10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2019

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 of incorporation or organization)	(I.R.S. Employer Identification No.)
440 South LaSalle Street, Suite 3100, Chicago, Illinois	60605
(Address of principal executive offices)	(Zip Code)

(312) 541-7200

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	CUO	NYSE American

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 every Interactive Data File required to be submitted 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 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:

Large Accelerated Filer ☐	Accelerated Filer ☐
Non-Accelerated Filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

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 August 6, 2019: 1,712,165.

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 29, 2019 AND DECEMBER 29, 2018

(000’s omitted except share data)

	JUNE 29, 2019		DECEMBER 29,
	(Unaudited)		2018
ASSETS
Current assets:
Cash and cash equivalents	$	5,187	$	594
Receivables, net		18,510		15,321
Receivable for insured losses		887		874
Inventories
Finished goods		4,519		5,448
Work in process		1,600		1,365
Raw materials and supplies		6,636		7,993
Prepaid expenses		2,693		1,785
Refundable income taxes		109		494
Other current assets		5,151		2,500
Other current assets held for sale		—		10,968
Total current assets		45,292		47,342
Property, plant and equipment		13,059		10,431
Right-of use assets		5,487		—
Intangible assets		13,465		—
Goodwill		5,551		1,000
Deferred income taxes		2,065		3,414
Other long-term assets		693		448
Other long-term assets held for sale		—		13,068
	$	85,612	$	75,703
LIABILITIES
Current liabilities:
Revolving bank loan payable	$	300	$	2,200
Accounts payable and accrued expenses		13,373		13,316
Short-term lease liabilities		1,114		—
Liability for unpaid claims covered by insurance		887		874
Other current liabilities held for sale		—		3,800
Total current liabilities		15,674		20,190
Long-term lease liabilities		4,449		—
Other long-term liabilities		7,884		6,445
Other long-term liabilities held for sale		—		292
Commitments and contingencies (Note 6)
SHAREHOLDERS’ EQUITY
Common shares, $.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares		643		643
Capital in excess of par value		2,013		1,930
Retained earnings		69,617		61,131
Treasury shares, 860,529 and 876,409 at cost		(14,668)		(14,928)
		57,605		48,776
	$	85,612	$	75,703

See notes to condensed consolidated financial statements.

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED JUNE 29, 2019 AND JUNE 30, 2018

(Unaudited)

(000’s omitted except per-share amounts)

	JUNE 29,		JUNE 30,
	2019		2018
Net sales	$	25,257	$	25,557
Costs and expenses:
Cost of sales (exclusive of depreciation, depletion and amortization)		21,535		19,583
Depreciation, depletion and amortization		254		405
Selling and administrative		9,096		4,649
Charges related to write off of deferred development		—		(94)
Loss on legal settlement		219		—
Gain on disposition of property and equipment		(428)		—
		30,676		24,543
Operating (loss) income		(5,419)		1,014
Interest income		161		21
Interest expense		(102)		(167)
Other income, net		45		22
(Loss) income from continuing operations before income taxes		(5,315)		890
(Benefit) provision for income taxes		(1,397)		223
(Loss) income from continuing operations		(3,918)		667
(Loss) income from discontinued operations net of income tax benefit of $307 and provision of $482		(918)		1,446
Net (loss) income		(4,836)		2,113
Retained earnings, beginning of period		74,453		60,794
Retained earnings, end of period	$	69,617	$	62,907
Basic and diluted income (loss) per share:
(Loss) income from continuing operations		(2.28)		0.39
(Loss) income from discontinued operations		(0.54)		0.85
Basic and diluted (loss) income per share	$	(2.82)	$	1.24
Average shares outstanding		1,715		1,698

See notes to condensed consolidated financial statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE SIX MONTHS ENDED JUNE 29, 2019 AND JUNE 30, 2018

(Unaudited)

(000’s omitted except per-share amounts)

	JUNE 29,		JUNE 30,
	2019		2018
Net sales	$	47,786	$	48,967
Costs and expenses:
Cost of sales (exclusive of depreciation, depletion and amortization)		39,382		37,988
Depreciation, depletion and amortization		772		810
Selling and administrative		15,889		9,839
Charges related to write off of deferred development		—		6,840
Gain on legal settlement		(14,781)		—
Gain on disposition of property and equipment		(433)		—
		40,829		55,477
Operating income (loss)		6,957		(6,510)
Interest income		310		45
Interest expense		(174)		(275)
Other income, net		58		41
Income (loss) from continuing operations before income taxes		7,151		(6,699)
Provision (benefit) for income taxes		1,969		(1,675)
Net income (loss) from continuing operations		5,182		(5,024)
Income from discontinued operations net of income tax provision of $1,255 and $315		3,304		944
Net income (loss)		8,486		(4,080)
Retained earnings, beginning of period		61,131		66,987
Retained earnings, end of period	$	69,617	$	62,907
Basic and diluted income (loss) per share:
Income (loss) from continuing operations	$	3.03	$	(2.96)
Income from discontinued operations		1.93		0.56
Basic and diluted income (loss) per share	$	4.96	$	(2.40)
Average shares outstanding		1,712		1,697

See notes to condensed consolidated financial statements

4

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 29, 2019 AND JUNE 30, 2018

(Unaudited)

(000’s omitted)

	JUNE 29,		JUNE 30,
	2019		2018
Net cash provided (used) by continuing operations	$	5,913	$	(2,977)
Net cash provided (used) by discontinued operations		294		(1,025)
Net cash provided (used) by operating activities		6,207		(4,002)
Investing activities:
Capital expenditures by continuing operations		(448)		(734)
Capital expenditures by discontinued operations		(172)		(1,414)
Payments for acquisitions		(23,213)		—
Cash proceeds from sale of discontinued operations		23,679		—
Cash proceeds from sale of continuing operations property and equipment		561		—
Cash proceeds from sale of discontinued operations property and equipment		—		1,400
Net cash provided (used) in investing activities		407		(748)
Financing activities:
Borrowings on the revolving bank loan		8,750		20,500
Repayments on the revolving bank loan		(10,650)		(16,000)
Repayments of finance lease obligations		(23)		—
Payments to acquire treasury stock		(98)		—
Net cash (used) provided by financing activities		(2,021)		4,500
Net increase (decrease) in cash and cash equivalents		4,593		(250)
Cash and cash equivalents:
Beginning of period		594		507
End of period	$	5,187	$	257
Supplemental disclosures of cash flow items:
Cash paid during the year for:
Interest, net	$	179	$	259
Contingent consideration from acquisitions		1,787		—
Income taxes, net		1,490		50

See notes to condensed consolidated financial statements

5

CONTINENTAL MATERIALS CORPORATION

CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(000’s omitted, except per share data)

Six Months Ended June 29, 2019
		Common		Capital
	Common	shares		in excess		Retained		Treasury	Treasury
	shares	amount		of par		earnings		shares	shares cost		Total
Balance at December 29, 2018	2,574,264	$	643	$	1,930	$	61,131	876,409	$	(14,928)	$	48,776
Net income	—		—		—		13,322	—		—		13,322
Compensation of Board of Directors by issuance  of treasury shares	—		—		83		—	(21,000)		358		441
Purchase of treasury shares	—		—		—		—	3,368		(69)		(69)
Balance at March 30, 2019	2,574,264	$	643	$	2,013	$	74,453	858,777	$	(14,639)	$	62,470
Net loss	—		—		—		(4,836)	—		—		(4,836)
Purchase of treasury shares	—		—		—		—	1,752		(29)		(29)
Balance at June 29, 2019	2,574,264	$	643	$	2,013	$	69,617	860,529	$	(14,668)	$	57,605

Six Months Ended June 30, 2018
		Common		Capital
	Common	shares		in excess		Retained		Treasury	Treasury
	shares	amount		of par		earnings		shares	shares cost		Total
Balance at December 30, 2017	2,574,264	$	643	$	1,887	$	66,987	892,097	$	(15,195)	$	54,322
Net loss	—		—		—		(6,193)			—		(6,193)
Compensation of Board of Directors by issuance of treasury shares	—		—		43		—	(16,000)		271		314
Purchase of treasury shares	—		—		—		—	112		—		—
Balance at March 31, 2018	2,574,264	$	643	$	1,930	$	60,794	876,209	$	(14,924)	$	48,443
Net income	—		—		—		2,113			—		2,113
Purchase of treasury shares	—		—		—		—	—		—		—
Balance at June 30, 2018	2,574,264	$	643	$	1,930	$	62,907	876,209	$	(14,924)	$	50,556

See notes to condensed consolidated financial statements

6

CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED JUNE 29, 2019

(Unaudited)

1.    Basis of Presentation:

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 29, 2018 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 2018 consolidated financial statements to conform to the 2019 presentation. The reclassifications had no effect on the consolidated results of operations, the net change in cash or the total assets, liabilities or shareholders’ equity of the Company. During the quarter ended March 30, 2019 the Company sold substantially all of the assets of Transit Mix Concrete Company’s ready-mix business and Daniels sand operation. The assets and liabilities related to these operations are presented as held for sale in accordance with generally accepted accounting principles. See Note 15. Accordingly, the operations of these businesses are presented as discontinued operations for all periods presented.

Revenue Recognition:

Effective December 31, 2017, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments, which creates a single source of revenue guidance for all companies in all industries and is more principles-based than previous revenue guidance. The Company adopted the standard using the modified retrospective approach. The adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on its financial position, consolidated results of operations or consolidated cash flows. As such, prior period financial statements were not recast and there was no cumulative effect adjustment upon adoption.

Sales are recognized when control of the promised goods or services transfers to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s payment terms generally range between 30 to 90 days after invoice is billed to the customer. Sales are reported net of sales tax. Shipping and other transportation costs paid by the Company and rebilled to the buyer are recorded gross (as both sales and cost of sales). The Company generally recognizes revenue from the sale of products at the time the products are shipped.

While the return of products is generally not allowed, some large customers have been granted the right to return a certain amount at the end of the normal selling season for seasonal products. Sales returns and allowances are estimated based on current program terms and historical experience. Provisions for estimated returns, discounts, volume rebates and other price adjustments are provided for in the same period the related revenues are recognized and are netted against revenues.

The Company is responsible for warranties related to the manufacture of its HVAC products and estimates the future warranty claims based upon historical experience and management estimates. The Company reviews warranty and related claims activities and records provisions as necessary.

7

The Company performs installation services for certain projects within its Door segment. Management determined there are two performance obligations related to most of these contracts, the equipment and the installation services. The transaction price for these contracts is allocated to each performance obligation based on its stated stand-alone selling price. Revenue is recognized at a point in time as each performance obligation is completed. No maintenance or service contracts are offered by the Company.

See Note 7 for disaggregation of revenue by segment.

Leases

Effective December 30, 2018 (the beginning of fiscal 2019) the Company adopted ASU No. 2016-02, Leases (Topic 842), which superseded Topic 840, “Leases”. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components for asset categories, except office space, and to exclude short-term leases from its Consolidated Balance Sheet. For the office space lease category the election was made to report lease and non-lease components separately as the non-lease components are billed and paid separately and are not a fixed amount over the lease term. The implicit discount rate of leases is used to calculate present values when available. When an implicit discount rate is not readily available an incremental borrowing rate is used to calculate present values.

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 Tax Cuts and Jobs Act, enacted December 22, 2017, elimintated the corporate Alternative Minimum Tax (“AMT”) and allows for all existing credit carryforwards to be used to offset regular tax liability for tax years beginning after December 31, 2017. Additionally, for tax years 2018, 2019 and 2020, to the extent that the AMT credit carryover exceeds the regular tax liability, 50% of the excess AMT credit is refundable. Any remaining credits will be fully refundable in 2021. For state tax purposes, net operating losses can be carried forward for various periods 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 has established a valuation reserve related to a portion of the California Enterprise Zone credit not expected to be utilized prior to expiration.

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. The Company did not identify any such uncertain tax positions as of June 29, 2019 or December 29, 2018.

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:

Level 1	Quoted prices in active markets for identical assets or liabilities.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.

8

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 created a single source of revenue guidance for all companies in all industries and is more principles-based than prior revenue guidance. Subsequently, the FASB issued various ASUs to provide further clarification around certain aspects of ASC 606. This standard was adopted by the Company in the first quarter of fiscal 2018. See Note 1 for further discussion of the Company’s revenue recognition policies and practices.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), requiring that the statement of cash flows explain the change in total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This standard was adopted by the Company in the first quarter of fiscal 2018 and did not have a material impact to the consolidated statement of cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which superseded Leases (Topic 840). The new accounting standard was effective for the Company beginning on December 30, 2018 (the beginning of fiscal 2019) and required the recognition on the balance sheet of right-of-use assets (ROU) and lease liabilities for all long-term leases, including operating leases. The Company elected the optional transition method and adopted the new guidance on December 30, 2018 on a modified retrospective basis with no restatement of prior period amounts. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components for most asset categories and to exclude short-term leases from its Consolidated Balance Sheet. The Company’s adoption of the new standard resulted in the recognition of ROUs of $5,353,000 and liabilities of $5,427,000 related to operating leases, with no material cumulative effect adjustment to equity as of the date of adoption. In connection with the adoption of this guidance, as required, the Company reclassified deferred rent liabilities as reductions to lease assets. Adoption of the new standard did not have a material impact on the Company’s Consolidated Statements of Income or Cash Flows. See Note 13.

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

5.    Historically, operating results of the Company for the first half of the year were not necessarily indicative of performance for the entire year due to the seasonality of most of the Company’s products. Management believes the recent disposal and acquisition activity should help smooth the seasonality of the Company’s portfolio and make operating results more consistent.

6.    There is no difference in the calculation of basic and diluted earnings per share (“EPS”) for the three-month or six-month periods ended June 29, 2019 and June 30, 2018 as the Company does not have any dilutive instruments.

7.    The Company sold substantially all of the assets of its ready mix concrete and Daniels sand operations in the first quarter of 2019. See Note 15. During the second quarter of 2019, the Company acquired the assets of four operating businesses through three separate transactions. See Note 16 for additional discussion of the acquisitions. In conjunction with these transactions management reviewed its segment reporting structure and determined it was no

9

longer appropriate for the consolidated business going forward. The segment reporting was revised to align with the way the operating businesses are being managed and measured by management after the sale of TMC’s assets and the acquisitions discussed below. Prior year amounts have been reclassified to conform to current segment reporting structure.

The Company operates primarily in the Building Products industry group. Within this industry group the Company has identified three reportable segments: the HVAC segment, the Door segment and the Construction Materials segment.

The HVAC segment produces and sells a variety of products including wall furnaces, fan coils, evaporative coolers, boiler room equipment and dryer boxes and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (“WFC”) of Colton, California, Phoenix Manufacturing, Inc. (“PMI”) of Phoenix, Arizona, Global Flow Products /American HVAC (“GFP”) of Broken Arrow, Oklahoma, and Inovate Dryer Technologies (“Inovate”) of Jupiter, Florida. Sales of this segment are nationwide although WFC and PMI sales are more concentrated in the southwestern United States. The Door segment sells hollow metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems from the Company’s wholly-owned subsidiaries; McKinney Door and Hardware, Inc. (“MDHI”), Fastrac Building Supply (“Fastrac”) and Serenity Sliding Door Systems (“Serenity”), which operate out of facilities in Pueblo and Colorado Springs, Colorado. Sales of this segment are concentrated in Colorado, California and the Northwestern United States although door sales are also made throughout the United States. The Construction Materials segment offers aggregates and construction supplies from locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries Castle Aggregates and Castle Rebar & Supply, of Colorado Springs and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.) of Pueblo, Colorado (the three companies collectively are referred to as the Castle Companies).

In addition to the above reporting segments, an “Unallocated Corporate and Other” 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 classification also includes expenses related to a property held by the Company which are not material to the consolidated Company.

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.

