UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 2928, ~~2018~~2019

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

For the transition period from to

Commission file number 1-3834

Continental Materials Corporation

(Exact name of registrant as specified in its charter)

Delaware		36-2274391
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)

440 South La Salle Street, Suite 3100, Chicago, Illinois		60605
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code 312-541-7200

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

Title of each class		Name of each exchange on which registered
Common Stock - $0.25 par value		NYSE American

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 and 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 of the Exchange Act). Yes ☐ No ☒

The aggregate market value (based on the ~~July~~June 128, ~~2018~~2019 closing price) of voting stock held by non-affiliates of registrant was approximately $8,~~690~~816,000. As of March 2213, ~~2019~~2020, there were 1,~~680~~675,~~223~~484 shares of the registrant’s common stock outstanding.

Incorporation by reference: ~~Portions~~The ofinformation ~~registrant’s~~contained ~~definitive~~in ~~proxy~~Part ~~statement~~III ~~for~~hereof ~~the~~is ~~2019~~hereby ~~Annual~~incorporated ~~Meeting~~by ofreference ~~stockholders~~from tothe beearlier ~~held~~filed ~~May 22,~~of: ~~2019~~(i) ~~into~~an ~~Part III~~amendment ofto this Annual Report on Form 10- K. ~~The~~or (ii) a definitive proxy statement isfiled ~~expected~~pursuant to beRegulation ~~filed~~14A, ~~with the Securities and Exchange Commission~~ within 120 days ~~after the close~~ of ~~the~~December ~~fiscal~~28, ~~year covered by this Form 10-K~~2019.

Table of Contents

TABLE OF CONTENTS

		Page
Special Note Regarding Forward Looking Statements		3
PART I.		3
Item 1. Business		3
Item 1A. Risk Factors		6
Item 1B. Unresolved Staff Comments		67
Item 2. Properties		67
Item 3. Legal Proceedings		78
Item 4. Mine Safety Disclosure		78
PART II.		89
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		89
Item 6. Selected Financial Data		89
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		910
Item 7A. Quantitative and Qualitative Disclosures about Market Risk		1920
Item 8. Financial Statements and Supplementary Data		2021
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosures		4149
Item 9A. Controls and Procedures		4149
Item 9B Other Information		4150
Part III.		4250
Part IV.		4250
Item 15. Exhibits, Financial Statement Schedules		4250
Item 16. Form 10-K Summary		4451

Table of Contents

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 Continental Materials Corporation’s (Company) 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 Annual 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 various factors including but not limited to: the impact of the novel coronavirus on the workforce, the Company’s supply chain and customer demand, 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 the income tax code, income tax rates as well as accounting pronouncements 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.

PART I

Item 1. BUSINESS

(References to a “Note” are to the Notes to Consolidated Financial Statements contained elsewhere in this report.)

The Company is a Delaware corporation, incorporated in 1954. The Company ~~operates~~is ~~primarily~~a ~~within~~holding ~~two~~company ~~industry~~with ~~groups,~~operations ~~Heating,~~in ~~Ventilation~~the ~~and~~Building ~~Air Conditioning (HVAC) and Construction~~ Products. ~~The~~industry ~~Company~~group, ~~has~~although ~~identified~~it ~~two~~may ~~reportable~~look ~~segments~~to inexpand ~~each~~outside of ~~the~~that ~~two~~market. Within this industry ~~groups:~~group the ~~Heating~~Company ~~and~~has ~~Cooling~~identified ~~segment~~three ~~and~~reportable ~~the~~segments: ~~Evaporative Cooling segment in~~ the HVAC ~~industry group and the Concrete~~segment, ~~Aggregates and Construction Supplies (CACS) segment and~~ the Door segment inand the Construction ~~Products~~Materials ~~industry group~~segment.

~~The~~HVAC Heating and Cooling segment primarily produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co. (WFC) of Colton, California. The Evaporative Cooling segment produces and sells primarily evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona. Concrete, aggregates and construction supplies 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, Colorado and Transit Mix of Pueblo, Inc. of Pueblo, Colorado (the three companies are collectively referred to as TMC). The Door segment sells hollow metal doors, door frames and related hardware, wood doors, lavatory fixtures and electronic access and security systems from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI), which operates out of facilities in Pueblo and Colorado Springs, Colorado. See Note 15 for additional financial information by industry segment.Segment

InThe ~~addition~~HVAC tosegment ~~the~~is ~~above~~comprised of ~~reporting~~four ~~segments,~~operating ancompanies ~~“Unallocated~~and ~~Corporate”~~sells ~~classification~~a isvariety ~~used~~of toproducts ~~report~~including ~~the~~residential ~~unallocated~~and ~~expenses~~commercial ofwall ~~the~~furnaces, ~~corporate~~fan ~~office~~coils, ~~which~~evaporative ~~provides treasury~~coolers, ~~insurance~~boiler ~~and~~room ~~tax~~equipment, ~~services~~dryer asboxes ~~well~~and asrelated ~~strategic~~accessories ~~business~~from ~~planning~~the ~~and~~Company’s ~~general~~wholly-owned ~~management~~subsidiaries, ~~services.~~Williams ~~Expenses~~Furnace ~~related~~Co. to(WFC), ~~the~~Phoenix ~~corporate~~Manufacturing, ~~information~~Inc. ~~technology~~(PMI) ~~group~~Global ~~are~~Flow ~~allocated~~Products to(GFP) ~~all~~and ~~locations,~~InOvate ~~including~~Dryer ~~the~~Technologies ~~corporate office~~(InOvate).

~~MARKETING~~•WFC manufactures residential gas furnaces and commercial fan coil systems. Activities covering the full cycle of product manufacturing, from design to production, are all performed in-house at its Colton, California location. WFC is one of three domestic companies producing wall furnaces (excluding units sold to the recreational vehicle industry) and gas-fired console heaters, which comprise only a small component of the heating industry, and is one of nine domestic companies producing fan coils.

~~The~~•PMI ~~HVAC~~manufactures ~~industry~~residential ~~group markets its products throughout North America through plumbing, heating~~ and ~~air~~commercial ~~conditioning~~evaporative ~~wholesale~~coolers. ~~distributors~~Activities ascovering ~~well~~the asfull ~~directly~~cycle ~~to major retail home-centers and other retail outlets. Some~~ of ~~the~~product ~~products~~manufacturing, ~~are~~from ~~also~~design ~~sold~~ to ~~HVAC~~production, ~~installing~~are ~~contractors~~all ~~and~~performed ~~equipment~~in-house ~~manufacturers~~at ~~for commercial applications. The Company contracts with independent manufacturers’ representatives for all of~~ its ~~products~~Phoenix, ~~while~~Arizona ~~also~~location. ~~employing~~PMI ~~and~~is ~~utilizing~~one ~~a staff~~ of ~~sales~~two ~~and~~primary ~~sales~~domestic ~~support~~manufacturers ~~personnel. Sales~~ of ~~furnaces and~~ evaporative coolers, ~~are~~although ~~predominantly~~there ~~in the United States and~~ are ~~concentrated~~other insmall ~~the~~domestic ~~Western~~competitors ~~and~~as ~~Southwestern~~well ~~states.~~as ~~Sales~~a ofnumber ~~furnaces and console heaters usually increase in the months~~ of ~~September through~~foreign ~~January.~~producers ~~Sales~~that ofalso distribute evaporative ~~coolers~~cooling ~~have~~products ~~historically been higher~~ in the ~~months of March through July~~U. ~~Sales of the fan coil product line are made throughout the United States, Canada and the Caribbean and are more evenly distributed throughout the year, although volume can fluctuate depending upon the~~ S.

•GFP manufactures American Society of Mechanical Engineers (ASME) certified tanks, pressure vessels, valves and other accessories typically found in commercial hydronic systems at its Broken Arrow, Oklahoma locations. GFP is one of many companies manufacturing and distributing valves, accessories and ASME certified tanks to the hydronics market.

•InOvate designs and manufactures a range of air venting and handling products focused on dryer exhaust safety and efficiency. InOvate partners with its supply chain to leverage manufacturing excellence from its location in Jupiter, Florida. InOvate is, we believe, the market leader in manufacturing metal air handling products for the dryer venting marketplace, as the limited competition generally manufactures lower quality products made out of plastic materials, albeit at a lower price point.

Table of Contents

~~shipment~~ The ofHVAC ~~larger~~segment ~~orders.~~group ~~Extended~~markets ~~payment~~its ~~terms~~products throughout North America through plumbing, ~~also~~heating ~~referred~~and toair conditioning wholesale distributors as ~~dating~~well ~~programs,~~as directly to major retail home-centers and other retail outlets. Some of the products are ~~offered~~also sold to ~~some~~contractors ~~customers~~that ininstall ~~order~~HVAC tocomponents ~~enhance~~and ~~sales~~equipment manufacturers for commercial applications. The Company contracts with independent manufacturers’ representatives for all of ~~evaporative~~its ~~coolers~~products ~~and~~while ~~wall~~also ~~furnaces~~employing ~~during~~a ~~the~~staff ~~off~~of ~~season~~sales and sales support personnel.

The ~~Construction~~HVAC ~~Products~~segment ~~industry~~ group ~~markets~~maintains ~~its~~several ~~products~~parts ~~primarily~~departments ~~through its own direct sales personnel~~ and, ~~except~~help ~~for~~lines ~~doors~~to ~~and~~assist ~~related hardware, confines~~ its ~~sales~~customers ~~largely~~in toservicing the ~~Southern~~products. ~~portion~~The ofCompany ~~the~~does ~~Front~~not ~~Range~~currently ~~area~~perform ininstallation ~~Colorado.~~services, ~~Sales~~nor are ~~primarily~~maintenance ~~made~~or toservice ~~general~~contracts ~~and~~offered. ~~sub-contractors,~~The ~~government~~HVAC ~~entities~~segment ~~and~~group ~~individuals.~~does ~~Sales~~not ~~are~~derive ~~affected~~any byrevenue ~~the~~from ~~general~~after-sales ~~economic~~service ~~conditions~~ and ~~weather~~support ~~conditions~~other inthan ~~the~~from ~~areas~~parts ~~serviced (as they relate to construction)~~sales. ~~Revenues~~Training ~~usually~~and ~~decline~~product ininformation ~~the~~sessions ~~winter~~for ~~months as~~ the ~~pace~~furnace, offan ~~construction~~coil ~~slows.~~and ~~Sales~~evaporative ofcooler ~~doors~~product ~~and~~lines ~~the~~are ~~related~~offered ~~hardware~~at ~~are~~our ~~made~~plants ~~throughout~~and ~~the~~other ~~United~~sites ~~States~~for ~~although~~distributors, ~~sales~~contractors, ~~are~~engineers, ~~primarily~~utility ~~within~~company ~~Colorado~~employees and ~~adjacent~~other ~~states~~customers.

~~During~~The ~~2018,~~heating noand ~~customer~~cooling ~~accounted~~industry ~~for~~is ~~10%~~dominated orby ~~more~~a offew ~~the~~manufacturers ~~total~~which ~~sales~~are ofsubstantially larger than the Company. These manufacturers sell diversified lines of heating and air conditioning units directed primarily toward central heating and cooling systems. Competition in this industry is primarily on a basis of price, product features and performance, service and timeliness of delivery.

~~CUSTOMER~~The ~~SERVICE~~HVAC ~~AND~~segment ~~SUPPORT~~has few direct competitors but there are multiple competitors for each product line.

~~The~~Door 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.Segment

The ~~personnel~~Door ~~in the CACS~~ segment ~~routinely~~is ~~take a leadership role in formulation~~ comprised of ~~the~~three ~~products~~operating tocompanies ~~meet~~and ~~the~~sells ~~specifications~~and ofinstalls ~~customers.~~hollow ~~The~~metal ~~Company~~and iswood ~~not involved in setting forms or performing finishing work on any of its concrete products. The Door segment offers~~ doors, door frames and related hardware, ~~including~~sliding ~~electronic~~door ~~access~~ systems. ~~Doors, frames~~ and ~~related~~electronic ~~hardware~~access and ~~lavatory~~security ~~fixtures~~systems ~~are~~from ~~installed by independent contractors engaged by~~ the ~~general~~Company’s ~~contractor~~wholly-owned orsubsidiaries, ~~building~~McKinney ~~owner.~~Door ~~Electronic access~~ and ~~security~~Hardware, ~~systems~~Inc. ~~are~~(MDHI), ~~often~~Fastrac ~~installed~~Building bySupply ~~the~~(Fastrac) ~~Company’s~~and ~~technicians,~~Serenity ~~generally~~Sliding ~~over~~Door aSystems ~~short period of time~~(Serenity).

~~MANUFACTURING~~ · MDHI is an authorized distributor of a major manufacturer of hollow metal doors and hardware operating from locations in Colorado Springs, Colorado and Pueblo, Colorado. MDHI has a leading position in the manufacturing of door components, including internal framing components (stile and rails), glass inserts, door core, interior door facings (molded and veneer) and exterior door facings. MDHI is one of many competitors in a fragmented, primarily regional market.

