UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending September 27, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to
Commission File number 1-3834

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   ý   No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   o   No   ý

 

Number of common shares outstanding at November 3, 2003               1,734,763

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 27, 2003 and DECEMBER 28, 2002

(000’s omitted except share data)

 

		SEPTEMBER 27, 2003			DECEMBER 28, 2002
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	3,650		$	3,536
Receivables, net		17,115			16,740
Inventories:
Finished goods		7,654			6,855
Work in process		1,300			1,523
Raw materials and supplies		6,059			6,214
Prepaid expenses		3,285			3,530
Total current assets		39,063			38,398
Property, plant and equipment, net		31,383			34,033
Goodwill		7,374			7,374
Non-compete agreements		1,235			1,403
Other assets		1,366			1,426
		$	80,421		$	82,634
LIABILITIES
Current liabilities:
Current portion of long-term debt		$	1,890		$	3,300
Accounts payable and accrued expenses		13,869			13,358
Income taxes		—			308
Total current liabilities		15,759			16,966
Long-term debt		9,875			10,220
Deferred income taxes		3,037			3,037
Other long-term liabilities		2,338			2,422
SHAREHOLDERS’ EQUITY
Common shares, $0.25 par value; authorized 3,000,000; issued 2,574,264		643			643
Capital in excess of par value		1,982			1,982
Retained earnings		58,173			57,851
Accumulated other comprehensive losses net of tax of $174 and $216 (interest rate swap adjustments)		(324		)	(404		)
Treasury shares, 830,759 and 790,766 at cost		(11,062		)	(10,083		)
		49,412			49,989
		$	80,421		$	82,634

 

See accompanying notes

 

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CONTINENTAL MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 27, 2003 AND SEPTEMBER 28, 2002

(Unaudited)

(000’s omitted except per share amounts)

 

		SEPTEMBER 27, 2003			SEPTEMBER 28, 2002
Sales		$	30,139		$	32,503
Costs and expenses:
Cost of sales (exclusive of depreciation, depletion and amortization)		23,382			24,933
Depreciation, depletion and amortization		1,517			1,536
Selling and administrative		4,036			4,303
		28,935			30,772
Operating income		1,204			1,731
Interest		(206		)	(223		)
Other income, net		91			85
Income before income taxes		1,089			1,593
Provision for income taxes		382			557
Net income		707			1,036
Retained earnings, beginning of period		57,466			55,684
Retained earnings, end of period		$	58,173		$	56,720
Basic earnings per share		$	.41		$	.58
Average shares outstanding		1,744			1,787
Diluted earnings per share		$	.40		$	.57
Average shares outstanding		1,779			1,823

 

See accompanying notes

 

3

 

CONTINENTAL MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2003 AND SEPTEMBER 28, 2002

(Unaudited)

(000’s omitted except per share amounts)

 

		SEPTEMBER 27, 2003			SEPTEMBER 28, 2002
Sales		$	88,440		$	96,529
Costs and expenses:
Cost of sales (exclusive of depreciation, depletion and amortization)		70,483			75,166
Depreciation, depletion and amortization		4,644			4,587
Selling and administrative		12,411			13,195
		87,538			92,948
Operating income		902			3,581
Interest		(565		)	(715		)
Other income, net		159			432
Income before income taxes		496			3,298
Provision for income taxes		174			1,154
Net income		322			2,144
Retained earnings, beginning of period		57,851			54,576
Retained earnings, end of period		$	58,173		$	56,720
Basic earnings per share		$	.18		$	1.19
Average shares outstanding		1,763			1,797
Diluted earnings per share		$	.18		$	1.17
Average shares outstanding		1,798			1,832

 

See accompanying notes

 

4

 

CONSOLIDATED MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2003 AND SEPTEMBER 28, 2002

(Unaudited)

(000’s omitted)

