**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended October 2, 2010**

 

**OR**

 

**o****         TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom             to             **

 

**Commission File number 1-3834**

 

**CONTINENTAL MATERIALS CORPORATION**

(Exactname of registrant as specified in its charter)

 

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

 

| **200 South Wacker Drive, Suite 4000,  Chicago, Illinois** | ** ** | **60606**  |
|----------------------------------------------------------------------|------------|------------|
| (Address of principal executive offices)                             |       | (Zip Code) |

 

**(312) 541-7200**

(Registrant’s telephone number, includingarea code)

 

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No x

 

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

 
| 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 (asdefined in Rule 12b-2 or the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classesof common stock, as of the latest practicable date: Common Stock, $0.25 parvalue, shares outstanding at November 5, 2010: 1,598,674.

 

 

 

----

 

PART I — FINANCIAL INFORMATION

 

**Item 1.   Financial Statements**

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

OCTOBER 2, 2010 and JANUARY 2, 2010

(Unaudited)

(000’s omitted except share data)

 
| ** **                                                                            | ** ** | **OCTOBER 2,** | ** ** | **JANUARY 2,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                            | ** ** | **2010**            | ** ** | **2010**            | ** ** |
| ***ASSETS***                                                                          | ** ** | ** **          | ** ** | ** **          | ** ** |
| Current assets:                                                                       |       |                |       |                |       |
| Cash and cash equivalents                                                             |       | $                   | 986        |                | $          | 681 |   |
| Receivables, net                                                                      |       | 18,549              |       | 17,001              |       |
| Receivable for insured losses                                                         |       | 607                 |       | 684                 |       |
| Inventories:                                                                          |       |                |       |                |       |
| Finished goods                                                                        |       | 7,572               |       | 6,898               |       |
| Work in process                                                                       |       | 820                 |       | 763                 |       |
| Raw materials and supplies                                                            |       | 8,252               |       | 8,634               |       |
| Refundable income taxes                                                               |       | 1,152               |       | 1,012               |       |
| Deferred income taxes                                                                 |       | 2,973               |       | 3,116               |       |
| Prepaid expenses                                                                      |       | 1,492               |       | 1,582               |       |
| Total current assets                                                                  |       | 42,403              |       | 40,371              |       |
|                                                                                  |       |                |       |                |       |
| Property, plant and equipment, net                                                    |       | 24,491              |       | 27,092              |       |
|                                                                                  |       |                |       |                |       |
| Goodwill                                                                              |       | 7,229               |       | 7,229               |       |
| Amortizable intangible assets, net                                                    |       | 377                 |       | 479                 |       |
| Cash deposits with insurance carriers                                                 |       | 4,840               |       | 4,840               |       |
| Other assets                                                                          |       | 2,389               |       | 2,101               |       |
|                                                                                  |       |                |       |                |       |
|                                                                                  |       | $                   | 81,729     |                | $          | 82,112 |   |
|                                                                                  |       |                |       |                |       |
| ***LIABILITIES***                                                                     |       |                |       |                |       |
| Currentliabilities:                                                                   |       |                |       |                |       |
| Current portion of long-term debt                                                     |       | $                   | 1,750      |                | $          | 1,375 |   |
| Accounts payable and accrued expenses                                                 |       | 13,409              |       | 12,131              |       |
| Liability for unpaid claims covered by insurance                                      |       | 607                 |       | 684                 |       |
| Total current liabilities                                                             |       | 15,766              |       | 14,190              |       |
|                                                                                  |       |                |       |                |       |
| Revolving bank loan payable                                                           |       | 5,650               |       | 5,850               |       |
| Long-term debt                                                                        |       | 4,400               |       | 5,775               |       |
| Deferred income taxes                                                                 |       | 3,098               |       | 3,243               |       |
| Other long-term liabilities                                                           |       | 1,854               |       | 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                                                                     |       | 65,103              |       | 65,328              |       |
| Treasury shares, 975,590, at cost                                                     |       | (16,615             | )          | (16,615             | )          |
|                                                                                  |       | 50,961              |       | 51,186              |       |
|                                                                                  |       |                |       |                |       |
|                                                                                  |       | $                   | 81,729     |                | $          | 82,112 |   |

 

Seenotes to condensed consolidated financial statements.

 

2

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FORTHE THREE MONTHS ENDED OCTOBER 2, 2010 AND OCTOBER 3, 2009

(Unaudited)

(000’somitted except per-share amounts)

 
| ** **                                                                                         | ** ** | **OCTOBER 2,** | ** ** | **OCTOBER 3,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                                         | ** ** | **2010**            | ** ** | **2009**            | ** ** |
|                                                                                               |       |                |       |                |       |
| Net sales                                                                                          |       | $                   | 29,142     |                | $          | 25,610 |   |
|                                                                                               |       |                |       |                |       |
| Costs and expenses:                                                                                |       |                |       |                |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization)                             |       | 22,477              |       | 21,090              |       |
| Depreciation, depletion and amortization                                                           |       | 1,102               |       | 1,064               |       |
| Selling and administrative                                                                         |       | 4,526               |       | 4,320               |       |
|                                                                                               |       |                |       |                |       |
| Gain on disposition of property and equipment                                                      |       | —              |       | 78                  |       |
|                                                                                               |       | 28,105              |       | 26,396              |       |
|                                                                                               |       |                |       |                |       |
| Operating income (loss)                                                                            |       | 1,037               |       | (786                | )          |
|                                                                                               |       |                |       |                |       |
| Interest expense, net                                                                              |       | (197                | )          | (146                | )          |
| Amortization of deferred financing fees                                                            |       | (51                 | )          | (52                 | )          |
| Other income, net                                                                                  |       | (1                  | )          | 40                  |       |
|                                                                                               |       |                |       |                |       |
| Income (loss) from continuing operations before  income taxes                                      |       | 788                 |       | (944                | )          |
|                                                                                               |       |                |       |                |       |
| Provision (benefit) for income taxes                                                               |       | 70                  |       | (244                | )          |
|                                                                                               |       |                |       |                |       |
| Net income (loss) from continuing operations                                                       |       | 718                 |       | (700                | )          |
|                                                                                               |       |                |       |                |       |
| Income (loss) from discontinued operation net of  income tax benefit (provision) of $24 and ($162) |       | 22                  |       | (282                | )          |
|                                                                                               |       |                |       |                |       |
| Net income (loss)                                                                                  |       | 740                 |       | (982                | )          |
|                                                                                               |       |                |       |                |       |
| Retained earnings, beginning of period                                                             |       | 63,363              |       | 67,420              |       |
| ** **                                                                                         | ** ** | ** **          | ** ** | ** **          | ** ** |
| Retained earnings, end of period                                                                   |       | $                   | 65,103     |                | $          | 66,438 |   |
|                                                                                               |       |                |       |                |       |
| Net income (loss) per basic and diluted share:                                                     |       |                |       |                |       |
| Continuing operations                                                                              |       | $                   | .45        |                | $          | (.44 | ) |
| Discontinued operation                                                                             |       | .01                 |       | (.17                | )          |
| Net income (loss) per basic and diluted share                                                      |       | $                   | .46        |                | $          | (.61 | ) |
|                                                                                               |       |                |       |                |       |
| Average shares outstanding                                                                         |       | 1,599               |       | 1,599               |       |

 

Seenotes to condensed consolidated financial statements

 

