UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2007
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File number 1-3834
CONTINENTAL MATERIALS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
36-2274391 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.)
|
200 South Wacker Drive, Suite 4000, Chicago, Illinois |
60606 |
(Address of principal executive offices) |
(Zip Code) |
(312) 541-7200 |
(Registrants telephone number, including area code) |
|
(Former name, former address and former fiscal year, if changed since last report) |
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
|
Accelerated Filer o |
|
Non-Accelerated Filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: Common Stock, $0.25 par value, shares outstanding at November 8, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . .1,602,706
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 2007 and DECEMBER 30, 2006
(Unaudited)
(000s omitted except share data)
|
|
SEPTEMBER 29, |
|
DECEMBER 30, |
|
||
ASSETS |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
3,184 |
|
$ |
2,770 |
|
Receivables, net |
|
24,603 |
|
24,120 |
|
||
Receivable for insured losses |
|
1,563 |
|
1,584 |
|
||
Inventories: |
|
|
|
|
|
||
Finished goods |
|
10,088 |
|
7,104 |
|
||
Work in process |
|
1,440 |
|
1,502 |
|
||
Raw materials and supplies |
|
10,270 |
|
8,229 |
|
||
Prepaid expenses |
|
4,338 |
|
4,291 |
|
||
Total current assets |
|
55,486 |
|
49,600 |
|
||
|
|
|
|
|
|
||
Property, plant and equipment, net |
|
35,648 |
|
32,365 |
|
||
|
|
|
|
|
|
||
Goodwill |
|
7,829 |
|
7,829 |
|
||
Amortizable intangible assets, net |
|
1,274 |
|
1,517 |
|
||
Other assets |
|
2,272 |
|
2,394 |
|
||
|
|
|
|
|
|
||
|
|
$ |
102,509 |
|
$ |
93,705 |
|
|
|
|
|
|
|
||
LIABILITIES |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Bank loan payable |
|
$ |
8,700 |
|
$ |
|
|
Current portion of long-term debt |
|
2,567 |
|
2,866 |
|
||
Accounts payable and accrued expenses |
|
18,628 |
|
17,060 |
|
||
Liability for unpaid claims covered by insurance |
|
1,563 |
|
1,584 |
|
||
Income taxes |
|
|
|
579 |
|
||
Total current liabilities |
|
31,458 |
|
22,089 |
|
||
|
|
|
|
|
|
||
Long-term debt |
|
11,000 |
|
12,800 |
|
||
Deferred income taxes |
|
3,808 |
|
3,883 |
|
||
Other long-term liabilities |
|
2,102 |
|
1,590 |
|
||
|
|
|
|
|
|
||
SHAREHOLDERS EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
||
Common shares, $0.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares |
|
643 |
|
643 |
|
||
Capital in excess of par value |
|
1,830 |
|
1,830 |
|
||
Retained earnings |
|
68,241 |
|
67,373 |
|
||
Treasury shares, 971,558 and 968,803, at cost |
|
(16,573 |
) |
(16,503 |
) |
||
|
|
54,141 |
|
53,343 |
|
||
|
|
|
|
|
|
||
|
|
$ |
102,509 |
|
$ |
93,705 |
|
See accompanying notes
2
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, RETAINED EARNINGS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2007 AND SEPTEMBER 30, 2006
(Unaudited)
(000s omitted except per-share amounts)
|
|
SEPTEMBER
29, |
|
SEPTEMBER
30, |
|
||
|
|
|
|
|
|
||
Sales |
|
$ |
42,288 |
|
$ |
40,924 |
|
|
|
|
|
|
|
||
Costs and expenses: |
|
|
|
|
|
||
Cost of sales (exclusive of depreciation, depletion and amortization) |
|
36,701 |
|
33,731 |
|
||
Depreciation, depletion and amortization |
|
1,309 |
|
1,212 |
|
||
Selling and administrative |
|
4,396 |
|
5,113 |
|
||
|
|
|
|
|
|
||
Gain on disposition of property and equipment |
|
53 |
|
47 |
|
||
|
|
42,353 |
|
40,009 |
|
||
|
|
|
|
|
|
||
Operating (loss) income |
|
(65 |
) |
915 |
|
||
|
|
|
|
|
|
||
Interest expense |
|
(341 |
) |
(250 |
) |
||
Other income, net |
|
27 |
|
137 |
|
||
|
|
|
|
|
|
||
(Loss) income before income taxes |
|
(379 |
) |
802 |
|
||
|
|
|
|
|
|
||
(Benefit) provision for income taxes |
|
(389 |
) |
273 |
|
||
|
|
|
|
|
|
||
Net income |
|
10 |
|
529 |
|
||
|
|
|
|
|
|
||
Retained earnings, beginning of period |
|
68,231 |
|
66,460 |
|
||
|
|
|
|
|
|
||
Retained earnings, end of period |
|
$ |
68,241 |
|
$ |
66,989 |
|
|
|
|
|
|
|
||
Basic and diluted earnings per share |
|
$ |
.01 |
|
$ |
.33 |
|
|
|
|
|
|
|
||
Average shares outstanding |
|
1,603 |
|
1,605 |
|
||
|
|
|
|
|
|
||
Comprehensive income: |
|
|
|
|
|
||
Net income |
|
$ |
10 |
|
$ |
529 |
|
Comprehensive loss from interest rate swap, net of tax benefit of $3 for the three months ended September 30, 2006 |
|
|
|
(5 |
) |
||
|
|
$ |
10 |
|
$ |
524 |
|
|
|
|
|
|
|
See accompanying notes
3
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2007 AND SEPTEMBER 30, 2006
(Unaudited)
(000s omitted except per-share amounts)
|
|
SEPTEMBER 29, |
|
SEPTEMBER 30, |
|
||
|
|
|
|
|
|
||
Sales |
|
$ |
128,018 |
|
$ |
118,312 |
|
|
|
|
|
|
|
||
Costs and expenses: |
|
|
|
|
|
||
Cost of sales (exclusive of depreciation, depletion and amortization) |
|
107,748 |
|
96,669 |
|
||
Depreciation, depletion and amortization |
|
3,946 |
|
3,651 |
|
||
Selling and administrative |
|
14,965 |
|
15,314 |
|
||
|
|
|
|
|
|
||
Gain on disposition of property and equipment |
|
86 |
|
193 |
|
||
|
|
126,573 |
|
115,441 |
|
||
|
|
|
|
|
|
||
Operating income |
|
1,445 |
|
2,871 |
|
||
|
|
|
|
|
|
||
Interest expense |
|
(922 |
) |
(548 |
) |
||
Other income, net |
|
306 |
|
189 |
|
||
|
|
|
|
|
|
||
Income before income taxes |
|
829 |
|
2,512 |
|
||
|
|
|
|
|
|
||
(Benefit) provision for income taxes |
|
(39 |
) |
854 |
|
||
|
|
|
|
|
|
||
Net income |
|
868 |
|
1,658 |
|
||
|
|
|
|
|
|
||
