UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2010
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 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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o |
|
Accelerated Filer o |
|
|
|
Non-Accelerated Filer o |
|
Smaller reporting company x |
(Do not check if a smaller reporting company) |
|
|
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 May 7, 2010 |
|
1,598,674 |
PART I - FINANCIAL INFORMATION
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 3, 2010 AND JANUARY 2, 2010
(Unaudited)
(000s omitted except share data)
|
|
APRIL 3, |
|
JANUARY 2, |
|
||
|
|
2010 |
|
2010 |
|
||
ASSETS |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
910 |
|
$ |
681 |
|
Receivables, net |
|
17,631 |
|
17,001 |
|
||
Receivable for insured losses |
|
858 |
|
684 |
|
||
Inventories: |
|
|
|
|
|
||
Finished goods |
|
7,669 |
|
6,898 |
|
||
Work in process |
|
839 |
|
763 |
|
||
Raw materials and supplies |
|
7,959 |
|
8,634 |
|
||
Refundable income taxes |
|
1,012 |
|
1,012 |
|
||
Deferred income taxes |
|
4,020 |
|
3,116 |
|
||
Prepaid expenses |
|
1,616 |
|
1,582 |
|
||
Total current assets |
|
42,514 |
|
40,371 |
|
||
|
|
|
|
|
|
||
Property, plant and equipment, net |
|
26,022 |
|
27,092 |
|
||
|
|
|
|
|
|
||
Goodwill |
|
7,229 |
|
7,229 |
|
||
Amortizable intangible assets, net |
|
445 |
|
479 |
|
||
Cash deposit for self-insured claims |
|
4,840 |
|
4,840 |
|
||
Other assets |
|
2,270 |
|
2,101 |
|
||
|
|
|
|
|
|
||
|
|
$ |
83,320 |
|
$ |
82,112 |
|
LIABILITIES |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Current portion of long-term debt |
|
$ |
1,500 |
|
$ |
1,375 |
|
Accounts payable and accrued expenses |
|
13,205 |
|
12,131 |
|
||
Liability for unpaid claims covered by insurance |
|
858 |
|
684 |
|
||
Total current liabilities |
|
15,563 |
|
14,190 |
|
||
|
|
|
|
|
|
||
Revolving bank loan payable |
|
7,300 |
|
5,850 |
|
||
Long-term debt |
|
5,400 |
|
5,775 |
|
||
Deferred income taxes |
|
3,320 |
|
3,243 |
|
||
Other long-term liabilities |
|
2,009 |
|
1,868 |
|
||
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 |
|
63,870 |
|
65,328 |
|
||
Treasury shares, 975,590, at cost |
|
(16,615 |
) |
(16,615 |
) |
||
|
|
49,728 |
|
51,186 |
|
||
|
|
|
|
|
|
||
|
|
$ |
83,320 |
|
$ |
82,112 |
|
See notes to condensed consolidated financial statements.
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED APRIL 3, 2010 AND APRIL 4, 2009
(Unaudited)
(000s omitted except per-share amounts)
|
|
APRIL 3, |
|
APRIL 4, |
|
||
|
|
|
|
|
|
||
Net sales |
|
$ |
23,973 |
|
$ |
32,279 |
|
|
|
|
|
|
|
||
Costs and expenses: |
|
|
|
|
|
||
Cost of sales (exclusive of depreciation, depletion and amortization) |
|
19,749 |
|
25,748 |
|
||
Depreciation, depletion and amortization |
|
1,104 |
|
1,119 |
|
||
Selling and administrative |
|
5,230 |
|
5,440 |
|
||
|
|
|
|
|
|
||
Gain on disposition of property and equipment |
|
70 |
|
57 |
|
||
|
|
26,013 |
|
32,250 |
|
||
|
|
|
|
|
|
||
Operating (loss) income |
|
(2,040 |
) |
29 |
|
||
|
|
|
|
|
|
||
Interest expense, net |
|
(280 |
) |
(153 |
) |
||
Other income, net |
|
11 |
|
12 |
|
||
|
|
|
|
|
|
||
Loss from continuing operations before income taxes |
|
(2,309 |
) |
(112 |
) |
||
|
|
|
|
|
|
||
Benefit from income taxes |
|
868 |
|
33 |
|
||
|
|
|
|
|
|
||
Net loss from continuing operations |
|
(1,441 |
) |
(79 |
) |
||
|
|
|
|
|
|
||
Loss from discontinued operation net of income tax benefit of $10 and $132 |
|
(17 |
) |
(411 |
) |
||
|
|
|
|
|
|
||
Net loss |
|
(1,458 |
) |
(490 |
) |
||
|
|
|
|
|
|
||
Retained earnings, beginning of period |
|
65,328 |
|
66,770 |
|
||
|
|
|
|
|
|
||
Retained earnings, end of period |
|
$ |
63,870 |
|
$ |
66,280 |
|
|
|
|
|
|
|
||
Net (loss) per basic and diluted share: |
|
|
|
|
|
||
Continuing operations |
|
$ |
(.90 |
) |
$ |
(.05 |
) |
Discontinued operation |
|
(.01 |
) |
(.26 |
) |
||
Basic and diluted loss per share |
|
$ |
(.91 |
) |
$ |
(.31 |
) |
|
|
|
|
|
|
||
Average shares outstanding |
|
1,599 |
|
1,599 |
|
See notes to condensed consolidated financial statements.
