SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File number 1-3834
CONTINENTAL MATERIALS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2274391
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
225 West Wacker Drive, Chicago, Illinois 60606
(Address of principal executive office)
(Zip Code)
(312) 541-7200
(Registrant's telephone number, including area code)
(Former name, former address and former
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of common shares outstanding at November 6, 1998 1,072,371
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 3, 1998 and JANUARY 3, 1998
(Unaudited)
(000's omitted except share data)
<TABLE>
<CAPTION>
OCTOBER 3, JANUARY 3,
1998 1998
<C> <S> <S>
ASSETS
Current assets:
Cash and cash equivalents $ 2,877 $ 1,524
Receivables, net 16,705 13,882
Inventories:
Finished goods 7,213 8,562
Work in process 1,452 1,471
Raw materials and supplies 4,475 4,260
Prepaid expenses 2,590 2,343
Total current assets 35,312 32,042
Property, plant and equipment, net 21,175 19,581
Other assets:
Investment in mining partnership 600 600
Other 2,273 2,132
$ 59,360 $ 54,355
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 950 $ 1,900
Accounts payable and accrued expenses 14,271 11,327
Income taxes 892 222
Total current liabilities 16,113 13,449
Long-term debt 5,450 6,400
Deferred income taxes 1,722 1,722
Other long-term liabilities 959 926
SHAREHOLDERS' EQUITY
Common shares, $0.50 par value; authorized
3,000,000; issued 1,326,588 663 663
Capital in excess of par value 3,484 3,484
Retained earnings 34,779 31,283
Treasury shares, 254,217 and 246,187, at cost (3,810) (3,572)
35,116 31,858
$ 59,360 $ 54,355
</TABLE>
See accompanying notes
2
<PAGE>
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
<S> <C> <C>
Net sales $ 29,069 $ 25,612
Costs and expenses:
Cost of sales (exclusive of depreciation,
depletion and amortization) 21,642 19,677
Depreciation, depletion and amortization 1,045 881
Selling and administrative 3,817 3,214
26,504 23,772
Operating income 2,565 1,840
Interest expense, net (154) (244)
Equity loss from mining partnership (7) (30)
Other income, net 189 209
Income before income taxes 2,593 1,775
Provision for income taxes 908 622
Net income 1,685 1,153
Retained earnings, beginning of period 33,094 29,151
Retained earnings, end of period $ 34,779 $ 30,304
Basic earnings per share $ 1.57 $ 1.05
Average shares outstanding 1,072 1,103
Diluted earnings per share $ 1.54 $ 1.03
Average shares outstanding 1,097 1,122
</TABLE>
See accompanying notes
3
<PAGE>
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
<C> <S> <S>
Net sales $ 80,810 $ 74,508
Costs and expenses:
Cost of sales (exclusive of depreciation,
depletion and amortization) 61,088 57,749
Depreciation, depletion and amortization 3,094 2,636
Selling and administrative 11,026 10,503
75,208 70,888
Operating income 5,602 3,620
Interest expense, net (538) (748)
Equity loss from mining partnership (45) (87)
Other income, net 360 494
Income before income taxes 5,379 3,279
Provision for income taxes 1,883 1,148
Net income 3,496 2,131
Retained earnings, beginning of period 31,283 28,173
Retained earnings, end of period $ 34,779 $ 30,304
Basic earnings per share $ 3.26 $ 1.93
Average shares outstanding 1,074 1,103
Diluted earnings per share $ 3.18 $ 1.90
Average shares outstanding 1,098 1,122
</TABLE>
See accompanying notes
4
<PAGE>
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
<S> <C> <C>
Net cash provided by operating activities $ 8,135 $ 848
Investing activities:
Capital expenditures (4,636) (2,157)
Proceeds from sale of property and equipment 37 9
Investment in mining partnership (45) (87)
Net cash used in investing activities (4,644) (2,235)
Financing activities:
Borrowings under revolving credit facility -- 600
Long-term borrowings -- 2,000
Repayment of long-term debt (1,900) (750)
Payment to acquire treasury stock (238) --
Net cash (used) provided by financing activities (2,138) 1,850
Net increase in cash and cash equivalents 1,353 463
Cash and cash equivalents:
Beginning of year 1,524 379
End of period $ 2,877 $ 842
Supplemental disclosures of cash flow items:
Cash paid during the nine months for:
Interest $ 543 $ 834
Income taxes 1,218 893
</TABLE>
See accompanying notes
5
<PAGE>
CONTINENTAL MATERIALS CORPORATION
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
NOTES TO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED OCTOBER 3, 1998
(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 latest annual report on Form 10-K.