Retained earnings, beginning of period |
|
67,373 |
|
65,331 |
|
||
|
|
|
|
|
|
||
Retained earnings, end of period |
|
$ |
68,241 |
|
$ |
66,989 |
|
|
|
|
|
|
|
||
Basic and diluted earnings per share |
|
$ |
.54 |
|
$ |
1.03 |
|
|
|
|
|
|
|
||
Average shares outstanding |
|
1,603 |
|
1,605 |
|
||
|
|
|
|
|
|
||
Comprehensive income: |
|
|
|
|
|
||
Net income |
|
$ |
868 |
|
$ |
1,658 |
|
Comprehensive loss from interest rate swap, net of tax benefit of $2 for the nine months ended September 30, 2006 |
|
|
|
(3 |
) |
||
|
|
$ |
868 |
|
$ |
1,655 |
|
See accompanying notes
4
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2007 AND SEPTEMBER 30, 2006
(Unaudited)
(000s omitted)
|
|
SEPTEMBER 29, |
|
SEPTEMBER 30, |
|
||
|
|
|
|
|
|
||
Net cash provided by (used in) operating activities |
|
$ |
418 |
|
$ |
(274 |
) |
|
|
|
|
|
|
||
Investing activities: |
|
|
|
|
|
||
Cash paid for acquisitions of assets of certain businesses |
|
|
|
(2,452 |
) |
||
Capital expenditures |
|
(6,996 |
) |
(5,036 |
) |
||
Proceeds from sale of assets |
|
370 |
|
214 |
|
||
Net cash used in investing activities |
|
(6,626 |
) |
(7,274 |
) |
||
|
|
|
|
|
|
||
Financing activities: |
|
|
|
|
|
||
Borrowings under revolving credit facility, net |
|
8,700 |
|
|
|
||
Long-term borrowings |
|
|
|
5,000 |
|
||
Repayment of long-term debt |
|
(2,099 |
) |
(1,667 |
) |
||
Payment to acquire treasury stock |
|
(70 |
) |
|
|
||
Other |
|
91 |
|
|
|
||
Net cash provided by financing activities |
|
6,622 |
|
3,333 |
|
||
|
|
|
|
|
|
||
Net increase (decrease) in cash and cash equivalents |
|
414 |
|
(4,215 |
) |
||
Cash and cash equivalents: |
|
|
|
|
|
||
Beginning of period |
|
2,770 |
|
6,829 |
|
||
|
|
|
|
|
|
||
End of period |
|
$ |
3,184 |
|
$ |
2,614 |
|
|
|
|
|
|
|
||
Supplemental disclosures of cash flow items: |
|
|
|
|
|
||
Cash paid during the six months for: |
|
|
|
|
|
||
Interest |
|
$ |
1,061 |
|
$ |
734 |
|
Income taxes |
|
545 |
|
656 |
|
||
Supplemental disclosures of noncash investing and financing activities |
|
|
|
|
|
||
Note issued as partial consideration for asset purchase |
|
$ |
|
|
$ |
1,000 |
|
Capital expenditures purchased on account |
|
45 |
|
|
|
See accompanying notes
5
CONTINENTAL MATERIALS CORPORATION
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
NOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 29, 2007
(Unaudited)
1. The unaudited interim condensed consolidated financial statements included herein are prepared pursuant to the Securities and Exchange Commission rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The interim condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys latest annual report on Form 10-K. As a result of certain organizational changes implemented at the beginning of the 2007 fiscal year, we reevaluated our reporting segments during the first quarter in accordance with Financial Accounting Standards Board (FASB) Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Although our four reporting segments, see Note 5, have remained the same, the Door Division of Transit Mix Concrete Co., previously reported within the Concrete, Aggregates and Construction Supplies segment is now reported within the Door segment. In the opinion of management, the condensed consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods.
2. Our effective income tax rate is based on expected income, statutory tax rates and tax positions taken in the various jurisdictions in which we operate. For interim financial reporting, we estimate the annual income tax rate based on projected taxable income for the full year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the year progresses, we refine the estimates of the years taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to our expected effective income tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual income tax rate. Significant judgment is required in determining our effective income tax rate and in evaluating our tax positions. The effective income tax rate for the quarter ended September 29, 2007 of 103% is primarily due to recognition during the quarter of $362,000 of earned California Enterprise Zone credits that will benefit future tax years.
On December 31, 2006, the first day of fiscal 2007, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN 48, the financial statement effects of a tax position should initially be recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold should initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon effective settlement with a taxing authority.
There was no cumulative adjustment to retained earnings required as a result of the implementation of FIN 48. The gross amount of unrecognized tax benefits at December 31, 2006 was $290,000 of which $79,000 would affect the effective tax rate. The gross amount of unrecognized tax benefits at September 29, 2007 was $287,000 of which $86,000 would affect the effective tax rate.
We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. Accrued interest and penalties included in our total liability for unrecognized tax benefits were $56,000 as of September 29, 2007 and $85,000 as of December 31, 2006.
The United States Federal statute of limitations expires during the third quarter of 2008 for our 2004 tax year. Included in the balance at September 29, 2007 is approximately $15,000 related to tax positions expected to be resolved within 12 months of this reporting date.