		SEPTEMBER 27, 2003			SEPTEMBER 28, 2002
Net cash provided by operating activities		$	4,653		$	3,846
Investing activities:
Acquisitions of subsidiaries, net of cash received		—			(2,125		)
Capital expenditures		(1,988		)	(6,740		)
Investment in mining partnership		(30		)	—
Proceeds from sale of property and equipment		213			164
Net cash used in investing activities		(1,805		)	(8,701		)
Financing activities:
Repayments of long term debt		(1,755		)	(1,899		)
Payments to acquire treasury stock		(979		)	(548		)
Net cash used in financing activities		(2,734		)	(2,447		)
Net increase (decrease) in cash and cash equivalents		114			(7,302		)
Cash and cash equivalents:
Beginning of period		3,536			7,579
End of period		$	3,650		$	277
Supplemental disclosures of cash flow items:
Cash paid during the nine months for:
Interest		$	689		$	906
Income taxes		(140		)	812

 

See accompanying notes

 

5

 

 

CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 27, 2003

(Unaudited)

 

1.               The unaudited interim consolidated financial statements included herein are prepared pursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements have been omitted.  The interim financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Report on Form 10-K for the year ended December 28, 2002, including any amendments thereto (2002 Annual Report).  In the opinion of management, the consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods.

 

2.               The provision for income taxes is based upon the estimated effective tax rate of 35% for the year.

 

3.               The Company signed a new Revolving Credit and Term Loan Agreement (the “Credit Agreement”) in September 2003 providing for a revolving credit facility in the amount of $10,000,000 and a term loan facility in the original principal amount of $11,500,000.  Both facilities are unsecured.  The term loan is payable in escalating quarterly installments with final payment of all then unpaid principal, on June 30, 2008.  The loan bears interest at prime or an adjusted LIBOR rate. 

 

The Company is required by the Credit Agreement to maintain certain levels of consolidated tangible net worth, to attain certain levels of cash flow (as defined) on a rolling four-quarter basis, and to maintain certain ratios including consolidated debt to earnings before interest, taxes, depreciation and amortization and excluding extraordinary items.  Additional borrowing, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends are either limited or require prior approval by the lenders. 

 

The term loan debt matures as follows under the Credit Agreement (amounts in thousands): 

 

 

The revolving credit facility is used for short-term cash needs and standby letters of credit.  Interest is charged at prime or adjusted LIBOR rates on cash borrowings.  There was no balance outstanding against the revolving credit facility as of September 27, 2003.

 

4.               Operating results for the first nine months of 2003 are not necessarily indicative of performance for the entire year.  Historically, sales of construction materials are higher in the second and third quarters.  Overall, sales of heating and air conditioning products have not shown strong seasonal fluctuations in recent years although product mix has historically yielded higher gross profit margins in the fourth quarter.  (See Note 11 of Notes to Consolidated Financial Statements in the Company’s 2002 Annual Report.)

 

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5.               The following is a reconciliation of the calculation of basic and diluted earnings per share (EPS) for the three and nine months ended September 27, 2003 and September 28, 2002 (amounts in thousands except per share data). 

 

		Three months ended								Nine months ended
		Income			Shares		Per-share earnings			Income			Shares		Per-share earnings
September 27, 2003
Basic EPS		$	707		1,744		$	.41		$	322		1,763		$	.18
Effect of dilutive options		—			35					—			35
Diluted EPS		$	707		1,779		$	.40		$	322		1,798		$	.18
September 28, 2002
Basic EPS		$	1,036		1,787		$	.58		$	2,144		1,797		$	1.19
Effect of dilutive options		—			36					—			35
Diluted EPS		$	1,036		1,823		$	.57		$	2,144		1,832		$	1.17

 

6.               The following table presents information about the Company’s reported segments for the nine-month and three-month periods ended September 27, 2003 and September 28, 2002 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands).

