UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the quarterly period ended April 1, 2017

OR

For the transition period from             to             

Commission File number 1-3834

CONTINENTAL MATERIALS CORPORATION

(Exact name of registrant as specified in its charter)

(312) 541-7200

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act).  Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.25 par value, shares outstanding at May 10, 2017: 1,682,167.

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

APRIL 1, 2017 AND DECEMBER 31, 2016

(000’s omitted except share data)

See notes to condensed consolidated financial statements.

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED APRIL 1, 2017 AND APRIL 2, 2016

(Unaudited)

(000’s omitted except per-share amounts)

See notes to condensed consolidated financial statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED APRIL 1, 2017 AND APRIL 2, 2016

(Unaudited)

(000’s omitted)

See notes to condensed consolidated financial statements

CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED APRIL 1, 2017

(Unaudited)

1.    Basis of Presentation:

The unaudited interim condensed consolidated financial statements included herein are prepared pursuant to the Securities and Exchange Commission (the “Commission”) rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The condensed consolidated balance sheet of Continental Materials Corporation (the “Company”) as of December 31, 2016 has been derived from the audited consolidated balance sheet of the Company as of that date. The interim condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K. In the opinion of management, the condensed consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods and to ensure the financial statements are not misleading. Certain reclassifications have been made to the 2016 consolidated financial statements to conform to the 2017 presentation. The reclassifications had no effect on the consolidated results of operations, the net decrease in cash or the total assets, liabilities or shareholders’ equity of the Company.

2.    Income taxes are accounted for under the asset and liability method that requires deferred income taxes to reflect the future tax consequences attributable to differences between the tax and financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized are based on the tax rates in effect in the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, based on available positive and negative evidence, it is “more likely than not” (greater than a 50% likelihood) that some or all of the net deferred tax assets will not be realized.

The Company has established a valuation reserve related to the carry-forward of all charitable contributions deductions arising from prior years as well as for a portion of the California Enterprise Zone credit not expected to be utilized prior to expiration. For Federal tax purposes, net operating losses can be carried forward for a period of 20 years while alternative minimum tax credits can be carried forward indefinitely. For state tax purposes, net operating losses can be carried forward for periods ranging from 5 to 20 years for the states that the Company is required to file in. California Enterprise Zone credits can be used through 2023 while Colorado credits can be carried forward for 7 years.

The Company’s income tax returns are subject to audit by the Internal Revenue Service (the “IRS”) and state tax authorities. The amounts recorded for income taxes reflect the Company’s tax positions based on research and interpretations of complex laws and regulations. The Company accrues liabilities related to uncertain tax positions taken or expected to be taken in its tax returns.

3.    Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheet:

Cash and Cash Equivalents: The carrying amount approximates fair value and was valued as Level 1.

Revolving Bank Loan Payable: Fair value is estimated based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of the Revolving Bank Loan Payable represents a reasonable estimate of the corresponding fair value as the Company’s debt is held at variable interest rates and was valued as Level 2.

There were no transfers between fair value measurement levels of any financial instruments in the current quarter.

4.    In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new revenue standard creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. Subsequently, the FASB has issued various ASUs to provide further clarification around certain aspects of ASC 606. This standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and the Company will adopt the standard on January 1, 2018. While the Company has not completed its analysis of the impact of the provisions of this standard, assuming no change to the current terms of sales utilized by the Company, we do not expect a significant impact to the consolidated financial statements or disclosure.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new standard supersedes existing lease guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The standard will be effective for the Company in the first quarter of 2019 and will be adopted using a modified retrospective approach. While we anticipate the adoption of ASU 2016-02 may have a significant impact on our consolidated balance sheets, consolidated statements of operations and disclosures, we are unable to quantify the financial statement impact at this time.

There are no other significant prospective accounting pronouncements that are expected to have a material effect on the Company’s consolidated financial statements.

5.    Operating results for the first three months of 2017 are not necessarily indicative of performance for the entire year due to the seasonality of most of the Company’s products. Historically, sales of the Evaporative Cooling segment are higher in the first and second quarters, sales of the Concrete, Aggregates and Construction Supplies (CACS) segment are higher in the second and third quarters and sales of furnaces in the Heating and Cooling segment are higher in the third and fourth quarters. Sales of the Door segment are generally more evenly spread throughout the year.