3

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FORTHE NINE MONTHS ENDED OCTOBER 2, 2010 AND OCTOBER 3, 2009

(Unaudited)

(000’somitted except per-share amounts)

 
| ** **                                                                    | ** ** | **OCTOBER 2,** | ** ** | **OCTOBER 3,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                    | ** ** | **2010**            | ** ** | **2009**            | ** ** |
|                                                                          |       |                |       |                |       |
| Net sales                                                                     |       | $                   | 84,533     |                | $          | 87,772 |   |
|                                                                          |       |                |       |                |       |
| Costs and expenses:                                                           |       |                |       |                |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization)        |       | 66,340              |       | 70,617              |       |
| Depreciation, depletion and amortization                                      |       | 3,367               |       | 3,410               |       |
| Selling and administrative                                                    |       | 14,352              |       | 14,513              |       |
|                                                                          |       |                |       |                |       |
| Gain on disposition of property and equipment                                 |       | 70                  |       | 2,201               |       |
|                                                                          |       | 83,989              |       | 86,339              |       |
|                                                                          |       |                |       |                |       |
| Operating income                                                              |       | 544                 |       | 1,433               |       |
|                                                                          |       |                |       |                |       |
| Interest expense, net                                                         |       | (673                | )          | (595                | )          |
| Amortization of deferred financing fees                                       |       | (154                | )          | (138                | )          |
| Other income, net                                                             |       | 27                  |       | 57                  |       |
|                                                                          |       |                |       |                |       |
| (Loss) income from continuing operations before  income taxes                 |       | (256                | )          | 757                 |       |
|                                                                          |       |                |       |                |       |
| (Benefit) provision for income taxes                                          |       | (97                 | )          | 358                 |       |
|                                                                          |       |                |       |                |       |
| Net (loss) income from continuing operations                                  |       | (159                | )          | 399                 |       |
|                                                                          |       |                |       |                |       |
| Loss from discontinued operation net of income tax  benefit of $41 and $1,088 |       | (66                 | )          | (731                | )          |
|                                                                          |       |                |       |                |       |
| Net loss                                                                      |       | (225                | )          | (332                | )          |
|                                                                          |       |                |       |                |       |
| Retained earnings, beginning of period                                        |       | 65,328              |       | 66,770              |       |
|                                                                          |       |                |       |                |       |
| Retained earnings, end of period                                              |       | $                   | 65,103     |                | $          | 66,438 |   |
|                                                                          |       |                |       |                |       |
| Net (loss) income per basic and diluted share:                                |       |                |       |                |       |
| Continuing operations                                                         |       | $                   | (.10       | )                   | $          | .25 |   |
| Discontinued operation                                                        |       | (.04                | )          | (.46                | )          |
| Net (loss) per basic and diluted share                                        |       | $                   | (.14       | )                   | $          | (.21 | ) |
|                                                                          |       |                |       |                |       |
| Average shares outstanding                                                    |       | 1,599               |       | 1,599               |       |

 

Seenotes to condensed consolidated financial statements

 

4

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

FORTHE NINE MONTHS ENDED OCTOBER 2, 2010 AND OCTOBER 3, 2009

(Unaudited)

(000’somitted)

 
| ** **                                                              | ** ** | **OCTOBER 2,  2010** | ** ** | **OCTOBER 3,  2009** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
|                                                                    |       |                      |       |                      |       |
| Net cash provided by operating activities                               |       | $                         | 2,099      |                      | $          | 1,775 |   |
|                                                                    |       |                      |       |                      |       |
| Investing activities:                                                   |       |                      |       |                      |       |
| Capital expenditures                                                    |       | (687                      | )          | (1,411                    | )          |
| Proceeds from sale of assets                                            |       | 93                        |       | 4,429                     |       |
| Net cash (used in) provided by investing  activities                    |       | (594                      | )          | 3,018                     |       |
|                                                                    |       |                      |       |                      |       |
| Financing activities:                                                   |       |                      |       |                      |       |
| Repayment of refinanced revolving credit facility                       |       | —                    |       | (6,400                    | )          |
| Payment of deferred financing fees related to new  credit facility      |       | —                    |       | (589                      | )          |
| (Repayments) borrowings under revolving credit  facility                |       | (200                      | )          | 5,100                     |       |
| Repayment of refinanced long-term debt                                  |       | —                    |       | (10,771                   | )          |
| Borrowings under new long-term debt                                     |       | —                    |       | 10,000                    |       |
| Repayment of new long-term debt                                         |       | (1,000                    | )          | (2,600                    | )          |
| Net cash used in financing activities                                   |       | (1,200                    | )          | (5,260                    | )          |
|                                                                    |       |                      |       |                      |       |
| Net increase (decrease) in cash and cash equivalents                    |       | 305                       |       | (467                      | )          |
| Cash and cash equivalents:                                              |       |                      |       |                      |       |
| Beginning of period                                                     |       | 681                       |       | 1,097                     |       |
|                                                                    |       |                      |       |                      |       |
| End of period                                                           |       | $                         | 986        |                      | $          | 630 |   |
|                                                                    |       |                      |       |                      |       |
| Supplemental disclosures of cash flow items:                            |       |                      |       |                      |       |
| Cash paid during the nine months for:                                   |       |                      |       |                      |       |
| Interest                                                                |       | $                         | 664        |                      | $          | 649 |   |
| Payment of income taxes                                                 |       | 2                         |       | 526                       |       |
| Supplemental disclosures of noncash investing and  financing activities |       |                      |       |                      |       |
| Note received from sale of discontinued operation                       |       | $                         | —     |                      | $          | 525 |   |

 

Seenotes to condensed consolidated financial statements

 

5

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CONTINENTALMATERIALS CORPORATION

SECURITIESAND EXCHANGE COMMISSION FORM 10-Q

NOTESTO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTERENDED OCTOBER 2, 2010

(Unaudited)

 

1.               The unauditedinterim condensed consolidated financial statements included herein areprepared pursuant to the Securities and Exchange Commission rules andregulations for reporting on Form 10-Q. Accordingly, certain informationand footnote disclosures normally accompanying the annual consolidatedfinancial statements have been omitted. The interim condensed consolidatedbalance sheet of the Company as of January 2, 2010 has been derived fromthe audited consolidated balance sheet of the Company as of that date. Theinterim condensed consolidated financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s latest annual report on Form 10-K. In theopinion of management, the condensed consolidated financial statements includeall adjustments (none of which were other than normal recurring adjustments)necessary for a fair statement of the results for the interim periods. OnJuly 17, 2009, the Company completed the sale of all of the outstandingcapital stock of Rocky Mountain Ready Mix (RMRM), a Colorado corporation toCampbells C-Ment Contracting, Inc., a Colorado corporation. RMRM operateda ready mix concrete business in the Denver metropolitan area and had beenincluded in the Construction, Aggregates and Construction Supplies (CACS)reporting segment. The operations of RMRM were classified as discontinuedoperations for the 2009 periods presented. Certain prior year’s amounts havebeen reclassified to conform to the current presentation.

 

2.               Income taxes areaccounted for under the asset and liability method that requires deferredincome taxes to reflect the future tax consequences attributable to differencesbetween the tax and financial reporting bases of assets and liabilities.Deferred tax assets and liabilities recognized are based on the tax rates ineffect in the year in which differences are expected to reverse. Deferred taxassets are reduced by a valuation allowance when, based on available positiveand 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 berealized.