 

		Heating and Air Conditioning			Construction Materials			All Other			Unallocated Corporate			Total
2003 Nine Months
Revenues from external customers		$	34,627		$	53,569		$	242		$	2		$	88,440
Operating income		2,405			607			2			(2,112		)	902
Assets		25,007			49,179			132			6,103			80,421
Three Months
Revenues from external customers		10,024			20,028			86			1			30,139
Operating income		661			1,235			10			(702		)	1,204
2002 Nine Months
Revenues from external customers		$	38,266		$	58,152		$	109		$	2		$	96,529
Operating income		2,919			3,138			(98		)	(2,378		)	3,581
Assets		30,289			52,989			74			1,274			84,626
Three Months
Revenues from external customers		11,121			21,345			36			1			32,503
Operating income		724			1,843			(9		)	(827		)	1,731

 

There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the 2002 Annual Report.

 

7

 

7.               On April 1, 2002, the Company acquired all of the stock of McKinney Door and Hardware, Inc. (MDHI), a refabricator and distributor of metal doors, wood doors and related hardware.  MDHI operates from one facility in Pueblo, Colorado.  The $2,125,000 purchase price, net of cash received and $1,129,000 of liabilities and debt, was funded by available cash balances and credit sources.  The unallocated excess purchase price over fair value of net assets acquired of $900,000 has been classified as goodwill.  The acquisition has been accounted for under the purchase method and accordingly, the operating results of MDHI have been included in the consolidated results since the date of acquisition.

 

Identifiable intangible assets as of September 27, 2003 consist of three amortizable non-compete agreements and were carried at $1,235,000 net of $765,000 accumulated amortization.  The pre-tax amortization expense for intangible assets during the nine-month and three-month periods ended September 27, 2003 was $168,000 and $57,000, respectively.  Based upon the intangible assets recorded on the balance sheet at September 27, 2003, amortization expense for the next five years is estimated to be as follows: 2003 - $225,000, 2004 - $225,000, 2005 - $225,000, 2006 - $216,000, and 2007 - $137,000.

 

8.               The interest rate swap agreement is reported consistent with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related amendment, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” which require recognition of derivatives as either assets or liabilities and measurement at fair value.  During the three-month and nine-month periods ended September 27, 2003, pre-tax gains of $120,000 and $123,000, respectively, are reported under comprehensive income as a result of the cash flow hedge as follows (amounts in thousands): 

 

		Three Months Ended September 27, 2003			Nine Months Ended September 27, 2003
Net Income, as reported		$	707		$	322
Swap agreement gain, net of tax effect of $40 and $43, respectively, for the three months and nine months ended September 27, 2003		80			80
Comprehensive net income		$	787		$	402

 

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

 

Financial Condition (See pages 2, 4 and 5)

 

Historically, the Company has experienced operating losses during the first quarter except when the weather is mild along the Front Range in Colorado.  Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in Colorado and the seasonal sales of evaporative coolers.  Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment.  Sales of fan coils are generally not subject to seasonal variation.  Reflecting the operating results and the use of sales dating programs related to the evaporative cooler product line, the cash balance is normally depleted during the first or second quarter of the year.  The Company’s borrowings against the revolving credit facility tend to peak during the second quarter and decline over the remainder of the year. This trend has continued thus far in 2003.

 

8

 

The cash balance increased consistent with the normal trend due to the seasonality of sales as well as the collection of evaporative cooler receivables related to the sales dating programs.  Operations provided $4,653,000 in cash flow in the first nine months of 2003 compared to $3,846,000 in the first nine months of 2002.  Relative changes in accounts payable and accruals (including income taxes) between the periods were responsible for approximately $1,300,000 of the increase.  The increase in inventories during the first nine months of 2003 used approximately $1,200,000 less cash than had been used during the first nine months of 2002.  The decline in 2003 net earnings compared to 2002 ($1,822,000) partially offset the positive cash flow effects of inventories, accounts payable and accruals.

 

The Company acquired MDHI for $2,125,000 at the beginning of the second quarter of 2002.  Short term borrowings used for a portion of the purchase were repaid during the third quarter of 2002 from operating cash flow.