We file income tax returns in the United States federal and various state jurisdictions. Generally, we are not subject to changes in income taxes by any taxing jurisdiction for the years prior to 2002.
6
3. Operating results for the first nine months of 2007 are not necessarily indicative of performance for the entire year. Historically, sales of the Evaporative Cooling segment are higher in the first and second quarters, sales of the Concrete, Aggregates and Construction Supplies segment are higher in the second and third quarters and sales of the Heating and Cooling segment are higher in the third and fourth quarters. Sales of the Door segment have not shown strong seasonal fluctuations in recent years.
4. There is no difference in the calculation of basic and diluted earnings per share (EPS) for either the three months or nine months ended September 29, 2007 or September 30, 2006.
5. The Company operates primarily in four reportable segments within its two principal industry groups; the Heating and Cooling segment and the Evaporative Cooling segment in the Heating, Ventilation and Air Conditioning (HVAC) industry group and the Concrete, Aggregates and Construction Supplies segment and the Door segment in the Construction Products industry group. The Heating and Cooling segment produces and sells gas-fired wall furnaces, console heaters and fan coils from the Companys wholly-owned subsidiary, Williams Furnace Co. of Colton, California. The Evaporative Cooling segment produces and sells evaporative coolers from the Companys wholly-owned subsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona. Sales of these two segments are nationwide, but are concentrated in the southwestern United States. Concrete, Aggregates and Construction Supplies are offered from numerous locations along the Front Range of Colorado operated by the Companys wholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co. (TMC), of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo and Rocky Mountain Ready Mix Concrete, Inc. of Denver. Doors are fabricated and sold along with the related hardware from the Companys wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI) of Pueblo, Colorado. Sales of these two segments are highly concentrated in the Front Range area in Colorado although door sales are also made throughout the United States. Prior to the 2007 fiscal year, the Company reported the Door Division of TMC as part of the Concrete, Aggregates and Construction Materials segment. On December 31, 2006, the first day of fiscal 2007, the Door Division was transferred to MDHI and is now reported as part of the Door segment. As required by FASB Statement No. 131, we have restated the 2006 financial information presented in the table below to conform to the current composition of our reportable segments.
The Company evaluates the performance of its segments and allocates resources to them based on a number of criteria including operating income, return on investment and other strategic objectives. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest, other income/expense or income taxes.
In addition to the above reporting segments, an Unallocated Corporate classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services and an Other classification is used to report a real estate operation. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
The following table presents information about reported segments for the nine month and three month periods ended September 29, 2007 and September 30, 2006 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):
7
|
|
Construction Products |
|
HVAC Products |
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
|
Concrete, Aggregates & Construction Supplies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Nine Months ended September 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Revenues from external customers |
|
$ |
71,110 |
|
$ |
13,733 |
|
$ |
84,843 |
|
$ |
24,297 |
|
$ |
18,607 |
|
$ |
42,904 |
|
$ |
13 |
|
$ |
258 |
|
$ |
128,018 |
|
||||||||||
Depreciation, depletion and amortization |
|
3,047 |
|
79 |
|
3,126 |
|
315 |
|
450 |
|
765 |
|
55 |
|
|
|
3,946 |
|
|||||||||||||||||||
Operating income (loss) |
|
3,656 |
|
1,627 |
|
5,283 |
|
(1,503 |
) |
(366 |
) |
(1,869 |
) |
(2,050 |
) |
81 |
|
1,445 |
|
|||||||||||||||||||
Segment assets |
|
58,280 |
|
7,128 |
|
65,408 |
|
23,379 |
|
11,222 |
|
34,601 |
|
2,496 |
|
4 |
|
102,509 |
|
|||||||||||||||||||
Capital expenditures (a) |
|
4,301 |
|
1,509 |
|
5,810 |
|
627 |
|
567 |
|
1,194 |
|
37 |
|
|
|
7,041 |
|
|||||||||||||||||||
Quarter ended September 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Revenues from external customers |
|
$ |
25,585 |
|
$ |
4,284 |
|
$ |
29,869 |
|
$ |
8,121 |
|
$ |
4,208 |
|
$ |
12,329 |
|
$ |
4 |
|
$ |
86 |
|
$ |
42,288 |
|
||||||||||
Depreciation, depletion and amortization |
|
1,018 |
|
18 |
|
1,036 |
|
104 |
|
150 |
|
254 |
|
19 |
|
|
|
1,309 |
|
|||||||||||||||||||
Operating income (loss) |
|
1,338 |
|
460 |
|
1,798 |
|
(824 |
) |
(493 |
) |
(1,317 |
) |
(573 |
) |
27 |
|
(65 |
) |
|||||||||||||||||||
Segment assets |
|
58,280 |
|
7,128 |
|
65,408 |
|
23,379 |
|
11,222 |
|
34,601 |
|
2,496 |
|
4 |
|
102,509 |
|
|||||||||||||||||||
Capital expenditures (a) |
|
495 |
|
1,300 |
|
1,795 |
|
395 |
|
89 |
|
484 |
|
6 |
|
|
|
2,285 |
|
|||||||||||||||||||
(a) Capital expenditures for the Evaporative Cooling segment include $45,000 of additions purchased on account.