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 for the year.
3.Operating results for the first nine months of 1998 are not
necessarily indicative of performance for the entire year.
Historically, sales of construction materials are higher in
the second and third quarters. The sales and gross margins of
the heating and air-conditioning segment, affected by weather
and a changing product mix, have not produced a consistent
pattern in recent years. (See Note 12 of Notes to
Consolidated Financial Statements in the Company's 1997 Annual
Report.)
4.The following is a reconciliation of the calculation of
basic and diluted earnings per share (EPS) for the three and nine
months ended October 3, 1998 and September 27, 1997.
<TABLE>
<CAPTION>
Three months ended Nine months ended
Per- Per-
share share
Income Shares earnings Income Shares earnings
<S> <C> <C> <C> <C> <C> <C>
October 3, 1998
Basic EPS $1,685 1,072 $ 1.57 $3,496 1,074 $ 3.26
Effect of
dilutive options -- 25 -- 24
Diluted EPS $1,685 1,097 $ 1.54 $3,496 1,098 $ 3.18
September 27, 1997
Basic EPS $1,153 1,103 $ 1.05 $2,131 1,103 $ 1.93
Effect of
dilutive options -- 19 -- 19
Diluted EPS $1,153 1,122 $ 1.03 $2,131 1,122 $ 1.90
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
The following discussion provides information which management
believes is relevant to an assessment and understanding of the
Company's results of operation and financial condition. The
discussion should be read in conjunction with the Company's
unaudited consolidated interim financial statements and notes
thereto and the Company's Annual Report on Form 10-K. This
report contains certain statements of a forward-looking nature
relating to future events or the future financial performance
of the Company. Investors are cautioned that such statements
are only predictions and that actual events or results may
differ materially. In evaluating such statements, investors
should carefully consider the various factors identified in
this report, which could cause actual results to differ
materially from those indicated from such forward-looking
statements.
Financial Condition (See pages 2 and 5)
Operations for the first nine months of 1998 provided
$8,135,000 of cash compared to $848,000 in 1997. A reduction
in inventory levels and an increase in payables and accrued
expenses combined with higher income to generate the
significant increase in cash.
The Company estimates that its short-term line of credit (none
of which was outstanding at October 3, 1998) will be adequate
to meet its cash requirements for the foreseeable future.
Historically, the Company's borrowings against the short-term
line peak during the second quarter and decline over the
remainder of the year.
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. In February 1998, the
FASB issued SFAS No. 132, Employers' Disclosure about
Pensions and Other Postretirement Benefits. In June 1998,
the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company has not yet
adopted these pronouncements, but does not expect that they
will have a material impact on the Company's financial
position or results of operations.
Operations - Comparison of Quarter Ended October 3, 1998 to
Quarter Ended September 27, 1997 (See page 3)
Consolidated net sales increased $3,457,000 (13.5%). The
construction materials segment reported sales up $675,000
(4.5%), as construction activity along the Front Range in
southern Colorado remained strong. The heating and air-
conditioning segment sales increased $2,782,000 (26.4%) as hot
July weather in the Southwest spurred evaporative cooler sales
making up some revenues foregone during the adverse effect of
El Nino in the second quarter. The fan coil line also
recorded sales gains.
Consolidated cost of sales (exclusive of depreciation,
depletion and amortization) as a percentage of sales decreased
from 76.8% to 74.5%. The decrease was due to improved margins
in the fan coil product line of the heating and air-
conditioning segment and an increase in sales in the
construction materials segment.
Depreciation, depletion and amortization increased 18.6%
($164,000) due to increased capital expenditures.
Interest expense declined 36.9% ($90,000) due to lower levels
of outstanding debt.
7
<PAGE>
Operations - Comparison of Nine Months Ended October 3, 1998
to Nine Months September 27, 1997 (See page 4)
Net sales rose $6,302,000 (8.5%). The increases in the
construction materials segment $5,778,000 (14.9%), and the
heating and air-conditioning segment $524,000 (1.5%), were due
to the reasons noted above.
Consolidated cost of sales (exclusive of depreciation,
depletion and amortization) as a percentage of sales decreased
from 77.5% to 75.6% due to the reasons noted above.
Depreciation, depletion and amortization increased 17.4%
($458,000) due to increased capital expenditures.
Interest expense declined 28.1% ($210,000) due to the reason
noted above.
Historically, the Company has experienced operating losses
during the first quarter while subsequent quarters have
improved over the first quarter's operating results. This
historical trend of first quarter operating losses has not
occurred in the past three years due to mild weather and a
strong construction market in the area served by the
construction materials segment. The historical trend is
expected to resume at some point in time as sales of
construction materials are generally higher in the second
through fourth quarters. Sales and gross margins in the
heating and air-conditioning segment, affected by weather and
a changing product mix, have not produced a consistent pattern
in recent years.