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 3, 2010 AND APRIL 4, 2009
(Unaudited)
(000s omitted)
|
|
APRIL 3, |
|
APRIL 4, |
|
||
|
|
|
|
|
|
||
Net cash used in operating activities |
|
$ |
(1,023 |
) |
$ |
(889 |
) |
|
|
|
|
|
|
||
Investing activities: |
|
|
|
|
|
||
Capital expenditures |
|
(41 |
) |
(879 |
) |
||
Proceeds from sale of property and equipment |
|
93 |
|
57 |
|
||
Net cash provided by (used in) investing activities |
|
52 |
|
(822 |
) |
||
|
|
|
|
|
|
||
Financing activities: |
|
|
|
|
|
||
Borrowings under revolving credit facility |
|
1,450 |
|
2,300 |
|
||
Repayment of long term debt |
|
(250 |
) |
(414 |
) |
||
Net cash provided by financing activities |
|
1,200 |
|
1,886 |
|
||
|
|
|
|
|
|
||
Net increase in cash and cash equivalents |
|
229 |
|
175 |
|
||
Cash and cash equivalents: |
|
|
|
|
|
||
Beginning of period |
|
681 |
|
1,097 |
|
||
|
|
|
|
|
|
||
End of period |
|
$ |
910 |
|
$ |
1,272 |
|
|
|
|
|
|
|
||
Supplemental disclosures of cash flow items: |
|
|
|
|
|
||
Cash paid (received) during the three months for: |
|
|
|
|
|
||
Interest, net |
|
$ |
219 |
|
$ |
177 |
|
Income taxes paid (refunded) |
|
2 |
|
(414 |
) |
||
|
|
|
|
|
|
||
Supplemental disclosures of noncash investing activities: |
|
|
|
|
|
||
Capital expenditures purchased on account |
|
$ |
|
|
$ |
60 |
|
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 APRIL 3, 2010
(Unaudited)
1. Basis of Presentation:
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 condensed consolidated balance sheet of the Company as of January 2, 2010 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 Companys 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. On July 17, 2009, the Company completed the sale of all of the outstanding capital stock of Rocky Mountain Ready Mix (RMRM), a Colorado corporation to Campbells C-Ment Contracting, Inc., a Colorado corporation. RMRM operated a ready mix concrete business in the Denver metropolitan area and had been included in the Construction, Aggregates and Construction Supplies (CACS) reporting segment. The operations of RMRM have been classified as discontinued operations for the period ended April 4, 2009. Certain prior years amounts have been reclassified to conform to the current presentation.
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.
Our income tax returns are subject to audit by the Internal Revenue Service (IRS) and state tax authorities. The amounts recorded for income taxes reflect our tax positions based on research and interpretations of complex laws and regulations. We accrue liabilities related to uncertain tax positions taken or expected to be taken in our tax returns. The Company has established a valuation reserve related to the carry forward of all charitable contributions deductions arising from prior years and the portion of contributions in 2010 that the Company believes it will be unable to utilize prior to the expiration of their carry forward periods. At January 2, 2010, the Company also established a valuation reserve of $1,721,000 related to the carry forward of the long-term capital loss related to the sale of the stock of RMRM due to the uncertainty that the Company will be able to generate offsetable long-term capital gains prior to the expiration of the carry forward period. For Federal 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 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.