 

Ourincome tax returns are subject to audit by the Internal Revenue Service (IRS)and state tax authorities. The amounts recorded for income taxes reflect ourtax positions based on research and interpretations of complex laws andregulations. We accrue liabilities related to uncertain tax positions taken orexpected to be taken in our tax returns. The Company has established avaluation reserve related to the carry forward of all charitable contributionsdeductions arising from prior years and the portion of contributions in 2010that the Company believes it will be unable to utilize prior to the expirationof their carry forward periods. For Federal purposes, net operating losses canbe carried forward for a period of 20 years while alternative minimum taxcredits can be carried forward indefinitely. For State purposes, net operatinglosses can be carried forward for periods ranging from 5 to 20 years for thestates in which the Company is required to file.

 

TheInternal Revenue Service has completed examinations for periods through 2007.Various state income tax returns also remain subject to examination.

 

3.               Although theFinancial Accounting Standards Board has issued new accounting standards sincethe end of the second quarter of 2010, the Company does not believe any ofthese new standards will have a material impact on the Company.

 

4.               Operating results for thefirst nine months of 2010 are not necessarily indicative of performance for theentire year due to the seasonality of most of our products. Historically, salesof 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 salesof 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. Theeconomic recession that began in the latter part of 2008 has had a significantdetrimental effect on the construction industry in general and on ourconstruction related businesses in particular in 2009 and 2010 and is expectedto continue to do so for the remainder of 2010.

 

5.               Fair value of the Company’slong-term debt is estimated based on the borrowing rates currently available tothe Company for bank loans with similar terms, maturities and credit risks. Thecarrying amount of long-term debt represents a reasonable estimate of thecorresponding fair value as the Company’s long-term debt is held at variableinterest rates.

 

6.               There is no difference inthe calculation of basic and diluted earnings per share (EPS) for thethree-month or nine-month periods ended October 2, 2010 and October 3,2009 as the Company does not have any dilutive instruments.

 

7.               The Companyoperates primarily in two industry groups, Heating, Ventilation and AirConditioning (HVAC) and Construction Products. Within each of these twoindustry groups, the Company has identified two reportable segments: theHeating and

 

6

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Coolingsegment and the Evaporative Cooling segment in the HVAC industry group and theConcrete, Aggregates and Construction Supplies (CACS) segment and the Doorsegment in the Construction Products industry group.

 

TheHeating and Cooling segment produces and sells gas-fired wall furnaces, consoleheaters and fan coils from the Company’s wholly-owned subsidiary, WilliamsFurnace Co. of Colton, California (WFC). The Evaporative Cooling segmentproduces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona (PMI). Salesof these two segments are nationwide, but are concentrated in the southwesternUnited States. Concrete, Aggregates and Construction Supplies are offered fromnumerous locations along the Southern Front Range of Colorado operated by theCompany’s wholly-owned subsidiaries collectively referred to as Transit MixConcrete Co. (TMC). RMRM of Denver, formerly included in this segment, was soldon July 17, 2009 and is classified as discontinued operation (see Note10). Doors are fabricated and sold along with the related hardware fromColorado Springs and Pueblo through the Company’s wholly-owned subsidiary,McKinney Door and Hardware, Inc. of Pueblo, Colorado (MDHI). Sales ofthese two segments are highly concentrated in the Southern Front Range area inColorado although door sales are also made throughout the United States.

 

Inaddition to the above reporting segments, an “Unallocated Corporate”classification is used to report the unallocated expenses of the corporateoffice which provides treasury, insurance and tax services as well as strategicbusiness planning and general management services and an “Other” classificationis used to report a real estate operation. Expenses related to the corporateinformation technology group are allocated to all locations, including thecorporate office.

 

TheCompany evaluates the performance of its segments and allocates resources tothem based on a number of criteria including operating income, return oninvestment and other strategic objectives. Operating income is determined bydeducting operating expenses from all revenues. In computing operating income,none of the following has been added or deducted: unallocated corporateexpenses, interest, other income or loss or income taxes.

 

Thefollowing table presents information about reported segments for thethree-month and nine-month periods ended October 2, 2010 and October 3,2009 along with the items necessary to reconcile the segment information to thetotals reported in the financial statements (amounts in thousands):

 
| ** **                                | ** ** | **Construction Products**                               | ** ** | **HVAC Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2010                                      |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Nine  Months ended October 2, 2010   |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Net  sales to external customers          |       | $                                                            | 29,008     |                   | $          | 9,765                                |       | $                         | 38,773     |                     | $          | 25,647 |   | $ | 19,846 |   | $ | 45,493 |   | $ | 9 |   | $ | 258 |   | $ | 84,533 |   |
| Depreciation,  depletion and amortization |       | 2,571                                                        |       | 108                    |       | 2,679                                |       | 294                       |       | 345                      |       | 639 |   | 49 |   | — |   | 3,367 |   |
| Operating  (loss) income                  |       | (514                                                         | )          | 594                    |       | 80                                   |       | 310                       |       | 2,069                    |       | 2,379 |   | (1,996 | ) | 81 |   | 544 |   |
| Segment  assets                           |       | 37,351                                                       |       | 6,207                  |       | 43,558                               |       | 19,009                    |       | 10,409                   |       | 29,418 |   | 8,690 |   | 63 |   | 81,729 |   |
| Capital  expenditures (b)                 |       | 425                                                          |       | 14                     |       | 439                                  |       | 181                       |       | 64                       |       | 245 |   | 3 |   | — |   | 687 |   |
| Quarter  ended October 2, 2010       |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Net  sales to external customers          |       | $                                                            | 10,491     |                   | $          | 3,025                                |       | $                         | 13,516     |                     | $          | 9,746 |   | $ | 5,792 |   | $ | 15,538 |   | $ | 2 |   | $ | 86 |   | $ | 29,142 |   |
| Depreciation,  depletion and amortization |       | 836                                                          |       | 36                     |       | 872                                  |       | 98                        |       | 115                      |       | 213 |   | 17 |   | — |   | 1,102 |   |
| Operating  income (loss)                  |       | 471                                                          |       | 66                     |       | 537                                  |       | 651                       |       | 469                      |       | 1,120 |   | (647 | ) | 27 |   | 1,037 |   |
| Segment  assets                           |       | 37,351                                                       |       | 6,207                  |       | 43,558                               |       | 19,009                    |       | 10,409                   |       | 29,418 |   | 8,690 |   | 63 |   | 81,729 |   |
| Capital  expenditures (b)                 |       | 46                                                           |       | 5                      |       | 51                                   |       | 90                        |       | 39                       |       | 129 |   | 3 |   | — |   | 183 |   |

 