|
|
Construction Products |
|
HVAC Products |
|
|
|
|
|
|
|
|||||||||||||||||||||
|
|
Concrete, Aggregates & Construction Supplies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nine Months ended September 30, 2006 as restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Revenues from external customers |
|
$ |
71,093 |
|
$ |
10,165 |
|
$ |
81,258 |
|
$ |
18,628 |
|
$ |
18,163 |
|
$ |
36,791 |
|
$ |
5 |
|
$ |
258 |
|
$ |
118,312 |
|
||||
Depreciation, depletion and amortization |
|
2,748 |
|
101 |
|
2,849 |
|
296 |
|
450 |
|
746 |
|
56 |
|
|
|
3,651 |
|
|||||||||||||
Operating income (loss) |
|
4,583 |
|
1,100 |
|
5,683 |
|
(570 |
) |
250 |
|
(320 |
) |
(2,573 |
) |
81 |
|
2,871 |
|
|||||||||||||
Segment assets (a) |
|
54,470 |
|
4,750 |
|
59,220 |
|
18,303 |
|
12,651 |
|
30,954 |
|
3,468 |
|
63 |
|
93,705 |
|
|||||||||||||
Capital expenditures (b) |
|
6,388 |
|
70 |
|
6,458 |
|
158 |
|
207 |
|
365 |
|
2 |
|
|
|
6,825 |
|
|||||||||||||
Quarter ended September 30, 2006 as restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Revenues from external customers |
|
$ |
26,022 |
|
$ |
3,613 |
|
$ |
29,635 |
|
$ |
6,997 |
|
$ |
4,204 |
|
$ |
11,201 |
|
$ |
2 |
|
$ |
86 |
|
$ |
40,924 |
|
||||
Depreciation, depletion and amortization |
|
912 |
|
34 |
|
946 |
|
98 |
|
150 |
|
248 |
|
18 |
|
|
|
1,212 |
|
|||||||||||||
Operating income (loss) |
|
1,837 |
|
441 |
|
2,278 |
|
(421 |
) |
(81 |
) |
(502 |
) |
(888 |
) |
27 |
|
915 |
|
|||||||||||||
Segment assets (a) |
|
54,470 |
|
4,750 |
|
59,220 |
|
18,303 |
|
12,651 |
|
30,954 |
|
3,468 |
|
63 |
|
93,705 |
|
|||||||||||||
Capital expenditures |
|
1,321 |
|
5 |
|
1,326 |
|
56 |
|
45 |
|
101 |
|
|
|
|
|
1,427 |
|
|||||||||||||
(a) Segment assets are as of December 30, 2006.
(b) Capital expenditures for the Concrete, Aggregates and Construction Supplies segment include $1,735,000 purchased on June 30, 2006 as part of the purchase of certain assets of a concrete producer in Colorado Springs. Capital expenditures for the Door segment include $54,000 purchased on January 1, 2006 as part of the purchase of the assets of CSSL. Also see Note 6.
There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the last annual report except as discussed above.
6. On June 30, 2006 the Company purchased certain assets of ASCI, a concrete producer in Colorado Springs, Colorado for $2,100,000 of cash and a $1,000,000 Note. The assets were acquired by TMC in the Concrete, Aggregates and Construction Supplies segment. The final purchase price allocation included $1,735,000 of plant and equipment, $290,000 for a non-compete agreement, $350,000 for a restriction of use covenant, $370,000 for existing customer relations and $355,000 of goodwill, all of which is amortizable over 15 years for tax purposes. For book purposes, the non-compete is being amortized over its five-year term, the restriction
8
of land use covenant is being amortized over its ten-year term and the customer relations intangible is being amortized over its estimated useful life of ten years. The purchase was accounted for as an acquisition of a business under FASB Statement No. 141, Standards of Accounting for Business Combinations.
The following unaudited pro forma summary financial information summarizes the estimated combined results of operations of the Company and ASCI assuming that the acquisition of ASCI had taken place on January 1, 2006. The unaudited pro forma combined results of operations were prepared on the basis of information provided to the Company by the former management of ASCI and no representation is made by the Company with respect to the accuracy of such information. The pro forma financial information for the nine months ended September 30, 2006 includes the results of ASCI from January 1, 2006 through April 30, 2006, and have been adjusted for interest expense, additional depreciation based on the fair market value of plant and equipment, amortization of identifiable intangibles and income tax expense. Interim financial information for the six month periods ended July 1, 2006 was not made available to the Company. Amounts are in thousands except per share amounts.
|
|
Nine Months Ended |
|
|
Net sales |
|
$ |
120,608 |
|
Net income |
|
1,685 |
|
|
Basic and diluted loss per share |
|
1.05 |
|
|
The unaudited pro forma combined results of operations are not necessarily indicative of, and do not purport to represent, what the Companys results of operations or financial condition actually would have been had the acquisitions been made as of January 1, 2006. Due to competitive conditions, the Company did not expect to, and has not, retained all of the concrete volume or market share previously attained by ASCI.
7. Identifiable intangible assets as of September 29, 2007 include five amortizable non-compete agreements, including the non-compete agreement related to ASCI acquired during the second quarter of 2006 (see Note 6). Identifiable intangible assets also include a restrictive land covenant and customer relations value, both related to the ASCI acquisition. Collectively, these assets were carried at $1,274,000, net of $1,336,000 accumulated amortization. The pre-tax amortization expense for intangible assets during the three months and nine months ended September 29, 2007 was $78,000 and $243,000, respectively. Based upon the intangible assets recorded on the balance sheet at September 29, 2007, amortization expense for the next five years is estimated to be as follows: 2007 $320,000, 2008 $300,000, 2009 $293,000, 2010 $262,000 and 2011 $101,000.
8. At September 29, 2007, the Company was not in compliance with the Leverage Ratio covenant as defined in the Companys loan agreement dated September 5, 2003, as amended, with LaSalle Bank National Association and Fifth Third Bank. In an amendment to the loan agreement dated October 23, 2007, the Company obtained waivers of the requirement for the quarter ended September 29, 2007 and for the quarter ended December 29, 2007. The Company expects to be in compliance with the covenant in future quarters. The principal reasons for not meeting the required ratio was the high level of capital expenditures as well as the decline in pre-tax earnings during the past twelve months. Also as part of the amendment, the revolving credit commitment was temporarily increased from $15,000,000 to $18,000,000 for the period from October 23, 2007 through January 15, 2008.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis gives effect to the restatement discussed in Note 5.
Company Overview
The Company operates in four reportable segments within its two principal industry groups; the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the Concrete, Aggregates and Construction Supplies segment and the Door segment in the Construction Products industry group.