~~The~~· ~~Company~~Fastrac ~~conducts~~is ~~its~~the ~~manufacturing~~architect, ~~operations~~builder, ~~through~~facility aowner, ~~number~~and ofwholesale ~~facilities~~distributor's asnationwide ~~more~~source ~~completely~~for ~~described~~commercial doors, frames, hardware, and millwork, in ~~Item~~particular 2for —healthcare, ~~Properties~~hospitality, ~~below~~and commercial office interior construction and design projects. Fastrac supplies and installs products from its Colorado Springs, Colorado location, and is one of many competitors in a fragmented market.

~~Due~~· toSerenity ~~the~~manufactures ~~seasonality~~sliding ofbarn ~~the~~door ~~HVAC~~systems ~~businesses~~ and tosliding ~~balance~~door ~~production~~systems ~~throughout~~for ~~the~~healthcare, ~~year~~hospitality, ~~furnaces~~and commercial office interior building and ~~evaporative~~design ~~coolers~~projects. ~~are~~Serenity ~~built~~provides ~~during~~a ~~their~~turn-key ~~respective~~sliding ~~off~~barn ~~seasons~~door indesign ~~order~~that allows for ~~the~~additional ~~Company~~floor tospace ~~have~~and ~~adequate~~versatility ~~supplies~~with toa ~~sell~~system ~~during~~that ~~the~~is ~~season.~~ADA ~~Although~~compliant, ~~sales~~fully ~~are~~sealed ~~made~~for ~~throughout~~sight ~~the~~and ~~year~~sound, ~~sales~~and ~~volume~~ is ~~generally~~capable ~~higher~~of reducing noise by up to 35 decibels. It operates from ~~September through~~its ~~January for~~location ~~furnaces~~in ~~while~~Colorado ~~sales~~Springs, ~~volume~~Colorado and is one of ~~evaporative~~only ~~coolers~~three competitors that have certified sound attenuating products, although it is ~~generally~~one ~~higher~~of ~~from~~many ~~March through~~sliding ~~July~~door system manufacturers.

~~In general, the Company can obtain the raw materials required by its operations in all segments from various sources in the quantities desired.~~ The ~~Company~~Door segment’s ~~CACS~~sales ~~segment~~are ~~purchases~~primarily ~~most~~for ofcommercial ~~its~~and ~~cement~~institutional ~~requirements~~buildings ~~from~~such ~~several~~as ~~suppliers~~schools, inhealthcare ~~order~~facilities toand ~~obtain~~hospitality ~~favorable pricing~~buildings. Sales ~~Although~~are ~~there~~made ~~have~~to ~~been~~independent ~~times~~installers, ~~when~~general ~~heavy~~contractors ~~cement~~or ~~demand~~building ~~has~~owners. ~~caused~~Sales ~~some~~include ~~scarcity~~metal ofand ~~cement~~wood ~~supply~~doors, ~~the~~door ~~Company~~frames ~~does~~and ~~not~~related ~~expect to encounter this situation in the foreseeable future due to the addition of a new cement mill near Pueblo~~hardware, ~~Colorado~~sliding ~~since~~door ~~the~~systems ~~last~~and ~~construction~~electronic ~~boom~~access and ~~slowing~~security ~~development of the oil fields north of Denver~~systems. ~~The~~Certain ~~Company~~projects ~~has~~include ~~no long-term supply contracts and does not consider itself to be dependent~~ on ~~any~~site ~~individual~~installation ~~supplier~~services. ~~MDHI~~The isDoor anSegment ~~authorized~~markets ~~distributor~~throughout ofNorth aAmerica ~~major~~primarily ~~manufacturer~~through ofits ~~hollow~~own ~~metal~~staff ~~doors and hardware. MDHI has historically purchased the majority~~ of ~~its~~industry ~~hardware~~professionals ~~primarily~~who ~~from~~specialize ~~this supplier~~ in ~~order~~medical, tohealthcare, ~~obtain~~hospitality, ~~favorable~~assisted ~~volume~~living ~~related~~and ~~pricing;~~commercial ~~however,~~office ~~other~~interior ~~suppliers~~building ~~are available~~products.

The ~~Company~~acquisition ~~mines~~of ~~aggregates~~Fastrac ~~(rock, gravel~~ and ~~sand)~~Serenity ~~from various owned and leased properties~~ in ~~Colorado.~~2019 ~~Colorado~~has mining permits require the 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~~range 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~~products ~~reclamation~~and ~~work~~services ~~using existing production employees~~ and ~~equipment~~expanded ~~primarily~~its atcustomer ~~times when production is curtailed due to inclement weather or there is decreased demand for our products~~base. ~~Consequently,~~See ~~the~~Note ~~reclamation work to date has had a minimal impact on our capital expenditures~~18.

Table of Contents

~~COMPETITIVE~~The ~~CONDITIONS~~Door segment sells hollow metal and wood doors, door frames and related hardware, lavatory fixtures and electronic access and security systems throughout the United States. The door industry is highly fragmented and competitive, and includes a number of regional and international competitors. Competition is largely based on the functional and aesthetic quality of products, service quality, distribution capability and price.

~~Heating~~Construction ~~and~~Materials 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 Company is one of nine primary companies producing fan coils. The heating and cooling 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.Segment

~~Evaporative~~The ~~Cooling~~Construction —Materials ~~The~~segment ~~Company~~offers ~~manufactures~~a ~~evaporative~~variety ~~air~~of ~~coolers~~construction atrelated ~~leased~~products ~~facilities~~including inlimestone, ~~Phoenix~~gravel, ~~Arizona.~~sand, ~~The~~steel ~~principal~~rebar ~~competitor is Essick Air Products, Inc.~~ and ~~its~~consumable ~~subsidiary~~construction ~~Champion~~products ~~Cooler~~from ~~Corp.~~facilities ~~There~~in ~~are~~Pueblo ~~other~~and ~~small~~Colorado ~~domestic~~Springs, ~~competitors~~Colorado asoperated ~~well~~by asthe aCompany’s ~~number~~wholly-owned ofsubsidiaries, ~~foreign~~Castle ~~producers~~Concrete ~~that~~Company ~~also~~(Aggregates) ~~distribute~~and ~~evaporative~~Castle ~~cooling~~Rebar ~~products~~& inSupply ~~the~~(Rebar) ~~U.S.~~and ~~All~~TMOP ~~producers~~Legacy ofCompany ~~evaporative~~(formerly ~~air~~Transit ~~coolers~~Mix ~~typically compete aggressively on the basis~~ of ~~price~~Pueblo, ~~product features and product availability during the cooling season~~Inc.).

~~Concrete,~~· Aggregates ~~and~~has ~~Construction~~ceased ~~Supplies~~mining —operations ~~This~~at ~~segment~~all ~~operates in highly competitive markets along the Southern Front Range~~ of ~~Colorado~~its properties. ~~The~~It ~~Company~~previously isoperated ~~one~~limestone, ofgravel ~~four~~and ~~companies~~sand ~~producing~~operations ~~ready-mix~~at ~~concrete~~multiple locations in ~~the~~or near Colorado Springs ~~area~~ and ~~one of two companies producing ready-mix concrete in the~~ Pueblo, ~~area~~Colorado. ~~Because~~Aggregates ofexpects ~~the~~to ~~relatively~~conduct ~~high~~property ~~transportation~~reclamation ~~costs~~over ~~associated with concrete,~~ the ~~level~~next offew ~~competition is heavily influenced by the distance from production facilities to markets served. Price~~years, ~~plant~~sell ~~location,~~off ~~transportation~~its ~~costs,~~remaining ~~service,~~assets ~~product quality~~ and ~~reputation~~exit ~~are major factors that affect competition among~~ the ~~ready-mix concrete producers~~market. ~~The Company is one of six producers of aggregates in the Colorado Springs and Pueblo marketing. All producers compete on the basis of price, quality of material and service.~~

~~The~~· ~~Company’s~~Rebar ~~sales~~provides ofcustom steel rebar shaping operations and ~~other~~sells consumable construction supplies into ~~the~~construction trade professionals from its locations in Colorado Springs, Colorado and Pueblo, ~~metropolitan~~Colorado. ~~areas~~The Company’s sales of rebar and other construction supplies are subject to intense competition from three larger companies in Denver and one company in Colorado Springs ~~although~~as well as a number of small local competitors ~~are also in the market~~. ~~The Company competes on price, product availability and customer service.~~

~~Door —~~ The ~~Company~~Construction ~~sells~~Materials ~~hollow~~segment ~~metal~~group ~~and~~markets ~~wood~~its ~~doors,~~products ~~door~~primarily ~~frames~~through ~~and~~its ~~related~~own ~~hardware,~~direct ~~lavatory~~sales ~~fixtures~~personnel and ~~electronic~~confines ~~access~~its ~~and security systems throughout the United States although~~ sales ~~are~~largely ~~primarily~~ in ~~Colorado~~southern ~~and adjacent states~~Colorado. ~~There~~The ~~are~~Company ~~numerous~~competes ~~competitors in our market area which compete aggressively based~~ on price, product availability and ~~delivery~~customer ~~times~~service.

During 2019, no customer accounted for 10% or more of the total sales of the Company.

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

The Company sold substantially all of the assets of its ready mix concrete and Daniels Sand operations in the first quarter of 2019. See Note 19. During the second quarter of 2019, the Company acquired the assets of four operating businesses through three separate transactions. See Note 18 for additional discussion of these 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 Company’s decision makers evaluate, manage and allocate resources to the operating businesses after the sale of the concrete and sand operation assets and the acquisitions discussed in Note 18. Segment information for prior periods has been reclassified to conform to current segment reporting structure.

EMPLOYEES

The Company employed ~~612~~460 people as of December 2928, ~~2018~~2019. Employment varies throughout the year due to the seasonal nature of ~~the~~its businesses. The number of employees was significantly reduced due to the sale of substantially all of the assets of its ready mix concrete and Daniels Sand operations in the first quarter of 2019. This transaction also caused the Company to re-align its segment reporting to align with the way management will measure and evaluate operations going forward. A breakdown of the current and prior year’s employment at year-end by segment was:

	2018	2017
	2019	2018
Heating and Cooling	214	191
HVAC Segment	350	337
Evaporative Cooling	123	127
Door Segment	73	43
Concrete, Aggregates and Construction Supplies	221	215
Construction Materials Segment	25	221
Door	43	44
Corporate Office and Other	12	11
Corporate Office and Other	11	13
Total	460	612
Total	612	590

The factory employees at the Colton, California plant are represented by the Carpenters Local 721 Union under a contract that expires December 31, 2022. The Company considers relations with its employees and with their union to be good. There are no unions at any of the Company’s other operations.

ENVIRONMENTAL MATTERS

Table of Contents

~~compliance~~ The ~~with~~factory ~~all~~employees ~~applicable~~at ~~environmental~~the ~~laws~~WFC ~~and~~plant ~~regulations,~~are ~~but~~represented toby ~~exceed~~ the ~~minimum~~Carpenters ~~requirements~~Local of721 ~~those~~Union ~~laws~~under ~~and~~a ~~regulations~~contract ~~where~~that ~~practicable.~~expires ~~However~~December 31, 2022. ~~there~~The ~~can~~Company beconsiders norelations ~~assurance~~with ~~that~~its ~~the~~employees ~~Company~~and ~~will~~with betheir inunion ~~compliance~~to ~~with~~be ~~all~~good. ~~applicable~~There ~~environmental~~are ~~laws~~no ~~and~~unions ~~regulations~~at inany of the ~~future~~Company’s other operations.

InENVIRONMENTAL 2018, 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.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. Some laws impose obligations on us with respect to the management of waste products. 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. However, there can be no assurance that the Company will be in compliance with all applicable environmental laws and regulations in the future.

In 2019, 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, it is difficult to predict total reclamation costs.

TENDER OFFER

On February 18, 2020 Bee Street Holdings LLC, an entity controlled by James G. Gidwitz, the Chairman of our board of directors and our Chief Executive Officer, ("Bee Street"), commenced an unsolicited tender offer to acquire all of the outstanding shares of common stock for $9.50 per share in cash.

On March 3, 2020 the Company filed Schedule 14D-9 stating that the Board of Directors had unanimously decided to express no opinion and remain neutral with respect to the offer.

On March 17, 2020, the Bee Street tender offer expired. On March 18, 2020 Bee Street extended the tender offer until April 3, 2020 to allow additional time for stockholders to consider the offer in the light of recent market activity and the developing economic situation stemming from the COVID-19 coronavirus pandemic.

AVAILABLE INFORMATION

The Company electronically files various reports and other information with the Securities and Exchange Commission (SEC) including this annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding the Company. Access to this information is available free of charge at the SEC’s website at http://www.sec.gov. In addition to the SEC site, the Company maintains an internet site which contains SEC filings, SEC filings in XBRL format, Governance documents and Annual Reports. Access to this site and the information therein is available free of charge at www.continental-materials.com. The information on our website is not incorporated by reference into this Annual Report on Form 10-K.

Item 1A. RISK FACTORS

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such, is not required to provide information in response to this item. However, in light of recent events, stockholders should be aware of the following risks associated with an investment in the Company:

If Bee Street fails to complete its tender offer for our common stock, our stock price, business, results of operations and financial condition could be adversely affected.