The Internal Revenue Service has completed examinations for periods through 2007. Various state income tax returns also remain subject to examination.
3. In April 2009, the FASB extended the new accounting standards requiring disclosures about fair value of financial instruments to interim as well as annual financial statements. The new interim disclosure requirement became effective for the Company on April 1, 2009, resulting in the disclosure of the fair value attributable to the Companys debt instruments within this interim report. The Company has concluded that the carrying amount of the debt at April 3, 2010 approximates its fair value, thus the Companys adoption of this statement had no impact on its consolidated financial position, results of operations or cash flows.
4. Operating results for the first three months of 2010 are not necessarily indicative of performance for the entire year due to the seasonality of most of our products. Historically, sales of the Evaporative Cooling segment are higher in the first and second quarters, sales of the 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. The sales of the Door segment are more evenly spread throughout the year. The economic recession that began in the latter part of 2008 has had a significant detrimental effect on the construction industry in general and on our construction related businesses in particular in 2009 and 2010 and is expected to continue to do so for the remainder of 2010.
5. There is no difference in the calculation of basic and diluted earnings per share (EPS) for the three months ended April 3, 2010 and April 4, 2009 as the Company does not have any dilutive instruments.
6. The Company operates primarily in two industry groups, HVAC and Construction Products. Within each of these two industry groups, the Company has identified two reportable segments: 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 (WFC). The Evaporative Cooling segment produces and sells evaporative coolers from the Companys wholly-owned subsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona (PMI). 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 Companys wholly-owned subsidiaries collectively referred to as Transit Mix Concrete Co. (TMC). RMRM of Denver, formerly included in this segment, was sold on July 17, 2009 and has been reclassified as discontinued operation (see Note 9). Doors are fabricated and sold along with the related hardware from Colorado Springs and Pueblo through the Companys wholly-owned subsidiary, McKinney Door and Hardware, Inc. of Pueblo, Colorado (MDHI). 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.
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 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 three months ended April 3, 2010 and April 4, 2009 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):
|
|
Construction Products |
|
HVAC Products |
|
|
|
|
|
|
|
|||||||||||||||||
|
|
Concrete, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Quarter ended |
|
Aggregates & |
|
Doors |
|
Combined |
|
Heating |
|
Evaporative |
|
Combined |
|
Unallocated |
|
Other |
|
Total |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Revenues from external customers |
|
$ |
6,728 |
|
$ |
3,628 |
|
$ |
10,356 |
|
$ |
9,152 |
|
$ |
4,376 |
|
$ |
13,528 |
|
$ |
3 |
|
$ |
86 |
|
$ |
23,973 |
|
Depreciation, depletion and amortization |
|
841 |
|
34 |
|
875 |
|
98 |
|
115 |
|
213 |
|
16 |
|
|
|
1,104 |
|
|||||||||
Operating income (loss) |
|
(1,614 |
) |
344 |
|
(1,270 |
) |
(302 |
) |
150 |
|
(152 |
) |
(645 |
) |
27 |
|
(2,040 |
) |
|||||||||
Segment assets |
|
38,658 |
|
6,016 |
|
44,674 |
|
15,367 |
|
14,948 |
|
30,315 |
|
8,268 |
|
63 |
|
83,320 |
|
|||||||||
Capital expenditures |
|
5 |
|
|
|
5 |
|
31 |
|
5 |
|
36 |
|
|
|
|
|
41 |
|
|||||||||
|
|
Construction Products |
|
HVAC Products |
|
|
|
|
|
|
|
|||||||||||||||||
|
|
Concrete, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Quarter ended |
|
Aggregates & |
|
Doors |
|
Combined |
|
Heating |
|
Evaporative |
|
Combined |
|
Unallocated |
|
Other |
|
Total |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Revenues from external customers |
|
$ |
10,257 |
|
$ |
4,723 |
|
$ |
14,980 |
|
$ |
9,898 |
|
$ |
7,309 |
|
$ |
17,207 |
|
$ |
6 |
|
$ |
86 |
|
$ |
32,279 |
|
Depreciation, depletion and amortization |
|
838 |
|
42 |
|
880 |
|
95 |
|
125 |
|
220 |
|
19 |
|
|
|
1,119 |
|
|||||||||
Operating income (loss) |
|
(1,312 |
) |
610 |
|
(702 |
) |
437 |
|
1,035 |
|
1,472 |
|
(768 |
) |
27 |
|
29 |
|
|||||||||
Segment assets (a) |
|
36,007 |
|
6,509 |
|
42,516 |
|
17,101 |
|
13,141 |
|
30,242 |
|
9,291 |
|
63 |
|
82,112 |
|
|||||||||
Capital expenditures (b) |
|
688 |
|
|
|
688 |
|
|
|
57 |
|
57 |
|
29 |
|
|
|
774 |
|
|||||||||
(a) Segment assets are as of January 2, 2010.