6.    There is no difference in the calculation of basic and diluted earnings per share (EPS) for the three-month periods ended April 1, 2017 and April 2, 2016 as the Company does not have any dilutive instruments.

7.    The Company operates primarily in two industry groups, Heating, Ventilation and Air Conditioning (HVAC) and Construction Products. The Company has identified two reportable segments within each of the industry groups: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the CACS segment and the Door segment in the Construction Products industry group.

The Heating and Cooling segment primarily produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co. (WFC) of Colton, California. The Evaporative Cooling segment primarily produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona. Sales of these two segments are nationwide, but are concentrated in the southwestern United States. Concrete, aggregates and construction supplies are offered from numerous locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned

subsidiaries Castle Concrete Company and Transit Mix Concrete Co., of Colorado Springs and Transit Mix of Pueblo, Inc. of Pueblo, Colorado (the three companies collectively are referred to as TMC). The Door segment sells hollow metal and wood doors, door frames and related hardware, lavatory fixtures and electronic access and security systems from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI), which operates out of facilities in Pueblo and Colorado Springs, Colorado. Sales of these two segments are highly concentrated in the Southern Front Range of Colorado although door sales are also made throughout the United States.

In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.

The Company evaluates the performance of its segments and allocates resources to them based on a number of criteria including operating income, return on investment and other strategic objectives. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest, other income or loss or income taxes.

The following table presents information about reported segments for the three-month periods ended April 1, 2017 and April 2, 2016 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):

There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the last annual report.

8.    On September 15, 2016 a Partial Summary Judgment Order was issued regarding the Company’s previously disclosed litigation, Continental Materials Corporation v. Valco, Inc., Civil Action No. 2014-cv-2510, filed in the United States District Court for the District of Colorado. The suit regards a sand and gravel lease between the

Company and Valco, Inc. (“Valco”) that calls for the payment of royalties over the life of the lease on an agreed 50,000,000 tons of sand and gravel reserves. In the suit the Company sought, among other things, to reform the sand and gravel lease in regard to the agreed amount of sand and gravel reserves and to recover approximately $1,282,000 of royalty overpayments included in other long-term assets. The Partial Summary Judgment Order resolved many of the Company’s claims in Valco’s favor, but the Company’s claim for the return of royalty overpayments made during the statutorily allowed period is still pending. During the third quarter of 2016, the Company recorded a $632,000 write-down representing the portion of the royalty overpayment paid prior to the statutorily allowed period because of litigation risk attendant to recovering that amount. On September 30, 2016 Valco filed a motion seeking to add three counterclaims alleging damages in excess of $5,900,000. The Company opposed Valco’s motion and on December 9, 2016, Valco withdrew its motion to add counterclaims. The Company has asserted partial failure of consideration as a defense to Valco’s counterclaims for unpaid royalties because the consideration for the promise to pay royalties was the 50,000,000 tons of sand and gravel reserves that do not exist. The Company sought certification of the Partial Summary Judgment Order because it and its legal counsel believe the court improperly resolved factual issues in its Partial Summary Judgment Order that should have been decided by a jury. The Company and its legal counsel believe there is a likelihood that some, or all, of the issues resolved by the Partial Summary Judgment Order may be reversed on appeal and remanded for trial by jury although there can be no assurance that an appeal will result in reversal. The Company paid royalties on approximately 17,700,000 tons, including the overpayments, of the 50,000,000 tons of sand and gravel reserves through the end of the third quarter of 2014. The impact of these proceedings could have a material financial effect on the Company; however, the Company does not believe that there is a reasonable basis for estimating the financial impact, if any, of the final outcome of these proceedings and accordingly no accrual or reserve has been recorded in compliance with accounting principles generally accepted in the United States of America. On February 23, 2017, the Partial Summary Judgment Order was certified for immediate appeal, and all other claims, counterclaims and defenses were stayed pending the resolution of that appeal. The Company filed a notice of appeal on March 24, 2017. The appeal is currently pending.

9.  The Company issued a total of 12,000 shares to the eight eligible board members effective March 8, 2017 as full payment for their 2017 retainer fee. As of April 2, 2016 the Company had not yet issued shares to the eight eligible board members as full payment for their 2016 retainer fee. All shares were issued under the 2010 Non-Employee Directors Stock Plan.