10

The following table presents information about reported segments for the six-month and three-month periods ended June 29, 2019 and June 30, 2018 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):

					Construction		Unallocated		Held for
	HVAC		Doors		Materials		Corporate		Sale		Total
Six Months Ended June 29, 2019
Revenues from external customers	$	34,010	$	10,696	$	3,064	$	16	$	—	$	47,786
Depreciation, depletion and amortization		522		89		134		28		—		772
Operating income (loss)		(2,336)		993		13,183		(4,883)		—		6,957
Segment assets		45,984		13,783		11,407		14,438		—		85,612
Capital expenditures		193		108		132		15		—		448
Three Months ended June 29, 2019
Revenues from external customers	$	17,289	$	6,454	$	1,509	$	5	$	—	$	25,257
Depreciation, depletion and amortization		112		46		82		15		—		254
Operating income (loss)		(1,858)		614		(861)		(3,314)		—		(5,419)
Segment assets		45,984		13,783		11,407		14,438		—		85,612
Capital expenditures  (b)		149		89		132		15		—		385

					Construction		Unallocated		Held for
	HVAC		Doors		Materials		Corporate		Sale		Total
Six Months Ended June 30, 2018
Revenues from external customers	$	35,131	$	10,078	$	3,725	$	33	$	—	$	48,967
Depreciation, depletion and amortization		540		82		165		23		—		810
Operating income (loss)		594		1,356		(6,561)		(1,899)		—		(6,510)
Segment assets (a)		29,003		8,003		11,315		3,346		24,036		75,703
Capital expenditures		545		79		64		46		—		734
Three Months ended June 30, 2018
Revenues from external customers	$	17,622	$	5,782	$	2,124	$	29	$	—	$	25,557
Depreciation, depletion and amortization		271		42		80		12		—		405
Operating income (loss)		279		918		692		(875)		—		1,014
Segment assets (a)		29,003		8,003		11,315		3,346		24,036		75,703
Capital expenditures (b)		280		46		—		(5)		—		321

(a) Segment assets are as of December 29, 2018.

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

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 Fee Sand and Gravel Lease (“Lease”) between the Company as Lessee and Valco, Inc. (“Valco”) as Lessor 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 declaratory judgment and damages pursuant to the Lease on the grounds that Agreed Sand and Gravel Reserves of 50 million tons did not exist, and for other relief including return of approximately $1,470,000 in royalty payments made by the Company to Valco in excess of tonnage actually produced (“Prepayments”). Based on information obtained through discovery, the Company alleges, in addition to the abovementioned claims, nondisclosure or concealment by Valco of material facts concerning the existence of Agreed Sand and Gravel Reserves of 50 million tons, and breach of warranty concerning the same. Valco asserted counterclaims against the Company alleging breach of contract and seeking declaratory judgment regarding the Company’s refusal to make further royalty payments under the Lease. In the ordinary course of business and absent any breach by

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Valco, the Company is required to make quarterly royalty payments amounting to not less than $300,000 in a calendar year. In response to Valco’s breaches of contract, the Company stopped making royalty payments at the start of the 2015 calendar year.

The Company has asserted partial failure of consideration as an affirmative defense to Valco’s counterclaims to offset the alleged back-due quarterly royalty payments and the amount due on quarterly royalty payments in the future. The Partial Summary Judgment Order resolved many of the Company’s claims in Valco’s favor, but did not resolve Valco’s counterclaims or the Company’s affirmative defense. 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. 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. On February 23, 2017, the Partial Summary Judgment Order was certified for immediate appeal, and all other claims, counterclaims and affirmative defenses were stayed pending the resolution of that appeal. The Company filed a notice of appeal which was denied on July 2, 2018 for lack of jurisdiction and remanded to the trial court for further proceedings. Subsequently, the trial court vacated its September 15, 2016 Partial Summary Judgment Order and set the matter for trial by jury on all issues on January 28, 2019. The Company filed its Third Amended Complaint on November 16, 2018 in which it dropped its claim to recover royalty overpayments but continued to seek to recover $1,470,000 in Prepayments. The Company wrote off the remaining royalty overpayment of $627,000, previously reported as Other assets on the Consolidated Balance Sheet, as of December 29, 2018 due to filing of the Third Amended Complaint. At the trial preparation conference on January 18, 2019, the court informed the parties that the trial would be rescheduled due to an ongoing shutdown of the federal government. The jury trial on all issues was then rescheduled for May 13, 2019. On April 30, 2019 the court entered an order stating: “Due to a conflict in the Court’s calendar, the trial preparation conference set for May 3, 2019 and the May 13, 2019, trial date are vacated.” On May 30, 2019, the case was reassigned to a different District Court Judge. A trial preparation conference was held on August 8, 2019. The trial has been rescheduled to October 21, 2019.

The Company has paid royalties on approximately 17,700,000 tons, including the Prepayments, 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.

9.The Company issued a total of 21,000 shares to the seven eligible board members effective February 7, 2019 as full payment for their 2019 retainer fee. The Company issued a total of 16,000 shares to the eight eligible board members effective January 16, 2018 as full payment for their 2018 retainer fee. All shares were issued under the 2010 Non-Employee Directors Stock Plan and pursuant to private offering exemptions available under Regulation D or Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

10.  The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective November 18, 2011. The Company entered into the Tenth Amendment to Credit Agreement effective March 22, 2019. The Company had previously entered into nine 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 Company was not in complicance with the Fixed Coverage Charge Ratio as of June 29, 2019. The lender has provided a waiver of the covenant violation for the

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period ended June 29, 2019. The Company and the lender will work to address terms of the existing loan agreement prior to the end of the third quarter of 2019. 

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:

· The Revolving Commitment is $20,000,000.

· 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 qualifying Capital Expenditures not to exceed $5,500,000 in any fiscal year (excluding the aggregate amount of any Capital Expenditures financed with the proceeds of a Revolving Line Advance).

· The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.06 to 1.0 for each trailing twelve month period measured at the end of each Fiscal Quarter.

· The maturity date of the credit facility is May 1, 2020.

· Interest rate pricing for the revolving credit facility is currently LIBOR plus 2.25% or the prime rate.

Definitions under the Credit Agreement as amended are as follows:

· Fixed Charge Coverage Ratio is defined as, for any computation period, the ratio of (a) the sum for such period of (i) EBITDA, as defined, minus (ii) the sum of income taxes paid in cash, the amount expended related to the development of the mining property discussed in Note 12 and all unfinanced capital expenditures to (b) the sum for such period of interest expense related to the Credit Agreement.

· EBITDA means for any Computation Period (or another time period to the extent expressly provided for in the Credit Agreement) the sum of the following with respect to the Company and its Subsidiaries each as determined in accordance with GAAP: (a) Consolidated Net Income, plus (b) federal, state and other income taxes deducted in the determination of Consolidated Net Income, plus (c) Interest Expense deducted in the determination of Consolidated Net Income, plus (d) depreciation, depletion and amortization expense deducted in the determination of Consolidated Net Income, plus (e) non-recurring fees and costs paid by the Company in respect of the following: (i) fees and due diligence costs associated with the Company’s permitted acquisitions; (ii) legal fees and costs associated with the Valco trial preparation; (iii) executive recruitment fees for the Company’s new Chief Financial Officer and Chief Operating Officer; and (iv) additional fees and costs associated with the exploration of the Company’s Hitch Rack Ranch facility in Colorado Springs, Colorado to determine the suitability for mining and the pursuit of mining permits, plus (f) any other non-cash charges and any extraordinary charges deducted in the determination of Consolidated Net Income, including any asset impairment charges (including write downs of goodwill), minus (g) any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued operations included in the determination of Consolidated Net Income.

Outstanding funded revolving debt was $300,000 as of June 29, 2019 compared to $2,200,000 as of December 29, 2018. The highest balance outstanding during the first six months of 2019 and 2018 was $2,200,000 and $9,800,000, respectively. Average outstanding funded debt was $407,000 and $5,779,000 for the first six months of 2019 and 2018, respectively. At June 29, 2019, the Company had outstanding letters of credit totaling

$4,745,000. 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. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.

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11.  The Company is involved in litigation matters related to its business. 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 these matters but rather expenses legal costs as incurred. Additionally, see Note 8 for discussion of the Valco litigation.

12.During July 2015, TMC began development of a granite mining property south of Colorado Springs. Prior to beginning the development process, the Company deposited $2,500,000 in an escrow account per agreement with the land owner. This amount was previously included in Other long-term assets on the Consolidated Balance Sheet. The development costs included drilling the property to ascertain its suitability for mining, engineering studies and legal expenses related to the preparation of TMC’s application to obtain the required mining permits from the State of Colorado and El Paso County.

TMC made its initial application for a mining permit from the state of Colorado in 2016. TMC filed its second application to the state in November 2017, which was rejected on April 26, 2018. The Company wrote off all capitalized costs associated with the permit application in the first quarter of 2018, a total of $6,934,000.

As of June 29, 2019 and December 29, 2018 the $2,500,000 escrow balance mentioned above was included in Other current assets as the Company has begun the process to settle the account and recover the funds.

13.The Company adopted ASU No. 2016-02 Leases (Topic 842) on December 30, 2018 (the beginning of fiscal 2019), resulting in the recognition of operating right-of-use assets of $5,353,000 and operating lease liabilities of $5,427,000. The Company has entered into lease arrangements for office space, manufacturing facilities, water rights and certain equipment. A number of the leases include one or more options to renew the lease terms, purchase the leased property or terminate the lease. The exercise of these options is at the Company’s discretion and is therefore recognized on the balance sheet when it is reasonably certain the Company will exercise such options.

Substantially all of the Company’s leases are considered operating leases. Finance leases were not material as of June 29, 2019 or for the three months ended June 29, 2019. The following table displays the undiscounted cash flows related to operating leases as of June 29, 2019, along with a reconciliation to the discounted amount recorded on the June 29, 2019 Consolidated Balance Sheet (amounts in thousands):

	OPERATING
	LEASE
	LIABILITIES
2019	$	742
2020		1,403
2021		1,375
2022		1,293
2023		747
Thereafter		899
Total lease payments		6,459
Less: interest		(896)
Present value of operating lease liabilities	$	5,563

Short-term lease cost represents the Company’s cost with respect to leases with a duration of 12 months or less and are not reflected on the Company’s Consolidated Balance Sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For the three and six months ended June 29, 2019 operating lease cost was $436,000 and $831,000, respectively, including $120,000 and $209,000 of short-term lease costs. Cash paid for amounts included in the measurement of lease liabilities for the three and six months ended June 29, 2019 was $299,000 and $619,000, respectively.

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New leases entered into during the three and six month periods ended June 29, 2019 resulted in the recognition of operating right-of-use assets and lease liabilities of $604,000. At June 29, 2019 the weighted-average remaining lease term and discount rate for operating leases was 5.1 years and 6.1%, respectively.

14. On January 15, 2019, the Company reached an amicable resolution to a business dispute by way of a settlement agreement. Pursuant to the settlement agreement, the Company received $15,000,000. The other party and the Company further agreed to set up a joint escrow account to support certain conditions in the agreement. The Company’s contribution to the escrow account was approximately $200,000. The Settlement Agreement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties.

15.On February 1, 2019, the Company and certain of its subsidiaries sold substantially all of the real property, tangible personal property and executory contracts of TMC’s ready-mix business and the operations of Daniels Sand Company (Daniels) to Aggregate Industries — WCR, Inc. (the Buyer), a Colorado corporation for $27,129,000. The purchase price was paid to the Company on February 1, 2019 less certain amounts to be held in escrow, as provided in the Asset Purchase Agreement among the Company parties and the Buyer (Purchase Agreement), to secure the Company’s obligations to pay its working capital adjustment and indemnification obligations under the Purchase Agreement. The escrow also retained amounts to be held pending the subdivision of certain real property to be sold to the Buyer at a subsequent date as included in the Purchase Agreement. Combined escrow amounts of $2,049,000 were included in Other current assets in the Consolidated Balance Sheet at June 29, 2019.

The Company retained the aggregates operations and retail building materials business of TMC and all related assets and liabilities. These operations include the Pikeview quarry business located in Colorado Springs, the aggregates mining business located in Pueblo, the sand and gravel mining business located in Fremont County, and the retail building materials business at sites located in Colorado Springs and Pueblo.

In the quarter ended March 30, 2019, the Company recorded a $6,508,000 pre-tax gain on the sale of TMC assets. During the quarter ending June 29, 2019 the working capital adjustment was finalized and resulted in the Company paying a net $1,248,000 to the Buyer. This adjustment, plus an adjustment to transaction fees, reduced the pre-tax gain on the sale to $5,283,000. The operations of the ready-mix and Daniels sand businesses were classified as discontinued operations and assets held for sale for all periods presented. General corporate overhead charges were not allocated to discontinued operations. Revenue, expenses and pre-tax income reclassified to discontinued operations were as follows (amounts in thousands):

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Revenue	$	-	$	17,743	$	4,058	$	31,206
Costs and expenses		-		15,512		3,900		28,452
Depreciation, depletion and amortization		-		302		578		573
Selling and administrative		-		890		304		1,811
Gain on sales of equipment		-		889		-		889
(Loss) gain on sale of assets		(1,225)		-		5,283		-
Pre-tax (loss) income	$	(1,225)	$	1,928	$	4,559	$	1,259

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The results of discontinued operations are summarized as follows:

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Operating income (loss)	$	-	$	1,928	$	(724)	$	1,259
(Loss) gain on sale of assets		(1,225)		—		5,283		—
Income tax (benefit) provision		(307)		482		1,255		315
Loss (income) from discontinued operations	$	(918)	$	1,446	$	3,304	$	944

The assets and liabilities held for sale related to TMC’s ready-mix and Daniels sand businesses were as follows:

	JUNE 29,		DECEMBER 29,
	2019		2018
Accounts receivable, net	$	—	$	9,054
Inventory		—		1,914
Property, plant and equipment, net		—		6,741
Other assets		—		6,327
Total assets held for sale	$	—	$	24,036
Accounts payable and accrued expenses	$		$	3,800
Other long-term liabilities		—		292
Total liabilities held for sale	$	—	$	4,092

16.  During the quarter ended June 29, 2019 the Company completed three different Asset Purchase Agreement (APA) transactions, acquiring the assets of four operating businesses.

On May 20, 2019 the Company acquired the assets of Serenity and Fastrac, both based in Colorado Springs, Colorado, using available cash reserves. Serenity is a proprietary sliding door system providing superior sound attenuation, sold primarily into healthcare markets across the country.  Fastrac is a leading supplier of commercial doors and hardware to healthcare and hospitality customers across the country. Serenity continues to operate as a stand-alone business while Fastrac operations were consolidated with the Company’s existing portfolio company, McKinney Door and Hardware, which has similar operations. The results of the acquisition of Serenity and Fastrac are included in the Company’s Consolidated Financial Statements from the date of acquisition. Both companies are included in the Door segment for reporting purposes.

On June 3, 2019 the Company acquired the assets of American Wheatley HVAC and Global Flow Products (together “GFP”), based in Broken Arrow, Oklahoma using available cash reserves. GFP sells American Wheatley HVAC branded products, including a broad line of ASME pressure vessels, custom fabricated products, valves, strainers and other hydronic accessories to commercial HVAC customers. The results of the acquisition of GFP are included in the Company’s Consolidated Financial Statements from the date of acquisition. GFP is included in the HVAC segment for reporting purposes.

These two transactions are not considered material individually. However, they are considered material in the aggregate. The total purchase price paid for these transactions was $13,019,000, subject to a traditional post-closing working capital adjustment currently estimated to be $586,000, approximately $12,163,000 paid in cash at closing. The Company will pay additional contingent consideration, if earned, in the form of an earn out amount pursuant to the terms of earn out agreements (the “Earn out Agreement”) in amounts of up to $4,300,000, the payment of which is subject to certain conditions and the successful achievement of gross profit growth targets for the acquired businesses following the closing of the transactions over a period of twenty-four (24) to thirty-six (36) months. Approximately $1,516,000 has been accrued based on estimated fair values of these earn out agreements.  We

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acquired trade receivables of $1,905,000, inventory of $1,468,000, property and equipment of $2,897,000, other assets of $346,000, intangibles of $4,626,000 and goodwill of $3,153,000 and retained liabilities of $1,375,000. The current value assigned to trade receivables represents aniticipated fair market value. These values are management’s preliminary estimates of fair value and may change as additional information becomes available over the next several months. The working capital adjustment has not been finalized on either transaction and work continues on final valuation of the fair value of assets and liabilities including receivables, inventory, fixed assets, intangibles, goodwill and accounts payable. Transaction costs, included in Selling and administrative in the Condensed Consolidated Statements of Operations for the three and six month periods ended June 29, 2019, were $1,059,000 and $1,101,000, respectively.

