segment operating income		1,205			2,077			1,205			2,077
Operating income as a percent of sales		4.4	%		9.1	%		4.4	%		9.1	%
Segment assets as of October 1, 2016	$	20,563		$	11,115		$	20,563		$	11,115
Return on assets		5.9	%		18.7	%		5.9	%		18.7	%

Nine Months ended October 3, 2015
Revenues from external customers	$	24,493		$	22,656
Segment gross profit		6,099			5,364
Gross profit as percent of sales		24.9	%		23.7	%
Segment operating income		994			1,850
Operating income as a percent of sales		4.1	%		8.2	%
Segment assets as of October 3, 2015	$	22,286		$	11,864
Return on assets		4.5	%		15.6	%

Heating and Cooling Segment

In the first nine months of ~~2016,~~2017, approximately ~~60%~~61% of sales in the Heating and Cooling segment consisted of wall furnaces and heaters. Fan coils accounted for ~~40%~~37% of the segment’s sales and other products were ~~less than 1%~~approximately 2%. In the first nine months of ~~2015~~2016 these shares of total segment sales were ~~61%~~60%, ~~39%~~40% and less than 1%, respectively. Overall sales in the Heating and Cooling segment in the first nine months of ~~2016 increased~~2017 decreased by ~~$2,897,000 (11.8%~~$32,000 (less than 1%) compared to the same period in ~~2015.~~2016. Sales of ~~fan coils~~furnaces increased by approximately ~~$1,433,000 (15.1%~~$486,000 (3.0%) in the first nine months of 2017 compared to the first nine months of ~~2015. The increase~~2016. This improvement was more than offset by a decrease in ~~sales is reflective~~fan coil sales. Sales of ~~increased construction spending~~fan coils declined 7.9% between the first nine months of 2017 and the same period in the ~~lodging industry.~~prior year. As discussed above, contribution margin is an internal measure of profitability for a product or product line. The fan coil contribution margin percentage in the first nine months of ~~2016 remained steady with the contribution margin~~2017 was 27.3% compared to 30.6% in the first nine months of ~~2015.~~2016 primarily due to increased material costs as well as aggressive pricing early in the year to increase sales and the backlog. Unit shipments of furnaces and heaters were up ~~2.4%~~1.6% in the first nine months of 2017 versus the first nine months of 2016 ~~compared to 2015~~ while ~~the~~ average sales price was up ~~8.1%~~1.3%. The increase in average selling price of furnaces and heaters in the first nine months of ~~2016~~2017 was due to ~~the same reasons noted~~changes in ~~the discussion of the third quarter’s results.~~product mix.

The Heating and Cooling segment’s gross profit ratio for the first nine months of ~~2016~~2017 was ~~25.5%~~21.8% compared to ~~24.9%~~25.5% for the first nine months of ~~2015.~~2016. The ~~higher~~lower gross profit ratio was principally due to ~~the overall increase in sales~~higher material costs, specifically steel, and ~~the improved margin in the furnace and heater lines attributable to better pricing and reduced steel~~increased freight costs.

Selling and administrative expenses in the first nine months of ~~2016~~2017 were ~~$681,000 higher~~$75,000 lower compared to the first nine ~~month’s~~months of ~~2015 largely due~~2016. The decrease is attributable to increased consulting and professional service costs which were more than offset by lower compensation related costs, including commissons, and reduced legal ~~costs.~~fees. As a percentage of sales, selling and administrative expenses were 19.3% in the first nine months of 2017 compared to 19.6% in the first nine months of ~~2016 compared to 19.1% in the first nine months of 2015.~~2016.

Evaporative Cooling Segment

Unit sales of evaporative coolers in the first nine months of ~~2016~~2017 were lower by ~~5.8%~~3.4% compared to the first nine months of ~~2015.~~2016. Revenue from evaporative cooler sales in the first nine months of ~~2016~~2017 declined ~~less than one percent~~3.0% compared to the same period in the prior year as average selling prices per unit ~~were approximately 5.8% higher compared to a year ago.~~increased less than 1%. The gross profit ratio in the first nine months of ~~2016~~2017 was ~~25.5%~~20.1% compared to ~~23.7%~~25.5% realized in the first nine months of ~~2015.~~2016. The ~~improvement~~decrease was due to ~~product sales mix~~increased labor costs, including overtime and ~~lower~~contract labor, and higher material costs, ~~discussed in the quarter’s results.~~most notably steel. Selling and administrative expenses were ~~$225,000 (7.2%~~$154,000 (4.6%) higher in the first nine months of ~~2016~~2017 mainly due to increased ~~advertising~~compensation and professional services spending. As a percentage of sales, selling and administrative expenses were ~~14.8%~~16.0% and ~~13.9%~~14.8% in the first nine months of ~~2016~~2017 and ~~2015,~~2016, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The condensed consolidated financial statements contained in this Quarterly Report have been prepared in accordance with accounting principles generally accepted in the United States of America 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 ~~October 1, 2016~~September 30, 2017 and ~~January 2,~~December 31, 2016 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 ~~January 2,~~December 31, 2016.