10.  The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective November 18, 2011. The Company has negotiated the Eighth Amendment to Credit Agreement which, among other things, extends the maturity date from May 1, 2018 to May 1, 2020. The Company is in the process of completing the internal documentation necessary to execute the Amendment. The Company had previously entered into seven separate amendments to the Credit Agreement. Cumulatively, the amendments were entered into by the Company to, among other things, (i) modify certain of the financial covenants, (ii) adjust the amount of the Revolving Commitment, (iii) terminate the Term Loan Commitment upon the repayment in full of the outstanding principal balance (and accrued interest thereon) of the Term Loan, (iv) modify the Borrowing Base calculation to provide for borrowing availability in respect of new Capital Expenditures, (v) decrease the interest rates on the Revolving Loans, (vi) extend the maturity date and (vii) decrease the Letter of Credit fee rate. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Credit Agreement bear interest based on a London Interbank Offered Rate (LIBOR) or prime rate based option.

The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period.

The Credit Agreement as amended provides for the following:

Definitions under the Credit Agreement as amended are as follows:

Outstanding funded revolving debt was $3,200,000 as of April 1, 2017 compared to $2,000,000 as of December 31, 2016. The highest balance outstanding during the first three months of 2017 and 2016 was $3,650,000 and $6,500,000, respectively. Average outstanding funded debt was $1,895,000 and $4,830,000 for the first three months of 2017 and 2016, respectively. At April 1, 2017, the Company had outstanding letters of credit totaling $5,415,000. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the available borrowing capacity exceeded the cash needs of the Company and this situation is expected to continue for the foreseeable future.

The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including planned capital expenditures, for the next twelve months except for the expenditures related to the acquisition of the necessary equipment needed to begin mining an aggregates property near Colorado Springs should TMC succeed in obtaining the required mining permits from the State of Colorado and El Paso County. As of April 1, 2017 the Company had invested and capitalized approximately $3,100,000 of deferred development expenditures related to this aggregates property. The Company expects to arrange for term or mortgage financing to fund the acquisition of the necessary equipment needed to begin mining the property should the permits be granted. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.

11.  The Company is involved in litigation matters related to its business, principally product liability matters related to the gas-fired heating products and fan coil products in the Heating and Cooling segment. In the Company’s opinion, none of these proceedings, when concluded, will have a material adverse effect on the Company’s consolidated results of operations or financial condition as the Company has established adequate accruals for matters that are probable and estimable. The Company does not accrue estimated future legal costs related to the defense of theses matters but rather expenses legal costs as incurred. Additionally, see Note 8 for discussion of litigation regarding the Pueblo sand and gravel lease.

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

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help investors understand the Company’s results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Company Overview

For an overview of the Company’s operations and operating structure, see Note 7 to the condensed consolidated financial statements contained in this Quarterly Report.

Liquidity and Capital Resources

Sales of the Company’s HVAC products are seasonal except for fan coils. Sales of furnaces, heaters and evaporative coolers are sensitive to weather conditions particularly during their respective peak selling seasons. Fan coil sales are, to a significant extent, dependent on commercial construction, particularly of hotels. Revenues in the CACS segment are primarily dependent on the level of construction activity along the Southern Front Range in Colorado. Sales for the Door segment are not as seasonal nor are they much affected by weather conditions. Historically, the Company has experienced operating losses during the first quarter except when the weather is mild and demand strong along the Southern Front Range. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in southern Colorado and the seasonal sales of the Evaporative Cooling segment. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. As expected, the Company reported an operating loss for the first quarter of 2017. For the first quarter of 2016 the Company reported an operating profit primarily due to the CACS segment which benefited from favorable weather and substantially higher fan coil sales.

The Company typically experiences operating cash flow deficits during the first half of the year reflecting operating results, the use of sales dating programs (extended payment terms) related to the Evaporative Cooling segment and payments of the prior year’s accrued incentive bonuses and Company profit-sharing contributions, if any. As a result, the Company’s borrowings against its revolving credit facility tend to peak during the second quarter and then decline over the remainder of the year.

Cash used by operations was $576,000 during the first three months of 2017 compared to $1,436 provided during the first three months of 2016. The current year use of cash is attributable to operating results combined with changes in working capital items; primarily increases in inventory levels partially offset by decreases in receivables. The prior year provision of cash was attributable to improved operating results combined with changes in working capital items.

During the three months ended April 1, 2017, investing activities used $630,000 of cash compared to $870,000 of cash used in the prior year’s period. Capital expenditures during the first three months of 2017 were $630,000 compared to $1,082,000 during the first three months of 2016. Lower capital spending in the CACS segment was the primary reason for this decrease. Additionally, the first three months of 2016 included $212,000 of cash proceeds from the sale of equipment compared to none in the first three months of 2017.