7

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|                                      |   | **Construction Products**                               | ** ** | **HVAC Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               |       |
|-------------------------------------------|--------|--------------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
|                                      |   | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** |   |
| 2009                                      |   |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Nine  Months ended October 3, 2009   |   |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Net  sales to external customers          |   | $                                                            | 32,388     |                   | $          | 11,756                               |       | $                         | 44,144     |                     | $          | 21,320 |   | $ | 22,038 |   | $ | 43,358 |   | $ | 12 |   | $ | 258 |   | $ | 87,772 |   |
| Depreciation,  depletion and amortization |   | 2,575                                                        |       | 126                    |       | 2,701                                |       | 278                       |       | 375                      |       | 653 |   | 56 |   | — |   | 3,410 |   |
| Operating  (loss) income (a)              |   | (1,601                                                       | )          | 1,130                  |       | (471                                 | )          | (869                      | )          | 2,833                    |       | 1,964 |   | (141 | ) | 81 |   | 1,433 |   |
| Segment  assets (c)                       |   | 36,007                                                       |       | 6,509                  |       | 42,516                               |       | 17,101                    |       | 13,141                   |       | 30,242 |   | 9,291 |   | 63 |   | 82,112 |   |
| Capital  expenditures (b)                 |   | 1,047                                                        |       | 171                    |       | 1,218                                |       | 54                        |       | 107                      |       | 161 |   | 32 |   | — |   | 1,411 |   |
| Quarter  ended October 3, 2009       |   |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Net  sales to external customers          |   | $                                                            | 11,366     |                   | $          | 3,171                                |       | $                         | 14,537     |                     | $          | 6,305 |   | $ | 4,679 |   | $ | 10,984 |   | $ | 3 |   | $ | 86 |   | $ | 25,610 |   |
| Depreciation,  depletion and amortization |   | 798                                                          |       | 42                     |       | 840                                  |       | 80                        |       | 125                      |       | 205 |   | 19 |   | — |   | 1,064 |   |
| Operating  income (loss) (a)              |   | 70                                                           |       | 152                    |       | 222                                  |       | (736                      | )          | 298                      |       | (438 | ) | (597 | ) | 27 |   | (786 | ) |
| Segment  assets (c)                       |   | 36,007                                                       |       | 6,509                  |       | 42,516                               |       | 17,101                    |       | 13,141                   |       | 30,242 |   | 9,291 |   | 63 |   | 82,112 |   |
| Capital  expenditures (b)                 |   | 46                                                           |       | 168                    |       | 214                                  |       | 54                        |       | 23                       |       | 77 |   | 3 |   | — |   | 294 |   |

 

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(a)          Included in the 2009Unallocated Corporate operating amount is a gain of $2,026,000 on the sale ofland in Colorado Springs.

(b)         Capital expenditures arepresented on the accrual basis of accounting.

(c)          Segment assets are as ofJanuary 2, 2010.

 

There are no differences in the basis of segmentation or in the basisof measurement of segment profit or loss from the last Annual Report on Form 10-K.

 

8.               Identifiable intangibleassets as of October 2, 2010 include a non-compete agreement, arestrictive land covenant and the customer relationships related to purchase ofthe assets of ASCI in 2006. Collectively, these assets are carried at $377,000,net of $633,000 accumulated amortization. The pre-tax amortization expense forintangible assets was $34,000 for both the quarter ended October 2, 2010and the quarter ended October 3, 2009 and $102,000 and $127,000 for thenine months ended October 2, 2010 and October 3, 2009, respectively(including the final $25,000 of amortization of a non-compete agreement relatedto the Door segment). Based upon the intangible assets recorded on the balancesheet at October 2, 2010, amortization expense for the next five years isestimated to be as follows: 2010 — $137,000; 2011 — $101,000; 2012 — $65,000;2013 — $58,000  and 2014 — $52,000.

 

Asof October 2, 2010 the recorded goodwill of $7,229,000 consisted of$6,229,000 related to the CACS segment and $1,000,000 related to the Doorsegment. Goodwill is not amortized but rather assessed for impairment as of theend of each fiscal year. To the extent that events occur during the year,either involving the relevant Company subsidiaries or their industries, theCompany revisits its assessment of the recorded goodwill to determine ifimpairment has occurred and should be immediately recognized. As of October 2,2010 and the quarter then ended, the Company has not noted any of these eventsor conditions.

 

9.               As of the periodended January 2, 2010 the Company was not in compliance with the minimumadjusted EBITDA and fixed charge coverage covenants of the Credit Agreement. Asa result, effective January 1, 2010 the default rate provision of theCredit Agreement increased the interest rate on all outstanding revolving andlong-term debt by 2%. Non-compliance with the financial covenants in the CreditAgreement constitutes an event of default under the agreement. Upon theoccurrence of an event of default, the lenders may, among other things,terminate their lending commitments, in whole or in part, declare all or anypart of the Company’s borrowings to be due and payable, and/or require theCompany to collateralize with cash any or all letters of credit provided by thelender. A waiver of the event of default relating to compliance with theminimum adjusted EBITDA and fixed charge coverage covenants was granted and asecond amendment to the Credit Agreement was entered into on April 15,2010. The Company was in compliance with all covenants as of October 2,2010 reporting tangible net worth of $36,514,000 and adjusted quarterly EBITDA,as defined, of $2,145,000. On November 12, 2010, the Company entered intoa third amendment to the Credit Agreement to extend the maturity date of thecredit facility to December 31, 2011. The primary conditions set forth inthe second and third amendments are as follows:

 

8

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·      The covenants regarding thefixed charge coverage and the maximum leverage ratio was eliminated for theduration of the amended Credit Agreement.

·      The Company must maintain aminimum tangible net worth of $32,000,000 provided that the required amount oftangible net worth shall increase (but not decrease) each fiscal year,commencing with fiscal year 2010, by an amount equal to fifty percent of theconsolidated net income for the immediately preceding fiscal year.

·      Capital expenditures for thetrailing twelve months may not exceed $3,500,000.

·      The maximum credit availableunder the revolving credit facility line was reduced to $13,500,000 effectiveOctober 1, 2010.

·      The maturity date of thecredit facility is December 31, 2011.

·      The interest rate for theremaining term of the amended Credit Agreement will be 4.0% over LIBOR but witha LIBOR floor of 2.0% (the Company’s effective LIBOR borrowing rate iscurrently 6.0%). The margin on the “base” or prime rate option will be the baseplus 1.75% with a base rate floor of 4% (the Company’s current effectiveborrowing rate is 5.75%).

·      The interest rate swaptransaction will remain in effect.

 

TheCredit Agreement as amended on November 12, 2010 requires the Company tomaintain certain financial covenants as disclosed in the table below (amountsin thousands):

 
| **Financial Covenant**                           | ** ** | **Date Required**                                                   | ** ** | **Required  Amount**                     | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------|------------|
| Minimum tangible net worth                            |       | Beginning with the end of the Second quarter of 2010                     |       | $                                        | 32,000     |   |
|                                                  |       |                                                                     |       | Modified as described in bullet #2 above |       |
| Minimum adjusted quarterly EBITDA                     |       | Quarter ended January 1, 2011                                            |       | $                                        | 250        |   |
|                                                  |       | Quarter ended April 2, 2011                                              |       | (600                                     | )          |
|                                                  |       | Quarter ended July 2, 2011                                          |       | 2,100                                    |       |
|                                                  |       | Quarter ended October 1, 2011                                            |       | 2,000                                    |       |
|                                                  |       | Quarter ended December 31, 2011                                          |       | 500                                      |       |
| Maximum capital expenditures (rolling twelve  months) |       | Trailing 12 months beginning with the end of the second quarter of  2010 |       | $                                        | < 3,500 |   |

 

Definitionsunder the Credit Agreement as amended are as follows:

 

·      Tangible net worth isdefined as net worth plus subordinated debt minus intangible assets (goodwill,intellectual property, prepaid expenses and deferred charges) minus allobligations owed to the Company or any of its subsidiaries by any affiliate orany or its subsidiaries and minus all loans owed by its officers, stockholders,subsidiaries or employees (Note: there are no loans owed by any of thereferenced parties at January 2, 2010 or as of the date of this filing).

