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Article by DailyStocks_admin    (03-06-12 01:24 AM)

Description

Contl Matrls Cp. Director, 10% Owner JAMES G GIDWITZ bought 93043 shares on 2-29-2012 at $ 12.04

BUSINESS OVERVIEW

BUSINESS



Continental Materials Corporation (the Company) is a Delaware corporation, incorporated in 1954. The Company operates primarily within two industry groups, Heating, Ventilation and Air Conditioning (HVAC) and Construction Products. The Company has identified two reportable segments in each of the two industry groups: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the Concrete, Aggregates and Construction Supplies segment and the Door segment in the Construction Products industry group.



The Heating and Cooling segment produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co. (WFC) of Colton, California. The Evaporative Cooling segment produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona. Concrete, Aggregates and Construction Supplies (CACS) are offered from numerous locations along the Southern portion of the Front Range of Colorado operated by the Company’s wholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co., of Colorado Springs and Transit Mix of Pueblo, Inc. of Pueblo (the three companies are collectively referred to as TMC). Doors are fabricated and sold along with the related hardware, including electronic access hardware, from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI), which operates out of facilities in Pueblo and Colorado Springs, Colorado.



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



During the past three years the only change in the Company’s business was the sale of Rocky Mountain Ready Mix Concrete, Inc. (RMRM) of Denver. The Company completed the sale of all of the outstanding capital stock of RMRM, a Colorado corporation to Campbells C-Ment Contracting, Inc., a Colorado corporation, on July 17, 2009. RMRM operated a ready mix concrete business in the Denver metropolitan area and had been included in the CACS reporting segment. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 — Financial Statements and Supplementary Data for further details.



Overall, sales in the CACS segment have remained weak due to the very low level of construction activity along the Southern Front Range of Colorado. In addition, the continued low volume has increased downward pressure on pricing despite increased costs. The nationwide depressed construction activity has also affected the sales volume of the Door segment. Sales of the Heating and Cooling segment and the Evaporative Cooling segment have been less affected. Fan coil sales improved during the year however overall industry demand remains well below prior years’ levels as construction, especially in the commercial sector has also exhibited significant weakness. Additional financial information relating to industry segments appears in Note 14 of this Form 10-K. References to a “Note” refer to the “Notes to Consolidated Financial Statements.”



MARKETING



The HVAC industry group markets its products throughout North America through plumbing, heating and air conditioning wholesale distributors as well as directly to major retail home-centers and other retail outlets. Some of the products are also sold to HVAC installing contractors and equipment manufacturers for commercial applications. The Company contracts independent manufacturers’ representatives for all of its products while also employing and utilizing a staff of sales and sales support personnel. Sales of furnaces and evaporative coolers are predominantly in the United States and are concentrated in the Western and Southwestern states. Sales of furnaces and console heaters usually increase in the months of September through January. Sales of evaporative coolers have historically been higher in the months of March through July. Sales of the fan coil product line are throughout the United States, Canada and the Caribbean and are more evenly distributed throughout the year although the highest volume typically occurs during the late spring and summer. In order to enhance sales of wall furnaces and evaporative coolers during the off season, extended payment terms, also referred to as dating programs, are offered to some customers.



The Construction Products industry group markets its products primarily through its own direct sales personnel and, except for doors and related hardware, confines its sales to the Southern portion of the Front Range area in Colorado. Sales are primarily made to general and sub-contractors, government entities and individuals. Sales are affected by the general economic conditions and weather conditions in the areas serviced (as it relates to construction). Revenues usually decline in the winter months as the pace of construction slows. Sales of doors and the related hardware are made throughout the United States although sales are primarily within Colorado and adjacent states.



During 2010, no customer accounted for 10% or more of the total sales of the Company.



CUSTOMER SERVICE AND SUPPORT



The HVAC industry group maintains parts departments and help lines to assist contractors, distributors and end users in servicing the products. The Company does not currently perform installation services, nor are maintenance or service contracts offered. In addition, training and product information sessions for the furnace, fan coil and evaporative cooler product lines are offered at our plants and other sites for distributors, contractors, engineers, utility company employees and other customers. The HVAC industry group does not derive any revenue from after-sales service and support other than from parts sales.



The personnel in the CACS segment routinely take a leadership role in formulation of the products to meet the specifications of customers. The Company is not involved in setting forms or performing finishing work on any of its concrete products. The Door segment offers doors, frames and hardware, including electronic access systems. Doors, frames and hardware are installed by independent contractors engaged by the general contractor or building owner. Electronic access systems are installed by the Company’s technicians.



BACKLOG



At January 1, 2011, the Heating and Cooling segment had a backlog of approximately $1,409,000 ($3,252,000 at January 2, 2010) primarily relating to orders that are expected to be filled during the first half of 2011 although some fan coil projects may extend past this timeframe. The decrease is primarily due to the reduction of fan coil orders which is directly related to the nationwide decline in construction activity.



At January 1, 2011, the Evaporative Cooling segment had a backlog of approximately $432,000 ($489,000 at January 2, 2010) primarily due to preseason orders placed prior to year end. This backlog is expected to be filled during the first quarter of 2011 and is not necessarily indicative of the sales level that will be realized during 2011.



At January 1, 2011, the CACS segment had a backlog of approximately $12,286,000 ($12,436,000 at January 2, 2010). The backlog relates primarily to construction contracts awarded and expected to be filled during 2011.



At January 1, 2011, the Door segment had a backlog of approximately $3,822,000 ($2,767,000 at January 2, 2010) primarily relating to orders that are expected to be filled during 2011. The higher backlog is primarily due to the timing of shipments related to current orders and is not necessarily indicative of the sales level that will be realized during 2011 as the level of bidding remains depressed and pricing highly competitive due to the overall slow economy and the decline in construction.



RESEARCH AND DEVELOPMENT/PATENTS



In general, the Company relies upon, and intends to continue to rely upon, unpatented proprietary technology and information. However, research and development activities in the HVAC industry group have resulted in a patent being issued to PMI related to the Power Cleaning System (expiring January 2014) used in evaporative coolers and a patent issued to WFC entitled “Wall Furnace With Side Vented Draft Hood” (expiring November 2011) for a process that increased the heat transference efficiency in our furnaces above that previously offered by the Company and its competitors. The amounts expended on research and development are not material and are expensed as incurred. The Company believes its interests in its patents, as well as its proprietary knowledge, are sufficient for its businesses as currently conducted.