Financing activities during the first three months of 2017 provided $1,200,000 as borrowings were used to partially finance the increase in working capital. During the first three months of 2016 financing activities used $700,000 as available cash was used to pay down the revolving bank loan. See also the discussion of the Revolving Credit and Term Loan Agreement below.

Revolving Credit and Term Loan Agreement

As discussed in Note 10 to the condensed consolidated financial statements contained in this Quarterly Report, the Company maintains a Credit Agreement, which, as amended, provides for a Revolving Commitment of $20,000,000. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Revolving Commitment are limited to (a) 80% of eligible accounts receivable, (b) the lesser of 50% of eligible inventories and $8,500,000 plus (c) 80% of new Capital Expenditures not to exceed $5,500,000 in the aggregate with respect to each of Fiscal Year 2016 and 2017. Borrowings under the Credit Agreement bear interest based on a LIBOR or prime rate based option.

The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period. The Credit Agreement has a maturity date of May 1, 2020.

The Company’s outstanding borrowings against the revolving credit facility were $3,200,000 at April 1, 2017. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the entire revolving credit facility was available to the Company. This situation is expected to continue for the foreseeable future.

As of April 1, 2017 the Company was in compliance with all covenants in the Credit Agreement and expects to be in compliance with all loan covenants for the remaining term of the Credit Agreement. The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including planned capital expenditures, for the next twelve months except for the expenditures related to the acquisition of the necessary equipment needed to begin mining an aggregates property near Colorado Springs should Transit Mix succeed in obtaining the required mining permits from the State of Colorado and El Paso County. The Company expects to arrange for term or mortgage financing to fund the acquisition of the necessary equipment needed to begin mining the property should the permits be granted. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.

Results of Operations - Comparison of Quarter Ended April 1, 2017 to the Quarter Ended April 2, 2016

(In the ensuing discussions of the results of operations the Company defines the term gross profit as the amount determined by deducting cost of sales before depreciation, depletion and amortization from sales. The gross profit ratio is gross profit divided by sales.)

Consolidated sales in the first quarter of 2017 were $34,103,000, a decrease of $125,000 or less than 1% compared to the first quarter of 2016. The CACS segment reported current quarter sales $1,284,000 higher than the first quarter of 2016 while the Door segment was relatively constant with an increase of less than 1%. These increased sales were more than offset by lower sales in the Heating and Cooling segment, down $714,000 (6.4%), and the Cooling segment, down $711,000 (10.1%) in the first quarter of 2017 compared to the prior year first quarter.

The consolidated gross profit ratio in the first quarter of 2017 was 17.7% compared to 20.5% in the same period of 2016. All segments, with exception of the Door segment, reported declines in gross profit margin in the first quarter of 2017 compared to the prior year first quarter. The Door segment gross profit percentage was fairly steady, increasing 0.4%, in the first quarter of the current year compared to the first quarter of the prior year. The decreases in gross profit for the other three segments are addressed in the discussion of segments below. 

Consolidated selling and administrative expenses were $288,000 higher than the comparable prior year quarter.

As a percentage of consolidated sales, selling and administrative expenses increased to 17.6% in the first quarter of 2017 from 16.7% in the first quarter of 2016.

Consolidated depreciation and amortization charges were virtually identical at $639,000 in the first quarter of 2017 compared to $638,000 in the first quarter of 2016.

The consolidated operating loss in the first quarter of 2017 was $611,000 compared to consolidated operating income of $852,000 in the first quarter of 2016. All segments reported declines in operating results and are addressed in the discussion of segments below.

Interest income for the first quarter 2017 was $18,000 compared to $15,000 for the first quarter of 2016. Interest expense in the first quarter of 2017 was $66,000 compared to $110,000 in the first quarter of 2016. Interest expense includes interest on outstanding funded debt, finance charges on outstanding letters of credit, the fee on the unused revolving credit line and other recurring fees charged by the lending bank. The decline from the prior year quarter is attributable to lower average borrowings and the capitalization of $24,000 of interest associated with the deferred development expenditures discussed in Note 10. The weighted average interest rate on outstanding funded debt in the first quarter of 2017, including the fee on the unused line of credit and other recurring bank charges but excluding finance charges on letters of credit, was approximately 8.1% compared to 4.9% in the first quarter of 2016. The higher interest rate was due to the lower average outstanding funded debt of $1,895,000 during the first quarter of 2017 compared to $4,830,000 in the first quarter of 2016. At the end of the first quarter of 2017 the outstanding funded debt was $3,200,000 compared to $5,500,000 at the end of the first quarter of 2016.