·      The adjusted EBITDA isdefined as net income plus interest, income taxes, depreciation, depletion andamortization plus other non-cash charges approved by the lender.

 

TheCompany expects to be in compliance with all debt covenants, as amended, duringthe next twelve months. The Company also believes that its existing cashbalance, anticipated cash flow from operations and borrowings available underthe Credit Agreement, will be sufficient to cover expected cash needs,including servicing debt and planned capital expenditures for the next twelvemonths.

 

The amount classified as current for the term loan under the CreditAgreement is $1,750,000 which includes the scheduled quarterly repayments dueduring the next four quarters.

 

10.   On July 17, 2009, the Company completed thesale of all of the outstanding capital stock of RMRM, a Colorado corporation toCampbell C-Ment Contracting, Inc., a Colorado corporation. RMRM operated aready mix concrete business in the Denver metropolitan area and had beenincluded in the CACS reporting segment.

 

Thenet sales, pretax loss and net loss from RMRM are reported as discontinued operationsfor the nine and three month fiscal periods ended October 2, 2010 and October3, 2009. The loss from discontinued operations recorded during the nine andthree month fiscal periods ended October 2, 2010 consists of adjustments toliabilities retained by the Company, primarily the reserve for workerscompensation. The 2009 results are summarized below (amounts in thousands):

 

9

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| ** **                                    | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **October 3, 2009**   | ** ** | **October 3, 2009**    | ** ** |
| Net sales                                     |       | $                               | 3,740      |                             | $          | 213 |   |
| Loss from operations                          |       | (1,172                          | )          | (120                             | )          |
| Loss on disposal and impairment of net assets |       | (647                            | )          | —                           |       |
| Pre-tax loss                                  |       | (1,819                          | )          | (120                             | )          |
| Income tax benefit (provision)                |       | 1,088                           |       | (162                             | )          |
| Loss from discontinued operation              |       | $                               | (731       | )                                | $          | (282 | ) |

 

11.   The Company is involved in litigation mattersrelated to its continuing business, principally product liability mattersrelated to the gas-fired heating products and the fan coil products of theHeating and Cooling segment. In the Company’s opinion, none of theseproceedings, when concluded, will have a material adverse effect on the Company’sconsolidated results of operations of financial condition as the Company hasestablished adequate accruals for known occurrences which represent management’sbest estimate of the future liability related to these claims up to theassociated deductible.

 

**Item 2.****       ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Company Overview

 

SeeNote 7 for an overview of the Company.

 

Liquidity and Capital Resources

 

Asnoted above, various factors affect the sales of the Company’s products.Historically, the Company has experienced operating losses during the firstquarter except when construction activity is strong along the Front Range ofColorado and the weather is mild. Operating results typically improve in thesecond and third quarters reflecting more favorable weather conditions inColorado and the seasonal sales of the Evaporative Cooling segment; however,the Company expects construction activity along the Front Range will remainweak for the balance of 2010.

 

Fourthquarter results can vary based on weather conditions in Colorado as well as inthe principal markets for the Company’s heating equipment. The Companytypically experiences operating cash flow deficits during the first half of theyear reflecting operating results, the use of sales dating programs (extendedpayment terms) related to the Evaporative Cooling segment and payments of theprior year’s accrued incentive bonuses and Company profit-sharingcontributions, if any. As a result, the Company’s borrowings against itsrevolving credit facility tend to peak during the second quarter and thendecline over the remainder of the year. This trend has continued in 2010.

 

Cashprovided by operations was $2,099,000 during the first nine months of 2010compared to the $1,775,000 of cash provided during the first nine months of2009. The Company’s operating cash flow during the first nine months of 2010was positive despite the operating loss primarily related to depreciationcharges. Operating cash flow during the first nine months of 2009 was boostedby a net reduction in working capital in part reflecting the reduced salesvolume. The cash flow generated in 2009 was significantly reduced by theCompany’s need to fund $4,840,000 of cash deposits with our insurance carriersin lieu of previously issued letters of credit.

 

Duringthe nine months ended October 2, 2010, investing activities used $594,000 ofcash compared to the $3,018,000 of cash provided in the prior year’s period.The Company continued to limit capital expenditures during the first ninemonths of 2010 as sales volume remains depressed. Capital expenditures duringthe first nine months of 2009 included almost $541,000 incurred by the CACSsegment for the completion of the slurry wall associated with the new miningphase at the Pueblo East aggregates site and $152,000 for a land movementmonitoring system for the Pikeveiw Quarry related to the 2008 landslides. The proceedsfrom the sale of assets during the 2009 period included $2,026,000 related tothe sale of land in Colorado Springs and receipt of $1,905,000 from the sale ofRMRM.

 

Financingactivities during the first nine months of 2010 used $1,200,000 as the Companyrepaid $200,000 of borrowings under the revolving credit facility and made allscheduled term debt payments. Financing activities used $5,260,000 of cashduring the first nine months of 2009 as the Company replaced its former creditfacility with a New Credit Agreement during the 2009 second quarter and usedcash generated by operating and investing activities to pay down term debt andborrowings under the revolving credit facility. During the first nine months of2010, the highest amount of Company borrowings outstanding under the revolvingcredit agreement was $9,100,000 and the average amount outstanding was$6,296,000.

 

10

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TheCompany believes that its existing cash balance, anticipated cash flow fromoperations and borrowings available under the Credit Agreement will besufficient to cover expected cash needs, including servicing debt and plannedcapital expenditures for the next twelve months. The Company expects to be incompliance with all debt covenants during this period.

 

Results of Operations - Comparison of Quarter Ended October 2, 2010 toQuarter Ended October 3, 2009

 

(Inthe ensuing discussions of the results of operations the term gross profitmeans the amount determined by deducting cost of sales before depreciation,depletion and amortization from sales. The gross profit ratio is gross profitdivided by sales.)

 

Consolidatedsales in the third quarter of 2010 were $29,142,000 or $3,532,000 (13.8%) morethan sales from continuing operations in the third quarter of 2009. Salesresults at the Company’s business segments were mixed. Sales at the Company’stwo HVAC businesses were higher in 2010 compared to the prior year while bothbusinesses in the Construction Products group experienced weaker sales. Theconsolidated gross profit ratio increased from 17.6% in the third quarter of2009 to 22.9% in the current year quarter. The improvement in the gross profitratio also represents varying results among the Company’s four businesssegments. The CACS segment achieved an improvement in its gross profit ratioprincipally due to reduced costs in its aggregates operations and increasedsales volume of industrial sands and construction supplies. The gross profitratio in the Door Segment declined principally due to competitive pressures.The gross profit ratio in the Evaporative Cooling segment was down less thanone percentage point due to higher costs for certain raw materials. The grossprofit in the Heating and Cooling Segment improved due to increased furnacesales and production volume, lower factory overhead spending and a negativeinventory adjustment recorded in the third quarter of 2009. Consolidatedselling and administrative expenses were just $206,000 higher in the 2010quarter compared to the prior year. Legal expenses in the CACS and Heating& Cooling segments, as discussed below, contributed to the increasedexpense level. Consolidated selling and administrative expenses as a percentageof consolidated sales decreased from 16.9% to 15.5%.  The operating income for the third quarter of2010 was $1,037,000 compared to a $786,000 operating loss from continuingoperations in the third quarter of 2009.