MANUFACTURING



The Company conducts its manufacturing operations through a number of facilities as more completely described in Item 2 — Properties below.



Due to the seasonality of the HVAC businesses and to balance production throughout the year, furnaces and evaporative coolers are built during their off seasons in order for the Company to have adequate supplies to sell during the season. Although sales are made throughout the year, sales volume is generally higher from September through January for furnaces while sales volume of evaporative coolers is generally higher from March through July.



In general, the Company can obtain the raw materials required by our operations in all segments from various sources in the quantities desired. The Company’s CACS segment has historically purchased most of its cement requirements from a single supplier in order to obtain favorable pricing. Although there have been times during heavy construction periods that there has been some scarcity of cement supply, the Company does not expect to encounter this situation in the foreseeable future due to the decline in construction activity and the recent completion of a new cement mill near Pueblo, Colorado. The Company has no long-term supply contracts and does not consider itself to be dependent on any individual supplier. MDHI is an authorized distributor of a major manufacturer of hollow metal doors and hardware. MDHI has historically purchased the majority of its hardware primarily from this supplier in order to obtain favorable volume related pricing; however, other suppliers are available.



The Company mines aggregates (rock, gravel and sand) from various owned and leased properties in Colorado. Colorado mining permits require permit holders to perform reclamation work in order to return the mined areas to a beneficial use. These requirements are similar in nature to those included in the mining permits of our competitors. Reclamation costs have increased since the mid-1990’s as the Company has engaged in enhanced reclamation projects that exceed the stated requirements. The enhanced reclamation efforts are being performed, in part, to establish community goodwill. The Company performs the majority of the reclamation work using existing production employees and equipment primarily at times when production is curtailed due to inclement weather or decreased demand for our products. Consequently, the reclamation work to date has had a minimal impact on our capital expenditures. The operations of our aggregates sites have been adversely affected by the shutdown of the Pikeview Quarry in December 2008 due to a landslide. The Colorado Division of Reclamation, Mining and Safety (DRMS) ordered that the quarry be shut down until such time as the Company submits a new mining and reclamation plan. The DRMS has given the Company an extension until May 13, 2011 to submit a revised plan. The Company and its consultants are working on such plan which, if approved by the DRMS, would permit the Company to resume production at the Pikeview Quarry. The Company believes that ultimately an acceptable plan for mining and reclamation will be developed and that the quarry will be reopened during 2011. The effect of reopening the Pikeview Quarry on future capital expenditures has not been determined, however, management expects that the total required capital expenditures will be less than $1,000,000. See the discussion on the Results of Operations for information on the effect of the Pikeview shutdown on the CACS segment results.



COMPETITIVE CONDITIONS



Heating and Cooling — The Company is one of three principal companies producing wall furnaces (excluding units sold to the recreational vehicle industry) and gas-fired console heaters. The wall furnace and console heater markets are only a small component of the heating industry. The Company serves its market from a plant in Colton, California. The sales force consists of in-house sales personnel and independent manufacturers’ representatives. The heating industry is dominated by a few manufacturers which are substantially larger than the Company. These manufacturers sell diversified lines of heating and air conditioning units directed primarily toward central heating and cooling systems. All of the producers, including the Company, compete primarily on a basis of price, product features and performance, service and timeliness of delivery.



Fan coils are also produced at the Colton plant. The Company generally obtains contracts for larger jobs based upon a competitive bidding process. The contracts are typically awarded based upon the competitive factors noted below. International Environmental Corp., a subsidiary of LSB Industries, Inc. is the largest manufacturer and competitor in this market. There are five other large competitors as well as a number of smaller companies that produce fan coils. All of the producers compete primarily on the basis of price, ability to meet customers’ specific design and performance requirements and timeliness of delivery.



Evaporative Cooling — The Company manufactures evaporative air coolers at a plant in Phoenix, Arizona. The principal competitor is Essick Air Products, Inc. and its subsidiary Champion Cooler Corp. A number of foreign producers also distribute evaporative cooling products in the U.S. All producers of evaporative air coolers typically compete aggressively on the basis of price, product features and product availability during the cooling season.

ENVIRONMENTAL MATTERS



Our operations involve the use, release, discharge, disposal and clean up of substances regulated under federal, state and/or local environmental protection laws and regulations, including those related to reclamation of mined areas. We strive not only to maintain compliance with all applicable environmental laws and regulations, but to exceed the minimum requirements of those laws and regulations where practicable.



In 2010, our capital expenditures and remediation expenses for environmental matters, except those expenses related to our mining reclamation efforts, were not material to our financial condition. Because of the complexity and ever-changing nature of environmental laws and regulations, we cannot predict whether capital expenditures and remediation expenses for future environmental matters will materially affect our financial condition, results of operations or liquidity.


CEO BACKGROUND

William D. Andrews is retired and has served on the Board since 2004. Mr. Andrews previously served as a Senior Vice President and the Executive Vice President of Fixed Income for Stein, Roe and Farnham, an investment management firm during the period from 1986 to 2002. Mr. Andrews has served on numerous Boards of non-profit organizations and private companies involved in a variety of activities. As a result of his professional experience, the Board has concluded that Mr. Andrews adds invaluable and extensive business, investment banking, finance and corporate management experience, as well as his in-depth understanding of the financial markets and mergers and acquisitions to the collective experience of the Board.



Thomas H. Carmody has served on the Board since 1994. Mr. Carmody is the Chief Executive Officer of Summit International, LLC, a sports marketing and distribution company he founded in 1999. He also serves as the Chairman of the Board of Ameridream, a charitable organization providing housing down payment assistance for qualifying individuals, since 2003. Mr. Carmody has also served as Vice President of U.S. Operations and Vice President of the Sports Division of a publicly traded footwear, apparel and fitness company. The Board has concluded that Mr. Carmody adds invaluable and extensive marketing and business experience to the Board as well as adding an entrepreneurial approach to situations that have or may face the Company.



Betsy R. Gidwitz is the daughter of one of the founders of the Company and has served on the Board since 1996. She is retired having previously been an instructor at Massachusetts Institute of Technology until 1992. The Board has concluded that Ms. Gidwitz adds in-depth insight and knowledge about the short and long-term issues that affect the Company as well as adding a unique academic thought process to the Board’s deliberations while also representing the Company’s majority stockholder family.