On June 17, 2019 the Company acquired the assets of Inovate, a supplier of commercial and residential dryer and HVAC venting systems and components. The total purchase price for the net assets acquired was $11,395,000, subject to a traditional post-closing working capital adjustment, with approximately $11,050,000 paid in cash at closing, using available cash reserves. The Company will pay additional contingent consideration, if earned, in the form of an earn out amount pursuant to the terms of an earn out agreement (the “Earn out Agreement”) in an amount of up to $1,250,000, the payment of which is subject to certain conditions and the successful achievement of gross profit growth targets for the acquired business following the closing of the transaction over a period of twelve (12) months. Approximately $240,000 has been accrued based on an estimated fair value of this earnout agreement.  The results of the acquisition of Inovate are included in the Company’s Consolidated Financial Statements from the date of acquisition. Transaction costs of $476,000 are included in Selling and administrative expense on the Condensed Consolidated Statement of Operations for the three and six months ended June 29, 2019.

In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s preliminary estimates of their fair values and may change as additional information becomes available over the next several months. The working capital adjustment has not been finalized on either transaction and work continues on final valuation of the fair value of assets and liabilities including receivables, inventory, fixed assets, intangibles, goodwill and accounts payable.  The condensed balance sheet of Inovate at the acquisition date was as follows:

Purchase price	$	11,395
Accounts receivable, net		1,448
Other tangible assets		864
Intangible assets		8,839
Accounts payable and accrued expenses		(1,063)
Total identifiable net assets		10,088
Goodwill	$	1,307

Accounts receivable are valued at anticipated fair market value and are not materially different from contracted value.

The following table presents selected unaudited pro forma information for the Company assuming the acquisition of Inovate had occurred as of December 31, 2017. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Revenue	$	26,372	$	29,254	$	55,588	$	56,166
Pre-tax income (loss) from continuing operations	$	13,107	$	1,431	$	8,277	$	(5,405)
Basic and diluted earnings (loss) per share:
From continuing operations	$	5.58	$	0.63	$	3.50	$	(2.39)
Average shares outstanding		1,715		1,698		1,712		1,697

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Per ASC 805, the chart below summaries the comparative financial statements for revenue and earnings as if all the acquired companies occurred at the beginning of the respective period.

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Revenue	$	30,700	$	31,942	$	64,764	$	61,188
Pre-tax income (loss) from continuing operations	$	14,380	$	2,242	$	10,457	$	(4,101)

Total goodwill added to the Consolidated Balance Sheet due to acquisition activity during the second quarter of 2019 was $4,551,000. The goodwill is attributable to the skills and technical talent of the established work force at each of the acquired businesses and synergies expected to be achieved from integrating the individual acquired business operations in to the Company’s exsisting consolidated business portfolio. This amount is attributable to the HVAC and Door segments in the amounts of $2,259,000 and $2,292,000, respectively. The goodwill amounts are not final and are subject to change as additional information is obtained over the coming months. Additionally, goodwill deductible for tax purposes is still being determined. The impact on revenue and earnings of the businesses acquired in the second quarter of 2019 was not material to the consolidated company for the current period.

17.  Identifiable amortizable intangible assets as of June 27, 2019 include trade names, intellectual property and customer related intangibles. These intangibles were all related to acquisition activity in the second quarter 2019 and are still in the process of being finalized. The amounts are subject to change as additional information is obtained over the coming months. See Note 16 for additional discussion. Collectively, these assets were carried at $13,465,000, net of zero accumulated amortization as of June 29, 2019. The pre-tax amortization expense for intangible assets during the quarters ended June 29, 2019 and June 30, 2018 was zero.

Based upon the intangible assets recorded on the balance sheet at June 29, 2019, amortization expense for the next five years is estimated to be as follows: 2019 – $198,000; 2020 through 2023 – $396,000 each year.

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 29, 2018.

Company Overview

The Company has experienced various changes in the first half of 2019 with the sale of substantially all assets of its ready-mix concrete and Daniels sand operations in the first quarter of 2019 and the acquisition of four new operating businesses in the second quarter of 2019. In conjunction with this activity, management reviewed its operating and reporting structure and made adjustments to align the structure with how operations will be measured and evaluated going forward. For additional detail 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

Certain products within the Company’s portfolio are seasonal, primarily furnaces and evaporative coolers in the HVAC segment which are sensitive to weather conditions particularly during their respective peak selling seasons. Other products within the HVAC segment, specifically fan-coils and dryer boxes, and Door segment are, to a significant extent, dependent on construction activity. Historically, the Company has experienced operating losses during the first quarter and typically improved in the second and third quarters reflecting more favorable weather

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conditions in southern Colorado and the seasonal sales of evaporative coolers. Fourth quarter results could vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. The sale of the Company’s ready-mix and Daniels sand operations along with the acquisitions recently competed is expected to reduce the seasonality of the Company’s operations. 

Historically, the Company would typically experience 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 HVAC 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 tended to peak during the second quarter and then decline over the remainder of the year. In the current year, a legal settlement and the sale of TMC assets in the first quarter provided sufficient cash reserves such that borrowings against the revolving credit facility were significantly less than historical experience. The cash reserves allowed the Company to complete the acquisitions of four operating businesses without taking on additional debt. The divestiture and acquisition activity is expected to smooth cash flow over the course of the fiscal year and result in more consistent levels of borrowings throughout the year.

Cash provided by continuing operations was $5,913,000 during the first six months of 2019 compared to $2,977,000 used during the first six months of 2018.  The current year includes a net $14,781,000 cash received from a legal settlement realized earlier in the year. The amount of cash used in investing activities is attributable to the acquisition activity detailed previously. The prior year included $878,000 related to deferred development of a mining property which was written off in the first quarter of 2018. See Note 12 for additional detail. Cash provided by discontinued operations in the first half of 2019 was $294,000 compared to $1,025,000 used in the first half of 2018. Both periods reflect operating results combined with changes in working capital items.

During the six months ended June 29, 2019,  investing activities provided  $407,000 of cash compared to $748,000 of cash used in the prior year’s period. The current year period included $23,679,000 of cash proceeds from the sale of TMC assets and cash payments of $23,213,000 to acquire assets of four operating businesses. See Note 15 and Note 16 for additional detail. Capital expenditures by continuing operations during the first six months of 2019 were $448,000 and  $734,000, respectively. Capital expenditures by discontinued operations were $172,000 and $1,414,000 for the first half of 2019 and 2018, respectively. The first half of 2019 included $561,000 in proceeds from the sale of equipment in the Construction Materials division. The first half of 2018 included $1,400,000 in proceeds from the sale of equipment in discontinued operations.

Financing activities during the first six months of 2019 used  $2,021,000 as excess cash was used to pay down the revolving debt. During the first six months of 2018 financing activities provided  $4,500,000 of cash as borrowings were used to finance the increase in working capital. 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 any fiscal year (excluding the aggregate amount of any Capital Expenditures financed with the proceeds of a Revolving Line advance). 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.

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The Company’s outstanding borrowings against the revolving credit facility were $300,000 at June 29, 2019. 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 June 29, 2019 the Company was in compliance with all covenants in the Credit Agreement, as amended, 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.

Results of Continuing Operations - Comparison of Quarter Ended June 29, 2019 to the Quarter Ended June 30, 2018

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 second quarter of 2019 were $25,257,000, a decrease of $300,000, or 1.2%, compared to the second quarter of 2018.  The decrease was primarily due to lower sales in the Construction Materials segment, down 29.0%, as one of the main operating quarries was mined out and moved to complete reclamation. The HVAC segment reported sales down 1.9% over the second quarter of the prior year.  The Door segment reported a  sales increase of 11.6% in the second quarter of 2019 compared to the second quarter of the previous year.

The consolidated gross profit ratio in the third quarter of 2018 was 14.7% compared to 23.4% in the same period of 2018 driven primarily by cost increases in the HVAC segment and to a lesser extent in the Door segment.

Consolidated selling and administrative expenses were $4,447,000 higher in the second quarter of 2019 compared to the second quarter of 2018.  The increase between years was primarily due to investments  to stimulate growth of the Company. The current quarter included $1,510,000 in expenses associated with the recent acquisition activity. These costs included transaction fees paid to an investment bank, legal fees, due diligence costs and other professional fees related to the onboarding of the new businesses. Additionally, there have been investments in the HVAC segment, as well as at the Corporate level, in key personnel, sales and marketing enhancements, consulting, research and development and travel. As a percentage of consolidated sales, selling and administrative expenses increased to 36.0% in the second quarter of 2019 from 18.2% in the second quarter of 2018.

The second quarter of 2019 included a $428,000 gain on the sale of equipment in the Construction Materials segment, discussed below.  There were no similar gains on sales of equipment for the second quarter of 2018.

The consolidated operating loss for the second quarter of 2019 was $5,419,000 compared to operating income of $1,014,000 in the second quarter of the prior year. The decreased performance is primarily attributable to the HVAC segment and the Corporate office selling and administrative expenses discussed above.  Individual segment performance is discussed further below.

Interest income in the second quarter of 2019 was $161,000 compared to $21,000 in the second quarter of 2018. The increase is attributable to interest earned on cash reserves in the current year resulting from the first quarter 2019 legal settlement and sale of TMC assets.

Interest expense in the second quarter of 2019 was $102,000 compared to $167,000 in the second quarter of 2018. 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 decrease from the prior year quarter is attributable to lower average borrowings. Average outstanding funded debt in the second quarter of 2019 was $224,000 compared to $7,765,000 for the second quarter of 2018. At the end of the second

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quarter of 2019 the outstanding funded debt was $300,000 compared to $8,000,000 at the end of the second quarter of 2018.

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 second quarter of 2019 was 26.3% compared to a benefit of 25.0% for the second quarter of 2018.

As discussed in Note 7, the Company has revised its segment reporting to align with how key management is reviewing and measuring performance of the portfolio companies going forward. The Company operates nine businesses in three reportable segments. The following addresses various aspects of operating performance within each of the reportable segments.

Results of Discontinued Operations - Comparison of Quarter Ended June 29, 2019 to the Quarter Ended June 30, 2018

The results of discontinued operations reflect the operations of the ready-mix and Daniels sand businesses of TMC. The Company sold the assets of these business units on February 1, 2019. The second quarter 2019 loss realized from discontinued operations included a pre-tax loss on the sale of assets of $1,225,000 resulting from the final working capital adjustment and adjustment to transaction fees. The pre-tax gain from discontinued operations for the first quarter of 2018 was $1,928,000.

HVAC Segment

The table below presents a summary of operating information for the HVAC segment for the quarters ended June 29, 2019 and June 30, 2018 (dollar amounts in thousands):

	Three Months ended
	JUNE 29,			JUNE 30,
	2019			2018
Revenues from external customers	$	17,289		$	17,622
Segment gross profit		2,620			3,337
Gross profit as percent of sales		15.2	%		18.9	%
Segment operating (loss) income	$	(1,858)		$	279
Operating (loss) income as a percent of sales		(10.7)	%		1.6	%
Segment assets	$	45,984		$	32,200
Return on assets		(4.0)	%		0.9	%

In the second quarter of 2019, approximately 51% of sales in the HVAC segment consisted of coolers. Wall furnaces and heaters accounted for 20% while fan coils accounted for 23% of the segment’s sales. Boiler room equipment and dryer vent products made up approximately 6% of 2019 second quarter sales.  In the second quarter of 2018 these shares of total segment sales were 59%, 21%, 20% and 0%, respectively. Overall sales in the HVAC segment in the second quarter of 2019 decreased by $333,000 (1.9%) compared to the same period in 2018.  Fan coil sales have lagged management expectations thus far in 2019, however, the backlog remains strong. Furnace sales were also below prior year levels. Management attributes much of this to the discontinuation of a pre-season discount program that is expected to push certain sales from the current quarter to later in the year. Cooler sales volume decreased approximately 8% from 2018 second quarter levels.  

Sales of furnaces and heaters decreased 6.9% in the three months ended June 29, 2019 compared to the three months ended June 28,  2018. Unit shipments of furnaces and heaters were 20.5% lower in the second quarter of 2019 compared to the prior year second quarter. Management believes the elimination of a pre-season discount program reduced current quarter sales, but anticipates these sales will be recognized later in the year. Average sales prices for furnaces and heaters were about 17.1% higher compared to a year ago due to changes in product mix and a price increase realized mid-second quarter 2018.

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Sales of fan coils during the second quarter of 2019 increased 11.3% compared to the second quarter 2018. 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 unit 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 second quarter of 2019 decreased to 27.2% from 28.9% in the second quarter of 2018.  Reduced production levels contributed to the decrease in contribution margin in the current quarter. Both quarter’s contribution margins were considered within acceptable performance levels. 

Sales of evaporative coolers decreased 13.4% in the second quarter of 2019 compared to the second quarter of 2018. Unit sales of evaporative coolers declined 18.5%. Average selling prices increased 8.5% between the second quarter of 2019 and the second quarter of 2018 primarily due to the price increase realized in 2018.

Sales of newly acquired business operations are included in the HVAC results from the date of acquisition. These sales contributed approximately $1,200,000 to current quarter results. See Note 16 for further discussion of acquisitions.

The HVAC segment’s gross profit ratio for the second quarter of 2019 was 15.2% compared to 18.9% in the second quarter of 2018. The decrease in gross profit ratio is attributable to lower sales and production levels.

Selling and administrative expenses in the second quarter of 2019 were $1,580,000 higher than the second quarter of the previous year. The increase was attributable to investments being made to stimulate future growth. These increased costs included compensation related expenses, sales and marketing related expenses and research and developmental related expenses. As a percentage of sales, selling and administrative expenses were 25.3% in the second quarter of 2019 and 15.8% in the second quarter of 2018.

Door Segment

The table below presents a summary of operating information for the Door segment for the quarters ended June 29, 2019 and June 30, 2018 (dollar amounts in thousands):

	Three Months ended
	JUNE 29,			JUNE 30,
	2019			2018
Revenues from external customers	$	6,454		$	5,782
Segment gross profit		1,681			1,686
Gross profit as percent of sales		26.0	%		29.2	%
Segment operating income	$	614		$	918
Operating income as a percent of sales		9.5	%		15.9	%
Segment assets	$	13,783		$	8,190
Return on assets		4.5	%		11.2	%

The Door segment sells hollow metal doors, door frames and related hardware, wood doors, sliding door systems, lavatory fixtures and electronic access and security systems. The Door segment’s sales are primarily for commercial and institutional buildings such as schools and healthcare facilities as well as hospitality buildings.  A majority 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. As the product components of any one job likely vary significantly from any other job, 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.

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Door sales in the second quarter of 2019 were $672,000 (11.6%) higher than in the second quarter of the previous year primarily due to the recent acquisition of Fastrac and Serenity. Bidding prices remain competitive. The gross profit ratio in the second quarter of 2019 and 2018 was 26.0% versus 29.2%, respectively, as competitive pricing on certain larger jobs and increased labor costs resulted in lower margins.

Selling and administrative expenses were $296,000 higher in the second quarter of 2019 compared to the second quarter of 2018 mainly due to the recent acquisitions. As a percentage of sales, these expenses increased to 15.8% in the second quarter of 2019 from 12.6% in the comparable 2018 quarter.

Construction Materials

The table below presents a summary of operating information for the Construction Materials segment for the quarters ended June 29, 2019 and June 30, 2018 (dollar amounts in thousands):

	Three Months ended
	JUNE 29,			JUNE 30,
	2019			2018
Revenues from external customers	$	1,509		$	2,124
Segment gross profit		(585)			922
Gross profit as percent of sales		(38.8)	%		43.4	%
Segment operating (loss) income	$	(861)		$	692
Operating (loss) income as a percent of sales		(57.1)	%		32.6	%
Segment assets	$	11,407		$	11,021
Return on assets		(7.5)	%		6.3	%

The ready-mix concrete and Daniels sand operational assets of TMC were sold on February 1, 2019. The operations of the ready-mix and Daniels sand businesses were classified as discontinued operations and assets held for sale for all periods presented. See Note 15 for further discussion of the transaction. The discontinued operations, together with the continuing operations formerly known as the Concrete, Aggregate and Construction Supply (CACS) segment, were reclassified to the Construction Materials segment for current reporting. The product offerings of continuing operations of the former CACS segment consist of aggregates and construction supplies. 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. Revenue of the Construction Materials segment decreased 29.0% in the second quarter of 2019 compared to the second quarter of 2018.