The Company’s effective income tax rate reflects federal and state statutory income tax rates adjusted for non-deductible expenses, tax credits and other tax items. The estimated effective income tax rate in the first quarter of 2017 was a benefit of 34.0% compared to a provision of 34.0% for the first quarter of 2016.

The Company operates four businesses in two industry groups. The businesses are generally seasonal, weather sensitive and subject to cyclical factors. The following addresses various aspects of operating performance focusing on the reportable segments within each of the two industry groups.

Construction Products

The table below presents a summary of operating information for the two reportable segments within the Construction Products industry group for the quarters ended April 1, 2017 and April 2, 2016 (dollar amounts in thousands):

Concrete, Aggregates and Construction Supplies Segment

The product offerings of the CACS segment consist of ready-mix concrete, aggregates and construction supplies. Ready-mix concrete and aggregates are produced at multiple locations in or near Colorado Springs and Pueblo, Colorado. Construction supplies encompass numerous products purchased from third party suppliers and sold to the construction trades, particularly concrete sub-contractors. During the three months ended April 1, 2017, concrete, aggregates and construction supplies accounted for approximately 74%, 20% and 6% of the sales of the CACS segment, respectively, including aggregates consumed internally in the production of concrete. In the first quarter of 2016, the sales mix between concrete, aggregates and construction supplies was 68%, 25% and 7%, respectively. Sales including aggregates consumed internally increased $1,316,000 (9.5%) from the first quarter of 2016 to the current year quarter. Sales to third parties increased by $1,284,000 (11.2%) between the same periods. The gross profit reported by the CACS segment declined to 7.8% in the first quarter of 2017 from 10.6% in the first quarter of the prior year. The decrease is primarily attributable to TMC’s aggregates operations as discussed below.

Ready-mix concrete sales, excluding flow fill material, increased 18.8% in the first quarter of 2017 versus the first quarter of 2016. Concrete volume, on the same basis, was 13.8% higher in the first quarter of 2017 compared to the prior year quarter. Average concrete prices for the first quarter of 2017 increased by approximately 4.3% over the comparable 2016 quarter largely due to a 3.9% increase in material costs. The market remains sharply competitive especially on large construction projects. Cement is the highest cost raw material used in the production of ready-mix concrete. Cement costs per yard increased by 10.6% in the first quarter of the current year compared to the same quarter of 2016. Higher cement costs, including delivery, were partially offset by lower fly ash, rock and other admixture costs. Batching cash costs per yard increased by 6.9% while delivery cash costs per yard increased 6.7% during the first quarter of the current year over the first quarter of the prior year. The increase in batching costs is attributable to higher equipment rental costs which was partially offset by lower repair and maintenance costs. The increase in delivery costs was mainly due to higher fuel and contract trucking costs.

The CACS segment also produces and sells sand, crushed limestone and gravel (collectively “aggregates”) from deposits in and around Colorado Springs. Sales volume (tons) of construction aggregates, including those used internally in the production of ready-mix concrete, decreased 29.0% in the first quarter of 2017 compared to the comparable 2016 quarter. Average selling prices, excluding freight, increased 23.8% due to the higher ratio of concrete sand to fill sand sales. Although the sand operation remained profitable in the first quarter of 2017, increased labor and repair and maintenance expenses reduced the related gross profit by 32.4% per ton in the first quarter of 2017 compared to the first quarter of 2016. This decline combined with the impact of mining challenges at two of the quarries and carrying costs related to the closed Pueblo quarry contributed to the $428,000 loss reported by the aggregates operations in the first quarter of 2017 compared to an $84,000 loss for the first quarter of 2016.

Sales of construction supplies decreased by $87,000 (9.5%) in the first quarter of 2017 compared to the prior year quarter. The lower sales combined with the fixed nature of many associated costs lead to a negative gross profit for the current year quarter compared to the $64,000 gross profit reported in the first quarter of 2016.

Depreciation and amortization charges decreased by $10,000 in the first quarter of 2017 compared to the first quarter of 2016.