James G. Gidwitz is the son of one of the founders of the Company and has served on the Board since 1978. He has served as the Chairman of the Board and its Chief Executive Officer since 1983. Mr. Gidwitz also serves on the Boards of several non-profit institutions involved in such diverse activities as medical research and political analysis as well as serving on the Board of the Hoover Institution, an organization associated with Stanford University. Mr. Gidwitz formerly served as Chairman of the Endowment Committee of The Hotchkiss School and continues to serve on the Committee. The Board has concluded that Mr. Gidwitz possesses strong leadership experience and knowledge of the Company and its business obtained through his long tenure with the Company. In addition, the Board believes that Mr. Gidwitz possesses the highest degree of integrity while also representing the Company’s majority stockholder family.



Ralph W. Gidwitz is the son of one of the founders of the Company and has served on the Board since 1984. Mr. Gidwitz is retired having previously started Capital Results LLC, a financial consulting company, for which he also served as the Managing Partner and Chief Executive Officer until 2009. Mr. Gidwitz has also served as the President and Chief Executive Officer of a private company engaged in manufacturing. Mr. Gidwitz currently serves on the Board of Trustees for a local college as well as serving as its Treasurer and Chairman of its Finance and Investment Committees. He also serves as a Director for three community associations and is a Governor for a Chicago cultural group. The Board has concluded that Mr. Gidwitz adds invaluable and extensive business and financial experience as well as possessing experience in mergers and acquisitions. Mr. Gidwitz also represents the Company’s majority stockholder family.



Mr. Ronald J. Gidwitz is the son of one of the founders of the Company and has served on the Board since 1974. Mr. Gidwitz is currently a partner in GCG Partners, a strategic consulting and equity capital firm he co-founded in 1998. Mr. Gidwitz served as President and Chief Executive Officer of the Unilever HPC Helene Curtis Business Unit from 1996 to 1998. Prior to that, Mr. Gidwitz served as President (since 1979) and Chief Executive Officer (since 1985) and member of the Board of Directors of Helene Curtis, a Fortune 500 consumer products company. Before being appointed President, Mr. Gidwitz held a number of positions within the company, with responsibilities ranging from sales to manufacturing. Mr. Gidwitz currently serves as a director on the Board of Kapstone Paper and Packaging Corporation, a publicly traded company as well as serving on the Board of numerous non-profit organizations including Rush University Medical Center, the Museum of Science and Industry and the Lyric Opera of Chicago. Mr. Gidwitz has also been appointed to various state and Chicago boards, commission and chambers. In addition, in 2006 Mr. Gidwitz was a candidate for Governor of the State of Illinois. The Board has concluded that Mr. Gidwitz adds invaluable and extensive business and leadership experience as well as diverse experience in politics and state and local organizations which have provided key contacts to the Company on numerous occasions. Mr. Gidwitz also represents the Company’s majority stockholder family.



Theodore R. Tetzlaff has served on the Board since 1981. He is currently of counsel to the law firm of Ungaretti & Harris LLP. which he joined as a partner in 2005. He has previously been a partner at other law firms where he served as the Managing Partner of one firm’s Chicago office and as a member of another firm’s Executive Committee. He served as General Counsel of Tenneco, Inc., a large publicly traded oil and gas company from 1992 to 1999 and General Counsel for Peoples Energy Corporation, a large publicly traded diversified energy company from 2003 to 2006. Mr. Tetzlaff has also served as Chairman of the Board of a large Chicago civic organization. The Board has concluded that Mr. Tetzlaff’s experience adds invaluable and extensive business experience as well as an in-depth understanding of legal issues that have or may affect the Company.

Peter E. Thieriot has served on the Board since 2001. He is currently the General Manager of EMR Land Co., a privately owned land and livestock company. He has served in that capacity since 2006. He previously served in the same capacity for the predecessor company, Elk Mountain Ranch Company, LLC, from 1993 to 2006. Mr. Thieriot possesses extensive and diverse experience having served in numerous capacities for The Chronicle Publishing Company (The Chronicle), a closely held, family, national media company. His roles have included President, Vice President, Publisher and Station Manager for newspapers and television stations owned by The Chronicle. Over the years, Mr. Thieriot has served as a director or trustee for numerous cultural, civic and other types of non-profit organizations as well as serving as a director of The Chronicle from 1977 — 1993. The Board has concluded that Mr. Thieriot’s diverse experience in various industries, including The Chronicle, adds a unique perspective to many of the issues and tasks that are the responsibility of the Company’s Board.



Darrell M. Trent has served as a Director since 1997. Mr. Trent is currently Chairman of the Board of Directors and Chief Executive Officer of Acton Development Company, Inc., a privately held real estate development and property management company since 1988. Mr. Trent was also Chairman of the Board and Chief Executive Officer of Clean Earth Technologies, Inc., an environmental management venture from 1992 to 1994. Mr. Trent took a leave of absence for part of 2003 to serve as a volunteer with the Coalition Provisional Authority in Iraq. Mr. Trent, a former U.S. Undersecretary of Transportation, was in Iraq to oversee the recreation of Iraq’s Ministry of Transportation. The Board has concluded that Mr. Trent brings invaluable and extensive business experience in real estate development, a segment of the economy that directly impacts the Company’s Concrete, Aggregates and Construction Supply (CACS) business as well as affecting other products offered by the Company. He also provides a unique insider’s experience with the federal government to which the CACS business often supplies products through general contractors in the southern portion of the Front Range in Colorado.

MANAGEMENT DISCUSSION FROM LATEST 10K

COMPANY OVERVIEW



As discussed in Item 1- Business, the Company operates primarily in two industry groups, HVAC and Construction Products. Within each of these two industry groups, the Company has identified two reportable segments: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the Concrete, Aggregates and Construction Supplies segment and the Door segment in the Construction Products industry group.