(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.
7. Identifiable amortizable intangible assets as of April 3, 2010 includes non-compete agreements, a restrictive land covenant and customer relations. Collectively, these assets were carried at $445,000, net of $565,000 accumulated amortization. The pre-tax amortization expense for intangible assets during the quarter ended April 3, 2010 was $34,000 compared to $73,000 for the quarter ended April 4, 2009.
Based upon the intangible assets recorded on the balance sheet at April 3, 2010 and January 2, 2010, amortization expense for the next five years is estimated to be as follows: 2010 $137,000; 2011 $101,000; 2012 $65,000; 2013 $59,000 and 2014 $52,000.
8. At the end of the period ended January 2, 2010, the Company was not in compliance with the minimum adjusted EBITDA and fixed charge coverage covenants of the Credit Agreement. As a result, effective January 1, 2010 the default rate provision of the Credit Agreement increased the interest rate on all outstanding revolving and long-term debt by 2%. Non-compliance with the financial covenants in the Credit Agreement constitutes an event of default under the agreement. Upon the occurrence of an event of default, the lenders may, among other things, terminate their lending commitments, in whole or in part, declare all or any part of the Companys borrowings to be due and payable, and/or require the Company to collateralize with cash any or all letters of credit provided by the lender. A waiver of the event of default relating to compliance with the minimum adjusted EBITDA and fixed charge coverage covenants was granted and a second amendment to the Credit Agreement was entered into on April 15, 2010. The second amendment provides for the following:
· The covenants regarding the fixed charge coverage and the maximum leverage ratio have been eliminated for the duration of the amended Credit Agreement.
· The Company must maintain a minimum tangible net worth of $32,000,000 beginning with the end of the second quarter of 2010. At April 3, 2010, the minimum tangible net worth, as defined, was $36,360,000.
· Annual capital expenditures may not exceed $3,500,000 beginning with the end of the second quarter of 2010.
· The maximum credit available under the revolving credit facility will remain at $15,000,000 until October 1, 2010 when it will then be reduced to $13,500,000.
· The maturity date of the credit facility is August 1, 2011.
· The interest rate for the remaining term of the amended Credit Agreement will be 4.0% over LIBOR but with a LIBOR floor of 2.0% (the Companys effective LIBOR borrowing rate will be 6.0%). The margin on the base or prime rate option will be the base plus 1.75% with a base rate floor of 4% (the Companys effective borrowing rate will be 5.75%).
· The interest rate swap transaction will remain in effect.
The Credit Agreement as amended on April 15, 2010 requires the Company to maintain certain financial covenants as disclosed in the table below (amounts in thousands):
Financial Covenant |
|
Date Required |
|
Required |
|
Minimum tangible net worth |
|
Beginning with the end of the second quarter of 2010 |
|
$32,000 |
|
Minimum adjusted quarterly EBITDA |
|
Quarter ended July 3, 2010 |
|
2,100 |
|
|
|
Quarter ended October 2, 2010 |
|
2,000 |
|
|
|
Quarter ended January 1, 2011 |
|
500 |
|
|
|
Quarter ended April 2, 2011 |
|
(600 |
) |
|
|
Quarter ended July 2, 2011 |
|
2,100 |
|
Maximum capital expenditures (rolling twelve months) |
|
Beginning with the end of the second quarter of 2010 |
|
< $3,500 |
|
Definitions under the Credit Agreement as amended are as follows:
· Tangible net worth is defined as net worth plus subordinated debt minus intangible assets (goodwill, intellectual property, prepaid expenses and deferred charges) minus all obligations owed to the Company or any of its subsidiaries by any affiliate or any or its subsidiaries and minus all loans owed by its officers, stockholders, subsidiaries or employees (Note: there are no loans owed by any of the referenced parties at January 2, 2010 or as of the date of this filing).