Selling and administrative expenses were $30,000 lower in the first quarter of 2017 compared to the same period in 2016. Increased compensation related expenses were more than offset by reduced legal fees. Litigation fees related to the Pueblo aggregate lease were $176,000 during the first quarter of 2017 compared to $301,000 incurred during the comparable period of 2016. As a percentage of sales selling and administrative expenses decreased to 9.6% in the first quarter of 2017 compared to 10.9% in the first quarter of 2016. 

Results for the first quarter of 2016 include $183,000 of gains on the sale of excess equipment. There were no such sales in the first quarter of 2017.

The prices of two commodities, cement and diesel fuel, can have a significant effect on the results of operations of this segment. Management negotiates cement prices with producers who have production facilities in or near the concrete markets that the Company serves. Management may negotiate separate cement prices for large construction projects depending on the demand for and availability of cement from the local producers. The Company buys diesel fuel from local distributors and occasionally enters into a short term arrangement with a distributor whereby the price of diesel fuel is fixed for a period of up to six months. In the past year the Company has not hedged diesel fuel prices. Increases in the cost of these two commodities have a direct effect on the results of operations depending upon whether competitive conditions prevailing in the marketplace enable the company to adjust its selling prices to recover such increases.

Door Segment

The Door segment sells hollow metal doors, door frames and related hardware, wood doors, lavatory fixtures and electronic access and security systems. Nearly all of the Door segments sales are for commercial and institutional buildings such as schools and healthcare facilities. Approximately 65% to 70% of the sales of the Door segment are related to jobs obtained through a competitive bidding process. Bid prices may be higher or lower than bid prices on similar jobs in the prior year. The Door segment does not track unit sales of the various products through its accounting or management reporting systems. Management focuses on the level of the sales backlog, the trend in sales and the gross profit rate in managing the business.

Door sales in the first quarter of 2017 were $14,000 (0.4%) higher than in the first quarter of the previous year. Bidding prices remain competitive. The gross profit ratio in the first quarter of 2017 was 26.5%, up from 26.1% in the comparable quarter of 2016. The improvement in the gross profit ratio is principally due to better pricing and mix of products shipped during the first quarter of 2017.

Sales and administrative expenses were $29,000 higher in the first quarter of 2017 compared to the first quarter of 2016. As a percentage of sales, these expenses were 18.0% and 17.4% in the first quarters of 2017 and 2016, respectively.

The Door segment sales backlog at the end of the first quarter of 2017 was $5,797,000 compared to $5,853,000 at the end of the first quarter of 2016.

HVAC Products

The table below presents a summary of operating information for the two reportable segments within the HVAC products industry group for the quarters ended April 1, 2017 and April 2, 2016 (dollar amounts in thousands):

Heating and Cooling Segment

In the first quarter of 2017, approximately 68% of sales in the Heating and Cooling segment consisted of wall furnaces and heaters. Fan coils accounted for 30% of the segment’s sales and other products were about 2%. In the first quarter of 2016 these shares of total segment sales were 69%, 31% and less than 1%, respectively. Overall sales in the Heating and Cooling segment in the first quarter of 2017 decreased by $714,000 (6.4%) compared to the same period in 2016.

Sales of furnaces and heaters increased 11.3% in the three months ended April 1, 2017 compared to the three months ended April 2, 2016. Unit shipments of furnaces and heaters were 8.3% higher in the first quarter of 2017. Prior year first quarter shipments were lower than usual, something management attributed to warm weather in the first quarter of 2016, most notably in January. Average sales prices for furnaces and heaters were about 2.8% higher compared to a year ago as a result of changes in product mix. The gross profit from furnaces and heaters declined in the first quarter of 2017 largely due to the increased cost of steel.

Sales of fan coils during the first quarter of 2017 declined 31.6% from the comparable 2016 quarter. Sales of fan coils in the first quarter of 2016 were significantly higher than anticipated, but slowed over the remainder of the year. The fan coil sales backlog at April 1, 2017 was $4,441,000 compared to $3,188,000 at April 2, 2016.  Typically, approximately 90% of the sales of fan coils are custom-made systems for hotels and other commercial buildings. Fan coil jobs are obtained through a competitive bidding process. Since every bid job is a unique configuration of materials and parts, the Company does not track units of sales or production as such unit volume data would not be useful in managing the business. Management focuses on the contribution margin by job, the

current level of sales and the sales backlog in managing the fan coil business. Contribution margin is measured by deducting variable manufacturing costs and variable selling expenses from sales for a particular product line and is used as an internal measure of profitability for a product or product line. The fan coil contribution margin percentage in the first quarter of 2017 was 34.0%, up from 29.5% in the first quarter of 2016. Both quarters’ margins were considered to be acceptable performance levels.