The Heating and Cooling segment produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, WFC of Colton, California. The Evaporative Cooling segment produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, PMI of Phoenix, Arizona. Sales of these two segments are nationwide, but are concentrated in the southwestern United States. Concrete, Aggregates and Construction Supplies are offered from numerous locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries collectively referred to as TMC. The Company sold its concrete operations in the Denver market, RMRM on July 17, 2009. The operations of RMRM are reported as discontinued operations for both of the reported years. Doors are fabricated and sold along with the related hardware from Colorado Springs and Pueblo through the Company’s wholly-owned subsidiary, MDHI of Pueblo, Colorado. Sales of these two segments are highly concentrated in the Front Range area in Colorado although door sales are also made throughout the United States.



Sales of all four segments are affected by the level of construction activity in the areas served and general economic conditions; however sales of furnaces and evaporative coolers are less affected by the level of construction activity as a large portion of their sales are for replacements. Weather conditions in the areas served also affect sales. Sales in all four segments were affected by these factors in both 2010 and 2009.



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



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES



Cash provided by operations in 2010 was $2,838,000 despite a net loss of $381,000. The positive cash flow in 2010 is reflective of depreciation and amortization charges of $4,381,000. The reduced cash flow as compared to that generated in 2009 was due to the reduction of working capital during 2009 as discussed below. Net working capital items increased in spite of the recovery of $1,375,000 of prior years federal income taxes resulting from the carryback of the Company’s 2009 net operating loss. Accounts receivable increased by $3,208,000 due to higher sales in the fourth quarter of 2010 compared to the comparable 2009 quarter.



Cash provided from operations in 2009 was $7,219,000 despite a net loss of $1,442,000. The principal source of cash flow from operations was a reduction in net working capital. Inventories were reduced by $6,878,000 in total as all of the Company’s business segments reduced inventories in response to a weak economy and more specifically lower sales in all but the Evaporative Cooling segment. The most significant inventory reduction was in the Heating and Cooling segment in response to a significant reduction in fan coil demand, a reduced production schedule for furnaces and stronger than expected furnace sales in the fourth quarter of 2009. Inventories were reduced in that segment by $5,235,000. As a result of the lower sales, accounts receivable decreased by $4,107,000. The accounts receivable and inventory reduction were offset to some extent by a $4,404,000 reduction in accounts payable and accrued expenses, which is also reflective of the lower level of sales.



Investing activities during 2010 used cash of $772,000, compared to the $1,966,000 of cash generated from investing activities during 2009. The Company continued to limit capital expenditures during 2010 as sales volume remains depressed. Capital expenditures during 2010 included $303,000 for the buyout of three leased loaders in the CACS segment. The remaining expenditures were primarily for routine replacement or refurbishing of equipment in all of the segments.



Investing activities in 2009 generated a net positive cash flow of $1,966,000. Cash proceeds from the sale of property and equipment were $2,250,000 including $2,026,000 received from the sale of a portion of the Company’s sand property in Colorado Springs (See discussion under Results of Operations). The Company also sold its Denver-based ready mix business, RMRM in July 2009 for total consideration of $2,385,000. Cash of $1,905,000 and a note receivable of $480,000 were received at the closing. After deducting $41,000 cash retained by RMRM at the time of the closing the net cash proceeds from the sale were $1,864,000. Capital expenditures in 2009 were $2,148,000 primarily in the CACS segment including $598,000 to purchase two aggregates plants that were previously leased, $541,000 to complete the slurry wall associated with the new mining phase at the Pueblo aggregates operation, $193,000 to purchase mixer trucks that were previously leased and $167,000 for the land movement monitoring system for the Pikeview Quarry. The Door segment spent $175,000 in 2009 for a new roof for its Colorado Springs fabrication and office facility.

During 2010, financing activities used $1,715,000 to reduce long-term debt by $1,615,000, including $1,375,000 of scheduled principal repayments, and pay $100,000 against the revolving bank loan.



During 2009, net cash used in financing activities was $9,601,000. Funded debt, consisting of long-term debt and a revolving bank loan, was reduced by a total of $4,172,000. Long-term debt was reduced by $3,622,000 including scheduled principal repayments of $1,164,000. In addition $2,100,000 of the proceeds from the sale of RMRM and the Colorado Springs sand property were used to pay down the long-term debt. The remaining $358,000 reduction in long-term debt was paid at the time of the April 16, 2009 refinancing with proceeds from the revolving bank loan. The revolving bank loan was reduced by $550,000 including the $358,000 borrowed to pay down the long-term debt. In 2009 the Company deposited cash of $4,840,000 with its casualty insurer to secure self-insured claims under its casualty insurance program. Previously, these claims were secured by a bank letter-of credit. The Company paid $589,000 in financing fees and other expenses associated with the refinancing.



Budgeted capital spending for 2011 is approximately $2,800,000. Projected depreciation, depletion and amortization are approximately $4,475,000. Planned capital expenditures in the CACS segment include conveyer belts for the Pueblo aggregates operation and retrofitting certain equipment for use in the Pikeview Quarry expected to be reopened during 2011. Capital expenditures in the other three segments include various production equipment, tooling and dies. The Company expects to fund the planned capital expenditures from operating cash flow or funds available from the revolving credit facility.



Sales of the Company’s HVAC products are seasonal except for fan coils. Sales of furnaces, heaters and evaporative coolers are sensitive to weather conditions particularly during the peak selling season. Fan coil sales are, to a significant extent, dependent on commercial construction, particularly for hotels. Revenues in the CACS segment are primarily dependent on the level of construction activity along the Front Range in southern Colorado. The level of construction activity over the past two years has been depressed due to the economic downturn, tighter credit markets and large quantity of repossessed homes for sale. This situation has prevailed throughout most of the United States. Price competition tends to intensify in this segment when demand is weak. Inclement weather during the winter months in southern Colorado can result in significantly reduced sales in those months even under robust economic conditions. Sales for the Door segment are not as seasonal nor are they much affected by weather conditions. Historically, the Company has experienced operating losses during the first quarter except when the weather is mild and demand strong along the Front Range. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in southern Colorado and the seasonal sales of the Evaporative Cooling segment. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. The Company typically experiences operating cash flow deficits during the first half of the year reflecting operating results, the use of sales dating programs (extended payment terms) related to the Evaporative Cooling segment and payments of the prior year’s accrued incentive bonuses and Company profit-sharing contributions, if any. As a result, the Company’s borrowings against its revolving credit facility tend to peak during the second quarter and then decline over the remainder of the year.