· Adjusted EBITDA is defined as net income plus interest, income taxes, depreciation, depletion and amortization plus other non-cash charges approved by the lender.
The Company has prepared a projection of cash sources and uses for the next 12 months. Under this projection, 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 servicing debt and planned capital expenditures for the next twelve months. The Company also expects to be in compliance with all debt covenants, as amended, during this period.
9. On July 17, 2009, the Company completed the sale of all of the outstanding capital stock of RMRM, a Colorado corporation to Campbells C-Ment Contracting, Inc. (Buyer), a Colorado corporation. RMRM operated a ready mix concrete business in the Denver metropolitan area and had been included in the CACS reporting segment.
RMRMs revenue of $1,821,000 and net loss of $411,000 for the fiscal three months ended April 4, 2009 are reported as discontinued operations.
10. The Company is involved in litigation matters related to its continuing business, principally product liability matters related to the gas-fired heating products in the Heating and Cooling segment. In the Companys opinion, none of these proceedings, when concluded, will have a material adverse effect on the Companys consolidated results of operations or financial condition as the Company has established adequate accruals for known occurrences which represent managements best estimate of the future liability related to these claims up to the associated deductible.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Company Overview
See Note 6 for an overview of the Company.
Liquidity and Capital Resources
As noted above, various factors affect the sales of the Companys products. Historically, the Company has experienced operating losses during the first quarter except when construction activity is strong along the Southern Front Range of Colorado and the weather is mild. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in Colorado and the seasonal sales of the Evaporative Cooling segment. However; the Company expects construction activity along the Southern Front Range will remain weak for the balance of 2010.
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, if any. 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 2010.
As expected, the Companys cash flow from operations during the first quarter was negative due to the seasonality of sales, production schedules, the sales dating programs related to the evaporative cooler product line and the overall current economic and financial markets effect on construction. Operations for the first three months of 2010 used $1,023,000 of cash compared to $889,000 during the first three months of 2009. The increased use of cash was primarily the result of the increase in the net loss during the first quarter of 2010 partially offset by changes in working capital items, most notably a larger increase in accounts receivable during the first quarter of 2009 compared to the 2010 quarter reflecting the higher level of sales during the first quarter of 2009.
As more fully discussed in Note 8 above, on April 15, 2010, the Company amended its Credit Agreement whereby the bank lender granted a waiver of the covenant defaults for the period ended January 2, 2010 and modified the covenants effective January 3, 2010. The Company was in compliance with the modified loan covenants as of the quarter ended April 3, 2010. The amendment established August 1, 2011 as the maturity date of the credit facility and accordingly, the outstanding revolving credit balances at April 3, 2010 and January 2, 2010 were classified as long-term obligations.
Capital expenditures were $41,000 for the first quarter of 2010. Scheduled debt repayments were made during the first quarter of both 2010 and 2009. As expected, the Company borrowed against its revolving credit facility during the first quarter of 2010. The highest amount of Company borrowings outstanding under the revolving credit agreement during the first quarter of 2010 was $7,300,000 and the average amount outstanding during the first quarter was $5,483,000.
The Company has prepared a projection of cash sources and uses for the next 12 months. Under this projection, the Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the New Credit Agreement will be sufficient to cover expected cash needs, including servicing debt and planned capital expenditures for the next twelve months. The Company expects to be in compliance with all debt covenants during this period.