We cannot assure that Bee Street will complete its tender offer for our common stock. If the tender offer is not completed, we will be subject to several risks. Because the current trading price of our common stock may reflect a market assumption that the tender offer will be completed, failure to complete the tender offer could adversely affect the price of our common stock. Also, we have incurred significant, and may incur additional, costs in connection with the tender offer, including the diversion of management resources, for which we will have received little or no benefit if the

Table of Contents

tender offer is not completed. A failed transaction may also result in a negative impression of the Company in the investment community.

The tender offer by Bee Street may increase the volatility of the price of our common stock, which may could result in substantial losses by investors.

The tender offer by Bee Street could affect the trading price of our common stock and increase its volatility, as well as reduce the market liquidity for our common stock. Securities class action litigation is commonly instituted against companies following periods of volatility in the market price of their securities. The commencement of this type of litigation against us in the future could result in substantial costs and a diversion of management’s attention and resources.

The spread of a new strain of coronavirus (also known as COVID-19) may adversely affect our business operations.

In December 2019, a new strain of coronavirus (also known as, and hereinafter referred to as “COVID-19”) originated in Wuhan, China, and quickly spread to infect many people in the city and surrounding area. In some cases, COVID-19 causes severe illness and even death. Since its discovery, COVID-19 has spread throughout China and to several other countries, significantly impacting their economies. Various measures may be taken by countries, including the United States, both on a macro country-wide level and a local level, to combat the virus and its spread. These may include quarantines or bans on public events.

The continued spread of COVID-19 may adversely affect our supply chain, results of operations and business generally, depending on the extent of its spread of the virus, the rate of infection, the severity of illness and the probability of lethality, the relative effect on various portions of the population (such as the aged), the measures taken to combat the virus and their effectiveness, the effect on international trade of any measures taken to combat the virus, any action taken (such as the lowering of interest rates) by government entities to combat the negative macroeconomic effects of these measures, the timing and availability of any vaccine for the virus, and other factors.

The Centers for Disease Control and Prevention has stated a risk exists of a pandemic in the United States, which would mean that the current methods in place to control of the spread of the virus have been ineffective. In such a situation, the effect on the economy and on the public may be severe. There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19 and a potential pandemic, and, as a result, there is considerable uncertainty of its potential effect on our business and results of operations.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

The ~~Heating~~HVAC ~~and Cooling~~ segment operates out of an owned ~~facility~~facilities in Colton, California and Broken Arrow, Oklahoma. ~~This~~These ~~facility~~facilities isare, in the opinion of management, in good condition and sufficient for the Company’s current needs. Production capacity exists at the Colton plant such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery. There is sufficient capacity in Broken Arrow, Oklahoma for the current level of business, however, expansion may be required to support increased business activity levels in future years. Additional facilities include leased facilities in Phoenix, Arizona, Jupiter, Florida and Broken Arrow, Oklahoma. Production capacity exists at the Phoenix facilities such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery. These facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs.

The ~~Evaporative~~Door ~~Cooling~~ segment operates out of ~~leased~~an ~~facilities~~owned facility in ~~Phoenix,~~Colorado ~~Arizona.~~Springs ~~These~~and leased facilities ~~are,~~ in ~~the~~Colorado ~~opinion~~Springs, ofColorado ~~management~~and Pueblo, inColorado. ~~good~~Product ~~condition~~volumes ~~and~~at ~~sufficient~~all ~~for~~of the ~~Company’s~~facilities ~~current~~of ~~needs.~~the ~~Production~~Company ~~capacity~~are ~~exists~~subject atto ~~the~~market ~~Phoenix~~fluctuations, ~~facilities~~but ~~such~~in ~~that~~ the ~~Company~~opinion ~~could~~of ~~exceed~~management, the ~~highest~~facilities ~~volumes~~are ~~achieved~~generally inwell ~~prior~~utilized. ~~years~~The orfacilities ~~expected~~are, in the ~~foreseeable~~opinion ~~future~~of management, in good condition and ~~maintain~~sufficient ~~timely~~for ~~delivery~~the Company’s current needs.

The CACS segment serves the Colorado ready-mix concrete market from seven owned batch plants. During 2018 the Company operated aggregate processing facilities on two owned and one leased mining property. Two of the three mining properties are located in or near Colorado Springs or Pueblo. These properties presently provide a majority of the aggregate requirements of our Colorado Springs and Pueblo ready-mix concrete business. The Company also owns two properties and leases one property that are not currently in production. During 2015, the Company obtained an option to lease the rights to an aggregates location south of Colorado Springs. The Company was pursuing the necessary permits, etc. for developing this site and the associated costs were being recorded as deferred development. In April, 2018 the State of Colorado denied the Company’s permit application for the second time. For further information see Note 16 and the CACS segment in Management’s Discussion and Analysis of Financial Condition and Results of Operations below. Construction supplies are sold from owned facilities adjacent to the main batch plants in Colorado Springs and Pueblo. All of the CACS segment’s facilities are located along the Southern Front Range in Colorado and, in the opinion of management, are in good condition and sufficient for the Company’s current needs. In the opinion of management, the properties owned and leased contain mineable reserves sufficient to service the majority of our sand, rock and gravel requirements for the Company’s current needs.7

Table of Contents

The ~~Door~~Construction Materials segment ~~operates~~comprises ~~out~~six ofaggregates anlocations ~~owned~~including ~~facility~~Grisenti inFarms, ~~Colorado~~Pikeview, ~~Springs~~Black Canyon (Synder), Pueblo East, Pueblo West, and aBarnhart ~~leased~~Pit, ~~facility~~which are all located in ~~Pueblo,~~southern Colorado. The ~~facilities~~previously ~~are~~leased properties of Pueblo East, inPueblo ~~the~~West ~~opinion~~and Barnhart Pit were part of ~~management~~the legal dispute with Valco, Inc. that was settled in ~~good~~October ~~condition~~2019 (see Note 2) and ~~sufficient~~are ~~for~~now owned by the Company’s. ~~current~~Following ~~needs~~the decision in 2019 to cease mining operations at Pikeview, none of the remaining properties are active in the production of aggregates and are in various states of reclamation under their respective mining permits.

Product volumes at all of the facilities of the Company are subject to seasonal fluctuations, but in the opinion of management, the facilities are generally well utilized.

The corporate office operates out of leased office space in Chicago, Illinois.

Item 3. LEGAL PROCEEDINGS

OnAs ~~September 15, 2016 a Partial Summary Judgment Order was issued regarding the Company’s~~ previously disclosed ~~litigation~~, ~~Continental~~on ~~Materials~~January ~~Corporation v. Valco~~15, ~~Inc.~~2019, ~~Civil~~the ~~Action~~Company ~~No.~~reached ~~2014-cv-2510,~~an ~~filed~~amicable inresolution ~~the~~to ~~United~~a ~~States~~business ~~District~~dispute ~~Court~~by ~~for~~way ~~the District~~ of ~~Colorado. The suit regards~~ a ~~Fee~~settlement ~~Sand~~agreement. ~~and~~Pursuant ~~Gravel~~to ~~Lease (“Lease”) between~~ the ~~Company~~settlement ~~as Lessee and Valco~~agreement, ~~Inc. (“Valco”) as Lessor that calls for~~ the ~~payment~~Company ofreceived ~~royalties over the life of the Lease on an agreed 50~~$15,000,000. ~~tons~~The ofother ~~sand~~party and ~~gravel reserves. In~~ the ~~suit the~~ Company ~~sought~~further ~~declaratory~~agreed ~~judgment and damages pursuant~~ to ~~the~~set ~~Lease~~up ona ~~the~~joint ~~grounds~~escrow ~~that~~account ~~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~~support incertain ~~excess~~conditions ~~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 sameagreement. ~~Valco~~The ~~asserted counterclaims against the~~ Company ~~alleging breach of contract and seeking declaratory judgment regarding the Company~~’s ~~refusal~~contribution to ~~make further royalty payments under~~ the ~~Lease.~~escrow Inaccount ~~the~~was ~~ordinary~~approximately ~~course of business and absent any breach by Valco, the Company is required to make quarterly royalty payments amounting to not less than~~ $~~300~~218,000. inThe aSettlement ~~calendar~~Agreement ~~year.~~does Innot ~~response~~contain toany ~~Valco’s~~admission ~~breaches~~ of ~~contract~~liability, ~~the~~wrongdoing, ~~Company~~or ~~stopped~~responsibility ~~making~~by ~~royalty~~any ~~payments at the start~~ of the ~~2015 calendar year~~parties.

~~The~~On ~~Company~~October ~~has~~9, ~~asserted~~2019, ~~partial failure of consideration as an affirmative defense to Valco’s counterclaims to offset~~ the ~~alleged~~Company ~~back-due quarterly royalty payments~~ and ~~the~~Valco ~~amount~~filed ~~due~~a onJoint ~~quarterly~~Notice ~~royalty~~of ~~payments~~Settlement, inregarding the ~~future. The Partial Summary Judgment Order resolved many of the~~ Company’s ~~claims~~previously indisclosed ~~Valco’s favor~~litigation, ~~but~~stating ~~did~~that ~~not~~the ~~resolve~~parties ~~Valco’s~~had ~~counterclaims~~reached ora ~~the~~settlement ~~Company’s~~agreement ~~affirmative~~resolving ~~defense~~all claims. ~~During~~As ~~the~~part ~~third quarter~~ of ~~2016,~~ the ~~Company recorded a~~ $~~632~~9,000,000 ~~write-down representing the portion of the royalty overpayment~~ settlement, paid ~~prior~~by to the ~~statutorily~~Company, ~~allowed~~we ~~period~~agreed ~~because of litigation risk attendant~~ to ~~recovering~~purchase ~~that amount. The Company sought certification of~~ the ~~Partial~~previously ~~Summary~~leased ~~Judgment~~property ~~Order~~from ~~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~~Valco. On ~~February~~October 2316, ~~2017~~2019, the ~~Partial~~Company ~~Summary Judgment Order was certified for immediate appeal,~~ and ~~all~~Valco ~~other claims, counterclaims and affirmative defenses were stayed pending the resolution of that appeal. The Company~~ filed a ~~notice~~Stipulated ofMotion ~~appeal which was denied on July 2, 2018~~ for ~~lack~~Dismissal ofwith ~~jurisdiction~~Prejudice ~~and~~which ~~remanded~~stated: to the ~~trial~~parties ~~court~~“agree ~~for~~that ~~further~~this ~~proceedings. Subsequently~~matter, ~~the~~including ~~trial~~all ~~court~~claims ~~vacated~~and ~~its September 15~~counterclaims, ~~2016~~dismissed ~~Partial~~with ~~Summary~~prejudice ~~Judgment Order~~ and ~~set~~without ~~the matter for trial by jury on all issues on January 28~~costs, ~~2019.~~each ~~The~~party ~~Company~~to ~~filed~~bear its ~~Third~~own ~~Amended~~attorneys’ ~~Complaint on November 16, 2018 in which it dropped its claim to recover royalty overpayments but seeks to recover $1,470,000 in Prepayments~~fees.” The ~~Company~~Court ~~wrote~~entered ~~off~~ the ~~remaining~~Order ~~royalty overpayment~~ of ~~$627,000,~~Dismissal ~~previously~~with ~~reported~~Prejudice ~~as Other assets~~ on ~~the~~October ~~Consolidated Balance Sheet~~16, ~~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 has been rescheduled for May 13, 2019. See Note 2.~~

See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 6.

Item 4. MINE SAFETY DISCLOSURES

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 Annual Report.

Table of Contents

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common stock of Continental Materials Corporation is traded on the NYSE American stock exchange under the symbol CUO.

The Company currently has fewer than 300 shareholders.

The Company has never paid, nor does it currently intend to declare, any dividends. The Company’s policy of reinvesting earnings from operations is reviewed periodically by the Board of Directors of the Company (the “Board”).

The following sets forth information regarding the Company’s equity plans as of December 2928, ~~2018~~2019:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	-	-	~~38,000~~2
Equity compensation plans not approved by security holders	-	-	-
Total	-	-	~~38,000~~2

The Company ~~established~~has an open-ended program to repurchase its common stock under which the Board authorized purchases up to a maximum amount of $21,~~750~~000,000. Repurchases may be made on the open market or in block trades at the discretion of management. AsDuring the 2019 fiscal year, 22,499 shares were repurchased and as of December 29 28, ~~2018,~~ 2019, $1743,~~085,961~~467 of the authorized amount remained available for stock repurchases.

On ~~April~~March 16, ~~2009~~2020, the Company entered into a credit agreement with a bank which contains certain restrictions on the Company’s ability to repurchase its stock. ~~Amendments to the credit agreement have retained these restrictions.~~ See further discussion in the “Financial Condition, Liquidity and Capital Resources” section of Item 7 below.

Item 6. SELECTED FINANCIAL DATA

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and, as such, is not required to provide information in response to this item.