Revolving Credit and Term Loan Agreement



On April 16, 2009, the Company entered into a secured credit agreement (Credit Agreement) under which the bank lender initially provided a total credit facility of $30,000,000, consisting of a $20,000,000 revolving credit facility (with credit availability reduced by letters of credit that may be issued by the lender on the Company’s behalf) and a $10,000,000 term loan. 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 credit facility are limited to 80% of eligible accounts receivable and 50% of eligible inventories. Effective April 15, 2010, inventory borrowings are limited to a maximum of $6,750,000. Borrowings under the Credit Agreement bear interest based on a London Interbank Offer Rate (LIBOR) or prime rate based option. Under the prior three amendments to the Credit Agreement (Amended Credit Agreement), the interest rate is 4.0% over LIBOR but with a LIBOR floor of 2.0% (the Company’s effective LIBOR borrowing rate is currently 6.0%). The prime rate option is 1.75% over prime but with a prime floor of 4% (the Company’s current effective borrowing rate is 5.75%). The Amended Credit Agreement also reduced the credit available under the revolving credit facility line to $13,500,000 however; the maturity date of the credit facility was extended to December 31, 2011. The Amended Credit Agreement requires the Company to maintain certain levels of tangible net worth, achieve minimum adjusted quarterly EBITDA (earnings before interest, income taxes, depreciation and amortization) and limits the amount of annual capital expenditures. Additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends are either limited or require prior approval by the lender. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period on both the revolving credit borrowings and the term debt borrowings. Principal payments under the term loan are due quarterly with a final payment of all remaining unpaid principal at the maturity date.



Outstanding borrowings under the revolving credit facility as of January 1, 2011 were $5,750,000. The highest balance outstanding on the revolving credit facility during 2010 was $9,100,000. Average outstanding revolving credit during the year was $5,940,000. The weighted average interest rates on the outstanding revolving credit and term debt in 2010 and 2009 were 6.5% and 4.8%, respectively, including the effect of the interest rate swap discussed below. At all times since the inception of the Credit Agreement, the Company had sufficient qualifying and eligible assets such that the maximum revolving credit facility was immediately available and is expected to be available for the foreseeable future.


DISCUSSION OF CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS



2010 vs. 2009



Consolidated sales in 2010 were $114,284,000, an increase of less than 1% compared to 2009. Sales at three of the Company’s four business segments were lower in 2010. Only the Heating and Cooling segment realized an increase in sales. A continuing depressed level of construction in southern Colorado resulted in lower sales at both the both business segments within the Construction Products group. The loss of a national retail account and some carryover of inventory at some customers from the previous season lead to lower sales for the Evaporative Cooling Segment.



The consolidated gross profit ratio in 2010 was 20.4%, an increase of a full 3 percentage points compared to17.4% for 2009. As seen throughout most of the 2010 year the Concrete, Aggregates and Construction Supplies (“CACS”) and the Heating and Cooling segment achieved an improvement in their gross profit ratio compared though to unusually low levels realized in 2009. The Company’s other two business segments experienced lower gross profit ratios due to increased raw material costs, lower production volumes or competitive pricing pressures. Consolidated selling and administrative expenses were $464,000 (2.6%) higher in 2010. As a percentage of consolidated sales these expenses were 16.2% compared to 15.9% in the prior year. Consolidated selling and administrative expenses would have been lower in 2010 absent higher legal expenses in the Heating and Cooling and CACS segment.



The operating profit for 2010 was $445,000 compared to an operating loss of $612,000 in 2009. However, of significance is that the operating result for 2009 included a $2,026,000 gain on the sale of a portion of the Company’s sand property in Colorado Springs. In 2010 gains from the sale of property and equipment were only $73,000.



Net interest expense in 2010 was $812,000 compared to $838,000 in 2009 including $71,000 of interest expense attributable to the discontinued operation. Higher interest rates under the current credit agreement largely offset a reduction in average outstanding funded debt. In 2010, the weighted average interest rate on outstanding funded debt was approximately 6.3% compared to 5.2% in 2009 including the interest of the discontinued operation. Average outstanding funded debt in 2010 was $12,819,000 compared to $15,993,000 in 2009. The reduction in outstanding indebtedness was due principally to reduced capital spending, proceeds from the sale of RMRM in July 2009 and a reduction in working capital.



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 effective income tax rate related to the loss from continuing operations in 2010 was a benefit of 50.2% compared to a benefit of 48.7% related to the 2009 loss from continuing operations.

OUTLOOK



Overall the Company expects sales in 2011 to be approximately the same as 2010. The construction market along the Front Range in southern Colorado is not expected to substantially improve in the coming year. The Company believes that price competition will remain sharp in the Construction Products Industry Group as it typically does when the construction market is slow. We expect cement prices to increase and fuel prices to remain at the current high level. In order to prevent our profit margins from deteriorating further we plan on increasing the prices we charge for ready-mix concrete in the second quarter of 2011. The Company continues to work on a mining and reclamation plan to reopen the Pikeview Quarry. The plan requires the approval of the Department of Natural Resources of the State of Colorado. If such approval is obtained, and there is no assurance that it will be obtained, the Company anticipates resuming operations at the Pikeview Quarry in 2011. We estimate that approximately $700,000 of capital spending will be required to recommence operations at Pikeview. We are unable to predict the outcome of the litigation with regard to the Pikeview Quarry business interruption claim



Sales in the HVAC Industry Group are also expected to be essentially unchanged from 2010. Hotel construction is expected to remain at a low level. This will be a negative influence on fan coil sales. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not reliant on new construction. However, a continuing high level of unemployment could reduce demand for these products. Sales of furnaces and evaporative coolers are influenced by weather conditions particularly during the usual selling season.



Overall capital spending in 2011 is expected to be approximately $2,800,000, including the equipment required for the planned reopening of the Pikeview Quarry.



CRITICAL ACCOUNTING POLICIES



The Securities and Exchange Commission requires all registrants, including the Company, to include a discussion of “critical” accounting policies or methods used in the preparation of financial statements. We believe the following are our critical accounting policies and methods.