 

Interestexpense in the third quarter of 2010 was higher compared to the same quarter of2009 due to higher interest rates under the current credit agreement. Theaverage interest rate in the third quarter of 2010 was approximately 6.3%compared to approximately 5.6% in the third quarter of 2009. Average totaloutstanding indebtedness was approximately $12,600,000 in 2010 compared toapproximately $13,650,000 in 2009.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the Construction Products group for the quarters ended October2, 2010 and October 3, 2009 (amounts in thousands):

 
| ** **                             | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors**  | ** ** |
|----------------------------------------|------------|------------------------------------------------------------|------------|------------|------------|
| Quarter ended October 2, 2010          | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| Revenues from external customers       |       | $                                                          | 10,491     |       | $          | 3,025 |   |
| Gross profit                           |       | 2,312                                                      |       | 582        |       |
| Gross profit as a percent of sales     |       | 22.0                                                       | %          | 19.2       | %          |
| Segment operating income               |       | 471                                                        |       | 66         |       |
| Operating income as a percent of sales |       | 4.5                                                        | %          | 2.2        | %          |
| Segment assets as of October 2, 2010   |       | $                                                          | 37,351     |       | $          | 6,207 |   |
| Return on assets                       |       | 1.3                                                        | %          | 1.1        | %          |
|                                   |       |                                                       |       |       |       |
| Quarter ended October 3, 2009          |       |                                                       |       |       |       |
| Net sales to external customers        |       | $                                                          | 11,366     |       | $          | 3,171 |   |
| Gross profit                           |       | 1,719                                                      |       | 721        |       |
| Gross profit as a percent of sales     |       | 15.1                                                       | %          | 22.7       | %          |
| Segment operating income               |       | 70                                                         |       | 152        |       |
| Operating income as a percent of sales |       | 0.1                                                        | %          | 4.8        | %          |
| Segment assets as of October 3, 2009   |       | $                                                          | 40,199     |       | $          | 5,887 |   |
| Return on assets                       |       | 0.0                                                        | %          | 2.6        | %          |

 

11

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Concrete, Aggregates and Construction Supplies Segment

 

Overallconstruction activity in the Company’s principal markets of Colorado Springsand Pueblo, Colorado remains slow and was so in both periods. Sales in the CACSsegment decreased by approximately 7.7% in the third quarter of 2010 comparedto the prior year quarter. The Company completed a large ready-mix concrete jobat Fort Carson just south of Colorado Springs, Colorado early on in the thirdquarter of 2010. Concrete yardage declined by approximately 12% from the prioryear quarter. The average price of ready-mixed concrete held steady. The grossprofit per cubic yard of concrete was approximately $1.42 lower in 2010principally as a result of higher prices paid for diesel fuel. Sales ofaggregates (sand, crushed limestone and gravel) were 5.6% lower in 2010compared to 2009. The lower volume reflects the drop in ready-mix concretesales and the overall low level of construction activity in southern Colorado.The Pikeview Quarry remains closed although the Company is making preparationsto resume limited production in the first half of 2011. The Company continuesto reduce the ongoing expenses of the Pikeview Quarry since theDecember 2008 landslide. The combined gross profit from all aggregateoperations in the third quarter of 2010 was $988,000 compared to a profit of$377,000 in 2009. The improved results reflect operating cost reductionsachieved since the 2009 quarter including the reduced ongoing expenses at thePikeview Quarry. Selling and administrative expenses for this segment increasedby $76,000 principally due to higher legal expenses related to the PikeviewQuarry insurance claim and accounts receivable collection efforts.

 

Door Segment

 

Salesduring the third quarter of 2010 in the Door segment decreased $146,000 or 4.6%from the comparable 2009 quarter as a result of the weaker construction markets.The gross profit percentage in 2010 was approximately 3.5 percentage pointslower than in 2009 due to an intensified level of price competition. Sellingand administrative expenses were reduced in response to the lower sales volume.

 

**HVAC Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the quarters ended October 2, 2010and October 3, 2009 (amounts in thousands):

 
| ** **                                    | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| Quarter ended October 2, 2010                 |       |                          |       |                     |       |
| Net sales to external customers               |       | $                             | 9,746      |                     | $          | 5,792 |   |
| Gross profit                                  |       | 2,493                         |       | 1,249                    |       |
| Gross profit as a percent of sales            |       | 25.6                          | %          | 21.6                     | %          |
| Segment operating income                      |       | 651                           |       | 469                      |       |
| Operating income as a percent of sales        |       | 6.7                           | %          | 8.1                      | %          |
| Segment assets as of October 2, 2010          |       | $                             | 19,009     |                     | $          | 10,409 |   |
| Return on assets                              |       | 3.4                           | %          | 4.5                      | %          |
|                                          |       |                          |       |                     |       |
| Quarter ended October 3, 2009                 |       |                          |       |                     |       |
| Net sales to external customers               |       | $                             | 6,305      |                     | $          | 4,679 |   |
| Gross profit                                  |       | 1,003                         |       | 1,047                    |       |
| Gross profit as a percent of sales            |       | 15.9                          | %          | 22.4                     | %          |
| Segment operating (loss) income               |       | (736                          | )          | 298                      |       |
| Operating (loss) income as a percent of sales |       | (11.7                         | )%         | 6.4                      | %          |
| Segment assets as of October 3, 2009          |       | $                             | 17,959     |                     | $          | 12,611 |   |
| Return on assets                              |       | (4.1                          | )%         | 2.4                      | %          |

 

Heating and Cooling Segment

 

Salesin the Heating and Cooling segment increased $3,441,000 (54.6%) in the thirdquarter of 2010 from the comparable 2009 quarter. Sales of both furnaces andfan coils were higher in the current quarter. Business conditions for our keyretail and wholesale furnace accounts were improved in 2010 compared to theprior year. Utility and state government sponsored subsidy programs provided amodest boost to furnace sales at the customer level. A large hotel job spurredfan coil sales higher than the year ago level. The gross profit ratio for thissegment improved from 15.9% to 25.6% due to an increased level of furnace salesand production and lower factory overhead costs. Selling and administrativeexpenses were substantially unchanged in the third quarter of 2010 compared to 2009with some cost savings initiatives during 2010 largely offset by higher legalexpenses primarily related to product liability claims.

 

12

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Evaporative Cooling Segment

 

Salesin the Evaporative Cooling segment increased $1,113,000 or 23.8% in the thirdquarter of 2010 compared to the 2009 quarter. The western United Statesexperienced hot weather throughout most of the third quarter of 2010. The grossprofit ratio was down from 22.4% to 21.6% due to increases in prices forcertain raw materials. Selling and administrative costs were moderately higherin the third quarter of 2010 as a result of the higher sales. As a percentageof sales, these expenses decreased from 13.3% to 11.5%.

 

Operations - Comparison of Nine Months Ended October 2, 2010 to NineMonths Ended October 3, 2009

 

(Inthe ensuing discussions of the results of operations the term gross profitmeans the amount determined by deducting cost of sales before depreciation,depletion and amortization from sales. The gross profit ratio is gross profitdivided by sales.)