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMPANY OVERVIEW

AsThe ~~discussed~~Company experienced various changes in ~~Item~~2019 1-including ~~Business,~~the sale of substantially all the ~~Company~~assets ~~operates~~of ~~primarily~~its ready-mix concrete and Daniels Sand operations in ~~two~~the ~~industry~~first ~~groups~~quarter, ~~HVAC~~the ~~and~~acquisition ~~Construction~~of ~~Products.~~four ~~Within~~new ~~each~~operating ofbusinesses ~~these~~in ~~two~~the ~~industry~~second ~~groups~~quarter, the ~~Company~~cessation ~~has~~of ~~identified~~mining ~~two~~at ~~reportable~~Pikeview ~~segments:~~quarry in the ~~Heating~~third quarter and ~~Cooling~~the ~~segment~~settlement ~~and~~of the ~~Evaporative~~Valco ~~Cooling~~litigation ~~segment~~ in the ~~HVAC~~fourth ~~industry~~quarter. ~~group~~In conjunction with this activity, management reviewed its operating and reporting structure and made adjustments to align the ~~CACS~~structure ~~segment~~with how operations will be measured and ~~the~~evaluated ~~Door~~going ~~segment~~forward, inincluding revisions to the ~~Construction~~Company’s ~~Products~~reporting ~~industry~~segments. ~~group~~Segment information for prior periods has been reclassified to conform to current segment reporting structure.

The ~~Heating~~HVAC ~~and Cooling~~ segment ~~primarily~~ produces and sells ~~gas-fired~~a ~~wall~~variety ~~furnaces,~~of ~~console~~products ~~heaters~~including ~~and~~wall furnaces, fan coils, ~~from~~evaporative ~~the~~coolers, ~~Company’s~~boiler ~~wholly-owned~~room ~~subsidiary~~equipment, ~~WFC~~dryer ~~of Colton~~boxes, ~~California. The Evaporative Cooling segment produces~~ and ~~sells~~related ~~primarily~~accessories ~~evaporative coolers~~ from the Company’s wholly-owned ~~subsidiary~~subsidiaries, ~~PMI~~Williams Furnace Co. (WFC) of Colton, California, Phoenix Manufacturing, ~~Arizona~~Inc. ~~Sales~~(PMI) of ~~these~~Phoenix, ~~two segments are nationwide~~Arizona, ~~but~~Global ~~are~~Flow ~~concentrated~~Products in/American ~~the~~HVAC ~~southwestern~~(GFP) ~~United~~of ~~States.~~Broken ~~Concrete~~Arrow, ~~aggregates~~Oklahoma, and ~~construction~~InOvate ~~supplies~~Dryer ~~are~~Technologies ~~offered~~(InOvate) ~~from~~of ~~numerous~~Jupiter, ~~locations~~Florida. ~~along~~Sales ~~the Southern portion~~ of ~~the~~this ~~Front~~segment ~~Range~~are ofnationwide ~~Colorado~~although ~~operated~~WFC byand ~~the~~PMI ~~Company’s~~sales ~~wholly-owned~~are ~~subsidiaries~~more ~~collectively~~concentrated ~~referred~~in tothe assouthwestern ~~TMC~~United States. The Door segment sells hollow metal and wood doors, door frames and related hardware, ~~lavatory~~sliding ~~fixtures~~door systems, and electronic access ~~and~~ /security systems ~~through~~from the Company’s wholly-owned ~~subsidiary~~subsidiaries, McKinney Door and Hardware, Inc. (MDHI), Fastrac Building Supply (Fastrac) and Serenity Sliding Door Systems (Serenity), which ~~operates~~operate out of facilities in Pueblo and Colorado Springs, Colorado. Sales of ~~these~~this ~~two~~segment ~~segments~~ are ~~highly~~ concentrated in ~~the~~Colorado, ~~Southern~~California ~~Front~~and ~~Range~~the ~~area~~Northwestern ofUnited ~~Colorado~~States although ~~Door~~door ~~Segment~~ 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.

~~Sales~~In inaddition to the ~~CACS~~above ~~and~~reporting ~~Door~~ segments, ~~are~~an ~~affected~~“Unallocated byCorporate” classification is used to report the ~~level~~unallocated expenses of ~~construction~~the ~~activity~~corporate inoffice ~~the~~which ~~areas~~provides ~~served~~treasury, insurance, property and ~~general~~tax ~~economic~~services ~~conditions.~~as ~~Sales~~well ofas ~~furnaces~~strategic business planning and ~~evaporative~~general ~~coolers~~management ~~are~~services. ~~less~~Expenses ~~affected~~related byto the ~~level~~corporate ofinformation ~~construction~~technology ~~activity~~group ~~and~~ are ~~influenced~~allocated byto ~~weather~~all ~~conditions~~locations, asincluding athe ~~large~~corporate ~~portion~~office. ofThis ~~their~~classification ~~sales~~also ~~are~~holds ~~for~~one ~~replacement~~property ~~units~~owned by the Company.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash provided by continuing operations during ~~2018~~2019 was $2,~~692~~573,000. The ~~decreased~~increased cash flow, compared to ~~the~~2018 ~~2017~~was ~~level~~primarily due to receipt of $14,782,000 isfrom ~~attributable~~a ~~mainly~~legal tosettlement ~~less~~in ~~favorable~~the first quarter of 2019 offset by a decrease in operating results. ~~partially~~See ~~offset~~Note 17 for further discussion. Cash used by ~~changes~~ discontinued operations in ~~working~~2019 ~~capital~~was ~~items~~$2,138,000. ~~primarily~~The ~~receivables~~increased ~~and~~use ~~inventories~~of cash compared to the prior year was mainly due to reduced operating results.

Cash provided by continuing operations ~~during~~in ~~2017~~2018 was $42,~~387~~061,000,. ~~compared~~The todecline ~~$8,099,000~~from ~~during~~prior ~~2016.~~year ~~The decreased~~ cash flow, ~~compared~~was ~~to the 2016 level, is~~ attributable mainly to less favorable operating results partially offset by changes in working capital items, including receivables and ainventory. ~~non-recurring~~Cash ~~cash~~provided ~~receipt~~by discontinued operations was $631,000 in ~~2016~~2018.

Investing activities ~~during~~provided ~~2018 used~~ $1886,~~270,~~000 during 2019 compared to $51,~~655~~270,000 used during ~~2017~~2018. In ~~Capital~~2019, ~~expenditures~~the ofCompany received $223,~~700~~679,000 infrom ~~2018~~the ~~were~~sale ~~offset~~of byits discontinued operations and used $122,~~430~~521,000 ~~received~~to acquire assets of four operating businesses. See Note 19 for discussion of the ~~sale~~sales of ~~property~~assets and ~~equipment~~Note in18 ~~the~~for ~~CACS~~discussion ~~segment~~of acquisitions. In ~~2017~~2019, capital expenditures by continuing operations of $52,~~781~~693,000, primarily in the ~~CACS~~Construction Materials segment, were offset by $~~126~~2,593,000 received ~~for~~from the sale of property and equipment., Inmainly ~~2017~~in the ~~CACS~~Construction Materials segment. ~~deferred~~Capital ~~costs~~expenditures ~~related~~by todiscontinued ~~the~~operations ~~development~~were $172,000 ofin an2019. ~~aggregates~~In ~~property.~~2018, ~~These~~capital ~~amounts~~expenditures by continuing operations were ~~written~~$1,409,000, ~~off~~primarily asin ofthe ~~March~~HVAC 30segment. Capital expenditures by discontinued operations of $1,291,000 ~~2018.~~were ~~See~~offset ~~Note~~by 16$1,430,000 received for ~~further~~the ~~discussion~~sale of property and equipment.

~~During 2018, the Company paid down $1,300,000 on its revolving credit line while $5,000 was used to repurchase stock of the Company.~~10

During 2017, the Company repaid $1,500,000 on its revolving credit line while $26,000 was used to repurchase stock from a former officer of the Company.

Sales of the Company’s HVAC products are seasonal except for fan coils. Sales of furnaces, heaters and evaporative coolers are sensitive to weather conditions particularly during their peak selling seasons. Fan coil sales are, to a

Table of Contents

~~significant~~ During ~~extent~~2019, ~~dependent~~the onCompany ~~commercial~~repaid ~~construction~~$1,400,000 ~~particularly of hotels. Revenues in the CACS segment are primarily dependent~~ on ~~the~~its ~~level~~revolving ofcredit ~~construction~~line while ~~activity along the Southern Front Range in Colorado. Sales for the Door segment are not as seasonal nor are they much affected by weather conditions. Historically~~$257,000 ~~the~~was ~~Company~~used ~~has~~to ~~experienced~~repurchase ~~operating~~stock losses during the first quarter except when the weather is mild and the concrete demand is strong along the Southern Front Range. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in southern Colorado and the seasonal sales of the ~~Evaporative Cooling segment. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the~~ Company~~’s heating equipment~~. During ~~The Company typically experiences operating cash flow deficits during the first half of the year reflecting operating results~~2018, 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~~repaid ~~contributions~~$1,300,000 ~~if any. The timing of capital expenditures can also have a significant effect~~ on ~~cash flow. Historically, the Company’s borrowings against~~ its revolving credit ~~facility~~line ~~tend~~while to$5,000 ~~peak~~was ~~during~~used ~~the~~to ~~second~~repurchase ~~quarter~~stock ~~and then decline over the remainder~~ of the ~~year~~Company.

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 sales 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 conditions for legacy products. Fourth quarter results have typically varied based on weather conditions affecting the Company’s discontinued operations 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 completed in the current year are 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 payment 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 future years.

Revolving Credit and Term Loan Agreement

The Company entered into ana Second Amended and Restated Credit Agreement (the “Credit Agreement”) effective ~~November 18, 2011. The Company entered into the Tenth Amendment to Credit Agreement effective~~ March 2216, ~~2019~~2020. 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 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) 8085% of eligible accounts receivable, (b) the lesser of 5060% 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~~Financial ~~Minimum~~Covenants ~~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.~~include:

·o ~~The~~Minimum ~~maturity~~EBITDA ~~date~~for of the ~~credit~~three ~~facility~~months isending ~~May~~March 131, 2020. must exceed $(525,000)

·o ~~Interest~~Minimum ~~rate~~EBITDA ~~pricing~~ for the ~~revolving~~three ~~credit~~months ~~facility~~ending isJune ~~currently~~30, ~~LIBOR~~2020 ~~plus~~must ~~2.25%~~exceed ~~or the prime rate.~~$265,000

The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.06 to 1.0 for each computation period measured at the end of each fiscal quarter, provided that the Fixed Charge Coverage Ratio shall not be tested if the average daily Excess Availability during the Fiscal Quarter exceeds $5,000,000. A computation period is the nine months ending September 30, 2020 or twelve months for all subsequent fiscal quarters.

The maturity date of the credit facility is May 1, 2023.

Interest rate pricing for the revolving credit facility is currently LIBOR plus 2.0% or the prime rate.

Table of Contents

Definitions under the Credit Agreement as amended are as follows:

· Fixed Charge Coverage Ratio ~~is defined as~~means, for any ~~computation~~Computation ~~period~~Period, the ratio of (a) the sum (without duplication) for such period of (i) EBITDA, asminus ~~defined~~(ii) income taxes paid in cash by the Loan Parties, minus (iiiii) all unfinanced Capital Expenditures, minus (iv) all amounts paid in cash in respect of any Permitted Capital Securities Repurchase, to (b) the sum for such period of ~~income~~(i) ~~taxes~~cash ~~paid~~Interest inExpense, plus (ii) scheduled payments of principal of Funded Debt (excluding the Revolving Loans), plus (iii) cash payments made in respect of Capital Leases, plus (iv) the amount ~~expended~~by ~~related~~which reclamation or similar costs paid in such period exceed the cash proceeds received from the sale of quarry assets and cash refunds of escrow balances; provided, however that for purposes hereof, to the ~~development~~extent during any period there are excess cash proceeds from the sale of quarry assets after netting such proceeds against the ~~mining~~reclamation ~~property~~or ~~discussed~~similar costs in ~~Note~~such 12period, such excess cash proceeds may be carried forward and ~~all~~netted ~~unfinanced~~against ~~capital~~the ~~expenditures~~reclamation toor similar costs in a later period, plus (bv) ~~the~~all ~~sum~~amounts ~~for~~paid ~~such~~in ~~period~~respect of ~~interest~~any ~~expense~~earnout ~~related~~or toother ~~the~~deferred ~~Credit~~payment ~~Agreement~~in connection with any Permitted Acquisition.

10 · Consolidated Net Income, plus (without duplication) each of the following items to the extent deducted in determining such Consolidated Net Income:

federal, state and other income taxes deducted in the determination of Consolidated Net Income;

ii.