Results of Operations - Comparison of Quarter Ended April 3, 2010 to Quarter Ended April 4, 2009
(In the ensuing discussions of the results of operations the term gross profit means 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 first quarter of 2010 were $23,973,000 or $8,306,000 (25.7%) less than sales from continuing operations in the first quarter of 2009. Sales at all of the Companys business segments were down compared to the prior year with the most significant reductions in the Concrete, Aggregates and Construction Supplies segment and the Evaporative Cooling segment. The consolidated gross profit ratio declined from 20.2% in the first quarter of 2009 to 17.6% in the current year quarter. This reduction is due principally to the reduced sales volume in the same two segments mentioned above. Consolidated selling and administrative expenses were $210,000 lower in the 2010 quarter compared to the prior year primarily as a result of a reduction in selling expenses that vary with sales in the Evaporative Cooling segment. Consolidated selling and administrative expenses, as a percentage of consolidated sales, increased from 16.9% to 21.8%. This higher percentage reflects the fixed nature of most of these expenses combined with the reduced sales. The operating loss for the first quarter of 2010 was $2,040,000 compared to a $29,000 operating profit from continuing operations in the first quarter of 2009. Historically, the Company has experienced operating losses during the first quarter except when the construction activity is strong and the weather is mild along the Southern Front Range in Colorado.
Interest expense increased to $280,000 in the first quarter of 2010 from $153,000 in the first quarter of 2009. The average interest rate in the first quarter of 2010 was approximately 7.25% compared to approximately 3.5% in the first quarter of 2009. As discussed more completely in Note 8, the Company entered into a second amendment to its Credit Agreement in April of 2010. Average outstanding indebtedness was approximately $5,300,000 lower in 2010 compared to 2009 due principally to reduced working capital and receipt of proceeds from the sale of RMRM in July 2009.
A discussion of operations by segment follows.
Construction Products
The table below presents a summary of operating information for the two reportable segments within the Construction Products industry group for the quarters ended April 3, 2010 and April 4, 2009 (dollar amounts in thousands):
|
|
Concrete, |
|
Doors |
|
||
Quarter ended April 3, 2010 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
6,728 |
|
$ |
3,628 |
|
Gross profit |
|
201 |
|
954 |
|
||
Gross profit as a percent of sales |
|
3.0 |
% |
26.3 |
% |
||
Segment operating (loss) income |
|
(1,614 |
) |
344 |
|
||
Operating (loss) income as a percent of sales |
|
(24.0 |
)% |
9.5 |
% |
||
Segment assets as of April 3, 2010 |
|
$ |
38,658 |
|
$ |
6,016 |
|
Return on assets |
|
(4.2 |
)% |
5.7 |
% |
||
|
|
|
|
|
|
||
Quarter ended April 4, 2009 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
10,257 |
|
$ |
4,723 |
|
Gross profit |
|
589 |
|
1,207 |
|
||
Gross profit as a percent of sales |
|
5.7 |
% |
25.6 |
% |
||
Segment operating (loss) income |
|
(1,312 |
) |
610 |
|
||
Operating (loss) income as a percent of sales |
|
(12.8 |
)% |
12.9 |
% |
||
Segment assets as of April 4, 2009 |
|
$ |
45,802 |
|
$ |
6,904 |
|
Return on assets |
|
(2.9 |
)% |
8.8 |
% |
Concrete, Aggregates and Construction Supplies Segment
Sales in the Concrete, Aggregates and Construction Supplies segment for the first quarter of 2010 decreased 34.4% compared to the prior year quarter. In the first half of 2009 the Company was servicing two large commercial jobs in Pueblo, Colorado. Those jobs were completed during 2009 and there were no jobs of comparable size in the first quarter of 2010. Otherwise, demand for construction materials in southern Colorado remained weak. Concrete yardage declined 29.5% from the prior year for these same reasons. The average price of ready-mixed concrete declined by 8.2% as a result of a change in product mix and lower cement costs. The gross profit per cubic yard of concrete was approximately $3.00 lower in 2010 as a result of the lower unit volume and higher fuel prices. Sales of aggregates (sand, crushed limestone and gravel) were 11.3% lower in 2010 compared to 2009. The Pikeview Quarry remains closed although the Company believes that it will be able to reopen the quarry pending approval of its mining and reclamation plan by the Colorado Division of Reclamation, Mining and Safety. The Company estimates that operations will resume in the latter part of 2010 or in 2011. The combined gross profit from all aggregate operations in the first quarter of 2010 was a modest loss of less than $30,000 compared to a loss of slightly over $300,000 in 2009. The Company has been able to reduce the ongoing expenses of the Pikeview Quarry since the December 2008 landslide. Construction supplies sales declined in the 2010 first quarter by $527,000 (51%) compared to the 2009 quarter due to the low level of construction activity in southern Colorado. The gross profit from construction supplies was a loss of $133,000 compared to a profit of $100,000 in the first quarter of 2009 due to the lower volume.