The Heating and Cooling segment produces and sells gas-fired wall furnaces, console heaters and fan coils from the Companys wholly-owned subsidiary, Williams Furnace Co. of Colton, California. The Evaporative Cooling segment produces and sells evaporative coolers from the Companys wholly-owned subsidiary,
9
Phoenix Manufacturing, Inc. of Phoenix, Arizona. Concrete, Aggregates and Construction Supplies are offered from numerous locations along the Front Range of Colorado operated by the Companys wholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co., of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo and Rocky Mountain Ready Mix Concrete, Inc. of Denver. Doors are fabricated and sold along with the related hardware from the Companys wholly-owned subsidiary, McKinney Door and Hardware, Inc. of Pueblo, Colorado.
In addition to the above reporting segments, an Unallocated Corporate classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services and an Other classification is used to report a real estate operation. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
Financial Condition and Liquidity
Sales of the Companys HVAC products are seasonal and weather sensitive except for fan coils. Revenues in the Companys Concrete, Aggregates and Construction Supplies segment are influenced by the level of construction activity and weather conditions along the Front Range of Colorado. Sales for the Door segment are not as strongly seasonal nor are they much affected by weather conditions. Historically, the Company has experienced operating losses during the first quarter except when the weather is mild along the Front Range. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in Colorado and the seasonal sales of Evaporative Cooling segment. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Companys 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 years accrued incentive bonuses and Company profit-sharing contributions. As a result, the Companys borrowings against its revolving credit facility tend to peak during the second quarter and then decline over the remainder of the year. This trend has continued thus far in 2007.
As expected, the Companys cash flow from operations during the quarter ended September 29, 2007 was positive by $1,523,000 due to the seasonality of sales, production schedules and the sales dating programs related to the evaporative cooler product line. Borrowings against the revolving credit facility increased however, as capital expenditures exceeded the cash generated by operations. For the nine months ended September 29, 2007, operations provided $418,000 of cash compared to using $274,000 of cash during the first nine months of 2006. The improved cash flow was due to changes in working capital accounts, primarily a smaller increase in accounts receivable partially offset by a larger increase in inventories and a smaller increase in accounts payable and accrued expenses during the first nine months of 2007 as compared to the 2006 period.
During the nine months ended September 29, 2007, investing activities used $6,626,000 of cash compared to $7,274,000 in the prior years period. Capital expenditures of $6,996,000 during the first nine months of 2007, primarily for the Concrete, Aggregates and Construction Supplies segment, were significantly higher than the expenditures during the comparable 2006 period. The replacement of two loaders and a scraper for the quarry operations and the construction and installation of an industrial sand plant all occurred during the first nine months of 2007. In addition, the Door segment purchased a building in Colorado Springs in order to consolidate activities and provide additional capacity for growth. The proceeds from the sale of assets for 2007 include $230,000 received from the June sale of stock received from the demutualization of a mutual insurance company. Investing activities during the first nine months of 2006 included $2,452,000 for the acquisition of certain assets of two companies.
Financing activities provided $6,622,000 during the first nine months of 2007 compared to $3,333,000 provided during the first nine months of 2006. The Company borrowed $8,700,000 against the revolving line of credit during the first nine months of 2007 compared to the $5,000,000 increase in the term loan during the 2006 period. All scheduled debt repayments were made during the first nine months of both 2007 and 2006. During the first nine months of 2007, the highest amount of Company borrowings outstanding under the revolving credit agreement was $8,700,000 and the average amount outstanding was $4,823,000. At September 29, 2007, the Company was not in compliance with the Leverage Ratio covenant as defined in the loan agreement. In an amendment to the loan agreement dated October 23, 2007, the Company obtained waivers of the requirement for the quarter ended September 29, 2007 and for the quarter ended December 29, 2007. The Company expects to be in compliance with the covenant in future quarters. The principal reasons
10
for not meeting the required ratio was the high level of capital expenditures as well as the decline in pre-tax earnings during the past twelve months. Also as part of the amendment, the revolving credit commitment was temporarily increased from $15,000,000 to $18,000,000 for the period from October 23, 2007 through January 15, 2008. The Company has not utilized any of the increase to the line as of the filing of this report on Form 10-Q.
The Company believes that anticipated cash flow from operations, supplemented by seasonal borrowings against the revolving line of credit, (of which $8,700,000 was outstanding at September 29, 2007) will be sufficient to cover expected cash needs, including servicing debt and planned capital expenditures for at least the next twelve months.
Operations Comparison of Quarter Ended September 29, 2007 to Quarter Ended September 30, 2006
Historically, the Company has experienced strong operating results during the third quarter as sales in the Concrete, Aggregates and Construction Supplies segment peak due to weather more conducive to construction activity. Sales followed this pattern in 2007 however; operating results were well below the historical trend due to shortfalls in the two HVAC reporting segments. Consolidated sales during the third quarter of 2007 were $42,288,000 compared to $40,924,000 in the third quarter of 2006. Operating results for the 2007 quarter were a loss of $65,000 compared to a profit of $915,000 during the comparable quarter of 2006.
The Heating and Cooling segment and the Door segment reported increased sales while the Evaporative Cooling segments sales were static and the Concrete, Aggregates and Construction Supplies segments sales declined. Cost of sales as a percentage of sales increased from 82.4% to 86.8% primarily due to decreased margins in the Heating and Cooling segment and the Evaporative Cooling segment. Margins in the Concrete, Aggregates and Construction Supplies segment also narrowed. Selling and administrative costs decreased both in dollars and as a percentage of sales. A reduction was realized at three of the four reporting segments as well as at the Corporate office resulting primarily from adjustments to incentive based compensation. Depreciation, depletion and amortization for the 2007 quarter increased $97,000 over the prior years quarter due to increased capital expenditures during 2006 and 2007 and amortization of intangible assets associated with the ASCI acquisition. The resulting operating loss of $65,000 was well off of the operating income of $915,000 reported for the third quarter of 2006.
Interest expense increased from $250,000 for the third quarter of 2006 to $341,000 in the 2007 quarter due to increased average debt and higher interest rates.
A discussion of operations by segment follows.