Goodwill and Other Intangible Assets



The Company annually assesses goodwill for potential impairment as of the last day of its fiscal year. In addition, to the extent that events occur, either involving the relevant reporting unit or in their industries, the Company revisits its assessment of the recorded goodwill to determine if impairment has occurred and should be recognized. As of January 1, 2011, the Company has recorded $7,229,000 of goodwill consisting of $6,229,000 related to the CACS reporting unit and $1,000,000 related to the Door reporting unit. In 2009 the Company charged $600,000 against earnings from discontinued operations representing the allocable portion of goodwill related to RMRM which was sold in July 2009.



For purposes of measuring the fair value of the CACS reporting unit the Company engages the services of an independent investment banking firm. The fair value of this reporting unit is determined by applying three valuation methods. These are 1) discounted cash flow (“DCF”) valuation, 2) an analysis of comparable transactions within the industry and 3) comparable enterprise valuations of other public companies in the industry. The DCF valuation involves projecting future cash flows. The cash flow projection entails key assumptions with regard to unit sales volumes, gross profit rate per unit or per sales dollar, capital expenditures and the discount rate. The cash flow projection assumes a gradual recovery in construction activity along the Front Range in southern Colorado, the reporting unit’s principal market area. However, projected unit volumes do not reach levels achieved in this reporting unit during the peak of the previous business cycle. The projections assume that the Company will resume operations at the Pikeview Quarry in 2011 or will be able to increase production at its other aggregate operations. The cash flow projections assume some increase in gross profit rates compared to current levels due to an increase in volume, an improvement in the relationship of selling prices for concrete relative to cement unit costs and some cost reductions. The projected gross profit rates do not exceed levels previously attained. Projected capital expenditures are compatible with the projected unit sales volume. The cash flow forecasts are adjusted by a discount rate that takes into consideration both the time value of money and the investment risk. The valuation of the CACS segment, assuming discount rates ranging between 13.0% and 14.0%, approximates $37.3 million to $41.3 million. The independent investment banking firm concluded that there were very few transaction consummated during 2010 that could be viewed as comparable to the CACS segment.

Currently, as a result of rapidly deteriorating EBITDA (earnings before interest, income taxes, depreciation and amortization) within the construction materials industry, many industry analysts are now applying multiples of Mid-Cycle or average EBITDA in valuing transactions. CACS’s 12 year average EBITDA (mid-cycle) is $7.3 million. While historic EBITDA multiples suggest that the 6 year average is 8.5 times EBITDA, the industry multiples more often seen applied to mid-cycle EBITDA is 5.5 times to 6.0 times. When applying this EBITDA multiple to the CACS mid-cycle EBITDA, the calculated value is between $40.4 million to $44.0 million. The comparison to other publicly traded construction materials companies that are comparable to CACS (a total of six companies were identified) had total enterprise values expressed as a multiple of EBITDA ranging from 8.1 times to 84.4 times as of December 31, 2010. The average EBITDA multiple was 15.5 times and the median EBITDA multiple was 13.8 times. The Comparison of Public Companies methodology results in a valuation of CACS of $43.8 million to $68.7 million.



The fair value of the Door reporting unit is estimated by the Company based on its own discounted cash flow (“DCF”) projection. The cash flow projection involves key assumptions regarding sales, costs, expenses and capital expenditures. Management believes that the projections are reasonable and the projected cash flows approximate prior experience. The discount rate used to determine the DCF valuation as of January 1, 2011 was 15%. The estimated fair value based on the discounted cash flow projection indicates a fair value for the reporting unit that exceeds the carrying value of the net assets in the reporting unit by 21%.



Management believes that the assumptions and estimates used to determine the estimated fair values are reasonable; however, a prolonged period of depressed construction activity along the Front Range in southern Colorado, inability to resume production at the Pikeview Quarry, inability to increase production at the Company’s other aggregate operations or changes in the aforementioned assumptions and estimates, as well as the effects of unpredictable future events or circumstances could materially affect the estimated fair value.



Long-lived Assets (other than Goodwill and Intangible Assets)



The Company reviews long-lived assets by asset group for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the amount and useful life over which cash flows will occur and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available given the Company’s historical experience and internal business plans. The Company has determined that there was no impairment of such long-lived assets in 2010.



Liabilities



The Company purchases insurance coverage for workers’ compensation, general product and automobile liability, retaining certain levels of risk (self-insured portion). See the above section titled “Insurance Policies” for information related to per incident deductibles and policy limits. Provision for workers’ compensation claims is estimated by management based on information provided by the independent third party administrator and periodic review of all outstanding claims. The Company’s independent claims administrator tracks all claims and assigns a liability to each individual claim based upon facts known at the time of estimation. In addition, management periodically reviews each individual claim with both the third party claims administrator and legal counsel and the third party administrator revises the estimated liability accordingly. The Company also retains an independent expert who applies actuarial methodology to the claims data provided by the Company’s independent claims administrator to estimate the ultimate aggregate settlement amount of the claims using specific loss development factors based on the Company’s prior experience. The Company then establishes its reserve for workers’ compensation claims based upon the actuarial evaluation and management’s knowledge of the outstanding claims. Management tracks changes to the incurred and paid amounts of individual workers compensation claims up to the date of final closure. In recent years, the net amounts that the claims have ultimately settled for have indicated that the reserve recorded by the Company has been sufficient.



With regard to product liability, provisions for both claims and unasserted claims that would be covered under the self-insured portion of the policies are reviewed at least annually and are recorded in accordance with accounting guidance on contingent liabilities provided in the FASB Accounting Standards Codification (Codification). Management also incorporates information from discussions with legal counsel handling the individual claims when revising its estimates. Provision for automobile claims is estimated based upon information provided by the Company’s independent claims administrator and the Company’s own experience. The number of automobile claims and the amounts involved are not material. Historically, there have not been many instances of significant variances between actual final settlements and our estimates regarding automobile and product liability claims.



The Company maintains a reserve for future reclamation work to be performed at its various aggregate operations based upon an estimate of the total expense that will be incurred to reclaim the disturbed areas. Actual reclamation costs are charged to expense. The adequacy of the recorded reserve is assessed annually. The assessment may be done more frequently if events or circumstances arise that may indicate a change in estimated costs, recoverable material or the period of mining activity. For the annual assessment of the reserve, Company engages an independent professional to assist in reevaluating the estimates of both the quantities of recoverable material and the cost of reclamation. Our assessment of the adequacy of the reclamation reserves is based on management’s assumptions with the assistance of the independent professional. The analysis requires the use of significant assumptions and estimates about the mining plans, homogeneity of the deposits, third party costs to perform work, method of reclamation to be used, etc. Management believes that the assumptions and estimates used to determine the reserve are reasonable; however, changes in the aforementioned assumptions and estimates, as well as the effects of unknown future events or circumstances, including legislative requirements, could materially affect estimated costs, the quantities of recoverable material or the period of mining. Depletion of rock and sand deposits and amortization of deferred development costs are computed by the units-of-production method based upon estimated recoverable quantities of rock and sand.