Year 2000 Compliance
The Year 2000 issue relates to the way computer hardware and
software define calendar dates; many use only two digits to
represent the year which could cause failures or
miscalculations. In addition, many systems and equipment that
are not typically thought of as computer-related (referred
to as non-IT) contain imbedded hardware or software that may
include a time element. The Year 2000 issue can arise at any
point in the Company's supply, manufacturing, processing,
distribution and financial chains. As a result, the Company
is at risk of disruptions to its business operations from
possible miscalculations or system failures occurring not only
in its own equipment and software, but those occurring in any
business or governmental entity that the Company relies on for
goods or services.
The Company has completed a study, with the assistance of
external consultants, to evaluate the Company's current
internal information and financial systems. The Company
concluded that the majority of the existing systems were not
Year 2000 compliant. We have therefore undertaken to
implement a Year 2000 compliant enterprise resource planning
(ERP) system to replace all non-compliant systems as well as
to modernize and integrate all of the Company's systems. The
majority of the hardware utilized by the Company, including
all that may be Year 2000 non-compliant, is also being
replaced. Work on the project began in the second quarter of
1998 and is expected to be completed during the second quarter
of 1999. The cost of the entire project is currently
estimated at $3,000,000 including hardware, software,
consulting fees and other out-of-pocket expenses.
Approximately $1,300,000 has been incurred to date. Funding
will be furnished by a lease of approximately $1,500,000 with
the balance provided by operating cash flow. The cost of the
project is not expected to have a significant negative impact
on the Company's future financial results.
A review has been undertaken, or is in process, to assess and
correct Year 2000 issues affecting both our products and the
non-IT systems and equipment used in our businesses. At the
present time, the Company has not identified any products
which would be Year 2000 non-compliant. One phone system has
been identified as Year 2000 non-compliant and a resolution is
being pursued.
8
<PAGE>
We rely on third party suppliers for raw materials, water,
utilities, transportation and other key services.
Interruption to any of their operations due to Year 2000
issues could affect the operations of our Company. We have
initiated efforts to ascertain the level of preparedness of
this group. We have found some of these entities less willing
to provide information concerning their state of readiness.
Alternative sources of raw materials and certain other
services have been identified, where possible, to help
mitigate any impact due to disruptions at any of our key
suppliers. While we believe that the steps we have taken
should reduce the adverse effect on our Company of any such
disruptions, the interdependent nature of the Company and its
suppliers, service providers, utilities and governmental
agencies is such that a disruption at one or more suppliers
could have material adverse consequences.
We are also dependent upon our customers for sales and cash
flow. Year 2000 interruptions in our customers' operations
could result in reduced sales, increased inventory or
receivable levels and cash flow reductions. While these
events are possible, we believe our customer base is broad
enough to minimize the affects to our Company of system
disruptions at some customers' operations. We are, however,
taking steps to contact and monitor the status of our larger
customers as a means of determining risks and alternatives.
At this time, we have not learned of any potential exposures
from external, non-compliant third party suppliers or
customers.
PART II Other Information -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27: Financial data schedule
(b) Registrant filed no reports on Form 8-K during the
quarter ended October 3, 1998.
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 9, 1998 By: /S/ Joseph J. Sum
Joseph J. Sum, Vice President
and Chief Financial Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-END> OCT-03-1998
<CASH> 2,877
<SECURITIES> 0
<RECEIVABLES> 16,705<F1>
<ALLOWANCES> 0
<INVENTORY> 13,140
<CURRENT-ASSETS> 35,312
<PP&E> 21,175<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 59,360
<CURRENT-LIABILITIES> 16,113
<BONDS> 0
0
0
<COMMON> 663
<OTHER-SE> 34,453
<TOTAL-LIABILITY-AND-EQUITY> 59,360
<SALES> 80,810
<TOTAL-REVENUES> 80,810
<CGS> 61,088<F3>
<TOTAL-COSTS> 75,208
<OTHER-EXPENSES> (315)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 538
<INCOME-PRETAX> 5,379
<INCOME-TAX> 1,883
<INCOME-CONTINUING> 3,496
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,496
<EPS-PRIMARY> 3.26
<EPS-DILUTED> 3.18
<FN>
<F1>Net of allowance for doubtful accounts
<F2>Net of accumulated depreciation and depletion
<F3>Exclusive of depreciation, depletion and amortization
</FN>
</TABLE>