 

Capital expenditures in the first nine months of 2003 were $1,988,000 compared to $6,740,000 in the first nine months of 2002.  The majority of the capital spending in 2003 was in the construction materials segment and related to the opening of the Brighton, Colorado batch plant during March 2003 and several projects associated with the new aggregates and concrete batching operations on the east side of Pueblo. The unusually high level of capital spending during the first nine months of 2002 related to four major projects as described in the Management’s Discussion and Analysis section of the Company’s 2002 Annual Report.  The Company has reduced the level of capital spending in 2003 in response to the decline in sales and production volume especially in the construction materials segment.

 

The Company expects that the operating cash flow from its subsidiaries, supplemented by the revolving line of credit (of which none was outstanding at September 27, 2003) will be sufficient to cover anticipated cash requirements, including debt service and planned capital expenditures for the next twelve months.

 

Operations - Comparison of Quarter Ended September 27, 2003 to Quarter Ended September 28, 2002 (See page 3)

 

Consolidated sales during the quarter ended September 27, 2003 declined $2,364,000 (7.3%) when compared to the quarter ended September 28, 2002.  Sales decreased $1,317,000 (6.2%) in the construction materials segment. The reduced level of construction activity along the Front Range in Colorado lead to lower volumes and increased price competition resulting in lower ready-mixed concrete prices, most notably in the Denver metropolitan area.  The reduced volume combined with the lower prices account for the diminished sales level.  Sales in the heating and air conditioning segment declined $1,097,000 (9.9%).  A sharp decline in fan coil sales combined with modestly lower furnace sales was responsible for the lower sales.  Fan coil sales continue to reflect the nationwide slump in commercial construction, notably hotel construction.  Partially offsetting the decline in fan coil and furnace sales was an increase in evaporative cooler sales driven primarily by hot, dry weather that persisted later in the year than normal. 

 

Consolidated cost of sales (exclusive of depreciation and depletion), as a percentage of sales, increased 0.9% to 77.6% for the quarter ended September 27, 2003 as compared to the 2002 quarter.  The increase was incurred exclusively by the construction materials segment.  The higher cost ratio in the construction materials segment was the result of the reduced volume, lower selling prices and higher operating costs, particularly maintenance.  The cost of sales percentage for the heating and air conditioning segment was virtually unchanged.

 

9

 

Selling and administrative expenses declined slightly in tandem with the diminished sales. 

 

Operations - Comparison of Nine Months Ended September 27, 2003 to Nine Months Ended September 28, 2002 (See page 4)

 

Consolidated sales for the nine months ended September 27, 2003 decreased $8,089,000 (8.4%) when compared to the nine months ended September 28, 2002.  Sales in the construction materials segment declined $4,583,000 (7.9%) despite the acquisition of McKinney Door and Hardware, Inc. on April 1, 2002.  The decline was due to the reasons noted above.  In addition, inclement weather during the first quarter of 2003, including a near record snowfall on March 17^th along Colorado’s Front Range, hampered sales.  The heating and air conditioning segment reported a $3,639,000 (9.5%) decrease in sales.  The decline was primarily due to the depressed fan coil market.

 

Cost of sales (exclusive of depreciation and depletion) as a percentage of sales increased from 77.9% for the nine months ended September 28, 2002 to 79.7% for the nine months ended September 27, 2003.  The cost of sales percentage in the construction materials segment increased for the reasons noted above.  In addition, the aforementioned inclement weather during the first quarter of 2003 adversely affected production.  The heating and air conditioning segment reported an increase in the cost of sales percentage due to the reduced production levels of fan coils, which increased unit costs, and a change in product mix of sales in the evaporative cooler line to lower margin items.

 

Selling and administrative expenses declined slightly in tandem with the diminished sales.

 

Net interest expense declined primarily due to the lower term loan balance in 2003, lower borrowings against the revolving credit facility during the second quarter of 2003 and receipt during the first quarter of 2003 of approximately $62,000 of interest related to state tax refunds.