The CACS segment produces and sells sand, crushed limestone and gravel (collectively “aggregates”) from deposits in and around Colorado Springs. Sales volume (tons) of aggregates decreased in the second quarter of 2019 compared to the comparable 2018 quarter. This is mainly attributable to the Grisenti pit being fully mined and working to complete reclamation with minimal sales. Sales at the Pikeview quarry were nominal in the second quarter of the current year as the Company prioritized completing the reclamation at Grisenti. The reduced sales volume and additional reclamation related costs at Grisenti lead to the aggregates operations reporting operating income in the second quarter of 2019 just over break-even compared to operating income of approximately $100,000 in the second quarter of 2018. There has been no change in the operating plan at Pikeview.

Sales of construction supplies decreased by 22.3% in the second quarter of 2019 compared to the prior year quarter. The prior year second quarter included shipment of a significant job that was non-recurring. The division reported an operating profit in the second quarter of 2019 and the second quarter of 2018. The operating profit was lower in the current year quarter due to reduced sales volume.

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Selling and administrative expenses were $355,000 higher in the second quarter of 2019 compared to the same period in 2018. The increase was attributable primarily to increased legal fees. Litigation fees during the second quarter of 2019 were $447,000 compared to $62,000 incurred during the comparable period of 2018.

The second quarter of 2019 included a gain of $428,000 on the sale of equipment. There were no similar gains in the second quarter of 2018.

Results of Continuing Operations - Comparison of Six Months Ended June 29, 2019 to Six Months Ended June 30, 2018

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 six months of 2019 were $47,786,000, a decrease of $1,181,000 or 2.4% compared to the first six months of 2018.  The Door segment reported a sales increase of 6.1%, however, the HVAC and Construction Materials segments reported sales decreases of 3.2% and 17.7%, respectively. Individual segments are discussed below.

The consolidated gross profit ratio in the first six months of 2019 was 17.6% compared to 22.4% in the first six months of 2018.  The decrease was mainly due to results of the Construction Materials segment which reported a gross loss of $952,000 in the first half of the current year compared to positive gross profit of $1,091,000in the first half of 2018. The Door and HVAC segments also reported decreases in gross profit in the first six months of 2019 compared to the same period in 2018.  The changes are addressed in more detail in the discussion by segment below.

Selling and administrative expenses in the first six months of 2019 were $6,050,000 (61.5%) higher compared to the same period of the prior year. The primary source of the increase was in the HVAC segment and Unallocated Corporate expenses. The increase is attributable to investments being made to promote future growth of the company. Specifically, in the HVAC segment there have been investments in key personnel, R&D and sales and marketing as WFC and PMI work towards future product design and development.  Additionally, at the Corporate level there have been key personnel investments and transaction expenses related to the second quarter 2019 acquisition activity discussed in the quarter review above. As a percentage of consolidated sales, selling and administrative expenses increased to 33.3%  in the first six months of 2019 compared to 20.1% in the same period of the prior year.

The first six months of 2019 included a $14,780,000 net gain from legal settlement recognized earlier in the year. See Note 14 for additional discussion. The first half of 2018 included the net write-off of $6,840,000 of deferred development costs previously capitalized in property, plant and equipment on the consolidated balance sheet or incurred in the first half of 2018. See Note 12 to the Quarterly Condensed Consolidated Financial Statements for further discussion.

The consolidated operating loss for the first half of 2019, before the gain from a legal settlement discussed above, was $7,824,000. The consolidated operating profit for the first half of 2018, before the write off of deferred development, was $330,000. All segments contributed to the decrease in performance, see discussion of segment performance below. Additionally, the Corporate expenses discussed above, contributed to the decrease in overall operating profit.

Interest income for the first half of 2019 was $310,000 compared to $45,000 for the first half of 2018. The increase was due to interest earned on cash reserves resulting from the legal settlement and the sale of TMC assets.

Interest expense for the first six months of 2019 was  $174,000 compared to $275,000 in the first six months of 2018 due to lower average borrowings combined with the fixed nature of certain bank fees and charges. Average

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outstanding funded debt in the first six months of 2019 was $513,000 compared to $5,779,000 in the first six months of 2018.

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 six months of 2019 was 27.5% compared to a benefit of 25.0% for the first six months of 2018.

Results of Discontinued Operations - Comparison of the Six Months Ended June 29, 2019 to the Six Months Ended June 30, 2018

The results of discontinued operations reflect the operations of the ready-mix and Daniels sand businesses of TMC. The Company sold the assets of these business units on February 1, 2019. The 2019 income realized from discontinued operations included a pre-tax loss from operations of $724,000 and a pre-tax gain on the sale of assets of $5,283,000. The pre-tax income from discontinued operations for the first half of 2018 was $1,259,000.

HVAC Segment

The table below presents a summary of operating information for the HVAC segment for the six months ended June 29, 2019 and June 30, 2018 (dollar amounts in thousands).

	Six Months Ended
	JUNE 29,			JUNE 30,
	2019			2018
Revenues from external customers	$	34,010		$	35,131
Segment gross profit		6,439			6,958
Gross profit as percent of sales		18.9	%		19.8	%
Segment operating income (loss)		(2,336)			594
Operating income (loss) as a percent of sales		(6.9)	%		1.7	%
Segment assets	$	45,984		$	32,200
Return on assets		(5.1)	%		1.8	%

In the first six months of 2019, approximately 35% of sales in the HVAC segment consisted of wall furnaces and heaters. Fan coils accounted for 17% of the segment’s sales. Coolers accounted for 44% of the segment’s sales and boiler room equipment, dryer boxes and other products were approximately 4%. In the first six months of 2018 these shares of total segment sales were 33%, 19%,  48% and 0%, respectively. Overall sales in the HVAC segment in the first six months of 2019 decreased by $1,121,000 (3.2%) compared to the same period in 2018 due to lower than anticipated fan coil sales partially offset by additional sales from newly acquired business operations. Sales of furnaces increased by 4.4% in the first six months of 2019 compared to the first six months of 2018. Sales of fan coils declined 11.5% between the first six months of 2019 and the same period in the prior year. As discussed above, contribution margin is an internal measure of profitability for a product or product line. The fan coil contribution margin percentage in the first six months of 2019 was 26.6% compared to 29.2% in the first six months of 2018. Reduced production levels contributed to the lower contribution margin. Unit shipments of furnaces and heaters were down 4.0% in the first six months of 2019 versus the first six months of 2018 attributable to the discontinued pre-season program discussed in the quarterly results. Average sales price was up 8.8% in the first six months of 2019 compared to the first six months of 2018 due to changes in product mix and the impact of the sales price increase in 2018. Unit sales of evaporative coolers in the first six months of 2019 were 15.9% lower compared to the first six months of 2018. Revenue from evaporative cooler sales in the first six months of 2019 decreased 8.9% compared to the same period in the prior year. Average selling prices per unit increased 9.4% attributable to product mix and the price increase implemented in 2018.  

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The gross profit ratio for the HVAC segment in the first six months of 2019 was 18.9% compared to 19.8% in the first six months of 2018. The decrease was attributable to reduced production levels. Selling and administrative expenses were $2,435,000 higher in the first six months of 2019 due to investments discussed in the quarterly review. As a percentage of sales, selling and administrative expenses were 24.3% and 16.6% in the first six months of 2019 and 2018, respectively.

Door Segment

The table below presents a summary of operating information for the Door segment for the six months ended June 29, 2019 and June 30, 2018 (dollar amounts in thousands):

	Six Months Ended
	JUNE 29,			JUNE 30,
	2019			2018
Revenues from external customers	$	10,696		$	10,078
Segment gross profit		2,900			2,897
Gross profit as percent of sales		27.1	%		28.7	%
Segment operating income	$	993		$	1,356
Operating income as a percent of sales		9.3	%		13.5	%
Segment assets	$	13,783		$	8,190
Return on assets		7.2	%		16.6	%

Door sales in the first six months of 2019 increased $618,000 (6.1%) compared to the six months of the previous year primarily due to the recent acquisitions on Fastrac and Serenity. The two new operations, combined, provided over $1,000,000 in additional revenue in the current year. The gross profit ratio declined 1.6% in the first half of 2019 compared to the first half of 2018. The decrease is attributable to increased material costs on certain projects.

Selling and administrative expenses in the first six months of 2019  increased by $360,000 compared to the first six months of 2018. The addition of two new operating businesses and additional compensation related costs at the existing operations accounted for the increase. As a percentage of sales, these expenses increased to 17.0% in the first six months of 2019 from 14.5% in the first six months of 2018.

Construction Materials

The table below presents a summary of operating information for the Construction Materials segment for the six months ended June 29, 2019 and June 30, 2018 (dollar amounts in thousands):

	Six Months Ended
	JUNE 29,			JUNE 30,
	2019			2018
Revenues from external customers	$	3,064		$	3,725
Segment gross profit		(952)			1,091
Gross profit as percent of sales		(31.1)	%		29.3	%
Segment operating income (loss)		13,183			(6,561)
Operating income (loss) as a percent of sales		430.2	%		(176.1)	%
Segment assets	$	11,407		$	11,021
Return on assets		115.6	%		(59.5)	%

The ready-mix concrete and Daniels sand operational assets of TMC were sold on February 1, 2019. The operations of the ready-mix and Daniels sand businesses were classified as discontinued operations and assets held for sale for all periods presented. See Note 15 for further discussion of the transaction. The discontinued operations, together with the continuing operations formerly known as the Concrete, Aggregate and Construction Supply (CACS)

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segment, were reclassified to Construction Materials segment for current reporting. The product offerings of continuing operations of the former CACS segment consist of aggregates and construction supplies. 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. 

In the first six months of 2019 sales in the Construction Materials segment decreased 17.7% compared to the first six months of 2018. The decrease is due to the Company’s Grisenti pit being fully mined and working on completing reclamation versus mining at other locations. Sales of construction supplies decreased 26.2% in the first half of 2019 compared to the first half of 2018. Decreased sales combined with additional reclamation costs at Grisenti contributed to the current year negative gross profit of $952,000 compared to an operating profit of $1,091,000 reported for the first half of 2018.

Selling and administrative expenses were $237,000 higher in the first six months of 2019 compared to the same period in 2018.  The increase was  primarily due to increased legal fees. Litigation fees related to the Pueblo aggregate lease were $432,000 during the six months ended June 29, 2019 compared to $221,000 incurred during the six months ended June 30,  2018. See Note 8 to the Quarterly Condensed Consolidated Financial Statements.

The first half of 2019 included a $14,781,000 net gain from a legal settlement recognized earlier in the year. See Note 14 for additional discussion. The first quarter of 2018 included a $6,934,000 write-off of deferred development costs associated with a mining property for which the Company had applied to the state of Colorado for the required mining permits. Subsequent to March 31, 2018 the permits were denied by the state’s Reclamation Mining and Safety Division. See Note 12 for further discussion.

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 June 29, 2019 and December 29, 2018 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 29, 2018.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 4 to the Quarterly Condensed Consolidated Financial Statements 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 June 29, 2019.

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

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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 Chie f 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 June 29, 2019. 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 June 29, 2019, 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.

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PART II - OTHER INFORMATION

Items 1, 1A, 2, 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 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

Exhibit No.	Description
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) and Exchange Act Rules 13a-15(f) and 15d-15(f), filed herewith.
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) and Exchange Act Rules 13a-15(f) and 15d-15(f), filed herewith.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
95	Mine Safety Disclosures filed herewith.
101	The following financial information from Continental Materials Corporation’s Quarterly Report on Form 10-Q for the period ended June 29,  2019 filed with the SEC on August 13,  2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations and Retained Earnings for the three and six-month periods ended June 29,  2019 and June 30, 2018, (ii) the Condensed Consolidated Balance Sheets at June 29,  2019 and December 29, 2018, (iii) the Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 29,  2019 and June 30, 2018, and (iv) Notes to the Quarterly Condensed Consolidated Financial Statements.

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SIGNATURE

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

		CONTINENTAL MATERIALS CORPORATION
Date:	August  13,  2019	By:	/s/ Paul Ainsworth
			Paul Ainsworth, Vice President, Secretary
			and Chief Financial Officer

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, James G. Gidwitz, certify that:

1. I have reviewed this Form 10-Q for the quarterly period ended June 29, 2019 of Continental Materials Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: August 13, 2019

By:	/s/ James G. Gidwitz
	James G. Gidwitz
	Chairman of the Board and
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Paul Ainsworth, certify that:

1. I have reviewed this Form 10-Q for the quarterly period ended June 29, 2019 of Continental Materials Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: August 13, 2019

By:	/s/ Paul Ainsworth
	Paul Ainsworth
	Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Continental Materials Corporation (the “Company”) on Form 10-Q for the period ended June 29, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James G. Gidwitz, the Chairman of the Board and Chief Executive Officer of the Company, and I, Paul Ainsworth, the Vice President, Secretary and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 13, 2019

By:	/s/  James G. Gidwitz
	James G. Gidwitz
	Chairman of the Board and
	Chief Executive Officer
By:	/s/  Paul Ainsworth
	Paul Ainsworth
	Vice President, Secretary and Chief Financial Officer

EX-95

Exhibit 95

Mine Safety Disclosures

The following disclosures are provided pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K, which require certain disclosures by companies required to file periodic reports under the Securities Exchange Act of 1934, as amended, that operate mines regulated under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”).

Mine Safety Information. Whenever the Federal Mine Safety and Health Administration (“MSHA”) believes a violation of the Mine Act, any health or safety standard or any regulation has occurred, it may issue a citation which describes the alleged violation and fixes a time within which the mining operator must abate the alleged violation. In some situations, such as when MSHA believes that conditions pose a hazard to miners, MSHA may issue an order removing miners from the area of the mine affected by the condition until the alleged hazards are corrected. When MSHA issues a citation or order, it generally proposes a civil penalty, or fine, as a result of the alleged violation, that the operator is ordered to pay.  Citations and orders can be contested and appealed, and as part of that process, are often reduced in severity and amount, and are sometimes dismissed. The number of citations, orders and proposed assessments vary depending on the size and type (underground or surface) of the mine as well as by the MSHA inspectors assigned.

Mine Safety Data. The following headings are used in the table below to describe the categories of violations, orders or citations issued by MSHA under the Mine Act with respect to the Company’s mines:

· Section 104 S&S Citations: Citations received from MSHA under Section 104 of the Mine Act for violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a mine safety or health hazard.

· Section 104(b) Orders: Orders issued by MSHA under Section 104(b) of the Mine Act, which represents a failure to abate a citation under Section 104(a) within the period of time prescribed by MSHA. This results in an order of immediate withdrawal from the area of the mine affected by the condition until MSHA determines that the violation has been abated.

· Section 104(d) Citations and Orders: Citations and orders issued by MSHA under Section 104(d) of the Mine Act for unwarrantable failure to comply with mandatory health or safety standards.

· Section 110(b)(2) Violations: Flagrant assessments issued by MSHA under Section 110(b)(2) of the Mine Act.

· Section 107(a) Orders: Orders issued by MSHA under Section 107(a) of the Mine Act for situations in which MSHA determined an “imminent danger” existed.

The following table details the violations, citations and orders issued to us by MSHA during the fiscal quarter ended June 29, 2019 (Dollar amounts in thousands):

			Section
	Section 104	Section	104(d)	Section	Section			Mining
	S&S	104(b)	Citations	110(b)(2)	107(a)	Proposed		Related
	Citations(2)	Orders	and Orders	Violations	Orders	Assessments(2)		Fatalities
Mine(1)	(#)	(#)	(#)	(#)	(#)	($)		(#)
Snyder Quarry	—	—	—	—	—	$	—	—
Grisenti Farms Gravel Pit	—	—	—	—	—		—	—
Daniels Sand Pit 1 & 2 (4)	5	—	—	—	—		3	—
Pueblo East	—	—	—	—	—		—	—
Pikeview Quarry	17	—	—	—	—		3	—

(1) The definition of “mine” found in Section 3 of the Mine Act includes the mine, as well as other items used in, or to be used in, or resulting from, the work of extracting minerals, such as land, structures, facilities, equipment, machines, tools and minerals preparation facilities. Unless otherwise indicated, any of these other items associated with a single mine have been aggregated in the totals for that mine. MSHA assigns an identification number to each mine and may or may not assign separate identification numbers to related facilities such as preparation facilities. We are providing the information in the table by mine rather than MSHA identification number because that is how we manage and operate our mining business and we believe this presentation will be more useful to the reader than providing information based on MSHA identification numbers.

(2) No Section 104 Citations were subject to contest as of June 29, 2019.