The Heating and Cooling segment’s gross profit ratio for the first quarter of 2017 was 26.8% compared to 27.1% in the first quarter of 2016. The lower gross profit ratio is attributable primarily to the reduced gross profit margins of the furnace and heater lines discussed above.

Selling and administrative expenses in the first quarter of 2017 were $228,000 higher than the first quarter of the previous year.  The increase was attributable to increased compensation costs, legal fees and marketing related expenses. As a percentage of sales, selling and administrative expenses were 19.9% in the first quarter of 2017 and 16.6% in the first quarter of 2016.

The Heating and Cooling segment’s operating profit decreased $469,000 (45.4%) for the first quarter of 2017 compared to the first quarter of 2016. This is attributable to lower overall sales combined with higher material costs and increased selling and administrative expenses. 

Evaporative Cooling Segment

Sales of evaporative coolers declined $711,000 (10.1%) in the first quarter of 2017 compared to the first quarter of 2016.  Unit sales of evaporative coolers in the first quarter of 2017 were approximately 11.0% lower than in the first quarter of 2016. Average selling prices were up less than 1% between the first quarter of 2017 and the first quarter of 2016. The gross profit ratio in the first quarter of 2017 was 18.3% compared to 24.1% a year ago. The decline in gross profit ratio is attributable to higher material costs, notably steel, and increased labor costs.

Selling and administrative expenses were $13,000 (1.2%) lower in the first quarter of 2017 as higher compensation related costs were more than offset by decreased advertising expenses. As a percentage of sales, selling and administrative expenses increased to 17.5% in the current quarter of 2017 from 15.9% in the prior year quarter.

The Evaporative Cooler segment reported an operating loss of $57,000 for the first quarter of 2017 compared to operating income of $453,000 for the first quarter of 2016. Lower sales volume and higher material and labor costs contributed to the decline in operating results for the current period as selling and administrative costs remained relatively unchanged.

Both businesses in the HVAC group are sensitive to changes in prices for a number of different raw materials, commodities and purchased parts. Prices of steel and copper in particular can have a significant effect on the results of operations of this group. Neither company is currently a party to any hedging arrangements with regard to steel or copper.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The condensed consolidated financial statements contained in this Quarterly Report have been prepared in accordance with accounting principles generally accepted in the United States of America which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of April 1, 2017 and December 31, 2016 and affect the reported amounts of revenues and expenses for the periods reported. Actual results could differ from those estimates.

Information with respect to the Company’s critical accounting policies which the Company believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management, is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

OUTLOOK

Although the Company expects consolidated sales in 2017 to exceed the 2016 level, revenues in the CACS segment are dependent of the level of construction activity along the Front Range in Southern Colorado as well as the level of selling prices. Construction activity has exhibited modest and thus far sustained improvement during the past two years in the Colorado Springs market. Construction activity in the Pueblo market has shown some improvement in last year as well. Concrete pricing has also improved, but the pricing on most bid jobs remains sharply competitive. Further improvements in the CACS segment operating results will depend on a sustained improvement in the Colorado Springs and Pueblo construction markets and the ability to maintain or enhance ready-mix concrete prices especially in response to any increases in cement and/or fuel costs that may occur.

The Company’s HVAC Industry Group anticipates some increase in sales in 2017 primarily from higher fan coil sales. Fan coil sales, however, are dependent on continued construction spending in the lodging industry as well as the timing of projects. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not heavily reliant on new construction. Sales of these products are generally dependent on the overall strength of the economy, especially employment levels. Sales of furnaces, heaters and evaporative coolers are also significantly influenced by weather conditions, particularly during their respective selling seasons.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 4 to the condensed consolidated financial statements contained in this Quarterly Report for a discussion of recently issued accounting standards.

MATERIAL CHANGES TO CONTRACTUAL OBLIGATIONS

There were no material changes to contractual obligations that occurred during the quarter ended April 1, 2017.