Sales



The Company recognizes revenue as products are shipped to customers. Sales are recorded net of estimates of applicable provisions for discounts, volume incentives, returns and allowances based upon current program terms and historical experience. At the time of revenue recognition, the Company also provides an estimate of potential bad debt and warranty expense as well as an amount anticipated to be granted to customers under cooperative advertising programs based upon current program terms and historical experience. Additionally, the HVAC companies offer discounts for early payment of amounts due under dating and other extended payment programs. The Company records reserves for these items based upon historical experience.



Guidance provided by the Codification that cash consideration (including sales incentives) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services unless both of the following conditions are met: a) the vendor receives an identifiable benefit in exchange for the consideration and b)the vendor can reasonably estimate the fair value of the benefit. Under this guidance, volume incentives and customer discounts provided to our customers are presumed to be a reduction in the selling price of our products and accordingly we record these as a reduction of gross sales. We require that our customers submit proof of both the advertisement and the cost of the advertising expenditure before we allow a deduction for cooperative advertising. Since the Company receives an identifiable and quantifiable benefit, these costs are recorded as selling and administrative expenses. These programs did not have a material effect of the operations of 2010 compared to 2009.



Recently Issued Accounting Standards



The “Recently Issued Accounting Pronouncements” section of Note 1 to the Consolidated Financial Statements discusses new accounting policies adopted by the Company since 2009 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards has an effect on financial condition, results of operations or liquidity, the impacts are discussed in the applicable notes to the consolidated financial statements.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Liquidity and Capital Resources



As noted above, various factors affect the sales of the Company’s products. Historically, the Company has experienced operating losses during the first quarter except when construction activity is strong along the Southern Front Range of Colorado and the weather is mild. Operating results typically improve in the second and third quarters, reflecting more favorable weather conditions in Colorado and the seasonal sales of the Evaporative Cooling segment; however, the Company expects construction activity along the Southern Front Range will remain depressed into the 2012 fiscal year.

Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. The Company typically experiences operating cash flow deficits during the first half of the year reflecting operating results, the use of sales dating programs (extended payment terms) related to the Evaporative Cooling segment and payments of the prior year’s accrued incentive bonuses and Company profit-sharing contributions, if any. As a result, the Company’s borrowings against its revolving credit facility tend to peak during the second quarter and then decline over the remainder of the year. This trend has continued in 2011. Although the actual outstanding balance at the end of the third quarter of 2011 was slightly higher than the balance at the end of the second quarter or 2011, the average outstanding balance during the third quarter was approximately $5,533,000 compared to the average outstanding balance during the second quarter of approximately $7,174,000.



Cash provided by operations was $547,000 during the first nine months of 2011 compared to the $2,099,000 of cash provided during the first nine months of 2010. The Company’s operating cash flow during the first nine months of 2011 was positive despite the increased operating loss primarily due to a larger net reduction in working capital during the first nine months of 2011 compared to the first nine months of 2010, in part reflecting the reduced sales volume.



During the nine months ended October 1, 2011, investing activities used $1,425,000 of cash compared to the $594,000 of cash used in the prior year’s period. The Company continued to closely monitor capital expenditures during the first nine months of 2011 as sales volume remains depressed. Capital purchases during the 2011 period were primarily related to the aggregates operations as well as the buyout of three leased mixer trucks. As discussed in Notes 7 and 9, the Company also made a loan of $352,000 to an officer of one of the Company’s subsidiaries in conjunction with his relocation.



Financing activities during the first nine months of 2011 provided $1,025,000 through borrowings of $1,400,000 against the revolving credit facility as well as the receipt of $500,000 resulting from the reduction of the amount deposited with our insurance carrier to secure the Company’s self-insured claims under its casualty insurance program. Financing activities used $1,200,000 during the first nine months of 2010 as the Company repaid $200,000 of borrowings under the revolving credit facility. All scheduled term debt payments were made during both the 2011 and 2010 periods. During the first nine months of 2011, the highest amount of Company borrowings outstanding under the revolving credit agreement was $9,000,000 and the average amount outstanding was $5,923,000.



The Company has prepared a projection of cash sources and uses for the next 12 months. Under this projection, 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 servicing debt and planned capital expenditures for the next 12 months. The Company also expects to be in compliance with all debt covenants, as amended, during this period.



Results of Operations - Comparison of Quarter Ended October 1, 2011 to Quarter Ended October 2, 2010



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



Consolidated sales in the third quarter of 2011 were $25,501,000 or $3,641,000 (12.5%) less than in the third quarter of 2010.The decline in sales is the result of the same market and economic factors that have prevailed throughout the year. A depressed construction market in the Colorado Springs and Pueblo, Colorado area resulted in a $2,225,000 (21.2%) decline in sales for the Concrete, Aggregates and Construction Supplies (“CACS”) segment. The same weak construction market conditions throughout most of the nation also lead to a drop in fan coil sales in the Heating and Cooling segment. Sales in the third quarter for that segment were down $1,332,000 (13.7%). Third quarter sales in 2011 for the Door and Evaporative Cooling segments were little changed compared to the same quarter in the prior year. The consolidated gross profit ratio declined from 22.9% in the third quarter of 2010 to 21.8% in the current year quarter. This deterioration in the gross profit rate is due principally to the lower sales volume, fixed costs and higher fuel costs experienced by the CACS segment. The gross profit rate for the Heating and Cooling segment improved compared to the prior year. The gross profit rate for the Door and Evaporative Cooling segments were slightly lower. Consolidated selling and administrative expenses were $411,000 higher in the 2011 third quarter compared to the comparable quarter in the prior year. Litigation expenses associated with the Pikeview Quarry insurance claim and expenses related to Williams EcoLogix, Inc. resulted in the increased expense level. Consolidated selling and administrative expenses as a percentage of consolidated sales increased to 19.4% from 15.5%. The Company incurred an operating loss of $363,000 in the third quarter of 2011 compared to a $1,037,000 operating profit in the third quarter of 2010.