Construction Products
The table below presents a summary of operating information for the two reportable segments within the Construction Products group for the quarters ended September 29, 2007 and September 30, 2006 (amounts in thousands):
|
|
Concrete, Aggregates and Construction Supplies |
|
|
|
||
Quarter ended September 29, 2007 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
25,585 |
|
$ |
4,284 |
|
Segment operating income |
|
1,338 |
|
460 |
|
||
Operating income as a percent of sales |
|
5.2 |
% |
10.7 |
% |
||
Segment assets as of September 29, 2007 |
|
$ |
58,280 |
|
$ |
7,128 |
|
Return on assets |
|
2.3 |
% |
6.5 |
% |
||
|
|
|
|
|
|
||
Quarter ended September 30, 2006 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
26,022 |
|
$ |
3,613 |
|
Segment operating income |
|
1,837 |
|
441 |
|
||
Operating income as a percent of sales |
|
7.1 |
% |
12.2 |
% |
||
Segment assets as of September 30, 2006 |
|
$ |
56,323 |
|
$ |
4,636 |
|
Return on assets |
|
3.3 |
% |
9.5 |
% |
11
Concrete, Aggregates and Construction Supplies Segment
Sales in the Concrete, Aggregates and Construction Supplies segment for the third quarter of 2007 declined 1.7% from the prior years comparable quarter. Concrete volume declined 12.5% while margins deteriorated as pricing decisions made in order to protect our market share were insufficient to fully recover higher material and delivery costs, including fuel. Aggregate volumes increased 5.9% despite the decline in construction activity along the Front Range of Colorado, especially housing construction. Margins also increased as production efficiency improved. Both increases are primarily due to the occurrence of floods at our two Arkansas River operations during the third quarter of 2006. All expenses incurred to repair the damage and resume production were recognized in cost of sales as incurred. Both quarries were back in operation by the end of 2006 although some measures to mitigate future vulnerability were performed in 2007. Construction supplies sales and margins both declined during the third quarter of 2007 as compared to the 2006 quarter due to the slow-down in construction.
Operating income declined for the 2007 quarter compared to the 2006 quarter. The decline in concrete volume and margins more than offset the improved aggregates operations. Depreciation, depletion and amortization increased because of the higher capital spending during 2006 and 2007 to date. Selling and administrative costs were lower due to the adjustment of incentive based compensation. As a result, both operating income as a percent of sales and the return on assets declined in the 2007 quarter from the prior years quarter.
Door Segment
Door segment sales rose $671,000, or 18.6%, during the third quarter of 2007 over the comparable 2006 quarter. Sales during a specific quarter can be heavily influenced by customer requests to either accelerate or delay shipments of jobs to better coincide with their own construction schedules. The backlog which had grown during the latter part of 2006 declined during the first six months of 2007 as a number of jobs were shipped; however, it has grown again during the current quarter to just below the September 2006 level. Sales prices increased in response to increased costs while margins declined modestly as competitive pressures restrained price increases.
Operating income improved from $441,000 during the third quarter of 2006 to $460,000 for the 2007 quarter as a result of the higher sales volume and an improvement in the electronics business (acquired at the beginning of 2006). Selling and administrative costs remained relatively constant during the 2007 quarter compared with the prior year quarter and decreased slightly as a percentage of sales. The segment acquired a building in Colorado Springs during the 2007 quarter and will consolidate their two Colorado Springs operations into the facility by the end of the year. As a result of the cost increases, both operating income as a percent of sales and return on assets declined in the 2007 quarter from the prior years quarter.
HVAC Products
The table below presents a summary of operating information for the two reportable segments within the HVAC products group for the quarters ended September 29, 2007 and September 30, 2006 (amounts in thousands):
|
|
Heating and |
|
Evaporative |
|
||
Quarter ended September 29, 2007 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
8,121 |
|
$ |
4,208 |
|
Segment operating loss |
|
(824 |
) |
(493 |
) |
||
Operating loss as a percent of sales |
|
(10.0 |
)% |
(11.7 |
)% |
||
Segment assets as of September 29, 2007 |
|
$ |
23,379 |
|
$ |
11,222 |
|
Return on assets |
|
(3.5 |
)% |
(4.4 |
)% |
||
|
|
|
|
|
|
||
Quarter ended September 30, 2006 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
6,997 |
|
$ |
4,204 |
|
Segment operating loss |
|
(421 |
) |
(81 |
) |
||
Operating loss as a percent of sales |
|
(6.0 |
)% |
(1.9 |
)% |
||
Segment assets as of September 30, 2006 |
|
$ |
19,660 |
|
$ |
10,048 |
|
Return on assets |
|
(2.1 |
)% |
(.8 |
)% |
Heating and Cooling Segment
Sales in the Heating and Cooling segment were $8,121,000 for the third quarter of 2007, an increase of $1,124,000, or 16.1%, from the comparable 2006 quarter. Fan coil volume accounted for the increase with sales surging nearly 54% from the prior years quarter. This increase was the result of favorable market
12
conditions and the restructured sales representative network which was completed in late 2005. Pricing remained relatively flat. Partially offsetting this increase was an 8% decline in furnace volume after a particularly strong first quarter. Cost of sales as a percentage of sales increased during the third quarter of 2007 to 93.6% from 79.7% for the comparable quarter of 2006. A change in product mix in favor of Fan coils and higher material and manufacturing costs contributed to this increase.
The operating loss for the 2007 quarter was $824,000 compared to the loss of $421,000 incurred during the third quarter of 2006. Selling and administrative expenses were $503,000 lower primarily due to lower incentive based compensation. As a result of the significant increase in manufacturing costs, both operating loss as a percent of sales and return on assets increased in the 2007 quarter from the prior years quarter.
Evaporative Cooling Segment
Sales in the Evaporative Cooling segment were static; increasing only $4,000 during the third quarter of 2007 compared to the third quarter of 2006. There were no significant events during the quarter that affected sales.
Operating results declined for the third quarter of 2007 to a loss of $493,000 from an $81,000 loss for the same quarter in 2006. The decline resulted from of an increase in cost of sales as a percentage of sales from 87.6% to 96.9%. Competitive pressures restricted price increases in response to cost increases and an additional workers compensation claims. Depreciation and amortization remained constant between the periods. The small increase in selling and administrative expenses was largely due to increased selling expenses, notably commissions and volume incentive. As a result, both the operating loss as a percent of sales and return on assets increased in the 2007 quarter from the prior years quarter.