OUTLOOK

Overall the Company expects consolidated sales in 2017 to reach 2016 ~~to exceed the 2015 level.~~levels. Revenues in the CACS segment are dependent of the level of construction activity along the Front Range in Southern Colorado as well as ~~the level~~

~~of selling prices.~~weather. Construction activity has exhibited modest and thus far sustained improvement during the past two years in the Colorado Springs market. Construction activity in the Pueblo market has shown ~~some~~ improvement inover the ~~current~~last year as well. However, weather in 2017 in the CACS market areas has not been favorable. Cool, wet weather patterns, snow and rain led to numerous days where concrete could not be poured. These conditions have continued into October. Although there is a backlog of work to complete, many customers have indicated that making up for the lost days may not be possible due to the inability to hire additional qualified concrete finishing personnel. Concrete pricing has ~~also~~ improved, but ~~the pricing~~bidding on ~~most bid~~ jobs remains sharply competitive. Further improvements in the CACS segment operating results will depend on a sustained improvement in the Colorado Springs and Pueblo construction markets and the ability to maintain or enhance ready-mix concrete prices especially in response to any increases in cement and/or fuel costs that may occur.

Sales inof the ~~Door segment are also, to a significant extent, reliant on new construction. Bidding activity remains strong. The sales backlog at October 1, 2016 is 27.4% above the backlog at October 3, 2015.~~

~~The~~ Company’s HVAC Industry Group ~~anticipates some increase~~for the remainder of the year depend upon a normal demand for furnaces and heaters as well as an improvement in ~~sales in 2016 largely due to higher~~ fan coil ~~sales as construction spending in~~sales. While the ~~lodging industry improves. To date,~~ fan coil backlog remains strong, sales ~~have outpaced~~are dependent on the ~~prior year’s actual and current year expected levels, however; order activity has slowed from the pace seen at the beginning~~timing of ~~2016.~~shipments which is controlled by our customers’ construction progress. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not heavily reliant on new construction. Sales of these products are generally dependent on the overall strength of the economy, especially employment levels, and are heavily influenced by weather conditions, particularly during their respective selling seasons. ~~In-season furnace sales in the fourth quarter will be largely weather-dependent. Sales of evaporative coolers in the fourth quarter are generally modest and dependent on pre-season sales.~~

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 4 to the condensed consolidated financial statements contained in this Quarterly Report for a discussion of recently issued accounting standards.

MATERIAL CHANGES TO CONTRACTUAL OBLIGATIONS

There were no material changes to contractual obligations that occurred during the quarter ended ~~October 1, 2016.~~September 30, 2017.

FORWARD-LOOKING STATEMENTS

This Quarterly Report 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 Quarterly Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects,” “will,” “continue” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors including but not limited to: the amount of new construction, weather, interest rates, availability of raw materials and their related costs, economic conditions and competitive forces in the regions where the Company does business, changes in governmental regulations and policies and the ability of the Company to obtain credit on commercially reasonable terms. Changes in accounting pronouncements as well as the ultimate resolution of the Pueblo lease litigation could also alter projected results. Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. Forward-looking statements speak only as of the date they were made and we undertake no obligation to publicly update them.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

The Company is a smaller reporting company as defined by Item 10(f) of Regulation S-K and, as such, is not required to provide information in response to this item.

Item 4.Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures.

The Company’s Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of the Company’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 (Exchange Act) as of ~~October 1, 2016.~~September 30, 2017. The Chief Executive Officer and Chief Financial Officer, based on that evaluation, concluded that the Company’s disclosure controls and procedures are effective and were reasonably designed to ensure that all material information relating to the Company (including its subsidiaries) required to be disclosed in the reports filed and submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission.

(b)Changes in Internal Control Over Financial Reporting.

During the quarter ended ~~October 1, 2016,~~September 30, 2017, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Items 1, 1A, 2, 3 and 5 are not applicable or the Company has nothing to report thereunder; therefore, the items have been omitted and no reference is required in this Quarterly Report.