Heating and Cooling Segment



Sales in the Heating and Cooling segment decreased $1,332,000 (13.7%) in the third quarter of 2011 from the comparable 2010 quarter. Sales of furnaces were modestly higher in 2011 but a continuing weak commercial construction market resulted in lower fan coil sales. The gross profit ratio for this segment improved from 25.6% to 29.1% due to better purchasing methods which resulted in reductions in some material costs, improved factory productivity and product sales mix. Selling and administrative expenses were substantially unchanged.



Evaporative Cooling Segment



Sales in the Evaporative Cooling segment were just $222,000 (3.8%) lower in the third quarter of 2011 compared to the prior year quarter. The gross profit ratio dropped from 21.6% to 20.9% due to increases in prices for certain raw materials, particularly steel.



Operations - Comparison of Nine Months Ended October 1, 2011 to Nine Months Ended October 2, 2010



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



Consolidated sales in the first nine months of 2011 were $6,289,000 (7.4%) less than in the first nine months of 2010. Sales results at three of the four Company’s business segments were lower in 2011. Only the Evaporative Cooling segment realized increased revenues. The same market and economic conditions mentioned in the discussion of the third quarter results contributed to the lower sales in the other three segments for the first nine months of 2011. The consolidated gross profit ratio was 20.4% in the first nine months of 2011 compared to 21.5% for the same period in 2010. The CACS segment experienced a substantial drop in its gross profit rate while the gross profit rate for the other three segments either improved or held steady. Consolidated selling and administrative expenses were $465,000 higher in the first nine months of 2011 compared to the comparable period in the prior year. As explained in the remarks on the third quarter results, the higher level of expense is due to the Pikevew litigation and Williams EcoLogix, Inc. Selling and administrative expenses as a percentage of net sales increased to 18.9% from 17.0%.



The operating loss for the first nine months of 2011 was $1,901,000 compared to a $544,000 operating profit in the comparable period in 2010. The operating loss for the first nine months of 2011 includes $169,000 in gains from the sale of equipment compared to gains of $70,000 in the prior year period.



Interest expense in the first nine months of 2011 was approximately $230,000 lower compared to the same period of 2010. The reduction in interest expense was due to a combination of lower interest rates and reduced borrowings. The average interest rate in the first nine months of 2011 was approximately 5.9 % compared to approximately 7.10% in 2010. Average total outstanding indebtedness was approximately $11,488,000 in the first nine months of 2011 compared to approximately $13,313,000 in the first nine months of 2010. The reduction in outstanding indebtedness was due principally to the scheduled term debt repayments.

Heating and Cooling Segment



Sales in the Heating and Cooling segment decreased $2,727,000 (10.6%) in the first nine month of 2011 from the comparable period in 2010. Fan coil sales were down 42% reflecting a continued depressed level of commercial construction particularly with regard to new hotels, a principal application for fan coils. Sales of furnaces and heaters increased by 7% compared to the first nine months of 2010. The higher level of sales for these products was due in part to some rehabilitation projects at multifamily dwellings and improved product availability. The gross profit ratio for this segment increased by 3.7 points for the reasons mentioned in the discussion of the third quarter results. Selling and administrative expenses were lower in the first nine months of 2011 as a result of a lower level of legal expenses associated with product liability claims and more stringent spending controls.



Evaporative Cooling Segment



Sales in the Evaporative Cooling segment increased $1,327,000 or 6.7% in the first nine months of 2011 compared to the same period in 2010. Sales in 2010 were held down by a carryover of inventory at some customers from the 2009 season. The gross profit ratio was virtually unchanged. The effect of the improved volume and a beneficial change in product sales mix was offset by some increased material costs, particularly steel. Selling and administrative expenses were higher in the 2011 period due to the higher level of sales, additional sales staff and higher incentive compensation provisions. As a percentage of net sales these expenses were 11.3% in the first nine months of 2011 compared to 11.2% for the same period in 2010.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 October 1, 2011 and January 1, 2011 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 Notes 2 - 4 in this report on Form 10-Q and 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 January 1, 2011.

OUTLOOK



The level of construction activity in southern Colorado continues at a slow pace. Housing starts in Colorado Springs have increased modestly compared to the last two years but remain at relatively low levels. Housing construction in Pueblo is very depressed. Business conditions are not expected to substantially improve within the next 12 months. Under the current conditions, pricing in the CACS segment is expected to remain sharply competitive. It is difficult to predict the timing and magnitude of any general recovery of construction in the markets served.



The Door segment’s sales are also, to a significant degree, reliant on new construction. The sales backlog of the Door segment at the end of September 2011 is modestly lower than at the end of September 2010. Pricing remains highly competitive.



July typically marks the end of the selling season for evaporative coolers. Sales during the third quarter of 2011 declined approximately 3.8% primarily due to less favorable weather conditions throughout the third quarter of 2011 when compared to the third quarter of 2010. Sales during the fourth quarter are preseason orders and are highly dependent upon the timing these orders are placed by our customers.



The sales backlog for fan coil products in the Heating and Cooling segment has shown some increase recently as some construction projects which were previously deferred are now moving forward. However, the overall commercial construction market is expected to remain slow. Furnace sales for the remainder of the year will be largely weather dependent.



RECENTLY ISSUED ACCOUNTING STANDARDS



See Note 4 for a discussion of recently issued accounting standards.



MATERIAL CHANGES TO CONTRACTUAL OBLIGATIONS



As discussed in Note 9, the Company entered into an amendment of its Credit Agreement with its bank lender. Other than discussed in the preceding sentence, there were no material changes to contractual obligations that occurred during the quarter ended October 1, 2011.



FORWARD-LOOKING STATEMENTS



The foregoing discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of the Company’s management as well as on assumptions made by and information available to the Company at the time such statements were made. When used in this Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects,” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of factors including but not limited to: weather, interest rates, availability of raw materials and their related costs, national and local economic conditions, competitive forces and changes in governmental regulations and policies. Some of these factors are discussed in more detail in the Company’s 2010 Annual Report on Form 10-K. Changes in accounting pronouncements could also alter projected results. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.

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