Interest Expense deducted in the determination of Consolidated Net Income;

iii.

depreciation, depletion and amortization expense deducted in the determination of Consolidated Net Income;

iv.

non-recurring fees and costs paid by the Company and its Subsidiaries in respect of the following: (i) fees, expenses (including legal fees and expenses) and due diligence costs associated with Permitted Acquisitions, whether or not consummated; (ii) legal fees and costs associated with the Valco trial preparation; (iii) fees, costs and expenses (including legal fees and expenses) in connection with the amendment and restatement of this agreement and all matters reasonably related thereto; (iv) fees, costs and expenses (including legal fees and expenses) in connection with the purchase of Capital Securities of the Company by Bee Street Holdings LLC or a Subsidiary thereof and transactions and other matters reasonably related thereto; (v) additional fees and costs associated with the exploration of the Hitch Rack Ranch facility in Colorado Springs, Colorado to determine the sustainability for mining and the pursuit of mining permits; and (vi) fees, costs and expenses in connection with reclamation or similar transactions related to the sale of quarry assets;

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); and

vi.

the amount of any earnout or other deferred payment paid in connection with any Permitted Acquisition; minus

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 $800,000 as of December 28, 2019 compared to $2,200,000 as of December 29, 2018. The highest balance outstanding during 2019 and 2018 was $3,700,000 and $9,800,000, respectively. Average outstanding funded debt was $313,000 and $6,058,000 for 2019 and 2018, respectively. At December 28, 2019, the Company had outstanding letters of credit (LOC) totaling $5,620,000. 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 was not in compliance with the Fixed Coverage Charge Ratio as of December 28, 2019. The lender provided a waiver of the covenant violation for the period ended December 28, 2019.

Table of Contents

~~determination of Consolidated Net Income, plus (d) depreciation, depletion and amortization expense deducted in~~ the ~~determination~~next oftwelve ~~Consolidated~~months. ~~Net~~The ~~Income, plus (e) non-recurring fees and costs paid by the~~ Company inexpects 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~~be ~~the suitability for mining and the pursuit of mining permits, plus (f) any other non-cash charges and any extraordinary charges deducted~~ in ~~the~~compliance ~~determination~~with ofall ~~Consolidated~~debt ~~Net Income~~covenants, ~~including~~as ~~any asset impairment charges (including write downs of goodwill)~~amended, ~~minus~~throughout ~~(g) any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued operations included in~~ the ~~determination~~facility’s ofremaining ~~Consolidated Net Income~~term.

Outstanding funded revolving debt was $2,200,000 as of December 29, 2018 compared to $3,500,000 as of December 30, 2017. The highest balance outstanding during 2018 and 2017 was $9,800,000 and $10,000,000, respectively. Average outstanding funded debt was $6,058,000 and $5,909,000 for 2018 and 2017, respectively. At December 29, 2018, the Company had outstanding letters of credit (LOC) 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.

Insurance Policies

The Company maintains insurance policies with the following per incident deductibles and policy limits:


			Per Occurrence		Policy Aggregate
	Deductible		Limits		Limits
Product liability	$	250,000	$	1,000,000	$	2,000,000
General liability		250,000		1,000,000		5,000,000
Workers’ compensation		350,000		350,000		Statutory
Auto and truck liability		100,000		2,000,000		No limit

Should any or all policy limits be exceeded, the Company maintains umbrella policies which cover the next $25,000,000 of claims.

Off-Balance Sheet Arrangements

WeThe ~~have~~Company has not entered into any off-balance sheet arrangements that are likely to have a material current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources other than the ~~expected~~ effect, during the first quarter of 2019, from the implementation of ASU No. 2016-02, Leases (Topic 842). asThe ~~discussed~~implementation of the ASU resulted in the ~~Recently~~recognition ~~Issued~~of ~~Accounting~~operating ~~Pronouncements~~right-of-use ~~section~~assets of $5,353,000 and operating lease liabilities of $5,427,000 as of the adoption date. See Note 19.

Cybersecurity Risks and Incidents

WeThe ~~are~~Company is dependent upon the capacity, reliability and security of our information technology (“IT”) systems for our manufacturing, sales, financial and administrative functions. We also face the challenge of supporting our IT systems and implementing upgrades when necessary, including the prompt detection and remediation of any cybersecurity breaches.

Our IT systems’ security measures are focused on the prevention, detection and remediation of damage from computer viruses, natural disaster, unauthorized access, cyber-attack and other similar disruptions. However, our IT systems remain vulnerable to intrusion and damage despite our implementation of security measures that we feel protect our IT systems. To date, we are not aware of any cybersecurity breaches that have negatively impacted our manufacturing operations, sales or financial and administrative functions or that resulted in the compromise of personal information of our employees, customers or suppliers. Should we learn of such a breach, the Company would promptly notify the SEC by filing a Form 8-K and notify all insiders that the purchase or sale of the Company’s stock is forbidden until such information has been given adequate time to become available to the trading public.

Table of Contents

systems. To date, we are not aware of any cybersecurity breaches that have negatively impacted our manufacturing operations, sales or financial and administrative functions or that resulted in the compromise of personal information of our employees, customers or suppliers. Should we learn of such a breach, the Company would promptly notify the SEC by filing a Form 8-K and notify all insiders that the purchase or sale of the Company’s stock is forbidden until such information has been given adequate time to become available to the trading public.

RESULTS OF OPERATIONS

In the ensuing discussions of the results of operations, we define 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.

DISCUSSION OF CONSOLIDATED RESULTS OF OPERATIONS

~~2018~~2019 vs. ~~2017~~2018

Consolidated sales in ~~2018~~2019 were $~~163~~113,~~983~~276,000, an increase of ~~$11~~12,~~173~~389,000 or 7 12.3%, compared to ~~2017~~2018 after adjusting for discontinued operations. The ~~improvement~~increase was ~~seen~~directly inattributable ~~all~~to ~~segments.~~the ~~The~~higher ~~Heating~~sales ~~and~~in ~~Cooling~~the HVAC and ~~Evaporative~~Doors ~~Cooling~~segment ~~segments~~reflecting ~~reported~~the ~~sales~~impact ~~increases~~ of ~~$3,436,000~~acquisitions ~~(8.1%)~~in ~~and~~the ~~$2,309,000~~second ~~(9.2%),~~quarter ~~respectively~~of 2019. The ~~Door~~HVAC segment reported a sales ~~increase~~increases of $18,~~506~~671,000 (811.18%) primarily due to the acquisitions of GFP and InOvate. The ~~CACS~~Door segment reported a sales ~~higher~~increase byof ~~$3,839,000 (5.8%).~~

The consolidated gross profit ratio in 2018 was 17.0% compared to 18.4% for 2017. The Door and Evaporative Cooling segments reported increases in gross profit while the CACS and Heating and Cooling segments reported decreases in gross profit for 2018 compared to 2017.

Selling and administrative expenses were $3,586,000 higher in 2018 compared to 2017. The increases were reported primarily in the Heating and Cooling segment (up 22.8%) and Unallocated Corporate expenses (up 33.5%). These increases are mainly attributable to investments in people and services to improve future growth. As a percentage of consolidated sales, selling and administrative expenses increased to 16.0% in 2018 compared to 14.8% in 2017.

Depreciation and amortization charges were $2,633,000 in 2018 compared to $2,554,000 in 2017.

The current year 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 current fiscal year. These costs included exploration of a property south of Colorado Springs to determine suitability for mining as well as costs associated with the Company’s pursuit of mining permits for the property. In April 2018 the permits were denied by the State of Colorado for the second time. See Note 16 for further discussion. The Company filed a Third Amended Complaint to its current litigation of an aggregates property on November 16, 2018 in which it dropped its claim to recover royalty overpayments but seeks 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. See Note 2 for further discussion.

2018 included $919,000 of gains from the sale of equipment in the CACS segment discussed below compared to $118,000 of gains from the sales of equipment in 2017.

The Company reported an operating loss in 2018 of $7,603,000 compared to operating income of $3,016,000 in 2017. The Door and Evaporative Cooling segments reported increases in operating income in 2018 compared to 2017. The increased selling and administrative costs and the write-off costs, both discussed above, in the other segments lead to decreased operating income in all other segments and the overall decrease in operating results.

Interest expense in 2018 and 2017 was $539,000 and $366,000, respectively. The increase was due to a higher average interest rate on higher average borrowings in 2018 and the capitalization of $117,000 of interest in 2017. The weighted average interest rate on outstanding funded debt, including the availability fee on the unused line of credit and other

Table of Contents

recurring bank charges but excluding finance charges on letters of credit was, approximately 6.0% for 2018 compared to 5.3% for 2017. Average outstanding funded debt in 2018 was $6,058,000 compared to $5,909,000 in 2017.

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 2017 rate included an estimate of the impact of the Tax Act discussed in Note 1 and Note 12. The effective income tax rate related to the net loss for 2018 was a benefit of 27.2% compared to an effective rate of 36.0% related to 2017 income.

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

Construction Products Industry Group

The table below presents a summary of operating information for the two reportable segments within the Construction Products industry group for the fiscal years 2018 and 2017 (amounts in thousands).

	Concrete,
	Aggregates and
	Construction
	Supplies			Door
2018
Revenues from external customers	$	70,246		$	20,158
Segment gross profit		7,173			5,656
Gross profit as percent of sales		10.2	%		28.1	%
Segment operating (loss) income	$	(6,717)		$	2,233
Operating (loss) income as a percent of sales		(9.6)	%		11.1	%
Segment assets as of December 29, 2018	$	35,351		$	8,003
Return on assets		(19.0)	%		27.9	%

	Concrete,
	Aggregates and
	Construction
	Supplies			Door
2017
Revenues from external customers	$	66,407		$	18,652
Segment gross profit		8,955			5,021
Gross profit as percent of sales		13.5	%		26.9	%
Segment operating income		2,656			1,861
Operating income as a percent of sales		4.0	%		10.0	%
Segment assets as of December 30, 2017	$	39,020		$	7,360
Return on assets		6.8	%		25.3	%

Concrete, Aggregates and Construction Supplies Segment

2018 vs. 2017

The product offerings of the CACS segment consist of ready-mix concrete, aggregates and construction supplies. Ready-mix concrete and aggregates are produced at multiple locations in or near Colorado Springs and Pueblo, Colorado. Construction supplies encompass numerous products purchased from third party suppliers and sold to the construction trades, particularly concrete sub-contractors. In 2018 concrete, aggregates (including aggregates consumed internally in the production of concrete) and construction supplies accounted for approximately 79%, 14% and 7% of sales of the CACS segment. In 2017 the sales mix between concrete, aggregates and construction supplies was 77%, 17% and 6%, respectively. Sales to third parties increased by $3,839,000 (5.8%) in 2018 compared to 2017. The increase was primarily attributable to improved concrete volumes and pricing in 2018 compared to 2017.

Table of Contents

~~Ready-mix concrete sales~~$4, ~~excluding flow fill material~~211,000 ~~improved by 6~~(20.89%) inprimarily ~~2018 compared to 2017. Average concrete prices for 2018 increased by 4.8% compared to 2017 mainly~~ due to ~~increased material costs. While concrete prices have increased,~~ the ~~market~~acquisitions ~~remains~~of ~~sharply~~Fastrac ~~competitive~~and ~~especially on large construction projects~~Serenity. ~~Material~~The ~~costs~~Construction ~~per~~Materials ~~yard,~~segment ~~including~~reported ~~cement,~~a ~~increased~~small bydecrease ~~11.9%~~ in ~~2018~~sales of ~~compared~~$399,000 ~~to 2017~~(5.6%) ~~Batching~~not ~~costs~~including ~~per~~approximately ~~yard decreased 2.~~$7%,156,000 inof 2018 ~~compared~~former tointercompany ~~2017 mainly~~sales ~~due~~ to ~~lower~~the ~~utility~~ready-mix ~~costs.~~business ~~Delivery~~that ~~costs~~was ~~per~~sold ~~yard increased 5.5%~~ in the ~~current~~first ~~year~~quarter ~~compared~~of ~~to the prior year~~2019. ~~This increase is mainly attributable to higher labor costs and increased repairs and maintenance expense. The gross profit ratio from concrete decreased to 11.4% in 2018 from 14.5% in 2017.~~

~~Sand,~~The ~~crushed~~consolidated ~~limestone~~gross ~~and~~profit ~~gravel~~ratio ~~(“aggregates”) are produced and sold from various deposits~~ in ~~and~~2019 was ~~around~~21.7% ~~Colorado~~compared ~~Springs~~to ~~and Pueblo, Colorado~~22.7% Infor 2018. ~~aggregates~~The ~~were~~Door ~~produced~~Segment ~~from three separate locations: two in or near Colorado Springs~~ and ~~one~~HVAC ~~near~~segments ~~Florence.~~reported Asincreases ~~more fully discussed~~ in ~~Note~~gross 2,profit ~~the~~while ~~Company ceased mining at~~ the ~~leased~~Construction ~~gravel~~Material ~~operation~~segment inreported ~~Pueblo,~~a ~~Colorado,~~decrease in ~~September 2014.~~gross ~~Sales~~profit ~~volume~~primarily (tons) of construction aggregates, including those used internally in the production of ready-mix concrete, decreased by 16.7% in 2018. Average selling prices, excluding delivery charges, increased 2.4% from 2017 due to ~~sales mix. Net sales of construction aggregates, including those consumed internally in~~ the ~~production of concrete but excluding delivery~~ charges, ~~decreased~~associated bywith ~~14.7%~~the ~~The~~decision ~~loss,~~to ~~before~~cease ~~depreciation,~~mining ~~from all aggregate~~ operations inat ~~2018~~the ~~was~~Pikeview ~~$710,000 compared to a gross profit of $175,000 in 2017~~quarry.