FORWARD-LOOKING STATEMENTS

This Quarterly Report 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 Quarterly Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects,” “will,” “continue” 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 various factors including but not limited to: the amount of new construction, weather, interest rates, availability of raw materials and their related costs, economic conditions and competitive forces in the regions where the Company does business, changes in governmental regulations and policies and the ability of the Company to obtain credit on commercially reasonable terms. Changes in accounting pronouncements as well as the ultimate resolution of the Pueblo lease litigation could also alter projected results. Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. 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

The Company is a smaller reporting company as defined by Item 10(f) of Regulation S-K and, as such, is not required to provide information in response to this item.

Item 4.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, as amended (Exchange Act) as of April 1, 2017. The Chief Executive Officer and Chief Financial Officer, based on that evaluation, concluded that the Company’s disclosure controls and procedures are effective and were reasonably designed to ensure that all material information relating to the Company (including its subsidiaries) required to be disclosed in the reports filed and submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission.

(b)Changes in Internal Control Over Financial Reporting.

During the quarter ended April 1, 2017, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Items 1A, 3 and 5 are not applicable or the Company has nothing to report thereunder; therefore, the items have been omitted and no reference is required in this Quarterly Report.

Item 1.Legal Proceedings

On September 15, 2016 a Partial Summary Judgment Order was issued regarding the Company’s previously disclosed litigation, Continental Materials Corporation v. Valco, Inc., Civil Action No. 2014-cv-2510, filed in the United States District Court for the District of Colorado. The suit regards a sand and gravel lease between the Company and Valco, Inc. (“Valco”) that calls for the payment of royalties over the life of the lease on an agreed 50,000,000 tons of sand and gravel reserves. In the suit the Company sought, among other things, to reform the sand and gravel lease in regard to the agreed amount of sand and gravel reserves and to recover approximately $1,282,000 of royalty overpayments. The Partial Summary Judgment Order resolved many of the Company’s claims in Valco’s favor, but the Company’s claim for the return of royalty overpayments made during the statutorily allowed period is still pending. On September 30, 2016 Valco filed a motion seeking to add three counterclaims alleging damages in excess of $5,900,000. The Company opposed Valco’s motion and on December 9, 2016, Valco withdrew its motion to add counterclaims. The Company has asserted partial failure of consideration as a defense to Valco’s counterclaims for unpaid royalties because the consideration for the promise to pay royalties was the 50,000,000 tons of sand and gravel reserves that do not exist. The Company sought certification of the Partial Summary Judgment Order because it and its legal counsel believe the court improperly resolved factual issues in its Partial Summary Judgment Order that should have been decided by a jury. The Company and its legal counsel believe there is a likelihood that some, or all, of the issues resolved by the Partial Summary Judgment Order may be reversed on appeal and remanded for trial by jury although there can be no assurance that an appeal will result in reversal. The Company paid royalties on approximately 17,700,000 tons, including the overpayments, of the 50,000,000 tons of sand and gravel reserves through the end of the third quarter of 2014. The impact of these proceedings could have a material financial effect on the Company; however, the Company does not believe that there is a reasonable basis for estimating the financial impact, if any, of the final outcome of these proceedings and accordingly no accrual or reserve has been recorded in compliance with accounting principles generally accepted in the United States of America. On February 23, 2017, the Partial Summary Judgment Order was certified for immediate appeal, and all other claims, counterclaims and defenses were stayed pending the resolution of that appeal. The Company filed a notice of appeal on March 24, 2017. The appeal is currently pending. See Note 2 for further discussion.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The Company reserved 150,000 treasury shares representing the maximum number allowed to be granted under the 2010 Non-Employee Directors Stock Plan (Plan) to non-employee directors in lieu of the base director retainer fee. The Company issued a total of 12,000 shares to the eight eligible board members effective March 8, 2017 as full payment for their 2017 retainer fee. In 2016 the Company issued shares to the eight eligible board members as full payment of their 2016 retainer fee during the second quarter. Transactions pursuant to the Plan are exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) of the Securities Act, as the shares authorized under the plan may only be issued to the Company’s directors and are not offered to the public. At April 1, 2017, a total of 54,000 shares remain eligible for issuance under the Plan.

Item 4.Mine Safety Disclosure

The Company’s aggregates mining operations, all of which are surface mines, are subject to regulation by the Federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (as amended, the “Mine Act”). MSHA inspects these operations on a regular basis and issues various citations and orders when it believes a violation of the Mine Act has occurred. Information concerning mine safety violations and other regulatory matters required to be disclosed by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this Quarterly Report.

Item 6.Exhibits

SIGNATURE

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