(3) Represents the total dollar value of the proposed assessment from MSHA under the Mine Act pursuant to the citations and/or orders preceding such dollar value in the corresponding row.

(4) Sold 2/1/2019

Pattern or Potential Pattern of Violations. During the fiscal quarter ended June 29, 2019, none of the mines operated by us received written notice from MSHA of (a) a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of mine health or safety hazards under Section 104(e) of the Mine Act or (b) the potential to have such a pattern.

Pending Legal Actions. There were no legal actions pending before the Federal Mine Safety and Health Review Commission (the “Commission”) as of June 29, 2019, nor were any legal actions instituted and resolved during the fiscal quarter ended June 29, 2019. The Commission is an independent adjudicative agency established by the Mine Act that provides administrative trial and appellate review of legal disputes arising under the Mine Act. These cases may involve, among other questions, challenges by operators to citations, orders and penalties they have received from MSHA, or complaints of discrimination by miners under Section 105 of the Mine Act. The following provides additional information of the types of proceedings that may be brought before the Commission:

· Contest Proceedings: A contest proceeding may be filed by an operator to challenge the issuance of a citation or order issued by MSHA.

· Civil Penalty Proceedings: A civil penalty proceeding may be filed by an operator to challenge a civil penalty MSHA has proposed for a violation contained in a citation or order. We do not institute civil penalty proceedings based solely on the assessment amount of proposed penalties. Any initiated adjudications address substantive matters of law and policy instituted on conditions that are alleged to be in violation of mandatory standards of the Mine Act.

· Discrimination Proceedings: Involves a miner’s allegation that he or she has suffered adverse employment action because he or she engaged in activity protected under the Mine Act, such as making a safety complaint. Includes also temporary reinstatement proceedings involving cases in which a miner has filed a complaint with MSHA stating that he or she has suffered discrimination and the miner has lost his or her position.

· Compensation Proceedings: A compensation proceeding may be filed by miners entitled to compensation when a mine is closed by certain closure orders issued by MSHA. The purpose of the proceeding is to determine the amount of compensation, if any, due to miners idled by the orders.

· Temporary Relief: Applications for temporary relief are applications filed under Section 105(b)(2) of the Mine Act for temporary relief from any modification or termination of any order.

· Appeals: An appeal may be filed by an operator to challenge judges’ decisions or orders to the Commission, including petitions for discretionary review and review by the Commission on its own motion.

During the fiscal quarter ended June 29, 2019, the Company had no legal actions instituted or resolved. As of June 29, 2019, the Company had no pending legal actions.

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 29, 2019	Aug. 06, 2019
Document and Entity Information
Document Type	10-Q
Document Period End Date	Jun. 29, 2019
Entity Registrant Name	CONTINENTAL MATERIALS CORPORATION
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		1,712,165
Current Fiscal Year End Date	--12-28
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q2
Entity Central Index Key	0000024104
Amendment Flag	false

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Jun. 29, 2019	Dec. 29, 2018
Current assets:
Cash and cash equivalents	$ 5,187	$ 594
Receivables, net	18,510	15,321
Receivable for insured losses	887	874
Finished goods	4,519	5,448
Work in process	1,600	1,365
Raw materials and supplies	6,636	7,993
Prepaid expenses	2,693	1,785
Refundable income taxes	109	494
Other current assets	5,151	2,500
Other current assets held for sale		10,968
Total current assets	45,292	47,342
Property, plant and equipment	13,059	10,431
Other assets
Right-of use assets	5,487
Intangible assets	13,465
Goodwill	5,551	1,000
Deferred income taxes	2,065	3,414
Other long-term assets	693	448
Other long-term assets held for sale		13,068
Total assets	85,612	75,703
Current liabilities:
Revolving bank loan payable	300	2,200
Accounts payable and accrued expenses	13,373	13,316
Short-term lease liabilities	1,114
Liability for unpaid claims covered by insurance	887	874
Other current liabilities held for sale		3,800
Total current liabilities	15,674	20,190
Long-term lease liabilities	4,449
Other long-term liabilities	7,884	6,445
Other long-term liabilities held for sale		292
Commitments and contingencies (Note 6)
SHAREHOLDERS' EQUITY
Common shares, $.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares	643	643
Capital in excess of par value	2,013	1,930
Retained earnings	69,617	61,131
Treasury shares, 860,529 and 876,409 at cost	(14,668)	(14,928)
Total shareholders' equity	57,605	48,776
Total liabilities and shareholders' equity	$ 85,612	$ 75,703

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Jun. 29, 2019	Dec. 29, 2018
CONDENSED CONSOLIDATED BALANCE SHEETS
Common shares, par value (in dollars per share)	$ 0.25	$ 0.25
Common shares, authorized shares	3,000,000	3,000,000
Common shares, issued shares	2,574,264	2,574,264
Treasury, shares	860,529	876,409

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 29, 2019	Jun. 30, 2018	Jun. 29, 2019	Jun. 30, 2018
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Net sales	$ 25,257	$ 25,557	$ 47,786	$ 48,967
Type of Revenue [Extensible List]	us-gaap:ProductMember	us-gaap:ProductMember	us-gaap:ProductMember	us-gaap:ProductMember
Costs and expenses:
Cost of sales (exclusive of depreciation, depletion and amortization)	$ 21,535	$ 19,583	$ 39,382	$ 37,988
Depreciation, depletion and amortization	254	405	772	810
Selling and administrative	9,096	4,649	15,889	9,839
Charges related to write-off of deferred development		(94)		6,840
(Gain) Loss on legal settlement	219		(14,781)
Gain on disposition of property and equipment	(428)		(433)
Total costs and expenses	30,676	24,543	40,829	55,477
Operating (loss) income	(5,419)	1,014	6,957	(6,510)
Interest income	161	21	310	45
Interest expense	(102)	(167)	(174)	(275)
Other income, net	45	22	58	41
Income (loss) from continuing operations before income taxes	(5,315)	890	7,151	(6,699)
Provision (benefit) for income taxes	(1,397)	223	1,969	(1,675)
Net income (loss) from continuing operations	(3,918)	667	5,182	(5,024)
(Loss) Income from discontinued operations net of income tax (benefit) provision	(918)	1,446	3,304	944
Net (loss) income	(4,836)	2,113	8,486	(4,080)
Retained earnings, beginning of period	74,453	60,794	61,131	66,987
Retained earnings, end of period	$ 69,617	$ 62,907	$ 69,617	$ 62,907
Basic and diluted income (loss) per share:
(Loss) income from continuing operations	$ (2.28)	$ 0.39	$ 3.03	$ (2.96)
(Loss) income from discontinued operations	(0.54)	0.85	1.93	0.56
Basic and diluted (loss) income per share (in dollar per share)	$ (2.82)	$ 1.24	$ 4.96	$ (2.40)
Average shares outstanding (in shares)	1,715	1,698	1,712	1,697

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 29, 2019	Jun. 30, 2018	Jun. 29, 2019	Jun. 30, 2018
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Income tax (benefit) provision	$ (307)	$ 482	$ 1,255	$ 315

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	6 Months Ended
	Jun. 29, 2019	Jun. 30, 2018
Operating activities
Net cash provided (used) by continuing operations	$ 5,913	$ (2,977)
Net cash provided (used) by discontinued operations	294	(1,025)
Net cash provided (used) by operating activities	6,207	(4,002)
Investing activities:
Capital expenditures by continuing operations	(448)	(734)
Capital expenditures by discontinued operations	(172)	(1,414)
Payments for acquisitions	(23,213)
Cash proceeds from sale of discontinued operations	23,679
Cash proceeds from sale of continuing operations property and equipment	561
Cash proceeds from sale of discontinued operations property and equipment		1,400
Net cash provided (used) in investing activities	407	(748)
Financing activities:
Borrowings on the revolving bank loan	8,750	20,500
Repayments on the revolving bank loan	(10,650)	(16,000)
Repayments of finance lease obligations	(23)
Payments to acquire treasury stock	(98)
Net cash (used) provided by financing activities	(2,021)	4,500
Net increase (decrease) in cash and cash equivalents	4,593	(250)
Cash and cash equivalents:
Beginning of period	594	507
End of period	5,187	257
Cash paid during the year for:
Interest, net	179	259
Contingent consideration from acquisitions	1,787
Income taxes, net	$ 1,490	$ 50

XML

CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - USD ($) $ in Thousands	Common shares	Capital in excess of par	Retained earnings	Treasury shares	Total
Balance at at Dec. 30, 2017	$ 643	$ 1,887	$ 66,987	$ (15,195)	$ 54,322
Balance at (in shares) at Dec. 30, 2017	2,574,264			892,097
Consolidated Statements of Shareholders' Equity
Net income (loss)			(6,193)		(6,193)
Compensation of Board of Directors by issuance of treasury shares		43		$ 271	314
Compensation of Board of Directors by issuance of treasury shares (in shares)				(16,000)
Purchase of treasury shares (in shares)				112
Balance at at Mar. 31, 2018	$ 643	1,930	60,794	$ (14,924)	48,443
Balance (in shares) at Mar. 31, 2018	2,574,264			876,209
Balance at at Dec. 30, 2017	$ 643	1,887	66,987	$ (15,195)	54,322
Balance at (in shares) at Dec. 30, 2017	2,574,264			892,097
Consolidated Statements of Shareholders' Equity
Net income (loss)					(4,080)
Balance at at Jun. 30, 2018	$ 643	1,930	62,907	$ (14,924)	50,556
Balance (in shares) at Jun. 30, 2018	2,574,264			876,209
Balance at at Mar. 31, 2018	$ 643	1,930	60,794	$ (14,924)	48,443
Balance at (in shares) at Mar. 31, 2018	2,574,264			876,209
Consolidated Statements of Shareholders' Equity
Net income (loss)			2,113		2,113
Balance at at Jun. 30, 2018	$ 643	1,930	62,907	$ (14,924)	50,556
Balance (in shares) at Jun. 30, 2018	2,574,264			876,209
Balance at at Dec. 29, 2018	$ 643	1,930	61,131	$ (14,928)	48,776
Balance at (in shares) at Dec. 29, 2018	2,574,264			876,409
Consolidated Statements of Shareholders' Equity
Net income (loss)			13,322		13,322
Compensation of Board of Directors by issuance of treasury shares		83		$ 358	441
Compensation of Board of Directors by issuance of treasury shares (in shares)				(21,000)
Purchase of treasury shares				$ (69)	(69)
Purchase of treasury shares (in shares)				3,368
Balance at at Mar. 30, 2019	$ 643	2,013	74,453	$ (14,639)	62,470
Balance (in shares) at Mar. 30, 2019	2,574,264			858,777
Balance at at Dec. 29, 2018	$ 643	1,930	61,131	$ (14,928)	48,776
Balance at (in shares) at Dec. 29, 2018	2,574,264			876,409
Consolidated Statements of Shareholders' Equity
Net income (loss)					8,486
Balance at at Jun. 29, 2019	$ 643	2,013	69,617	$ (14,668)	57,605
Balance (in shares) at Jun. 29, 2019	2,574,264			860,529
Balance at at Mar. 30, 2019	$ 643	2,013	74,453	$ (14,639)	62,470
Balance at (in shares) at Mar. 30, 2019	2,574,264			858,777
Consolidated Statements of Shareholders' Equity
Net income (loss)			(4,836)		(4,836)
Purchase of treasury shares				$ (29)	(29)
Purchase of treasury shares (in shares)				1,752
Balance at at Jun. 29, 2019	$ 643	$ 2,013	$ 69,617	$ (14,668)	$ 57,605
Balance (in shares) at Jun. 29, 2019	2,574,264			860,529

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BASIS OF PRESENTATION

6 Months Ended

Jun. 29, 2019

BASIS OF PRESENTATION

BASIS OF PRESENTATION

1.    Basis of Presentation:

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 29, 2018 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 2018 consolidated financial statements to conform to the 2019 presentation. The reclassifications had no effect on the consolidated results of operations, the net change in cash or the total assets, liabilities or shareholders’ equity of the Company. During the quarter ended March 30, 2019 the Company sold substantially all of the assets of Transit Mix Concrete Company’s ready-mix business and Daniels sand operation. The assets and liabilities related to these operations are presented as held for sale in accordance with generally accepted accounting principles. See Note 15. Accordingly, the operations of these businesses are presented as discontinued operations for all periods presented.

Revenue Recognition:

Effective December 31, 2017, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments, which creates a single source of revenue guidance for all companies in all industries and is more principles-based than previous revenue guidance. The Company adopted the standard using the modified retrospective approach. The adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on its financial position, consolidated results of operations or consolidated cash flows. As such, prior period financial statements were not recast and there was no cumulative effect adjustment upon adoption.

Sales are recognized when control of the promised goods or services transfers to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s payment terms generally range between 30 to 90 days after invoice is billed to the customer. Sales are reported net of sales tax. Shipping and other transportation costs paid by the Company and rebilled to the buyer are recorded gross (as both sales and cost of sales). The Company generally recognizes revenue from the sale of products at the time the products are shipped.

While the return of products is generally not allowed, some large customers have been granted the right to return a certain amount at the end of the normal selling season for seasonal products. Sales returns and allowances are estimated based on current program terms and historical experience. Provisions for estimated returns, discounts, volume rebates and other price adjustments are provided for in the same period the related revenues are recognized and are netted against revenues.

The Company is responsible for warranties related to the manufacture of its HVAC products and estimates the future warranty claims based upon historical experience and management estimates. The Company reviews warranty and related claims activities and records provisions as necessary.

The Company performs installation services for certain projects within its Door segment. Management determined there are two performance obligations related to most of these contracts, the equipment and the installation services. The transaction price for these contracts is allocated to each performance obligation based on its stated stand-alone selling price. Revenue is recognized at a point in time as each performance obligation is completed. No maintenance or service contracts are offered by the Company.

See Note 7 for disaggregation of revenue by segment.

Leases

Effective December 30, 2018 (the beginning of fiscal 2019) the Company adopted ASU No. 2016-02, Leases (Topic 842), which superseded Topic 840, “Leases”. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components for asset categories, except office space, and to exclude short-term leases from its Consolidated Balance Sheet. For the office space lease category the election was made to report lease and non-lease components separately as the non-lease components are billed and paid separately and are not a fixed amount over the lease term. The implicit discount rate of leases is used to calculate present values when available. When an implicit discount rate is not readily available an incremental borrowing rate is used to calculate present values.

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INCOME TAXES

6 Months Ended

Jun. 29, 2019

INCOME TAXES

INCOME TAXES

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 Tax Cuts and Jobs Act, enacted December 22, 2017, elimintated the corporate Alternative Minimum Tax (“AMT”) and allows for all existing credit carryforwards to be used to offset regular tax liability for tax years beginning after December 31, 2017. Additionally, for tax years 2018, 2019 and 2020, to the extent that the AMT credit carryover exceeds the regular tax liability, 50% of the excess AMT credit is refundable. Any remaining credits will be fully refundable in 2021. For state tax purposes, net operating losses can be carried forward for various periods 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 has established a valuation reserve related to a portion of the California Enterprise Zone credit not expected to be utilized prior to expiration.

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. The Company did not identify any such uncertain tax positions as of June 29, 2019 or December 29, 2018.

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FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 29, 2019

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

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:

Level 1	Quoted prices in active markets for identical assets or liabilities.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.

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.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

6 Months Ended

Jun. 29, 2019

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

4.    In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new revenue standard created a single source of revenue guidance for all companies in all industries and is more principles-based than prior revenue guidance. Subsequently, the FASB issued various ASUs to provide further clarification around certain aspects of ASC 606. This standard was adopted by the Company in the first quarter of fiscal 2018. See Note 1 for further discussion of the Company’s revenue recognition policies and practices.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), requiring that the statement of cash flows explain the change in total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This standard was adopted by the Company in the first quarter of fiscal 2018 and did not have a material impact to the consolidated statement of cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which superseded Leases (Topic 840). The new accounting standard was effective for the Company beginning on December 30, 2018 (the beginning of fiscal 2019) and required the recognition on the balance sheet of right-of-use assets (ROU) and lease liabilities for all long-term leases, including operating leases. The Company elected the optional transition method and adopted the new guidance on December 30, 2018 on a modified retrospective basis with no restatement of prior period amounts. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components for most asset categories and to exclude short-term leases from its Consolidated Balance Sheet. The Company’s adoption of the new standard resulted in the recognition of ROUs of $5,353,000 and liabilities of $5,427,000 related to operating leases, with no material cumulative effect adjustment to equity as of the date of adoption. In connection with the adoption of this guidance, as required, the Company reclassified deferred rent liabilities as reductions to lease assets. Adoption of the new standard did not have a material impact on the Company’s Consolidated Statements of Income or Cash Flows. See Note 13.