 

Consolidatedsales in the first nine months of 2010 were $84,533,000, 3.7% less than salesfrom continuing operations in the first nine months of 2009. While sales in thesecond and third quarter of 2010 were higher than the previous year this wasnot sufficient to overcome a very weak first quarter. Sales results at three ofthe four business segments were lower in the first nine months of 2010. Onlythe Heating and Cooling segment realized increased sales. The consolidatedgross profit ratio was 21.5% in the first nine months of 2010 compared to 19.5%for the same period in 2009. The Concrete Aggregates and Construction Suppliesand the Heating and Cooling segments realized improved gross profit ratios. Theother two business segments experienced lower gross profit ratios due toincreased raw material costs or to competitive pricing pressures. Consolidatedselling and administrative expenses were $161,000 lower in the first nine monthof 2010 compared to the prior year. Consolidated selling and administrativeexpenses, as a percentage of consolidated sales, increased from 16.5% to 17.0%.

 

Theoperating profit for the first nine months of 2010 was $544,000 compared to a$1,433,000 operating profit from continuing operations in 2009. However, theoperating profit for the first nine months of 2009 included a $2,026,000 gainon the sale of a portion of the Company’s sand property in Colorado Springs.

 

Interestexpense in the first nine months of 2010 was slightly higher compared to thesame period of 2009. Higher interest rates under the current credit agreementwere partially offset by reduced outstanding borrowings. The average interestrate in the first nine months of 2010 was approximately 6.50% compared toapproximately 4.60% in 2009. Average total outstanding indebtedness wasapproximately $13,300,000 in the first nine months of 2010 compared toapproximately $17,200,000 in 2009. The reduction in outstanding indebtednesswas due principally to reduced capital spending, a reduction in working capitaland proceeds from the sale of Rocky Mountain Ready Mix in July 2009.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the Construction Products group for the nine months endedOctober 2, 2010 and October 3, 2009 (amounts in thousands):

 
| ** **                                    | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors**  | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------|------------|------------|------------|
| Nine Months ended October 2, 2010             | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| Net sales to external customers               |       | $                                                          | 29,008     |       | $          | 9,765 |   |
| Gross profit                                  |       | 5,053                                                      |       | 2,245      |       |
| Gross profit as a percent of sales            |       | 17.4                                                       | %          | 23.0       | %          |
| Segment operating (loss) income               |       | (514                                                       | )          | 594        |       |
| Operating (loss) income as a percent of sales |       | (1.2                                                       | )%         | 6.1        | %          |
| Segment assets as of October 2, 2010          |       | $                                                          | 37,351     |       | $          | 6,207 |   |
| Return on assets                              |       | (1.4                                                       | )%         | 9.6        | %          |
|                                          |       |                                                       |       |       |       |
| Nine Months ended October 3, 2009             |       |                                                       |       |       |       |
| Net sales to external customers               |       | $                                                          | 32,388     |       | $          | 11,756 |   |
| Gross profit                                  |       | 4,626                                                      |       | 2,884      |       |
| Gross profit as a percent of sales            |       | 14.3                                                       | %          | 24.5       | %          |
| Segment operating (loss) income               |       | (1,601                                                     | )          | 1,130      |       |
| Operating (loss) income as a percent of sales |       | (4.9                                                       | )%         | 9.6        | %          |
| Segment assets as of October 3, 2009          |       | $                                                          | 40,199     |       | $          | 5,887 |   |
| Return on assets                              |       | (4.0                                                       | )%         | 19.2       | %          |

 

13

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Concrete, Aggregates and Construction Supplies Segment

 

Salesin the CACS segment decreased by approximately 10.4% in the first nine monthsof 2010 compared to the prior year. The lower level of business reflects theslowdown in all construction activity in southern Colorado. Concrete yardagedecreased by 8.5% compared to the first nine months of 2009. The average priceof ready-mixed concrete declined by 4.9% as a result of a more intense level ofcompetition, lower cement costs and a change in product mix. The gross profitper cubic yard of concrete was approximately $2.26 lower in 2010 as a result ofthe lower volume, lower selling prices and higher prices charged for dieselfuel. Sales of aggregates (sand, crushed limestone and gravel) were approximately1.4% lower in 2010 compared to 2009. The increased production capability at theBlack Canyon Quarry was an offsetting factor to the general slowdown in localdemand for aggregate products. See discussion for the third quarter regardingthe status of the Pikeview Quarry. The combined gross profit from all aggregateoperations in the first nine months of 2010 was $2,064,000 compared to a grossprofit of $123,000 in 2009. The improved results in the aggregate operationsreflect reduced operating costs including a lower level of ongoing expenses atthe Pikeview Quarry. The increased production level at the Black Canyon Quarryalso contributed to the improved results of the aggregate business. There wasnot a significant change in either depreciation or selling and administrativeexpenses for this segment when comparing the two nine month periods.

 

Door Segment

 

Salesduring the first nine months of 2010 in the Door segment decreased $1,991,000or 16.9% from the comparable 2009 period as a result of the weaker constructionmarkets. The gross profit ratio in 2010 was 23.0% compared to 24.5% in 2009 dueto the reduced sales volume and an intensified level of price competition.Selling expenses were reduced in response to the lower sales volume.

 

**HVAC Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the nine months ended October 2,2010 and October 3, 2009 (amounts in thousands):

 
| ** **                                    | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| Nine Months ended October 2, 2010             |       |                          |       |                     |       |
| Net sales to external customers               |       | $                             | 25,647     |                     | $          | 19,846 |   |
| Gross profit                                  |       | 6,070                         |       | 4,628                    |       |
| Gross profit as a percent of sales            |       | 23.7                          | %          | 23.3                     | %          |
| Segment operating income                      |       | 310                           |       | 2,069                    |       |
| Operating income as a percent of sales        |       | 1.2                           | %          | 10.4                     | %          |
| Segment assets as of October 2, 2010          |       | $                             | 19,009     |                     | $          | 10,409 |   |
| Return on assets                              |       | 1.6                           | %          | 19.9                     | %          |
|                                          |       |                          |       |                     |       |
| Nine Months ended October 3, 2009             |       |                          |       |                     |       |
| Net sales to external customers               |       | $                             | 21,320     |                     | $          | 22,038 |   |
| Gross profit                                  |       | 4,626                         |       | 5,662                    |       |
| Gross profit as a percent of sales            |       | 21.7                          | %          | 25.7                     | %          |
| Segment operating (loss) income               |       | (869                          | )          | 2,833                    |       |
| Operating (loss) income as a percent of sales |       | (5.5                          | )%         | 12.9                     | %          |
| Segment assets as of October 3, 2009          |       | $                             | 17,959     |                     | $          | 12,611 |   |
| Return on assets                              |       | (4.8                          | )%         | 22.5                     | %          |

 

Heating and Cooling Segment

 

Salesin the Heating and Cooling segment increased $4,327,000 (20.3%) in the firstnine month of 2010 from the comparable period in 2009. Cooler weather in Apriland May extended the heating season and contributed to increased furnace sales.Initial stocking orders for the forthcoming heating season from key accountswere higher in 2010 reflecting improved business conditions for most of ourcustomers. The fan coil market is moderately stronger in 2010 compared to 2009when construction projects were deferred or suspended due to the uncertainty ofthe economy or financing markets. The gross profit ratio for this segmentincreased from 21.7% to 23.7% primarily due to a higher level of furnaceproduction and tighter controls over manufacturing overhead spending. Sellingand administrative expenses were higher as a result of the increased furnacesales, additional sales incentives to key furnace customers and a higher levelof legal expenses associated with product liability claims.