 

OUTLOOK

 

The weak construction market in Colorado and the depressed commercial construction market nationwide, notably hotel construction, along with their above noted effects on the Company, are expected to continue for the balance of 2003.

 

NEW ACCOUNTING STANDARDS

 

On December 30, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” This standard requires recording the fair value of a liability for an asset retirement obligation in the period in which it is incurred. In connection with permits to mine aggregate deposits in Colorado, the Company is obligated to reclaim the mined areas.  The Company records a reserve for future reclamation work to be performed at its various aggregate operations based upon estimates of the recoverable quantities of rock and sand available in each location combined with an estimate of the total expense that will be incurred to reclaim a property.  Provision is made based upon the units of production method.  Reclamation costs are charged to operations as the properties are mined.  Actual reclamation costs are charged against the reserve.  The adequacy of the recorded reserve is assessed annually.  Estimates of both the quantities of recoverable material and the cost of reclamation are periodically updated with the assistance of an independent professional.  Reclamation on any mining property is performed soon after each section of the deposit is mined.  Reclamation is substantially complete by the time the entire deposit is depleted.  The Company believes that this approach, which had been previously used to establish the annual expense and the reserve recorded for future reclamation obligations, continues

 

10

 

to provide the best estimate of the fair value of these obligations.   Therefore the adoption of SFAS No. 143 did not have an impact on the Company’s consolidated balance sheet or consolidated statement of operations as of December 30, 2002.

 

If the provisions of Statement 143 had been adopted effective December 30, 2001, there would have been no impact on earnings per share, net of income tax effect. Since a change in earnings per share would not have occurred, proforma earnings per share disclosures are not presented.

 

FORWARD-LOOKING STATEMENTS

 

The foregoing discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended.  Such forward-looking statements are based on the beliefs of the Company’s management as well as on assumptions made by and information available to the Company at the time such statements were made.  When used in this Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects,” and similar expressions are intended to identify forward-looking statements.  Actual results could differ materially from those projected in the forward-looking statements as a result of factors including but not limited to: weather, interest rates, availability of raw materials and their related costs, economic conditions and competitive forces.  Changes in accounting pronouncements could also alter projected results.  Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.

 

Item 3.   Quantitative And Qualitative Disclosures About Market Risk

 

There have been no changes in the market risks that the Company is exposed to since those discussed in the Company’s 2002 Annual Report on Form 10-K.  At September 27, 2003, the amount subject to the interest rate swap agreement was $10,500,000.  Also see Note 8 above in the notes to financial statements.

 

Item 4.   Disclosure Controls and Procedures

 

(a)   Evaluation of disclosure controls and procedures.

 

The Company’s chief executive officer and chief financial officer, with the participation of management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).  Based on their evaluation, they have concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its subsidiaries) required to be disclosed in this quarterly report and no changes are required at this time.

 

(b)   Changes in internal controls over financial reporting.

 

There were no significant changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

11

 

PART II - Other Information

 

Item 6.		Exhibits and Reports on Form 8-K
		(a)	Exhibits

 

		Exhibit No.			Description
		10    Revolving Credit and Term Loan Agreement, dated as of September 5, 2003, by and among the Company and LaSalle Bank National Association and Fifth Third Bank.
		31.1  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
		31.2  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
		32    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
		(b) Registrant filed one report on Form 8-K during the quarter ended September 27, 2003.  The report, dated August 8, 2003, related to the press release disclosing the results of the registrant’s operations for the second quarter of 2003 issued July 29, 2003.

 

 

SIGNATURE

 

 

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

 

			CONTINENTAL MATERIALS CORPORATION
Date:	November 5, 2003		By:	/S/ Joseph J. Sum
				Joseph J. Sum, Vice President and Chief Financial Officer

 

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Exhibit Index

 

Exhibit No.		Description
10		Revolving Credit and Term Loan Agreement, dated as of September 5, 2003, by and among the Company and LaSalle Bank National Association and Fifth Third Bank.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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