~~Sales~~Selling ofand ~~construction~~administrative ~~supplies~~expenses ~~increased 26.~~were $9%,483,000 higher in 2019 compared to 2018. The ~~gross~~increases ~~profit~~were ~~ratio~~reported ~~increased~~primarily toin 8the HVAC segment (up 27.76%) due to the impact of acquisitions and in ~~2018~~the ~~from~~Unallocated 4Corporate expenses (up 33.65%) inprimarily ~~2017 as~~due ~~management~~to ~~focused~~professional onservices ~~improving~~related ~~bidding~~to acquisition activity. As a percentage of consolidated sales, selling and ~~pricing~~administrative expenses increased to 28.1% in 2019 compared to 22.5% in 2018.

~~Selling~~Depreciation and ~~administrative~~amortization ~~expenses~~charges were $~~890~~1,962,000 ~~higher~~ in ~~2018~~2019 compared to ~~2017. The increase is primarily due to higher professional fees, including legal expenses. Legal fees, including those related to the Pueblo aggregate lease litigation, were~~ $1,~~603~~472,000 in 2018. ~~compared~~The toincrease ~~$923,000~~between inyears ~~2017.~~is Asattributed ato ~~percentage~~the acquisition of ~~sales,~~the ~~selling~~assets ~~and~~of ~~administrative~~four ~~expenses~~operating ~~were 8.4%~~business induring ~~2018 compared~~the tosecond ~~7.5%~~quarter inof ~~2017~~2019.

~~The~~2019 ~~current year~~ included ~~the~~an ~~net~~aggregated ~~write-off~~charge of $622,~~840~~492,000 ofto ~~deferred~~impair ~~development~~mining ~~costs~~assets ~~previously~~related ~~capitalized~~to ~~in property, plant and equipment on~~ the ~~Consolidated~~final ~~Balance~~asset ~~Sheet~~retirement orobligations ~~incurred~~recorded in the ~~current~~Construction ~~fiscal~~Materials ~~year~~segment. ~~These~~2018 ~~costs~~ included ~~exploration~~charges of a$6,840,000 ~~property~~and ~~south~~$627,000 ~~of Colorado Springs~~ to ~~determine~~write ~~suitability~~off ~~for~~deferred ~~mining~~development ~~as well as~~ costs ~~associated~~and ~~with~~an ~~the~~overpayment ~~Company’s pursuit~~ of ~~mining~~prepaid ~~permits~~royalties, ~~for the property. In April 2018 the permits were denied by the State of Colorado for the second time. See Note 16 for further discussion. The current year~~ also ~~included~~in the ~~write-off~~Construction ofMaterials ~~$627,000 of royalty overpayments related to the aggregates property in Pueblo~~segment. ~~See Note 2 for further discussion.~~

~~Gains~~The onCompany ~~disposition~~recognized ofa ~~assets~~net ~~were~~ $~~919~~14,~~000 in 2018 including $889~~781,000 ~~related~~gain tofrom ~~the~~a ~~sale~~legal ofsettlement ~~the~~and ~~Industrial~~a ~~Sand~~$6,800,000 ~~Plant~~loss toon anlegal ~~unrelated~~settlement ~~party~~for ~~that continued to operate~~ the ~~plant~~year atended ~~its~~December ~~current~~28, ~~location under a lease arrangement with the Company~~2019. ~~Gains~~See onNote ~~disposition~~2 ofand ~~assets~~Note in17 ~~2017~~for ~~were~~additional ~~$118,000~~discussion.

~~The~~2019 ~~prices~~included ~~of two commodities~~$1, ~~cement and diesel fuel~~237,000 ~~can~~of ~~have~~gains afrom ~~significant effect on~~ the ~~results~~sale of ~~operations~~equipment ~~of this segment. Management negotiates cement prices with producers who have production facilities~~ in ~~or near~~ the ~~concrete~~Construction ~~markets~~Materials ~~that~~segment wediscussed ~~serve~~below. ~~Management~~There ~~may~~were ~~negotiate~~no ~~separate~~gains ~~cement~~or ~~prices~~losses ~~for large construction projects depending on the demand for and availability of cement~~ from the ~~local~~sale ~~producers. The Company buys diesel fuel from local distributors and occasionally enters into short term arrangements with a distributor whereby the price~~ of ~~diesel~~equipment ~~fuel is fixed for a period~~ of upcontinuing tooperations ~~six~~in ~~months~~2018. InThere ~~the~~were ~~past~~$919,000 ~~year~~of ~~the~~gains ~~Company~~from ~~did not hedge diesel fuel prices. Increases in~~ the ~~cost~~sales of ~~these~~equipment ~~two commodities have a direct effect on the results~~ of discontinued operations ~~depending upon whether competitive conditions prevailing~~ in ~~the marketplace enable management to adjust its selling prices to recover the increased cement and diesel prices~~2018.

~~Door~~The ~~Segment~~Company reported an operating loss in 2019 of $22,845,000 compared to operating loss of $8,764,000 in 2018. Increased selling and administrative costs and impairment costs are driving the overall decrease in operating results.

Interest income in 2019 was $362,000 compared to $76,000 in 2018. vsThe increase was due to interest earned on cash reserves in the first half of 2019. ~~2017~~Interest expense in 2019 and 2018 was $371,000 and $539,000, respectively. The decrease was due to lower average borrowings in 2019 compared to 2018. Average outstanding funded debt in 2019 was $313,000 compared to $6,058,000 in 2018.

The ~~Door~~Company’s ~~segment~~effective ~~sells~~income ~~hollow~~tax ~~metal~~rate ~~doors,~~reflects ~~door~~federal ~~frames~~ and ~~related~~state ~~hardware,~~statutory ~~wood~~income ~~doors,~~tax ~~lavatory~~rates ~~fixtures~~adjusted ~~and~~for ~~electronic~~non-deductible ~~access~~expenses, tax credits and ~~security~~other ~~systems~~tax items. ~~Nearly~~The ~~all~~effective ofincome ~~the~~tax ~~Door~~rate ~~segments~~related ~~sales~~to ~~are~~the net loss for ~~commercial~~2019 and ~~institutional~~2018 ~~buildings~~was ~~such~~a asbenefit ~~schools~~of ~~and healthcare facilities~~23. ~~Approximately 65~~7% toand 7027.2%, ~~of the sales of the Door segment are~~ respectively.

The Company operates businesses within the Building Products industry group. The businesses are grouped into three reportable segments. The following addresses various aspects of operating performance focusing on the reportable segments.

DISCUSSION OF CONSOLIDATED RESULTS OF DISCONTINUED OPERATIONS

The results of discontinued operations reflect the operations of the ready-mix and Daniels Sand businesses of the Company’s former subsidiary, 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 year ended December 28, 2018 was $1,161,000.

Table of Contents

~~related~~ HVAC toSegment jobs obtained through a competitive bidding process. Bid prices may be higher or lower than bid prices on similar jobs in the prior year. The Door segment does not track unit sales of the various products through its accounting or management reporting, but instead tracks gross profit by job. Management relies on the trend in sales and the gross profit rate by job and in the aggregate in managing the business.Group

~~Door~~The ~~sales~~table inbelow ~~2018~~presents ~~were~~a ~~$1,506,000,~~summary orof ~~8.1%~~operating ~~higher~~information ~~than~~for inthe ~~2017.~~HVAC ~~The~~segment ~~gross~~group ~~profit~~for ~~ratio~~the infiscal ~~2018~~years ~~was~~2019 ~~28.1%,~~and up2018 ~~from~~(amounts ~~26.9%~~ in ~~2017~~thousands).

Selling and administrative expenses increased by $220,000 (7.3%) in 2018 compared to 2017. The increase was primarily due to higher compensation related expenses. As a percentage of sales, these expenses were 16.1% and 16.3% in 2018 and 2017, respectively.


	Year Ended
	DECEMBER 28,			DECEMBER 29,
		2019			2018
Revenues from external customers	$	82,149		$	73,478
Segment gross profit		19,706			14,876
Gross profit as percent of sales		24.0	%		20.2	%
Segment operating income	$	948		$	931
Operating income as a percent of sales		1.2	%		1.3	%
Segment assets	$	50,822		$	29,003
Return on assets		1.9	%		3.2	%

~~HVAC~~2019 ~~Industry~~vs. ~~Group~~2018

~~The~~Sales ~~table~~in ~~below~~the ~~presents~~HVAC asegment ~~summary~~increased $8,671,000 of(11.8%) ~~operating~~between ~~information~~2019 ~~for~~and 2018 reflecting the impact of the acquisitions of GFP and InOvate. The two ~~reportable~~acquisitions, ~~segments~~combined, ~~within~~contributed ~~the~~14.8% ~~HVAC~~of ~~industry~~current ~~group~~year ~~for~~revenue. ~~the~~Sales ~~fiscal~~of furnaces and fan-coils were consistent between years ~~2018~~while ~~and~~sales ~~2017~~of ~~(amounts~~cooling related equipment declined in ~~thousands)~~the current year from the prior year.

	Heating and			Evaporative
	Cooling			Cooling
2018
Revenues from external customers	$	45,953		$	27,525
Segment gross profit		9,937			4,939
Gross profit as percent of sales		21.6	%		17.9	%
Segment operating income	$	613		$	318
Operating income as a percent of sales		1.3	%		1.2	%
Segment assets as of December 29, 2018	$	19,668		$	9,335
Return on assets		3.1	%		3.4	%

The HVAC segment’s gross profit ratio increased to 24.0% in 2019 from 20.2% in 2018. The increase was primarily due to impact of the acquisitions noted above.

	Heating and			Evaporative
	Cooling			Cooling
2017
Revenues from external customers	$	42,517		$	25,216
Segment gross profit		9,804			4,297
Gross profit as percent of sales		23.1	%		17.0	%
Segment operating income (loss)		2,140			(550)
Operating income (loss) as a percent of sales		5.0	%		(2.2)	%
Segment assets as of December 29, 2018	$	21,543		$	11,896
Return on assets		9.9	%		(4.6)	%

Selling and administrative expenses in 2019 were $4,494,000 higher than the prior year. The acquisition activity noted above was the primary driver behind the increased expense between the two years. Additional investment spending on personnel and processes to stimulate future growth in previously owned lines of business also contributed to the increase between years. As a percentage of sales, such expenses were 21.3% in 2019 compared to 17.7% in 2018.

~~Heating~~Certain businesses in the HVAC group are sensitive to changes in the prices for a number of different raw materials, commodities and ~~Cooling~~purchased ~~Segment~~parts. Prices of steel and copper in particular can have a significant effect on the results of operations of this group. The Company is not currently a party to any hedging arrangements with regard to steel or copper.

~~2018~~Door ~~vs.~~Segment ~~2017~~Group

~~Sales~~The intable ~~the~~below ~~Heating~~presents ~~and~~a ~~Cooling~~summary ~~segment improved $3,436,000 (8.1%) between 2018 and 2017. In 2018, approximately 70%~~ of ~~sales~~operating ~~consisted~~information offor ~~wall~~the ~~furnaces~~Door ~~and~~Segment ~~heaters.~~group ~~Fan coils accounted~~ for ~~approximately 30% of~~ the ~~segment’s~~fiscal ~~sales~~years ~~and~~2019 ~~other products made up less than 1%. In 2017 these shares of total segment sales were 68%, 30%~~ and ~~2%, respectively. Unit sales of furnaces and heaters increased 2.2% while the average sales price increased 7.7% between~~ 2018 ~~and~~(amounts ~~2017. The improved average sales price is due to realization of a price increase implemented~~ in ~~the first half of 2018~~thousands).

Fan coil sales increased 6.4% in 2018 compared to 2017. Historically, approximately 90% of the company’s sales of fan coils are custom-made systems for hotels and other commercial buildings. Fan coil sales in both 2018 and 2017 were in line with this historical experience. Fan coil jobs are obtained through a competitive bidding process. Every bid job is a


	Year Ended
	DECEMBER 28,			DECEMBER 29,
	2019			2018
Revenues from external customers	$	24,369			20,158
Segment gross profit		7,062			5,656
Gross profit as percent of sales		29.0	%		28.1	%
Segment operating income	$	2,174			2,233
Operating income as a percent of sales		8.9	%		11.1	%
Segment assets	$	14,248			8,003
Return on assets		15.3	%		27.9	%

Table of Contents

~~unique~~ 2019 ~~configuration of materials and parts, therefore the company does not track units of sales or production as per unit information would not be useful in managing the business~~vs. Management focuses on the contribution margin by job, current level of sales and the sales backlog in managing the fan coil business. Contribution margin is calculated 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 was virtually static between 2018 ~~and 2017. Contribution margins and year-end backlog, in both years, were within acceptable ranges to management.~~

The ~~Heating~~Door segment sells hollow metal doors, door frames and ~~Cooling~~related ~~segment’s~~hardware, ~~gross~~wood ~~profit~~doors, ~~ratio~~sliding ~~decreased~~door tosystems, ~~21.6%~~lavatory infixtures ~~2018~~and ~~from~~electronic ~~23.1%~~access inand ~~2017~~security systems. ~~The~~Nearly ~~overall~~all ~~decline~~of inthe ~~gross~~Door ~~profit~~segments issales ~~primarily~~are ~~due~~for tocommercial ~~increased~~and ~~material~~institutional ~~costs,~~buildings ~~including~~such ~~steel~~as schools, hotels, and ~~management’s~~healthcare ~~decision~~facilities. Approximately 65% to ~~increase~~70% ~~inventory~~of ~~valuation~~the ~~reserves~~sales asof itthe ~~works~~Door segment are related to ~~streamline~~jobs obtained through a competitive bidding process. Bid prices may be higher or lower than bid prices on similar jobs in the ~~number~~prior year. The Door segment does not track unit sales of the various products ~~sold~~through its accounting or management reporting, but instead tracks gross profit by job. Management relies on the trend in sales and the gross profit rate by job and in the aggregate in managing the business.