~~Item 1.Legal Proceedings~~

On September 15, 2016 a Partial Summary Judgment was issued regarding the Company’s previously disclosed litigation, Continental Materials Corporation v. Valco, Inc., Civil Action No. 2014-cv-2510, filed in the United States District Court for the District of Colorado. The suit regards a sand and gravel lease between the Company and Valco, Inc. (“Valco”) that calls for the payment of royalties over the life of the lease on an agreed 50,000,000 tons of sand and gravel reserves. In the suit the Company sought, among other things, to reform the sand and gravel lease in regard to the agreed amount of sand and gravel reserves and to recover approximately $1,282,000 of royalty overpayments included in other long-term assets. The Partial Summary Judgment resolved many of the Company’s claims in Valco’s favor, but the Company’s claim for the return of royalty overpayments made during the statutorily allowed period is still pending. The Company has concluded that recovery of the overpayments in excess of approximately $650,000 is not likely due to the statute of limitations and has therefore recorded a $632,000 write-down to the long-term asset during the third quarter of 2016. The Company and its legal counsel believe there are grounds to appeal the Partial Summary Judgment regarding this and the other claims of the suit as the court improperly resolved factual issues that should have been decided by a jury. The Company and its legal counsel believe there is a likelihood that some, or all, of the issues resolved by the Partial Summary Judgment may be reversed on appeal and remanded for trial by jury although there can be no assurance that an appeal will result in reversal. The Company paid royalties on approximately 17,700,000 tons, including the overpayments, through the end of the third quarter of 2014. The impact of these proceedings could have a material effect although the Company does not believe that there is a reasonable basis for estimating the financial impact, if any, of the final outcome of these proceedings and accordingly no accrual or reserve has been recorded in compliance with accounting principles generally accepted in the United States of America. In addition, on September 30, 2016 Valco filed a motion seeking to add three new counterclaims alleging damages in excess of $5,900,000. The Company has vigorously opposed the motion which has not yet been ruled upon.

~~Item 2.Unregistered Sales of Equity Securities and Use of Proceeds~~

The Company reserved 150,000 treasury shares representing the maximum number allowed to be granted under the 2010 Non-Employee Directors Stock Plan (Plan) to non-employee directors in lieu of the base director retainer fee. The Company issued a total of 12,000 shares to the eight eligible board members effective April 6, 2016 as full payment for their 2016 retainer fee. Transactions pursuant to the Plan are exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) of the Securities Act, as the shares authorized under the plan may only be issued to the Company’s directors and are not offered to the public. At October 1, 2016, a total of 66,000 shares remain eligible for issuance under the Plan.

Item 4.Mine Safety Disclosure

The Company’s aggregates mining operations, all of which are surface mines, are subject to regulation by the Federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (as amended, the “Mine Act”). MSHA inspects these operations on a regular basis and issues various citations and orders when it believes a violation of the Mine Act has occurred. Information concerning mine safety violations and other regulatory matters required to be disclosed by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this Quarterly Report.

Item 6.Exhibits


Exhibit No.		Description

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) and Exchange Act Rules 13a-15(f) and 15d-15(f), filed herewith.

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) and Exchange Act Rules 13a-15(f) and 15d-15(f), filed herewith.

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-Oxley Act of 2002 filed herewith.

95		Mine Safety Disclosures filed herewith.

101		The following financial information from Continental Materials Corporation’s Quarterly Report on Form 10-Q for the period ended ~~October 1, 2016~~September 30, 2017 filed with the SEC on November ~~15, 2016,~~14, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations and Retained Earnings for the three and nine-month periods ended September 30, 2017 and October 1, 2016, ~~and October 3, 2015,~~ (ii) the Condensed Consolidated Balance Sheets at ~~October 1, 2016~~September 30, 2017 and ~~January 2,~~December 31, 2016, (iii) the Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2017 and October 1, 2016, ~~and October 3, 2015,~~ and (iv) Notes to the Quarterly Condensed Consolidated Financial Statements.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		CONTINENTAL MATERIALS CORPORATION



Date:	November ~~15, 2016~~14, 2017	By:	/s/ Mark S. Nichter
			Mark S. Nichter, Vice President, Secretary
			and Chief Financial Officer



	OCTOBER 1, 2016		JANUARY 2,
	(Unaudited)		2016
ASSETS
Current assets:
Cash and cash equivalents	$	240	$	547
Receivables, net		21,426		22,715
Receivable for insured losses		32		—
Inventories
Finished goods		9,443		7,446
Work in process		1,310		1,459
Raw materials and supplies		9,837		10,741
Prepaid expenses		3,204		2,138
Refundable income taxes		—		70
Total current assets		45,492		45,116

Property, plant and equipment		19,357		17,639

Other assets
Goodwill		7,229		7,229
Amortizable intangible assets, net		—		21
Deferred income taxes		3,329		3,149
Other assets		1,115		2,601
	$	76,522	$	75,755

LIABILITIES
Current liabilities:
Revolving bank loan payable	$	1,000	$	6,200
Accounts payable and accrued expenses		16,805		15,267
Liability for unpaid claims covered by insurance		32		—
Income taxes		835		—
Total current liabilities		18,672		21,467

Other long-term liabilities		5,981		5,872

SHAREHOLDERS’ EQUITY
Common shares, $.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares		643		643
Capital in excess of par value		1,765		1,817
Retained earnings		64,834		61,483
Treasury shares, 915,097, at cost		(15,373)		(15,527)
		51,869		48,416
	$	76,522	$	75,755