Door Segment
Sales during the first quarter of 2010 in the Door segment decreased $1,095,000 or 23.2% from the comparable 2009 quarter as a result of the weaker construction markets. Sales in the first quarter of 2009 benefitted from a large backlog carried forward from the prior year. The sales backlog at the end of the first quarter of 2010 was approximately $2,450,000 compared to a year-ago backlog of $3,100,000. The gross profit ratio in 2010 improved slightly in spite of the lower level of business due to product mix factors.
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 April 3, 2010 and April 4, 2009 (dollar amounts in thousands):
|
|
Heating and |
|
Evaporative |
|
||
Quarter ended April 3, 2010 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
9,152 |
|
$ |
4,376 |
|
Gross profit |
|
2,135 |
|
904 |
|
||
Gross profit as a percent of sales |
|
23.3 |
% |
20.7 |
% |
||
Segment operating (loss) income |
|
(302 |
) |
150 |
|
||
Operating (loss) income as a percent of sales |
|
(3.3 |
)% |
3.4 |
% |
||
Segment assets as of April 3, 2010 |
|
$ |
15,367 |
|
$ |
14,948 |
|
Return on assets |
|
(2.0 |
)% |
1.0 |
% |
||
|
|
|
|
|
|
||
Quarter ended April 4, 2009 |
|
|
|
|
|
||
Revenues from external customers |
|
$ |
9,898 |
|
$ |
7,309 |
|
Gross profit |
|
2,682 |
|
2,020 |
|
||
Gross profit as a percent of sales |
|
27.1 |
% |
27.6 |
% |
||
Segment operating income |
|
437 |
|
1,035 |
|
||
Operating income as a percent of sales |
|
4.4 |
% |
14.2 |
% |
||
Segment assets as of April 4, 2009 |
|
$ |
20,253 |
|
$ |
21,691 |
|
Return on assets |
|
2.2 |
% |
1.4 |
% |
Heating and Cooling Segment
Sales in the Heating and Cooling segment declined $746,000 (7.5%) in the first quarter of 2010 from the comparable 2009 quarter. The entire decline is attributable to lower fan coil sales. Furnace sales were up slightly during the first quarter of 2010. The lower fan coil sales reflected a slow commercial construction market particularly related to new hotel construction. The gross profit ratio for this segment declined from 27.1% to 23.3% due to more competitive pricing in the fan coil business and increases in steel and copper prices. Selling and administrative expenses were approximately $189,000 higher in 2010 principally due an increase in legal expenses.
Evaporative Cooling Segment
Sales in the Evaporative Cooling segment decreased $2,933,000 or 40.1%, in the first quarter of 2010 compared to the 2009 quarter. The decrease in sales was due to cool temperatures that prevailed throughout the first quarter in the principal markets for evaporative coolers in sales and the loss of a national retail account. Production of evaporative coolers was reduced in response to the reduced demand. The gross margin ratio declined from 27.6% to 20.7% as a result of the lower level of production coupled with certain fixed manufacturing overhead costs. Selling and administrative costs were reduced by $221,000 but as a percentage of sales increased from 11.8% to 14.6%. Most of the reduction was in selling expenses and was a function of the lower sales.
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 April 3, 2010 and January 2, 2010 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 January 2, 2010.
OUTLOOK
The construction markets in southern Colorado are not expected to substantially improve for the balance of 2010. Housing starts in this area have modestly increased compared to the last two years but remain at relatively low levels. Under these conditions, pricing in the CACS segment is expected to remain sharply competitive. It is difficult to predict the timing and magnitude of the recovery of construction in the markets served. While the American Recovery and Reinvestment Act of 2009 (ARRA) has had little or no impact on our sales to date, we do expect that spending on this program will benefit southern Colorado and should add to our sales volume in the next twelve months or longer. Both local governments (Colorado Springs and Pueblo) have submitted a substantial list of construction projects to the federal government seeking ARRA funding. The Companys contract to provide concrete to the Fort Carson army base located just south of Colorado Springs was begun in the latter part of September 2009 but slowed dramatically through the winter months. The project resumed during May 2010.
The Door segments sales are also to a significant degree reliant on new construction. The sales backlog of the Door segment has held steady for the last few months although pricing has become more competitive here as well.