~~Selling~~Door ~~and~~sales ~~administrative expenses~~ in ~~2018~~2019 were $14,~~623~~211,000, or 20.9% higher than ~~the~~in ~~prior~~2018. ~~year~~The increase is primarily due to ~~investments~~the inacquisition ~~personnel~~of Fastrac and ~~processes~~Serenity toin ~~stimulate~~the ~~future~~second ~~growth.~~quarter Asof athe ~~percentage~~current ofyear. ~~sales,~~The ~~such~~gross ~~expenses~~profit ~~were~~ratio 19in 2019 was 29.0% ~~in 2018~~ compared to 1628.71% in ~~2017~~2018.

~~Evaporative~~Selling ~~Cooling~~and ~~Segment~~administrative expenses increased by $1,353,000 (41.6%) in 2019 compared to 2018. The increase was primarily due to acquisition activity noted previously. As a percentage of sales, these expenses were 18.9% and 16.1% in 2019 and 2018, respectively.

~~2018~~Construction ~~vs.~~Materials ~~2017~~Segment Group

~~Sales~~The oftable ~~evaporative~~below ~~coolers~~presents ~~during~~a ~~2018 increased $2,309,000,~~summary ~~approximately 9.2%, compared to the prior year. Unit sales~~ of ~~evaporative~~operating ~~coolers~~information ~~were~~for ~~basically static between 2018 and 2017. Average selling prices per unit, excluding~~ the ~~effect~~Construction ofMaterials ~~parts~~segment ~~sales,~~group ~~increased~~for ~~7.6% attributable to a price increase implemented in~~ the ~~first~~fiscal ~~half of 2018. The gross profit ratio in 2018 was 17.9% compared to 17.0% in 2017. The increase between~~ years is2019 ~~mainly~~and ~~due to the increased selling prices combined with realization of benefits from year-end~~ 2018 ~~cost~~(amounts ~~adjustments. Selling and administrative expenses declined 4.0%~~ in ~~2018 compared to 2017~~thousands). ~~As a percentage of sales, these expenses were 15.5% and 16.7% for 2018 and 2017, respectively.~~

Both businesses in the HVAC group are sensitive to changes in the prices for a number of different raw materials, commodities and purchased parts. Prices of steel and copper in particular can have a significant effect on the results of operations of this group. The Company is not currently a party to any hedging arrangements with regard to steel or copper.


	Year Ended
	DECEMBER 28,			DECEMBER 29,
	2019			2018
Revenues from external customers	$	6,751		$	7,150
Segment gross (loss) profit		(2,222)			2,220
Gross (loss) profit as percent of sales		(32.9)	%		31.0	%
Segment operating loss	$	(18,492)		$	(7,878)
Operating loss as a percent of sales		(273.9)	%		(110.2)	%
Segment assets	$	10,463		$	11,315
Return on assets		(176.7)	%		(69.6)	%

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. 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 consisted 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.

Management made a strategic decision to cease mining operations at the Pikeview quarry at the end of the third quarter of 2019 when it was determined that continued mining was not in the best economic interests of the consolidated portfolio. The third quarter 2019 included a $20,217,000 impairment charge related to the cessation of mining. In the fourth quarter of 2019 the Company, by way of a legal settlement, purchased land it previously leased in Pueblo, Colorado. See Note 2. The Company does not plan to resume mining of the Pueblo property and has recorded an impairment charge of $2,230,000 related to reclamation liabilities associated with the property for the fiscal year ended December 28, 2019. See Note 20. The quarries may continue to report some revenue from dumping fees or for remaining inventory sales, but otherwise will turn to full reclamation status.

Prior to the decision to cease mining operations, the CACS segment produced and sold sand, crushed limestone and gravel (collectively “aggregates”) from deposits in and around Colorado Springs, Colorado. Sales volume of aggregates

Table of Contents

decreased in 2019 compared to 2018 primarily attributable to the Grisenti pit being fully mined and the ensuing work to complete reclamation with minimal sales. Sales at the Pikeview quarry were nominal in 2019 as the Company prioritized completing the reclamation at Grisenti. In 2018, the aggregate operations supplied the ready-mix business with $7,156,000 of product. These sales reduced with the sale of the ready-mix operations. The reduced sales volumes and additional reclamation related costs, in part, led management to its decision to cease mining operations at the remaining quarries in the current year.

Selling and administrative expenses were $232,000 higher in 2019 compared to 2018. The increase is primarily due to litigation related costs. Legal expenses, including those related to the Pueblo aggregate lease litigation, were $1,757,000 in 2019 compared to $1,603,000 in 2018. As a percentage of sales, selling and administrative expenses were 38.0% in 2019 compared to 32.6% in 2018.

The fiscal year ended December 28, 2019 included a $14,781,000 net gain on legal settlement and a $6,800,000 legal settlement expense related to previously disclosed litigation. See Note 2 and Note 17. The fiscal year ended December 29, 2018 included charges of $6,840,000 and $627,000 related to the write-off of deferred development and prepaid royalties, respectively. See Note 16.

Gains on disposition of assets were $1,231,000 in 2019 due to the disposition of equipment no longer considered useful upon the cessation of mining operations. There were no gains or losses on disposition of assets in 2018.

In connection with the movement to full reclamation status at all mining properties in 2019, management completed an assessment to determine if certain assets should be considered held for sale. Based on this assessment, $896,000 of property previously included in Machinery and equipment on the Consolidated Balance Sheet was classified as Assets held for sale as of December 28, 2019.

OUTLOOK

OnThe ~~February~~Company’s ~~1st,~~HVAC ~~2019,~~segment ~~the~~anticipates ~~Company~~growth ~~sold~~in ~~the~~2020 ~~ready~~sales ~~mix~~due ~~assets~~to the impact of ~~Transit~~a ~~Mix~~full ~~Concrete~~year Coof the operations acquired in a2019. ~~cash~~Fan ~~transaction~~coil sales are expected to aincrease ~~third~~due ~~party~~to ~~(see~~continued ~~Note~~construction ~~17). Accordingly,~~spending in the ~~Company~~lodging ~~expects~~industry ~~consolidated~~and ~~sales~~investments made in sales and marketing during 2019. toSales beof ~~reduced~~furnaces, byheaters ~~the~~and ~~CACS~~evaporative ~~sales~~coolers are ~~relative~~primarily tofor ~~2018.~~replacement ~~Revenues~~purposes inand ~~the~~therefore ~~remaining~~are ~~Door~~not ~~segment~~heavily reliant on new construction. Sales of these products are generally dependent on the ~~level~~overall strength of the economy, especially employment levels. Sales of ASME tanks, hydronics accessories and dryer related products are dependent on construction ~~activity~~levels, which isare expected to grow. in 2020.

~~The~~Sales ~~Company’s~~in ~~HVAC~~the ~~Industry~~Door ~~Group~~segment ~~anticipates~~are ~~some~~expected ~~growth~~to increase in ~~2019~~2020 ~~sales from increased fan coil sales~~ due to ~~continued~~full ~~construction~~year ~~spending~~impact inof the ~~lodging~~operations ~~industry~~acquired ~~and investments made~~ in ~~sales and marketing during 2018~~2019. Sales ~~of furnaces, heaters and evaporative coolers~~ are ~~primarily~~somewhat ~~for~~dependent ~~replacement purposes and therefore are not heavily reliant~~ on ~~new~~the ~~construction.~~level ~~Sales~~ of ~~these~~commercial ~~products~~construction ~~are~~activity, ~~generally~~which ~~dependent~~is onalso ~~the~~expected ~~overall~~to ~~strength~~grow ofin ~~the economy, especially employment levels~~2020.

Sales in the Construction Materials segment are expected to remain consistent with 2019. Sales are dependent upon the level of commercial construction activity in the Colorado Springs, Colorado area. As the Company has ceased mining operations it intends to sell off its excess assets, over a period of the next few years, as reclamation is completed. The proceeds from these sales are expected to be available to reduce borrowings by the Company.

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.

Table of Contents

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 December ~~29, 2018, the Company had 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.~~

The Company follows Accounting Standards Update (ASU) 2011-08 which allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. At the end of 2018 and 2017, the Company concluded that the quantitative analysis was more appropriate than the qualitative analysis. For purposes of measuring the fair value of the CACS reporting unit the Company engages the services of an investment banking firm to assist management with the calculation. 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 was calculated using an appropriate discount rate. The simple average of EBITDA (earnings before interest, taxes, depreciation and amortization) multiples of select transactions in the construction materials industry in the last couple of years was used for method #2 and the simple average of EBITDA multiples of select publicly traded construction materials companies comparable to CACS was used for method #3. The Company’s adoption ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) in the fourth quarter of 2017 resulted in no impairment charge. See additional discussion in Note 1.17

Table of Contents

28, 2019, the Company had recorded $5,932,000 of goodwill consisting of $3,198,000 related to the Door segment and $2,734,000 related to the HVAC segment.

In connection with acquisition activity in 2019, the Company recorded $12,809,000 of amortizable intangible assets related to customers, trade names and intellectual property. Recorded amounts were based on valuations performed by an independent business advisory firm. These intangible assets are amortized over their estimated useful lives on a straight-line basis. See Note 4 and Note 18.

The Company follows ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) which simplified the test for goodwill impairment by eliminating the calculation of implied goodwill fair value. Instead, companies compare the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Management prepared a discounted cash flow (DCF) valuation to estimate the fair value of each reporting unit. The DCF valuation was calculated using an appropriate discount rate. The calculated fair values were compared to the reporting unit’s carrying value including goodwill. In each case the fair value exceeded carrying costs resulting in no impairment. See additional discussion in Note 1.

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. In 2019, the Company recognized $22,492,000 of impairment charges related to mining assets in the Construction Materials segment that were simultaneously recorded and impaired as the future undiscounted cash outflows were expected to exceed the current carrying value. See Note 20. In the first two quarters of 2018, the Company wrote off a net $6,840,000 of deferred development costs, previously reported in Property, plant and equipment in the Consolidated Balance Sheet, related to an aggregates property after the necessary mining permits were denied by the State of Colorado for the second time. See Note 16 for further discussion. During the fourth quarter of 2018 the Company wrote-off $627,000 of royalty overpayments related to the aggregate property in ~~Pueblo~~that ~~currently~~was under litigation. ~~See~~at ~~Note~~the ~~2 for further discussion~~time.

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.

17 With regard to product liability, provisions for both claims and un-asserted claims that would be covered under the self-insured portion of the policies are reviewed as circumstances dictate, at least annually, and are recorded in accordance

Table of Contents

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 as circumstances dictate, 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 generally 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~~has arecorded ~~reserve~~an estimate of liability for ~~future~~final reclamation ~~work~~of toits mining properties in the Colorado Springs, Colorado area per ASC 410-20 guidance on accounting for Asset Retirement Obligations (AROs). An ARO is defined in ASC 410-20-20 as an “obligation associated with the retirement of a tangible long-lived asset”. An ARO should be ~~performed~~measured at ~~its~~fair ~~various~~value ~~aggregate~~and ~~operations~~should ~~based~~be ~~upon~~recognized anat the time the obligation is incurred if a reasonable estimate of ~~the~~fair ~~total~~value ~~expense~~can be made. ASC 410-20 also says that ~~will~~upon beinitial ~~incurred~~recognition toof ~~reclaim~~a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the ~~disturbed~~carrying ~~areas.~~amount ~~Actual~~of ~~reclamation~~the ~~costs~~related ~~are~~long-lived ~~charged~~asset toby ~~expense~~the same amount as the liability. ~~The~~Prior ~~adequacy~~to the third quarter of 2019, the ~~recorded~~Company ~~reserve~~had isperformed ~~assessed~~reclamation ~~annually~~concurrently with mining operations and recognized the related costs in operations. The ~~assessment~~decision ~~may~~to becease ~~done~~mining ~~more~~operations ~~frequently~~at ifPikeview ~~events~~in orthe ~~circumstances~~third ~~arise~~quarter ~~that~~of ~~may~~2019 ~~indicate~~and athe ~~change~~acquisition of Valco property in ~~estimated~~the ~~costs,~~fourth ~~recoverable~~quarter ~~material~~of or2019 allowed the ~~period~~Company to reasonably estimate the cost of final reclamation at these mining ~~activity~~properties. ~~For~~To estimate the ~~annual~~fair ~~assessment~~value of the ~~reserve~~liabilities, the Company ~~engages~~used an ~~independent~~expected ~~professional~~present value technique. The Company compared its estimates to ~~assist~~those inprepared ~~reevaluating~~by an independent expert to ensure the estimates ofwere ~~both~~reasonable. The related ARO mining assets were considered fully impaired as expected undiscounted future cash outflows exceeded carrying value. Going forward, changes in the ~~quantities~~ARO due to passage of ~~recoverable~~time ~~material~~will ~~and~~be recognized as an increase in the ~~cost~~carrying amount of ~~reclamation~~the liability and as an expense classified as accretion expense. The assessment of ~~the~~ adequacy of the ~~reclamation~~ARO ~~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~~timing, ~~homogeneity of the deposits,~~ third party costs to perform work, and 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~~performance ~~are~~obligations ~~shipped~~ to customers are met. 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~~certain 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 mandates 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 on operations in ~~2018~~2019 or ~~2017~~2018.