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

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SEASONALITY AND CURRENT ECONOMIC CONDITIONS

6 Months Ended

Jun. 29, 2019

SEASONALITY AND CURRENT ECONOMIC CONDITIONS

SEASONALITY AND CURRENT ECONOMIC CONDITIONS

5.    Historically, operating results of the Company for the first half of the year were not necessarily indicative of performance for the entire year due to the seasonality of most of the Company’s products. Management believes the recent disposal and acquisition activity should help smooth the seasonality of the Company’s portfolio and make operating results more consistent.

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EARNINGS PER SHARE

6 Months Ended

Jun. 29, 2019

EARNINGS PER SHARE

EARNINGS PER SHARE

6.    There is no difference in the calculation of basic and diluted earnings per share (“EPS”) for the three-month or six-month periods ended June 29, 2019 and June 30, 2018 as the Company does not have any dilutive instruments.

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INDUSTRY SEGMENT INFORMATION

6 Months Ended

Jun. 29, 2019

INDUSTRY SEGMENT INFORMATION

INDUSTRY SEGMENT INFORMATION

7.    The Company sold substantially all of the assets of its ready mix concrete and Daniels sand operations in the first quarter of 2019. See Note 15. During the second quarter of 2019, the Company acquired the assets of four operating businesses through three separate transactions. See Note 16 for additional discussion of the acquisitions. In conjunction with these transactions management reviewed its segment reporting structure and determined it was no longer appropriate for the consolidated business going forward. The segment reporting was revised to align with the way the operating businesses are being managed and measured by management after the sale of TMC’s assets and the acquisitions discussed below. Prior year amounts have been reclassified to conform to current segment reporting structure.

The Company operates primarily in the Building Products industry group. Within this industry group the Company has identified three reportable segments: the HVAC segment, the Door segment and the Construction Materials segment.

The HVAC segment produces and sells a variety of products including wall furnaces, fan coils, evaporative coolers, boiler room equipment and dryer boxes and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (“WFC”) of Colton, California, Phoenix Manufacturing, Inc. (“PMI”) of Phoenix, Arizona, Global Flow Products /American HVAC (“GFP”) of Broken Arrow, Oklahoma, and Inovate Dryer Technologies (“Inovate”) of Jupiter, Florida. Sales of this segment are nationwide although WFC and PMI sales are more concentrated in the southwestern United States. The Door segment sells hollow metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems from the Company’s wholly-owned subsidiaries; McKinney Door and Hardware, Inc. (“MDHI”), Fastrac Building Supply (“Fastrac”) and Serenity Sliding Door Systems (“Serenity”), which operate out of facilities in Pueblo and Colorado Springs, Colorado. Sales of this segment are concentrated in Colorado, California and the Northwestern United States although door sales are also made throughout the United States. The Construction Materials segment offers aggregates and construction supplies from locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries Castle Aggregates and Castle Rebar & Supply, of Colorado Springs and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.) of Pueblo, Colorado (the three companies collectively are referred to as the Castle Companies).

In addition to the above reporting segments, an “Unallocated Corporate and Other” 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 classification also includes expenses related to a property held by the Company which are not material to the consolidated Company.

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 six-month and three-month periods ended June 29, 2019 and June 30, 2018 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):

					Construction		Unallocated		Held for
	HVAC		Doors		Materials		Corporate		Sale		Total
Six Months Ended June 29, 2019
Revenues from external customers	$	34,010	$	10,696	$	3,064	$	16	$	—	$	47,786
Depreciation, depletion and amortization		522		89		134		28		—		772
Operating income (loss)		(2,336)		993		13,183		(4,883)		—		6,957
Segment assets		45,984		13,783		11,407		14,438		—		85,612
Capital expenditures		193		108		132		15		—		448
Three Months ended June 29, 2019
Revenues from external customers	$	17,289	$	6,454	$	1,509	$	5	$	—	$	25,257
Depreciation, depletion and amortization		112		46		82		15		—		254
Operating income (loss)		(1,858)		614		(861)		(3,314)		—		(5,419)
Segment assets		45,984		13,783		11,407		14,438		—		85,612
Capital expenditures  (b)		149		89		132		15		—		385

					Construction		Unallocated		Held for
	HVAC		Doors		Materials		Corporate		Sale		Total
Six Months Ended June 30, 2018
Revenues from external customers	$	35,131	$	10,078	$	3,725	$	33	$	—	$	48,967
Depreciation, depletion and amortization		540		82		165		23		—		810
Operating income (loss)		594		1,356		(6,561)		(1,899)		—		(6,510)
Segment assets (a)		29,003		8,003		11,315		3,346		24,036		75,703
Capital expenditures		545		79		64		46		—		734
Three Months ended June 30, 2018
Revenues from external customers	$	17,622	$	5,782	$	2,124	$	29	$	—	$	25,557
Depreciation, depletion and amortization		271		42		80		12		—		405
Operating income (loss)		279		918		692		(875)		—		1,014
Segment assets (a)		29,003		8,003		11,315		3,346		24,036		75,703
Capital expenditures (b)		280		46		—		(5)		—		321

(a) Segment assets are as of December 29, 2018.

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

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DISCONTINUED OPERATIONS

6 Months Ended

Jun. 29, 2019

DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS

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 Fee Sand and Gravel Lease (“Lease”) between the Company as Lessee and Valco, Inc. (“Valco”) as Lessor 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 declaratory judgment and damages pursuant to the Lease on the grounds that Agreed Sand and Gravel Reserves of 50 million tons did not exist, and for other relief including return of approximately $1,470,000 in royalty payments made by the Company to Valco in excess of tonnage actually produced (“Prepayments”). Based on information obtained through discovery, the Company alleges, in addition to the abovementioned claims, nondisclosure or concealment by Valco of material facts concerning the existence of Agreed Sand and Gravel Reserves of 50 million tons, and breach of warranty concerning the same. Valco asserted counterclaims against the Company alleging breach of contract and seeking declaratory judgment regarding the Company’s refusal to make further royalty payments under the Lease. In the ordinary course of business and absent any breach by Valco, the Company is required to make quarterly royalty payments amounting to not less than $300,000 in a calendar year. In response to Valco’s breaches of contract, the Company stopped making royalty payments at the start of the 2015 calendar year.

The Company has asserted partial failure of consideration as an affirmative defense to Valco’s counterclaims to offset the alleged back-due quarterly royalty payments and the amount due on quarterly royalty payments in the future. The Partial Summary Judgment Order resolved many of the Company’s claims in Valco’s favor, but did not resolve Valco’s counterclaims or the Company’s affirmative defense. 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. 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. On February 23, 2017, the Partial Summary Judgment Order was certified for immediate appeal, and all other claims, counterclaims and affirmative defenses were stayed pending the resolution of that appeal. The Company filed a notice of appeal which was denied on July 2, 2018 for lack of jurisdiction and remanded to the trial court for further proceedings. Subsequently, the trial court vacated its September 15, 2016 Partial Summary Judgment Order and set the matter for trial by jury on all issues on January 28, 2019. The Company filed its Third Amended Complaint on November 16, 2018 in which it dropped its claim to recover royalty overpayments but continued to seek to recover $1,470,000 in Prepayments. The Company wrote off the remaining royalty overpayment of $627,000, previously reported as Other assets on the Consolidated Balance Sheet, as of December 29, 2018 due to filing of the Third Amended Complaint. At the trial preparation conference on January 18, 2019, the court informed the parties that the trial would be rescheduled due to an ongoing shutdown of the federal government. The jury trial on all issues was then rescheduled for May 13, 2019. On April 30, 2019 the court entered an order stating: “Due to a conflict in the Court’s calendar, the trial preparation conference set for May 3, 2019 and the May 13, 2019, trial date are vacated.” On May 30, 2019, the case was reassigned to a different District Court Judge. A trial preparation conference was held on August 8, 2019. The trial has been rescheduled to October 21, 2019.

The Company has paid royalties on approximately 17,700,000 tons, including the Prepayments, 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.

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NON-EMPLOYEE DIRECTORS SHARE-BASED COMPENSATION

6 Months Ended

Jun. 29, 2019

NON-EMPLOYEE DIRECTORS SHARE-BASED COMPENSATION

NON-EMPLOYEE DIRECTORS SHARE-BASED COMPENSATION

9.The Company issued a total of 21,000 shares to the seven eligible board members effective February 7, 2019 as full payment for their 2019 retainer fee. The Company issued a total of 16,000 shares to the eight eligible board members effective January 16, 2018 as full payment for their 2018 retainer fee. All shares were issued under the 2010 Non-Employee Directors Stock Plan and pursuant to private offering exemptions available under Regulation D or Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

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REVOLVING BANK LOAN AND LONG-TERM DEBT

6 Months Ended

Jun. 29, 2019

REVOLVING BANK LOAN AND LONG-TERM DEBT

REVOLVING BANK LOAN AND LONG-TERM DEBT

10.  The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective November 18, 2011. The Company entered into the Tenth Amendment to Credit Agreement effective March 22, 2019. The Company had previously entered into nine 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 Company was not in complicance with the Fixed Coverage Charge Ratio as of June 29, 2019. The lender has provided a waiver of the covenant violation for the period ended June 29, 2019. The Company and the lender will work to address terms of the existing loan agreement prior to the end of the third quarter of 2019.

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:

· The Revolving Commitment is $20,000,000.  

· 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 qualifying Capital Expenditures not to exceed $5,500,000 in any fiscal year (excluding the aggregate amount of any Capital Expenditures financed with the proceeds of a Revolving Line Advance).

· The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.06 to 1.0 for each trailing twelve month period measured at the end of each Fiscal Quarter.

· The maturity date of the credit facility is May 1, 2020.

· Interest rate pricing for the revolving credit facility is currently LIBOR plus 2.25% or the prime rate.

Definitions under the Credit Agreement as amended are as follows:

· Fixed Charge Coverage Ratio is defined as, for any computation period, the ratio of (a) the sum for such period of (i) EBITDA, as defined, minus (ii) the sum of income taxes paid in cash, the amount expended related to the development of the mining property discussed in Note 12 and all unfinanced capital expenditures to (b) the sum for such period of interest expense related to the Credit Agreement.

· EBITDA means for any Computation Period (or another time period to the extent expressly provided for in the Credit Agreement) the sum of the following with respect to the Company and its Subsidiaries each as determined in accordance with GAAP: (a) Consolidated Net Income, plus (b) federal, state and other income taxes deducted in the determination of Consolidated Net Income, plus (c) Interest Expense deducted in the determination of Consolidated Net Income, plus (d) depreciation, depletion and amortization expense deducted in the determination of Consolidated Net Income, plus (e) non-recurring fees and costs paid by the Company in respect of the following: (i) fees and due diligence costs associated with the Company’s permitted acquisitions; (ii) legal fees and costs associated with the Valco trial preparation; (iii) executive recruitment fees for the Company’s new Chief Financial Officer and Chief Operating Officer; and (iv) additional fees and costs associated with the exploration of the Company’s Hitch Rack Ranch facility in Colorado Springs, Colorado to determine the suitability for mining and the pursuit of mining permits, plus (f) any other non-cash charges and any extraordinary charges deducted in the determination of Consolidated Net Income, including any asset impairment charges (including write downs of goodwill), minus (g) any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued operations included in the determination of Consolidated Net Income.

Outstanding funded revolving debt was $300,000 as of June 29, 2019 compared to $2,200,000 as of December 29, 2018. The highest balance outstanding during the first six months of 2019 and 2018 was $2,200,000 and $9,800,000, respectively. Average outstanding funded debt was $407,000 and $5,779,000 for the first six months of 2019 and 2018, respectively. At June 29, 2019, the Company had outstanding letters of credit totaling

$4,745,000. 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. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.

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LEGAL PROCEEDINGS

6 Months Ended

Jun. 29, 2019

LEGAL PROCEEDINGS

LEGAL PROCEEDINGS

11.  The Company is involved in litigation matters related to its business. 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 these matters but rather expenses legal costs as incurred. Additionally, see Note 8 for discussion of the Valco litigation.

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WRITE OFF OF DEFERRED DEVELOPMENT

6 Months Ended

Jun. 29, 2019

WRITE OFF OF DEFERRED DEVELOPMENT

WRITE OFF OF DEFERRED DEVELOPMENT

12.During July 2015, TMC began development of a granite mining property south of Colorado Springs. Prior to beginning the development process, the Company deposited $2,500,000 in an escrow account per agreement with the land owner. This amount was previously included in Other long-term assets on the Consolidated Balance Sheet. The development costs included drilling the property to ascertain its suitability for mining, engineering studies and legal expenses related to the preparation of TMC’s application to obtain the required mining permits from the State of Colorado and El Paso County.

TMC made its initial application for a mining permit from the state of Colorado in 2016. TMC filed its second application to the state in November 2017, which was rejected on April 26, 2018. The Company wrote off all capitalized costs associated with the permit application in the first quarter of 2018, a total of $6,934,000.  

As of June 29, 2019 and December 29, 2018 the $2,500,000 escrow balance mentioned above was included in Other current assets as the Company has begun the process to settle the account and recover the funds.

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LEASES

6 Months Ended

Jun. 29, 2019

LEASES

LEASES

13.The Company adopted ASU No. 2016-02 Leases (Topic 842) on December 30, 2018 (the beginning of fiscal 2019), resulting in the recognition of operating right-of-use assets of $5,353,000 and operating lease liabilities of $5,427,000. The Company has entered into lease arrangements for office space, manufacturing facilities, water rights and certain equipment. A number of the leases include one or more options to renew the lease terms, purchase the leased property or terminate the lease. The exercise of these options is at the Company’s discretion and is therefore recognized on the balance sheet when it is reasonably certain the Company will exercise such options.

Substantially all of the Company’s leases are considered operating leases. Finance leases were not material as of June 29, 2019 or for the three months ended June 29, 2019.  The following table displays the undiscounted cash flows related to operating leases as of June 29, 2019, along with a reconciliation to the discounted amount recorded on the June 29, 2019 Consolidated Balance Sheet (amounts in thousands):

	OPERATING
	LEASE
	LIABILITIES
2019	$	742
2020		1,403
2021		1,375
2022		1,293
2023		747
Thereafter		899
Total lease payments		6,459
Less: interest		(896)
Present value of operating lease liabilities	$	5,563

Short-term lease cost represents the Company’s cost with respect to leases with a duration of 12 months or less and are not reflected on the Company’s Consolidated Balance Sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For the three and six months ended June 29, 2019 operating lease cost was $436,000 and $831,000, respectively, including $120,000 and $209,000 of short-term lease costs. Cash paid for amounts included in the measurement of lease liabilities for the three and six months ended June 29, 2019 was $299,000 and $619,000, respectively.

New leases entered into during the three and six month periods ended June 29, 2019 resulted in the recognition of operating right-of-use assets and lease liabilities of $604,000. At June 29, 2019 the weighted-average remaining lease term and discount rate for operating leases was 5.1 years and 6.1%, respectively.

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LEGAL SETTLEMENT

6 Months Ended

Jun. 29, 2019

LEGAL SETTLEMENT

LEGAL SETTLEMENT

14. On January 15, 2019, the Company reached an amicable resolution to a business dispute by way of a settlement agreement. Pursuant to the settlement agreement, the Company received $15,000,000. The other party and the Company further agreed to set up a joint escrow account to support certain conditions in the agreement. The Company’s contribution to the escrow account was approximately $200,000. The Settlement Agreement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties.

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SALE OF TMC ASSETS

6 Months Ended

Jun. 29, 2019

SALE OF TMC ASSETS

SALE OF TMC ASSETS

15.On February 1, 2019, the Company and certain of its subsidiaries sold substantially all of the real property, tangible personal property and executory contracts of TMC’s ready-mix business and the operations of Daniels Sand Company (Daniels) to Aggregate Industries — WCR, Inc. (the Buyer), a Colorado corporation for $27,129,000. The purchase price was paid to the Company on February 1, 2019 less certain amounts to be held in escrow, as provided in the Asset Purchase Agreement among the Company parties and the Buyer (Purchase Agreement), to secure the Company’s obligations to pay its working capital adjustment and indemnification obligations under the Purchase Agreement. The escrow also retained amounts to be held pending the subdivision of certain real property to be sold to the Buyer at a subsequent date as included in the Purchase Agreement. Combined escrow amounts of $2,049,000 were included in Other current assets in the Consolidated Balance Sheet at June 29, 2019.