 

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Evaporative Cooling Segment

 

Salesin the Evaporative Cooling segment decreased $2,192,000 or 9.9% in the firstnine months of 2010 compared to the same period in 2009. The loss of a nationalretail account and a carryover of inventory at some customers from the previousseason accounted for the lower level of sales. The gross profit ratio declinedfrom 25.7% to 23.3% principally as the result of the lower sales and productionvolume and increases in certain raw material costs in the third quarter of2010. A beneficial change in product sales mix offset some of the impact of thereduced volume and higher material costs. Selling and administrative costs werereduced by $240,000 as a result of the lower sales and cost reductions. As apercentage of sales, these expenses were unchanged at 11.1% for both periods.

 

CRITICALACCOUNTING POLICIES AND ESTIMATES

 

Thecondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States whichrequire the Company to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities as of October 2, 2010 and January 2, 2010 and affect the reportedamounts of revenues and expenses for the periods reported. Actual results coulddiffer from those estimates.

 

Informationwith respect to the Company’s critical accounting policies which the Companybelieves could have the most significant effect on the Company’s reportedresults and require subjective or complex judgments by management is containedin Note 8 in this report on Form 10-Q and in Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, ofthe Company’s Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2010.

 

OUTLOOK

 

Thelevel of construction activity in southern Colorado continues at a slow pace.Housing starts in Colorado Springs have increased modestly compared to the lasttwo years but remain at relatively low levels. Housing construction in Pueblois very depressed. Although business conditions are not expected tosubstantially improve for the balance of 2010, two relatively large industrialprojects in Pueblo and two highway projects in Colorado Springs could aidfourth quarter sales volume provided the weather remains favorable. Under thecurrent conditions, pricing in the CACS segment is expected to remain sharplycompetitive. It is difficult to predict the timing and magnitude of any generalrecovery of construction in the markets served.

 

TheDoor segment’s sales are also, to a significant degree, reliant on newconstruction. The sales backlog of the Door segment at the end of September2010 is lower than at September 2009 but has improved slightly since June.Pricing remains highly competitive.

 

Julytypically marks the end of the selling season for evaporative coolers thoughmore favorable weather conditions throughout the third quarter of 2010 resultedin sales outpacing the third quarter of 2009. Sales during the fourth quarterare preseason orders and are highly dependent upon the timing these orders areplaced by our customers.

 

Thesales backlog for fan coil products in the Heating and Cooling segment hasincreased recently due to some increase in bidding activity as someconstruction projects which were previously deferred are now moving forward.However, the overall commercial construction market is expected to remain slow.Furnace sales got off to a strong start in September although sales for theremainder of the year will be largely weather dependent.

 

RECENTLYISSUED ACCOUNTING STANDARDS

 

SeeNote 3 for a discussion of recently issued accounting standards.

 

MATERIAL CHANGES TOCONTRACTUAL OBLIGATIONS

 

As discussed in Note 9, theCompany entered into an amendment of its Credit Agreement with its bank lender.Other than discussed in the preceding sentence, there were no material changesto contractual obligations that occurred during the quarter ended October 2,2010.

 

FORWARD-LOOKING STATEMENTS

 

Theforegoing discussion contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended. Suchforward-looking statements are based on the beliefs of the Company’s managementas well as on assumptions made by and information available to the Company atthe time such statements were made.  Whenused in this Report, words such

 

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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 theforward-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 ingovernmental regulations and policies. Some of these factors are discussed inmore detail in the Company’s 2009 Annual Report on Form 10-K. Changes inaccounting pronouncements could also alter projected results. Forward-lookingstatements speak only as of the date they were made, and the Company undertakesno obligation to publicly update them.

 

**Item 3.****   ****Quantitative and QualitativeDisclosures About Market Risk**

 

There were no material changes in the market risks nor legalproceedings that the Company is exposed to since those discussed in the Company’s2009 Annual Report on Form 10-K.

 

**Item 4T.****    ****Controlsand Procedures**

 

(a)       Evaluation of DisclosureControls and Procedures.

 

The Company’s Chief Executive Officer and Chief Financial Officer, withthe participation of management, have evaluated the effectiveness of theCompany’s disclosure controls and procedures as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (Exchange Act) as of October 2, 2010. Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective and were reasonablydesigned to ensure that all material information relating to the Company(including its subsidiaries) required to be disclosed in this quarterly reportis recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and Exchange Commission. Thematerial weakness described in the 2008 and 2009 Form 10-Ks relating toaccounting controls over inventory and related recording of costs of sales inthe Heating and Cooling segment was reported as remediated in Item 4T of theForm 10-Q filed for the quarter ended July 3, 2010.

 

(b)       Changes in Internal ControlOver Financial Reporting.

 

TheCompany continually reassesses its internal control over financial reportingand makes changes as deemed prudent. The Company had identified a materialweakness in internal control over financial reporting related to accounting forinventory and related cost of sales in its Heating and Cooling segment prior tothe close of the third quarter of Fiscal 2008. As part of its remediationprocess, the Company identified the causes that resulted in the inventoryaccounting errors and developed an action plan to address each of these causes.The Company concluded that the changes made during 2009 and the first twoquarters of 2010 improved the internal controls over financial reportingrelated to accounting for inventory and related cost of sales in its Heatingand Cooling segment such that these controls can be relied upon as of October2, 2010.

 

Duringthe quarter ended October 2, 2010, there were no material weaknesses identifiedin our review of internal control over financial reporting and no significantchanges in the Company’s internal control over financial reporting occurred duringthe quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

**Item 2.****       ****UnregisteredSales of Equity Securities and Use of Proceeds**

 

TheCompany has not purchased any of its common stock to become treasury stockduring the period July 3, 2010 through October 2, 2010.

 

OnJanuary 19, 1999, the Company initiated purchases under the currentopen-ended program to repurchase its common stock. Purchases are made on theopen market or in block trades at the discretion of management. The dollaramount authorized for the program has been periodically increased by the Boardof Directors and approved by the Company’s lender under the Company’s prior creditfacility. As of October 2, 2010, $1,307,404 of the authorized amount remainsavailable for stock purchases. The Credit Agreement contains certainrestrictions on the Company’s ability to repurchase its stock. Amendments tothe Credit Agreement have retained these restrictions. See further discussionin Note 9 and the “Liquidity and Capital Resources” section of Item 2 above.

 

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**Item 6.****           ****Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3                    |       | Registrant’s  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                   |       | Registrant’s  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                   |       | Credit  Agreement dated April 16, 2009 among Continental Materials Corporation, as  the Company, The Various Financial Institutions Party Hereto, as Lenders, and  The Private Bank 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; 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; and Third Amendment  thereto dated November 12, 2010 filed herewith as Exhibit 10.1. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   |                    |   | CONTINENTAL  MATERIALS CORPORATION |
|--------|-------------------------|--------|------------------------------------|
|   |                    |   |                               |
|   |                    |   |                               |   |
| Date:  | November 15,  2010 |   | By:                                | /s/  Joseph J. Sum |
|   |                    |   |                               | Joseph  J. Sum, Vice President |
|   |                    |   |                               | and  Chief Financial Officer |

 

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