Operations - Comparison of Nine Months Ended September 29, 2007 to Nine Months Ended September 30, 2006
Consolidated sales during the first nine months of 2007 were $128,018,000 compared to $118,312,000 during the first nine months of 2006. The improvement was primarily generated by the Heating and Cooling segment and the Door segment. Cost of sales as a percentage of sales increased from 81.7% for the 2006 period to 84.2% during the 2007 period. Depreciation, depletion and amortization increased $295,000 over the prior years period due to increased capital expenditures during 2006 and 2007 and amortization of intangible assets associated with the ASCI acquisition. Selling and administrative costs declined as a percentage of sales as well as in total, the result of adjustments to accrued incentive based compensation. The increased cost of sales led to a reduction of operating income from $2,871,000 for the nine months ended September 30, 2006 to $1,445,000 for the first nine months of 2006. Interest expense increased from $548,000 for the nine months ended September 30, 2006 to $922,000 for the nine months ended September 29, 2007 due to increased average borrowings and higher rates. Other income for the first nine months of 2007 includes a $230,000 gain on the sale of stock received from the demutualization of a mutual insurance company.
A discussion of operations by segment follows.
Construction Products
The table below presents a summary of operating information for the two reportable segments within the Construction Products group for the nine months ended September 29, 2007 and September 30, 2006 (amounts in thousands):
|
|
Concrete, Aggregates and Construction Supplies |
|
|
|
||
Nine Months ended September 29, 2007 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
71,110 |
|
$ |
13,733 |
|
Segment operating income |
|
3,656 |
|
1,627 |
|
||
Operating income as a percent of sales |
|
5.1 |
% |
11.8 |
% |
||
Segment assets as of September 29, 2007 |
|
$ |
58,280 |
|
$ |
7,128 |
|
Return on assets |
|
6.3 |
% |
22.8 |
% |
||
|
|
|
|
|
|
||
Nine Months ended September 30, 2006 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
71,093 |
|
$ |
10,165 |
|
Segment operating income |
|
4,583 |
|
1,100 |
|
||
Operating income as a percent of sales |
|
6.4 |
% |
10.8 |
% |
||
Segment assets as of September 30, 2006 |
|
$ |
54,470 |
|
$ |
4,750 |
|
Return on assets |
|
8.4 |
% |
23.2 |
% |
13
Concrete, Aggregates and Construction Supplies Segment
Sales in the Concrete, Aggregates and Construction Supplies segment for the first nine months of 2007 were flat compared to the prior years comparable period. Concrete volume declined approximately 4% but sales dollars increased due to increased prices in response to higher material and delivery costs, including fuel. Margins, however, deteriorated as pricing increases did not keep pace with higher cement, delivery and other costs. Repair and maintenance costs were also higher than the prior year period. Aggregate volumes increased approximately 5% despite the decline in construction activity, primarily due to the sale of some bulk product, including fill sand, during the first quarter of 2007 and the interruption of business at our two Arkansas River operations from floods during the third quarter of 2006. Aggregate margins improved as a result of the production efficiencies during 2007 and the flood damage costs incurred during the third quarter of 2006 as described above for the current quarter. In addition, margins were aided by the recovery of $725,000 during the second quarter of 2007 from our insurance carrier as settlement of flood claims. Construction supplies sales and margins declined during the first nine months of 2007 for the reasons noted above for the quarter.
Operating income declined to $3,656,000 during the 2007 period from $4,583,000 for the 2006 period. The decline was due to the reduced concrete volume and margins. Partially offsetting this decline was the improved aggregate margins for the reasons noted above. Depreciation, depletion and amortization increased during the 2007 period for the reasons noted for the quarter. For the 2007 nine month period, the lower selling and administrative expenses were attributable to incentive based compensation noted in the discussion of the quarter and the consolidation of administrative functions into the Colorado Springs office. As a result of the decline of concrete volume and margins, both operating income as a percent of sales and return on assets declined for the nine months ended September 29, 2007 compared to the nine months ended September 30, 2006.
Door Segment
Sales in the Door segment for the first nine months of 2007 increased $3,568,000 over the comparable 2006 period due to the timing of shipments as described in the discussion for the current quarter, pricing increases in response to higher costs and a steady market demand. Due to the nature of this segments products, its sales correspond to the latter part of the construction cycle; therefore the current nationwide decline in construction activity has not yet been experienced by this segment.
Operating income improved from $1,100,000 during the first nine of 2006 to $1,627,000 for the 2007 period primarily due to higher sales volume and an improvement in the electronics business. As noted in the discussion of the current quarter, the backlog was also reduced during the first half of 2007. As a result, operating income as a percent of sales improved while the return on assets declined slightly due to the building addition during the nine months ended September 29, 2007 compared to the nine months ended September 30, 2006.
HVAC Products
The table below presents a summary of operating information for the two reportable segments within the HVAC products group for the nine months ended September 29, 2007 and September 30, 2006 (amounts in thousands):
|
|
Heating |
|
Evaporative |
|
||
Nine Months ended September 29, 2007 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
24,297 |
|
$ |
18,607 |
|
Segment operating loss |
|
(1,503 |
) |
(366 |
) |
||
Operating loss as a percent of sales |
|
(6.2 |
)% |
(2.0 |
)% |
||
Segment assets as of September 29, 2007 |
|
$ |
23,379 |
|
$ |
11,222 |
|
Return on assets |
|
(6.4 |
)% |
(3.3 |
)% |
||
|
|
|
|
|
|
||
Nine Months ended September 30, 2006 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
18,628 |
|
$ |
18,163 |
|
Segment operating (loss) income |
|
(570 |
) |
250 |
|
||
Operating (loss) income as a percent of sales |
|
(3.1 |
)% |
1.4 |
% |
||
Segment assets as of September 30, 2006 |
|
$ |
19,660 |
|
$ |
10,048 |
|
Return on assets |
|
(2.9 |
)% |
2.5 |
% |
Heating and Cooling Segment
Sales in the Heating and Cooling segment increased $5,669,000, or 30%, during the first nine months of 2007 over the comparable 2006 period. Fan coil volume was responsible for the majority of the increase although
14
furnace volume was higher on the strength of sales during the first quarter, largely in January. For the first nine months of 2007, fan coil sales increased 73% due to the reasons cited for the quarter above.