Sales of the Evaporative Cooling segment for the remainder of the current cooling season will largely be weather dependent.
The sales backlog for fan coil products in the Heating and Cooling segment has increased recently although the overall commercial construction market remains slow. Furnace sales so far this year benefitted from cool weather in the principal market areas but the selling season is now ending. In-season furnace sales later this year will also be largely weather dependent.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 3 for a discussion of recently issued accounting standards.
MATERIAL CHANGES TO CONTRACTUAL OBLIGATIONS
As discussed above in Note 8, the Company entered into an amendment of its Credit Agreement with its bank lender. Other than discussed in the preceding sentence, there were no material changes to contractual obligations that occurred during the quarter ended April 3, 2010.
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, competitive forces and changes in governmental regulations and policies. Some of these
factors are discussed in more detail in the Companys 2009 Annual Report on Form 10-K. Changes in accounting pronouncements could also alter projected results. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
There were no material changes in the market risks nor legal proceedings that the Company is exposed to since those discussed in the Companys 2009 Annual Report on Form 10-K.
Item 4T. Controls and Procedures
(a) Evaluation of 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 (Exchange Act) as of April 3, 2010. The Chief Executive Officer and Chief Financial Officer, based on that valuation, concluded that our disclosure controls and procedures were effective and were reasonably designed to ensure that all material information relating to the Company (including its subsidiaries) 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. The previously reported material weakness relating to accounting controls over inventory and related cost of sales reporting in the Heating and Cooling segment has been remediated. This conclusion is based in part on the results of a physical inventory taken at the end of April 2010.
(b) Changes in Internal Control Over Financial Reporting.
The Company continually reassesses our internal control over financial reporting and makes changes as deemed prudent. The Company had identified a material weakness in internal control over financial reporting related to accounting for inventory and related cost of sales in its Heating and Cooling segment prior to the close of the third quarter of Fiscal 2008. As part of its remediation process, the Company identified the causes that resulted in the inventory accounting errors and developed an action plan to address each of these causes. The Company believes that the changes made during 2009 and 2010 have improved the internal controls over financial reporting related to accounting for inventory and related cost of sales in its Heating and Cooling segment such that these controls can be relied upon as of April 3, 2010.
During the quarter ended April 3, 2010, there were no other material weaknesses identified in our review of internal control over financial reporting and no significant changes in the Companys internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting except as noted in the previous paragraph.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company has not purchased any of its common stock to become treasury stock during the period January 2, 2010 through April 3, 2010.
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 lender under the Companys credit facility. As of April 3, 2010, $1,307,404 of the authorized amount remains available for stock repurchases. The Credit Agreement contains certain restrictions on the Companys ability to repurchase its stock. Amendments to the Credit Agreement have retained these restrictions. See further discussion in Note 8 and the Liquidity and Capital Resources section of Item 2 above.
Item 6. Exhibits
Exhibit No. |
|
Description |
|
|
|
3 |
|
Registrants Restated Certificate of Incorporation dated May 28, 1975, as amended on May 24, 1978, May 27, 1987 and June 3, 1999 filed as Exhibit 3 to Form 10-K for the year ended January 1, 2005, incorporated by reference. |
|
|
|
3a |
|
Registrants By-laws, as amended September 19, 1975 filed as Exhibit 6 to Form 8-K for the month of September 1975, incorporated herein by reference. |
|
|
|
10.1 |
|
Credit Agreement dated April 16, 2009 among Continental Materials Corporation, as the Company, The Various Financial Institutions Party Hereto, as Lenders, and The PrivateBank and Trust Company, as Administrative Agent and Arranger, filed as Exhibit 10f to Form 10-K for the year ended January 3, 2009, incorporated herein by reference; First Amendment thereto dated as of November 18, 2009, filed as Exhibit 10.1 to Form 10-K for the year ended January 2, 2010, incorporated herein by reference; and Second Amendment thereto dated April 15, 2010, filed as Exhibit 10.2 to Form 10-K for the year ended January 2, 2010, incorporated herein by reference. |
|
|
|
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: |
May 18, 2010 |
|
By: |
/s/ Joseph J. Sum |
|
|
|
Joseph J. Sum, Vice President |
|
|
|
|
and Chief Financial Officer |
|