The Company retained the aggregates operations and retail building materials business of TMC and all related assets and liabilities. These operations include the Pikeview quarry business located in Colorado Springs, the aggregates mining business located in Pueblo, the sand and gravel mining business located in Fremont County, and the retail building materials business at sites located in Colorado Springs and Pueblo.

In the quarter ended March 30, 2019, the Company recorded a $6,508,000 pre-tax gain on the sale of TMC assets. During the quarter ending June 29, 2019 the working capital adjustment was finalized and resulted in the Company paying a net $1,248,000 to the Buyer. This adjustment, plus an adjustment to transaction fees, reduced the pre-tax gain on the sale to $5,283,000. The operations of the ready-mix and Daniels sand businesses were classified as discontinued operations and assets held for sale for all periods presented. General corporate overhead charges were not allocated to discontinued operations. Revenue, expenses and pre-tax income reclassified to discontinued operations were as follows (amounts in thousands):

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Revenue	$	-	$	17,743	$	4,058	$	31,206
Costs and expenses		-		15,512		3,900		28,452
Depreciation, depletion and amortization		-		302		578		573
Selling and administrative		-		890		304		1,811
Gain on sales of equipment		-		889		-		889
(Loss) gain on sale of assets		(1,225)		-		5,283		-
Pre-tax (loss) income	$	(1,225)	$	1,928	$	4,559	$	1,259

The results of discontinued operations are summarized as follows:

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Operating income (loss)	$	-	$	1,928	$	(724)	$	1,259
(Loss) gain on sale of assets		(1,225)		—		5,283		—
Income tax (benefit) provision		(307)		482		1,255		315
Loss (income) from discontinued operations	$	(918)	$	1,446	$	3,304	$	944

The assets and liabilities held for sale related to TMC’s ready-mix and Daniels sand businesses were as follows:

	JUNE 29,		DECEMBER 29,
	2019		2018
Accounts receivable, net	$	—	$	9,054
Inventory		—		1,914
Property, plant and equipment, net		—		6,741
Other assets		—		6,327
Total assets held for sale	$	—	$	24,036
Accounts payable and accrued expenses	$		$	3,800
Other long-term liabilities		—		292
Total liabilities held for sale	$	—	$	4,092

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ASSETS ACQUISITIONS

6 Months Ended

Jun. 29, 2019

ASSETS ACQUISITIONS

ASSETS ACQUISITIONS

16.  During the quarter ended June 29, 2019 the Company completed three different Asset Purchase Agreement (APA) transactions, acquiring the assets of four operating businesses.

On May 20, 2019 the Company acquired the assets of Serenity and Fastrac, both based in Colorado Springs, Colorado, using available cash reserves. Serenity is a proprietary sliding door system providing superior sound attenuation, sold primarily into healthcare markets across the country.  Fastrac is a leading supplier of commercial doors and hardware to healthcare and hospitality customers across the country. Serenity continues to operate as a stand-alone business while Fastrac operations were consolidated with the Company’s existing portfolio company, McKinney Door and Hardware, which has similar operations. The results of the acquisition of Serenity and Fastrac are included in the Company’s Consolidated Financial Statements from the date of acquisition. Both companies are included in the Door segment for reporting purposes.

On June 3, 2019 the Company acquired the assets of American Wheatley HVAC and Global Flow Products (together “GFP”), based in Broken Arrow, Oklahoma using available cash reserves. GFP sells American Wheatley HVAC branded products, including a broad line of ASME pressure vessels, custom fabricated products, valves, strainers and other hydronic accessories to commercial HVAC customers. The results of the acquisition of GFP are included in the Company’s Consolidated Financial Statements from the date of acquisition. GFP is included in the HVAC segment for reporting purposes.

These two transactions are not considered material individually. However, they are considered material in the aggregate. The total purchase price paid for these transactions was $13,019,000, subject to a traditional post-closing working capital adjustment currently estimated to be $586,000, approximately $12,163,000 paid in cash at closing. The Company will pay additional contingent consideration, if earned, in the form of an earn out amount pursuant to the terms of earn out agreements (the “Earn out Agreement”) in amounts of up to $4,300,000, the payment of which is subject to certain conditions and the successful achievement of gross profit growth targets for the acquired businesses following the closing of the transactions over a period of twenty-four (24) to thirty-six (36) months. Approximately $1,516,000 has been accrued based on estimated fair values of these earn out agreements.  We acquired trade receivables of $1,905,000, inventory of $1,468,000, property and equipment of $2,897,000, other assets of $346,000, intangibles of $4,626,000 and goodwill of $3,153,000 and retained liabilities of $1,375,000. The current value assigned to trade receivables represents aniticipated fair market value. These values are management’s preliminary estimates of fair value and may change as additional information becomes available over the next several months. The working capital adjustment has not been finalized on either transaction and work continues on final valuation of the fair value of assets and liabilities including receivables, inventory, fixed assets, intangibles, goodwill and accounts payable. Transaction costs, included in Selling and administrative in the Condensed Consolidated Statements of Operations for the three and six month periods ended June 29, 2019, were $1,059,000 and $1,101,000, respectively.

On June 17, 2019 the Company acquired the assets of Inovate, a supplier of commercial and residential dryer and HVAC venting systems and components. The total purchase price for the net assets acquired was $11,395,000, subject to a traditional post-closing working capital adjustment, with approximately $11,050,000 paid in cash at closing, using available cash reserves. The Company will pay additional contingent consideration, if earned, in the form of an earn out amount pursuant to the terms of an earn out agreement (the “Earn out Agreement”) in an amount of up to $1,250,000, the payment of which is subject to certain conditions and the successful achievement of gross profit growth targets for the acquired business following the closing of the transaction over a period of twelve (12) months. Approximately $240,000 has been accrued based on an estimated fair value of this earnout agreement.  The results of the acquisition of Inovate are included in the Company’s Consolidated Financial Statements from the date of acquisition. Transaction costs of $476,000 are included in Selling and administrative expense on the Condensed Consolidated Statement of Operations for the three and six months ended June 29, 2019.

In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s preliminary estimates of their fair values and may change as additional information becomes available over the next several months. The working capital adjustment has not been finalized on either transaction and work continues on final valuation of the fair value of assets and liabilities including receivables, inventory, fixed assets, intangibles, goodwill and accounts payable.  The condensed balance sheet of Inovate at the acquisition date was as follows:

Purchase price	$	11,395
Accounts receivable, net		1,448
Other tangible assets		864
Intangible assets		8,839
Accounts payable and accrued expenses		(1,063)
Total identifiable net assets		10,088
Goodwill	$	1,307

Accounts receivable are valued at anticipated fair market value and are not materially different from contracted value.

The following table presents selected unaudited pro forma information for the Company assuming the acquisition of Inovate had occurred as of December 31, 2017. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Revenue	$	26,372	$	29,254	$	55,588	$	56,166
Pre-tax income (loss) from continuing operations	$	13,107	$	1,431	$	8,277	$	(5,405)
Basic and diluted earnings (loss) per share:
From continuing operations	$	5.58	$	0.63	$	3.50	$	(2.39)
Average shares outstanding		1,715		1,698		1,712		1,697

Per ASC 805, the chart below summaries the comparative financial statements for revenue and earnings as if all the acquired companies occurred at the beginning of the respective period.

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Revenue	$	30,700	$	31,942	$	64,764	$	61,188
Pre-tax income (loss) from continuing operations	$	14,380	$	2,242	$	10,457	$	(4,101)

Total goodwill added to the Consolidated Balance Sheet due to acquisition activity during the second quarter of 2019 was $4,551,000. The goodwill is attributable to the skills and technical talent of the established work force at each of the acquired businesses and synergies expected to be achieved from integrating the individual acquired business operations in to the Company’s exsisting consolidated business portfolio. This amount is attributable to the HVAC and Door segments in the amounts of $2,259,000 and $2,292,000, respectively. The goodwill amounts are not final and are subject to change as additional information is obtained over the coming months. Additionally, goodwill deductible for tax purposes is still being determined. The impact on revenue and earnings of the businesses acquired in the second quarter of 2019 was not material to the consolidated company for the current period.

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AMORTIZABLE INTANGIBLE ASSETS

6 Months Ended

Jun. 29, 2019

AMORTIZABLE INTANGIBLE ASSETS.

AMORTIZABLE INTANGIBLE ASSETS

17.  Identifiable amortizable intangible assets as of June 27, 2019 include trade names, intellectual property and customer related intangibles. These intangibles were all related to acquisition activity in the second quarter 2019 and are still in the process of being finalized. The amounts are subject to change as additional information is obtained over the coming months. See Note 16 for additional discussion. Collectively, these assets were carried at $13,465,000, net of zero accumulated amortization as of June 29, 2019. The pre-tax amortization expense for intangible assets during the quarters ended June 29, 2019 and June 30, 2018 was zero.

Based upon the intangible assets recorded on the balance sheet at June 29, 2019, amortization expense for the next five years is estimated to be as follows: 2019 – $198,000;  2020 through 2023 – $396,000 each year.

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BASIS OF PRESENTATION (Policies)

6 Months Ended

Jun. 29, 2019

BASIS OF PRESENTATION

Basis of Presentation

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 29, 2018 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 2018 consolidated financial statements to conform to the 2019 presentation. The reclassifications had no effect on the consolidated results of operations, the net change in cash or the total assets, liabilities or shareholders’ equity of the Company. During the quarter ended March 30, 2019 the Company sold substantially all of the assets of Transit Mix Concrete Company’s ready-mix business and Daniels sand operation. The assets and liabilities related to these operations are presented as held for sale in accordance with generally accepted accounting principles. See Note 15. Accordingly, the operations of these businesses are presented as discontinued operations for all periods presented.

Revenue Recognition

Revenue Recognition:

Effective December 31, 2017, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments, which creates a single source of revenue guidance for all companies in all industries and is more principles-based than previous revenue guidance. The Company adopted the standard using the modified retrospective approach. The adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on its financial position, consolidated results of operations or consolidated cash flows. As such, prior period financial statements were not recast and there was no cumulative effect adjustment upon adoption.

Sales are recognized when control of the promised goods or services transfers to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s payment terms generally range between 30 to 90 days after invoice is billed to the customer. Sales are reported net of sales tax. Shipping and other transportation costs paid by the Company and rebilled to the buyer are recorded gross (as both sales and cost of sales). The Company generally recognizes revenue from the sale of products at the time the products are shipped.

While the return of products is generally not allowed, some large customers have been granted the right to return a certain amount at the end of the normal selling season for seasonal products. Sales returns and allowances are estimated based on current program terms and historical experience. Provisions for estimated returns, discounts, volume rebates and other price adjustments are provided for in the same period the related revenues are recognized and are netted against revenues.

The Company is responsible for warranties related to the manufacture of its HVAC products and estimates the future warranty claims based upon historical experience and management estimates. The Company reviews warranty and related claims activities and records provisions as necessary.

The Company performs installation services for certain projects within its Door segment. Management determined there are two performance obligations related to most of these contracts, the equipment and the installation services. The transaction price for these contracts is allocated to each performance obligation based on its stated stand-alone selling price. Revenue is recognized at a point in time as each performance obligation is completed. No maintenance or service contracts are offered by the Company.

See Note 7 for disaggregation of revenue by segment.

Leases

Leases

Effective December 30, 2018 (the beginning of fiscal 2019) the Company adopted ASU No. 2016-02, Leases (Topic 842), which superseded Topic 840, “Leases”. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components for asset categories, except office space, and to exclude short-term leases from its Consolidated Balance Sheet. For the office space lease category the election was made to report lease and non-lease components separately as the non-lease components are billed and paid separately and are not a fixed amount over the lease term. The implicit discount rate of leases is used to calculate present values when available. When an implicit discount rate is not readily available an incremental borrowing rate is used to calculate present values.

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INDUSTRY SEGMENT INFORMATION (Tables)

6 Months Ended

Jun. 29, 2019

INDUSTRY SEGMENT INFORMATION

Schedule of information about reported segments along with the items necessary to reconcile the segment information to totals reported in financial statements

The following table presents information about reported segments for the six-month and three-month periods ended June 29, 2019 and June 30, 2018 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):

					Construction		Unallocated		Held for
	HVAC		Doors		Materials		Corporate		Sale		Total
Six Months Ended June 29, 2019
Revenues from external customers	$	34,010	$	10,696	$	3,064	$	16	$	—	$	47,786
Depreciation, depletion and amortization		522		89		134		28		—		772
Operating income (loss)		(2,336)		993		13,183		(4,883)		—		6,957
Segment assets		45,984		13,783		11,407		14,438		—		85,612
Capital expenditures		193		108		132		15		—		448
Three Months ended June 29, 2019
Revenues from external customers	$	17,289	$	6,454	$	1,509	$	5	$	—	$	25,257
Depreciation, depletion and amortization		112		46		82		15		—		254
Operating income (loss)		(1,858)		614		(861)		(3,314)		—		(5,419)
Segment assets		45,984		13,783		11,407		14,438		—		85,612
Capital expenditures  (b)		149		89		132		15		—		385

					Construction		Unallocated		Held for
	HVAC		Doors		Materials		Corporate		Sale		Total
Six Months Ended June 30, 2018
Revenues from external customers	$	35,131	$	10,078	$	3,725	$	33	$	—	$	48,967
Depreciation, depletion and amortization		540		82		165		23		—		810
Operating income (loss)		594		1,356		(6,561)		(1,899)		—		(6,510)
Segment assets (a)		29,003		8,003		11,315		3,346		24,036		75,703
Capital expenditures		545		79		64		46		—		734
Three Months ended June 30, 2018
Revenues from external customers	$	17,622	$	5,782	$	2,124	$	29	$	—	$	25,557
Depreciation, depletion and amortization		271		42		80		12		—		405
Operating income (loss)		279		918		692		(875)		—		1,014
Segment assets (a)		29,003		8,003		11,315		3,346		24,036		75,703
Capital expenditures (b)		280		46		—		(5)		—		321

(a) Segment assets are as of December 29, 2018.

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

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LEASES (Tables)

6 Months Ended

Jun. 29, 2019

LEASES

Summary of undiscounted cash flows related to operating leases

The following table displays the undiscounted cash flows related to operating leases as of June 29, 2019, along with a reconciliation to the discounted amount recorded on the June 29, 2019 Consolidated Balance Sheet (amounts in thousands):

	OPERATING
	LEASE
	LIABILITIES
2019	$	742
2020		1,403
2021		1,375
2022		1,293
2023		747
Thereafter		899
Total lease payments		6,459
Less: interest		(896)
Present value of operating lease liabilities	$	5,563

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SALE OF TMC ASSETS (Tables)

6 Months Ended

Jun. 29, 2019

SALE OF TMC ASSETS

Summary of revenue, expenses and pre-tax income reclassified to discontinued operations, results of discontinued operations and assets and liabilities held for sale

Revenue, expenses and pre-tax income reclassified to discontinued operations were as follows (amounts in thousands):

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Revenue	$	-	$	17,743	$	4,058	$	31,206
Costs and expenses		-		15,512		3,900		28,452
Depreciation, depletion and amortization		-		302		578		573
Selling and administrative		-		890		304		1,811
Gain on sales of equipment		-		889		-		889
(Loss) gain on sale of assets		(1,225)		-		5,283		-
Pre-tax (loss) income	$	(1,225)	$	1,928	$	4,559	$	1,259

The results of discontinued operations are summarized as follows:

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Operating income (loss)	$	-	$	1,928	$	(724)	$	1,259
(Loss) gain on sale of assets		(1,225)		—		5,283		—
Income tax (benefit) provision		(307)		482		1,255		315
Loss (income) from discontinued operations	$	(918)	$	1,446	$	3,304	$	944

The assets and liabilities held for sale related to TMC’s ready-mix and Daniels sand businesses were as follows:

	JUNE 29,		DECEMBER 29,
	2019		2018
Accounts receivable, net	$	—	$	9,054
Inventory		—		1,914
Property, plant and equipment, net		—		6,741
Other assets		—		6,327
Total assets held for sale	$	—	$	24,036
Accounts payable and accrued expenses	$		$	3,800
Other long-term liabilities		—		292
Total liabilities held for sale	$	—	$	4,092

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ASSETS ACQUISITIONS (Tables)

6 Months Ended

Jun. 29, 2019

ASSETS ACQUISITIONS

Schedule of tangible and intangible net assets acquired

Purchase price	$	11,395
Accounts receivable, net		1,448
Other tangible assets		864
Intangible assets		8,839
Accounts payable and accrued expenses		(1,063)
Total identifiable net assets		10,088
Goodwill	$	1,307

Schedule of pro forma information

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Revenue	$	26,372	$	29,254	$	55,588	$	56,166
Pre-tax income (loss) from continuing operations	$	13,107	$	1,431	$	8,277	$	(5,405)
Basic and diluted earnings (loss) per share:
From continuing operations	$	5.58	$	0.63	$	3.50	$	(2.39)
Average shares outstanding		1,715		1,698		1,712		1,697

Per ASC 805, the chart below summaries the comparative financial statements for revenue and earnings as if all the acquired companies occurred at the beginning of the respective period.