The operating loss increased from $570,000 during the first nine months of 2006 to a loss of $1,503,000 for the 2007 period despite the increase in sales. Cost of sales as a percent of sales increased from 75.8% to 86.5% due to the reasons noted above. In addition, pricing decisions made to retain a national home center account during the second quarter of 2006 also decreased margins. Selling and administrative costs were $328,000 lower due to reasons noted above partially offset by the addition of personnel in the sales and engineering departments. As a result of the significant increase in manufacturing costs, the operating loss as a percent of sales increased while the return on assets declined for the first nine months of 2007 from the prior years period.
Evaporative Cooling Segment
Sales in the Evaporative Cooling segment increased $444,000, or 2.4%, during the first nine months of 2007 over the comparable 2006 period. The improvement occurred during the first quarter largely as a result of two new customers.
The operating profit of $250,000 during the first nine months of 2006 declined to a loss of $366,000 for the first nine months of 2007. Cost of sales as a percentage of sales increased to 88% in 2007 from 84.6% for the comparable 2006 period due to the reasons cited above. Depreciation and amortization remained constant between the periods while selling and administrative expenses increased modestly during the first nine months of 2007 compared to the 2006 period for the reasons cited in the quarters discussion above. As a result, the operating results as a percent of sales and the return on assets were lower during the first nine months of 2007from the prior years period.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of September 29, 2007 and December 30, 2006 and affect the reported amounts of revenues and expenses for the periods reported. Actual results could differ from those estimates.
Information with respect to the Companys critical accounting policies which the Company believes could have the most significant effect on the Companys reported results and require subjective or complex judgments by management is contained in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, of the Companys Annual Report on Form 10-K for the fiscal year ended December 30, 2006.
OUTLOOK
Concrete prices throughout our Colorado markets have improved compared to 2006, however not enough to recover the higher prices paid for cement and increased delivery costs. The pressure on pricing has come from aggressive competition, especially from a small new concrete producer in Colorado Springs, in response to a softening in construction activity along the Front Range of Colorado. Current predictions do not anticipate construction to recover until at least 2008. The sales volume and backlog for the Door segment remain strong and it is unknown whether the current downturn in construction will affect this segments sales in the near future.
Sales of the Evaporative Cooling segment are not expected to grow significantly and will remain weather sensitive. However, sales of fan coil products in the Heating and Cooling segment are expected to grow as a result of favorable market conditions and the restructured sales representative network and marketing efforts. Pricing in these two segments remains a concern.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 for discussion of the accounting standards adopted in 2007.
The Company discusses recently issued accounting standards and tax law changes in the Critical Accounting Policies section under Item 7 and in Note 1 to Consolidated Financial Statements in Item 8 of the Companys
15
Annual Report on Form 10-K for the fiscal year 2006. Other than as discussed in those sections, the Company does not currently have any transactions or circumstances that have been addressed by recently issued accounting pronouncements. Therefore, adoption of any of these statements or pronouncements would not have a material impact on the Companys results of operations, financial position or liquidity.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of the Companys management as well as on assumptions made by and information available to the Company at the time such statements were made. When used in this Report, words such as anticipates, believes, contemplates, estimates, expects, plans, projects, and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of factors including but not limited to: weather, interest rates, availability of raw materials and their related costs, national and local economic conditions and competitive forces. Some of these factors are discussed in more detail in the Companys 2006 Annual Report on Form 10-K. Changes in accounting rules and pronouncements could also alter projected results. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them, except as required by law.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
There have been no material changes in the market risks that the Company is exposed to since those discussed in the Companys 2006 Annual Report on Form 10-K.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures.
The Companys Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 29, 2007. Based on that evaluation, they have concluded that the Companys disclosure controls and procedures as of such date are effective and are reasonably designed to ensure that all material information relating to the Company (including its subsidiaries) is accumulated and communicated to management to allow timely decisions regarding required disclosure and to ensure that all material information required to be disclosed in this quarterly report is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
(b) Changes in Internal Control Over Financial Reporting.
There have been no significant changes in the Companys internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
16
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to purchases made by the Company of its common stock to become treasury stock for the period July 1, 2007 through September 29, 2007. No shares were purchased during the current quarter.
Issuer Purchases of Equity Securities |
|
||||||||||
|
|
(a) Total Number of Shares Purchased |
|
|
|
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
|
||
July 1 July 28, 2007 |
|
|
|
$ |
|
|
|
|
$ |
1,349,255 |
|
July 29 August 25, 2007 |
|
|
|
|
|
|
|
1,349,255 |
|
||
August 26 September 29, 2007 |
|
|
|
|
|
|
|
1,349,255 |
|
||
Total |
|
|
|
$ |
|
|
|
|
$ |
1,349,255 |
|
On January 19, 1999, the Company initiated purchases under the current open-ended program to repurchase its common stock. Purchases are made on the open market or in block trades at the discretion of management. The dollar amount authorized for the program has been periodically increased by the Board of Directors and approved by the Companys two banks as required by the Companys Revolving Credit and Term Loan Agreement. The June 28, 2005 amendment to the Loan Agreement provides that the Company may make purchases of its own stock in an amount not to exceed $1,438,000, separate from purchases made in connection with the 2005 tender offer and the exercise of cashless stock options. Since the 2005 tender offer, management has not actively sought to repurchase shares.
Item 6. |
|
Exhibits |
|
|
|
|
|
|
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a/15d-14(a) and Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) and Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
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 |
|
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 13, 2007 |
By: |
/S/ Joseph J. Sum |
|
|
|
Joseph J. Sum, Vice President |
|
|
|
and Chief Financial Officer |
17