	Three Months ended				Six Months Ended
	JUNE 29,		JUNE 30,		JUNE 29,		JUNE 30,
	2019		2018		2019		2018
Revenue	$	30,700	$	31,942	$	64,764	$	61,188
Pre-tax income (loss) from continuing operations	$	14,380	$	2,242	$	10,457	$	(4,101)

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BASIS OF PRESENTATION (Details)	6 Months Ended
	Jun. 29, 2019 item
Number of performance obligations for installation service contracts	2
Minimum [Member]
Payment terms number of days	30 days
Maximum [Member]
Payment terms number of days	90 days

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FAIR VALUE MEASUREMENTS (Details) $ in Thousands	Jun. 29, 2019 USD ($)
Fair Value Measurements
Fair value, financial instruments transferred between levels	$ 0

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - (Details) - USD ($)	Jun. 29, 2019	Dec. 30, 2018
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Operating right-of-use assets	$ 5,487,000
Liabilities related to operating leases	$ 5,563,000
ASU 2016-02 | Restatement Adjustment [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Operating right-of-use assets		$ 5,353,000
Liabilities related to operating leases		$ 5,427,000

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EARNINGS PER SHARE (Details) - $ / shares	3 Months Ended		9 Months Ended
	Sep. 29, 2018	Sep. 30, 2017	Sep. 29, 2018	Sep. 30, 2017
EARNINGS PER SHARE
Difference between the calculation of basic and diluted EPS (in dollars per share)	$ 0	$ 0	$ 0	$ 0

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INDUSTRY SEGMENT INFORMATION (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 29, 2019 USD ($)	Jun. 30, 2018 USD ($)	Jun. 29, 2019 USD ($) segment company	Jun. 30, 2018 USD ($)	Dec. 29, 2018 USD ($)
INDUSTRY SEGMENT INFORMATION
Number of operating segments | segment			4
Number of reportable segments | segment			3
Number of companies that comprise TMC | company			3
Revenues from external customers	$ 25,257	$ 25,557	$ 47,786	$ 48,967
Depreciation, depletion and amortization	254	405	772	810
Operating income (loss)	(5,419)	1,014	6,957	(6,510)
Segment assets	85,612	75,703	85,612	75,703	$ 75,703
Capital expenditures	385	321	448	734
Held for Sale
INDUSTRY SEGMENT INFORMATION
Segment assets		24,036		24,036
Unallocated Corporate
INDUSTRY SEGMENT INFORMATION
Revenues from external customers	5	29	16	33
Depreciation, depletion and amortization	15	12	28	23
Operating income (loss)	(3,314)	(875)	(4,883)	(1,899)
Segment assets	14,438	3,346	14,438	3,346
Capital expenditures	15	(5)	15	46
HVAC
INDUSTRY SEGMENT INFORMATION
Revenues from external customers	17,289	17,622	34,010	35,131
Depreciation, depletion and amortization	112	271	522	540
Operating income (loss)	(1,858)	279	(2,336)	594
Segment assets	45,984	29,003	45,984	29,003
Capital expenditures	149	280	193	545
Doors
INDUSTRY SEGMENT INFORMATION
Revenues from external customers	6,454	5,782	10,696	10,078
Depreciation, depletion and amortization	46	42	89	82
Operating income (loss)	614	918	993	1,356
Segment assets	13,783	8,003	13,783	8,003
Capital expenditures	89	46	108	79
Construction Materials
INDUSTRY SEGMENT INFORMATION
Revenues from external customers	1,509	2,124	3,064	3,725
Depreciation, depletion and amortization	82	80	134	165
Operating income (loss)	(861)	692	13,183	(6,561)
Segment assets	11,407	$ 11,315	11,407	11,315
Capital expenditures	$ 132		$ 132	$ 64

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DISCONTINUED OPERATIONS (Details)		3 Months Ended		12 Months Ended
	Sep. 15, 2016 USD ($) T	Sep. 30, 2016 USD ($)	Sep. 27, 2014 T	Dec. 29, 2018 USD ($)	Nov. 16, 2018 USD ($)
Minimum [Member]
Disposition of assets.
Quarterly royalty payment	$ 300,000
Pueblo Colorado gravel operations
Disposition of assets.
Sand and gravel reserves (in tons) | T	50,000,000
Royalty overpayments	$ 1,470,000
Write off of prepaid royalties		$ 632,000
Recovery amount due pending outcome of litigation					$ 1,470,000
Charges related to cessation of mining an aggregates deposit				$ 627,000
Sand and gravel tons paid for | T			17,700,000
Pre payment of sand and gravel reserve | T			50,000,000

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NON-EMPLOYEE DIRECTORS SHARE-BASED COMPENSATION (Details) - Director [Member]	Feb. 07, 2019 director shares	Jan. 16, 2018 director shares
NON-EMPLOYEE DIRECTORS SHARE-BASED COMPENSATION
Number of shares issued to eligible board members | shares	21,000	16,000
Number of eligible board members | director	7	8

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REVOLVING BANK LOAN AND LONG-TERM DEBT (Details)	6 Months Ended
	Jun. 29, 2019 USD ($) agreement	Jun. 30, 2018 USD ($)	Dec. 29, 2018 USD ($)
Debt Instrument [Line Items]
Number of separate amendments to the Credit agreement | agreement	9
Period over which existing cash balance, anticipated cash flow from operations and borrowings available under the credit agreement will be sufficient to cover expected cash needs	12 months
Minimum [Member] | Period Ending June 28, 2014 [Member]
Debt Instrument [Line Items]
Fixed charge coverage ratio	1.06
Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Maximum revolving credit facility line	$ 20,000,000
Borrowings as a percentage of capital expenditures	80.00%
Annual capital expenditures for fiscal year 2016, maximum	$ 5,500,000
Outstanding amount	300,000		$ 2,200,000
Highest balance outstanding during the period	2,200,000	$ 9,800,000
Average outstanding	407,000	$ 5,779,000
Outstanding amount of letters of credit total	$ 4,745,000
Revolving Credit Facility [Member] | Minimum [Member]
Debt Instrument [Line Items]
Borrowings as a percentage of eligible accounts receivable	80.00%
Borrowings as a percentage of eligible inventories	50.00%
Maximum inventory borrowings	$ 8,500,000
Revolving Credit Facility [Member] | LIBOR
Debt Instrument [Line Items]
Variable interest rate base	LIBOR
Percentage points added to the reference rate	2.25%

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LEGAL PROCEEDINGS (Details)	6 Months Ended
	Jun. 29, 2019 item
LEGAL PROCEEDINGS
Number of proceedings having material adverse effect on the consolidated results of operations, cash flows or financial condition	0

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WRITE OFF OF DEFERRED DEVELOPMENT (Details) - USD ($)	3 Months Ended	6 Months Ended	12 Months Ended
	Mar. 31, 2018	Jun. 29, 2019	Dec. 29, 2018	Jan. 15, 2019	Jul. 31, 2015
WRITE OFF OF DEFERRED DEVELOPMENT
Escrow Deposit				$ 200,000	$ 2,500,000
Write-off of deferred development costs	$ 6,934,000	$ 2,500,000	$ 2,500,000

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LEASES (Details) - USD ($)	6 Months Ended
	Jun. 29, 2019	Dec. 30, 2018
Lessee, Lease, Description [Line Items]
Operating right-of-use assets	$ 5,487,000
Present value of operating lease liabilities	$ 5,563,000
Options to renew	true
ASU 2016-02 | Restatement Adjustment [Member]
Lessee, Lease, Description [Line Items]
Operating right-of-use assets		$ 5,353,000
Present value of operating lease liabilities		$ 5,427,000

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LEASES - Operating Leases (Details) $ in Thousands	Jun. 29, 2019 USD ($)
Undiscounted cash flows related to operating leases
2019	$ 742
2020	1,403
2021	1,375
2022	1,293
2023	747
Thereafter	899
Total lease payments	6,459
Less: interest	(896)
Present value of operating lease liabilities	$ 5,563

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LEASES - Additional Information (Details)	3 Months Ended	6 Months Ended
	Jun. 29, 2019 USD ($)	Jun. 29, 2019 USD ($)
LEASES
Operating lease cost	$ 436,000	$ 831,000
Short-term lease costs	120,000	209,000
Cash paid, lease liabilities	$ 299,000	$ 619,000
Weighted-average remaining lease term	5 years 1 month 6 days	5 years 1 month 6 days
Right-of-use assets	$ 604,000	$ 604,000
Lease liabilities	$ 604,000	$ 604,000
Weighted-average discount rate	6.10%	6.10%

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LEGAL SETTLEMENT (Details) - USD ($)	Jan. 15, 2019	Jul. 31, 2015
LEGAL SETTLEMENT
Settlement receipt	$ 15,000,000
Escrow deposit	$ 200,000	$ 2,500,000

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SALE OF TMC ASSETS (Details) - USD ($)	3 Months Ended			6 Months Ended
	Jun. 29, 2019	Mar. 30, 2019	Jun. 30, 2018	Jun. 29, 2019	Jun. 30, 2018	Feb. 01, 2019	Jan. 15, 2019	Jul. 31, 2015
Disposition of assets.
Escrow Deposit							$ 200,000	$ 2,500,000
Payment as working capital adjustment	$ 1,248,000
Revenue, expenses and pre-tax income reclassified to discontinued operations
Revenue			$ 17,743,000	$ 4,058,000	$ 31,206,000
Costs and expenses			15,512,000	3,900,000	28,452,000
Depreciation, depletion and amortization			302,000	578,000	573,000
Selling and administrative			890,000	304,000	1,811,000
Gain on sales of equipment			889,000		889,000
(Loss) gain on sale of assets	(1,225,000)			5,283,000
Pre-tax income (loss)	(1,225,000)		1,928,000	4,559,000	1,259,000
The results of discontinued operations
Operating income (loss)			1,928,000
(Loss) gain on sale of assets	(1,225,000)			5,283,000
Income tax (benefit) provision	(307,000)		482,000	1,255,000	315,000
Loss (income) from discontinued operations	$ (918,000)		$ 1,446,000	3,304,000	944,000
Transit Mix Concrete | Discontinued operation
Disposition of assets.
Sale price						$ 27,129,000
Escrow Deposit						$ 2,049,000
Revenue, expenses and pre-tax income reclassified to discontinued operations
(Loss) gain on sale of assets		$ 6,508,000		5,283,000
The results of discontinued operations
Operating income (loss)				(724,000)	1,259,000
(Loss) gain on sale of assets		$ 6,508,000		5,283,000
Income tax (benefit) provision				1,255,000	315,000
Loss (income) from discontinued operations				$ 3,304,000	$ 944,000

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SALE OF TMC ASSETS - Assets and Liabilities Held for Sale (Details) $ in Thousands	Dec. 29, 2018 USD ($)
Disposal Group, Including Discontinued Operation, Balance Sheet Disclosures [Abstract]
Accounts receivable, net	$ 9,054
Inventory	1,914
Property, plant and equipment, net	6,741
Other assets	6,327
Total assets held for sale	24,036
Accounts payable and accrued expenses	3,800
Other long-term liabilities	292
Total liabilities held for sale	$ 4,092

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ASSETS ACQUISITIONS (Details)	6 Months Ended
	Jun. 29, 2019 agreement item
ASSETS ACQUISITIONS
Number of asset purchase agreements | agreement	3
Number of asset acquired operating businesses | item	4

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ASSETS ACQUISITIONS - GFP (Details) - USD ($)		3 Months Ended	6 Months Ended
	Jun. 03, 2019	Jun. 29, 2019	Jun. 29, 2019	Jun. 30, 2019	Dec. 29, 2018
Business Acquisition [Line Items]
Goodwill		$ 5,551,000	$ 5,551,000		$ 1,000,000
American Wheatley HVAC And Global Flow Products
Business Acquisition [Line Items]
Purchase price	$ 13,019,000
Estimated working capital adjustment	586,000
Consideration paid in cash	12,163,000
Contingent liability	4,300,000
Accrual For Earn Out Agreement Achievement Of Growth Targets				$ 1,516,000
Trade receivables	1,905,000
Inventory	1,468,000
Property and equipment	2,897,000
Other assets	346,000
Intangibles	4,626,000
Goodwill	3,153,000
Retained liabilities	$ 1,375,000
American Wheatley HVAC And Global Flow Products | Minimum [Member]
Business Acquisition [Line Items]
Earn out agreement, achievement of growth targets period	24 months
American Wheatley HVAC And Global Flow Products | Maximum [Member]
Business Acquisition [Line Items]
Earn out agreement, achievement of growth targets period	36 months
Selling and administrative expense | American Wheatley HVAC And Global Flow Products
Business Acquisition [Line Items]
Transaction costs		$ 1,059,000	$ 1,101,000

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ASSETS ACQUISITIONS - INOVATE (Details) - USD ($)		3 Months Ended	6 Months Ended
	Jun. 17, 2019	Jun. 29, 2019	Jun. 29, 2019	Jun. 30, 2019	Dec. 29, 2018
Business Acquisition [Line Items]
Goodwill		$ 5,551,000	$ 5,551,000		$ 1,000,000
Inovate
Business Acquisition [Line Items]
Consideration paid in cash	$ 11,050,000
Contingent liability	$ 1,250,000
Accrual based on fair value of earnout agreement				$ 240,000
Earn out agreement, achievement of growth targets period	12 months
Purchase price	$ 11,395,000
Accounts receivable, net	1,448,000
Other tangible assets	864,000
Intangible assets	8,839,000
Accounts payable and accrued expenses	(1,063,000)
Total identifiable net assets	10,088,000
Goodwill	$ 1,307,000
Selling and administrative expense | Inovate
Business Acquisition [Line Items]
Transaction costs		$ 476,000	$ 476,000

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ASSETS ACQUISITIONS - PROFORMA (Details) - USD ($) $ / shares in Units, shares in Thousands	3 Months Ended		6 Months Ended
	Jun. 29, 2019	Jun. 30, 2018	Jun. 29, 2019	Jun. 30, 2018
Business Acquisition [Line Items]
Revenue	$ 30,700,000	$ 31,942,000	$ 64,764,000	$ 61,188,000
Pre-tax income (loss) from continuing operations	14,380,000	2,242,000	10,457,000	(4,101,000)
Basic and diluted earnings (loss) per share:
Goodwill added due to acquisition	4,551,000
Inovate
Business Acquisition [Line Items]
Revenue	26,372,000	29,254,000	55,588,000	56,166,000
Pre-tax income (loss) from continuing operations	$ 13,107,000	$ 1,431,000	$ 8,277,000	$ (5,405,000)
Basic and diluted earnings (loss) per share:
From continuing operations	$ 5.58	$ 0.63	$ 3.50	$ (2.39)
Average shares outstanding	1,715	1,698	1,712	1,697
Doors
Basic and diluted earnings (loss) per share:
Goodwill added due to acquisition	$ 2,292,000
HVAC | Concrete Aggregates and Construction Supplies
Basic and diluted earnings (loss) per share:
Goodwill added due to acquisition	$ 2,259,000

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AMORTIZABLE INTANGIBLE ASSETS (Details) - USD ($)	3 Months Ended
	Jun. 29, 2019	Jun. 30, 2018
AMORTIZABLE INTANGIBLE ASSETS.
Intangible assets	$ 13,465,000
Accumulated amortization	0
Pre-tax amortization expense	0	$ 0
Estimated amortization expense
2019	198,000
2020	396,000
2021	396,000
2022	396,000
2023	$ 396,000