Recently Issued Accounting Standards

The “Recently Issued Accounting Pronouncements” section of Note 1 discusses new accounting policies adopted by the Company since ~~2017~~2018 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 our financial condition, results of operations or liquidity, the impacts are discussed in the applicable notes to the Consolidated Financial Statements.

1819

Table of Contents

adopted. To the extent the adoption of new accounting standards has an effect on our financial condition, results of operations or liquidity, the impacts are discussed in the applicable notes to the Consolidated Financial Statements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and, as such, is not required to provide information in response to this item.

1920

Table of Contents

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

		PAGE
Financial Statements and Financial Statement Schedule of Continental Materials Corporation and Report of Independent Registered Public Accounting Firm thereon:
Consolidated Statements of Operations for fiscal years 2018 and 2017		21
Consolidated Statements of Operations for fiscal years 2019 and 2018		22
Consolidated Statements of Cash Flows for fiscal years 2018 and 2017		22
Consolidated Statements of Cash Flows for fiscal years 2019 and 2018		23
Consolidated Balance Sheets as of December 29, 2018 and December 30, 2017		23
Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018		24
Consolidated Statements of Shareholders’ Equity for fiscal years 2018 and 2017		24
Consolidated Statements of Shareholders’ Equity for fiscal years 2019 and 2018		25
Notes to Consolidated Financial Statements		2526-3946
Report of Independent Registered Public Accounting Firm		4048

2021

Table of Contents

Continental Materials Corporation

Consolidated Statements of Operations

For Fiscal Years ~~2018~~2019 and ~~2017~~2018

(Amounts in thousands, except per share data)

	2018		2017
	2019		2018
Net sales	$	~~163~~113,~~983~~276	$	~~152~~100,~~810~~887
Costs and expenses:
Cost of sales (exclusive of depreciation, depletion and amortization)		136,176		124,715
Cost of sales (exclusive of depreciation and amortization)		88,723		78,033
Depreciation, depletion and amortization		2,633		2,554
Depreciation and amortization		1,962		1,472
Selling and administrative		2632,~~229~~162		22,~~643~~679
Charges related to write-off of deferred development		6,840		—
Charges related to write off of deferred development		—		6,840
Charges related to write-off of overpayment of prepaid royalties		627		—
Charges related to write off of overpayment of prepaid royalties		—		627
Gain on disposition of property and equipment		(919)		(118)
Mining asset impairment		22,492		—
Operating (loss) income		(7,603)		3,016
Gain on legal settlement		(14,781)		—
Interest income		76		79
Loss on legal settlement		6,800		—
Interest expense		(539)		(366)
Gain on disposition of property and equipment		(1,237)		—
Other income, net		25		110
Operating loss		(22,845)		(8,764)
(Loss) income before income taxes		(8,041)		2,839
Interest income		362		76
Benefit (provision) for income taxes		2,185		(1,021)
Interest expense		(371)		(539)
Net (loss) income	$	(5,856)	$	1,818
Other income, net		80		25
Basic and diluted (loss) income per share		(3.45)		1.08
Loss from continuing operations before income taxes		(22,774)		(9,202)
Average shares outstanding		1,697		1,680
Benefit for income taxes		5,396		2,500
Loss from continuing operations		(17,378)		(6,702)
Income from discontinued operations net of income tax provision of $1,080 and $315		3,479		846
Net loss	$	(13,899)	$	(5,856)
Basic and diluted loss per share:
Loss from continuing operations	$	(10.15)	$	(3.95)
Income from discontinued operations		2.03		0.50
Basic and diluted loss per share		(8.12)		(3.45)
Average shares outstanding		1,711		1,697

The accompanying notes are an integral part of the consolidated financial statements.

2122

Table of Contents

Continental Materials Corporation

Consolidated Statements of Cash Flows ~~For Fiscal Years 2018 and 2017~~

For Fiscal Years 2019 and 2018

(Amounts in thousands)

	2018			2017
		2019			2018
Operating activities
Net (loss) income	$	(5,856)		$	1,818
Net loss		$	(13,899)		$	(5,856)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Discontinued operations, net of income tax			(3,479)			(846)
Depreciation, depletion and amortization		2,633			2,554
Adjustments to reconcile net loss to net cash provided by operating activities:
Write-off of deferred development costs		5,409			—
Depreciation and amortization			1,962			1,472
Write-off of overpayment of prepaid royalties		627			—
Write-off of deferred development costs			—			5,409
Deferred income tax provision		(1,798)			—
Impairment of mining property assets			22,492			—
Compensation of Board of Directors paid by issuance of treasury shares		315			326
Write-off of overpayment of prepaid royalties			—			627
Provision for doubtful accounts		165			134
Deferred income tax provision			(4,253)			(1,798)
Gain on disposition of property and equipment		(919)			(118)
Stock based compensation			204			—
Changes in working capital items:
Compensation of Board of Directors paid by issuance of treasury shares			568			315
Receivables		(1,187)			(1,970)
Provision for doubtful accounts			189			165
Inventories		3,639			286
Gain on disposition of property and equipment			(1,237)			—
Prepaid expenses		116			(94)
Changes in working capital items:
Accounts payable and accrued expenses		(110)			864
Receivables			(3,096)			(1,091)
Income taxes payable and refundable		(437)			682
Inventories			2,995			3,961
Other		95			(95)
Prepaid expenses			(256)			116
Net cash provided by operating activities		2,692			4,387
Accounts payable and accrued expenses			5,251			(282)
Investing activities:
Income taxes payable and refundable			(1,903)			(436)
Capital expenditures		(2,700)			(5,781)
Other			(2,965)			305
Cash proceeds from sale of property and equipment		1,430			126
Net cash provided by continuing operations			2,573			2,061
Net cash used in investing activities		(1,270)			(5,655)
Net cash (used) provided by discontinued operations			(2,138)			631
Financing activities:
Net cash provided by operating activities			435			2,692
Borrowings on the revolving bank loan		33,100			32,100
Investing activities:
Repayments on the revolving bank loan		(34,400)			(30,600)
Capital expenditures by continuing operations			(2,693)			(1,409)
Principal repayments of capital lease obligations		(30)			—
Capital expenditures by discontinued operations			(172)			(1,291)
Payments to acquire treasury stock		(5)			(26)
Payments for acquisitions			(22,521)			—
Net cash (used) provided by financing activities		(1,335)			1,474
Cash proceeds from sale of discontinued operations			23,679			—
Net decrease in cash and cash equivalents		87			206
Cash proceeds from sale of continuing operations property and equipment			2,593			—
Cash and cash equivalents:
Cash proceeds from sale of discontinued operations property and equipment			—			1,430
Beginning of period		507			301
Net cash provided (used) by investing activities			886			(1,270)
End of period	$	594		$	507
Financing activities:
Supplemental disclosures of cash flow items:
Borrowings on the revolving bank loan			21,750			33,100
Cash paid during the year for:
Repayments on the revolving bank loan			(23,150)			(34,400)
Interest, net	$	468		$	403
Repayments of finance lease obligations			(80)			(30)
Income taxes, net		50			339
Payments to acquire treasury stock			(257)			(5)
Capital expenditures purchased through capital lease obligation		200			—
Net cash used by financing activities			(1,737)			(1,335)
Net (decrease) increase in cash and cash equivalents			(416)			87
Cash and cash equivalents:
Beginning of period			594			507
End of period		$	178		$	594
Supplemental disclosures of cash flow items:
Cash paid during the year for:
Interest, net		$	333		$	468
Income taxes, net			1,840			50
Other Information:
Contingent consideration from acquisitions			1,540			—
ARO liabilities and assets recognized			22,492			—
Capital expenditures purchased through capital lease obligation			—			200
Assets reclassified as held for sale			896			24,036
Liabilities reclassified as held for sale			—			4,092
Right of use assets obtained in exchange for operating lease liabilities			587			—

The accompanying notes are an integral part of the consolidated financial statements.

2223

Table of Contents

Continental Materials Corporation

Consolidated Balance Sheets As of December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018

(Amounts in thousands except share data)

	December 29, 2018		December 30, 2017
	December 28, 2019		December 29, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	~~594~~178	$	~~507~~594
Receivables less allowance of $560 and $240 for fiscal 2018 and 2017, respectively		24,375		24,227
Receivables less allowance of $494 and $410 for fiscal 2019 and 2018, respectively		21,555		15,321
Receivable for insured losses		~~874~~911		—874
Inventories		1613,~~720~~953		2014,~~359~~806
Prepaid expenses		12,~~785~~171		1,~~901~~785
Refundable income taxes		~~494~~2,397		57494
Other current assets		24,~~500~~229		—2,500
Total current assets		47,342		47,051
Other current assets held for sale		896		10,968
Total current assets		46,290		47,342
Property, plant and equipment
Land and improvements		24,~~781~~072		21,~~781~~409
Buildings and improvements		2014,~~158~~939		2013,~~574~~451
Machinery and equipment		7748,~~991~~269		7848,~~062~~569
Mining properties		63,~~383~~770		115,~~792~~015
Less accumulated depreciation and depletion		(9059,~~142~~025)		(9058,~~385~~013)
		17,171		22,824
		12,025		10,431
Other assets
Goodwill		7,229		7,229
Right-of use assets		4,978		—
Deferred income taxes		3,414		1,616
Goodwill		5,932		1,000
Other assets		547		3,769
Intangible assets		12,437		—
	$	75,703	$	82,489
Deferred income taxes		7,667		3,414
Other long-term assets		654		448
Other long-term assets held for sale		—		13,068
	$	89,983	$	75,703
LIABILITIES
Current liabilities:
Revolving bank loan payable	$	~~2,200~~800	$	32,~~500~~200
Accounts payable		78,~~002~~490		83,~~492~~234
Accrued expenses
Compensation		2,~~638~~181		2,~~274~~638
Reserve for self-insured losses		21,~~451~~967		12,~~880~~451
Liability for unpaid claims covered by insurance		~~874~~911		—874
Profit sharing		~~1,065~~710		1,~~429~~065
Reclamation		1,061		981
Short-term asset retirement obligation		4,200		1,017
Other		23,~~899~~377		32,~~318~~911
Total current liabilities		20,190		21,874
Short-term lease liabilities		1,170		—
Accrued reclamation		5,479		5,185
Other current liabilities held for sale		—		3,800
Other long-term liabilities		1,258		1,108
Total current liabilities		23,806		20,190
Commitments and contingencies (Note 6)
Long-term lease liabilities		3,991		—
Long-term compensation liabilities		1,842		959
Asset retirement obligation		23,713		5,252
Other long-term liabilities		1,442		234
Other long-term liabilities held for sale		—		292
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		1,~~930~~853		1,~~887~~930
Retained earnings		6147,~~131~~232		6661,~~987~~131
Treasury shares, 876,409 and 892,097 at cost		(14,928)		(15,195)
Treasury shares, 860,910 and 876,409 at cost		(14,539)		(14,928)
		48,776		54,322
		35,189		48,776
	$	7589,~~703~~983	$	8275,~~489~~703

The accompanying notes are an integral part of the consolidated financial statements.

2324

Table of Contents

Continental Materials Corporation

Consolidated Statements of Shareholders’ Equity

For Fiscal Years ~~2018~~2019 and ~~2017~~2018

(Amounts in thousands except share data)

		Common		Capital
	Common	shares		in excess		Retained		Treasury	Treasury
	shares	amount		of par		earnings		shares	shares cost
Balance at December 31, 2016	2,574,264	$	643	$	1,765	$	65,169	903,097	$	15,373
Balance at December 30, 2017	2,574,264	$	643	$	1,887	$	66,987	892,097	$	15,195
Net income	—		—		—		1,818	—		—
Net loss	—		—		—		(5,856)	—		—
Compensation of Board of Directors by issuance of treasury shares	—		—		122		—	(12,000)		(204)
Purchase of treasury shares	—		—		—		—	1,000		26
Balance at December 30, 2017	2,574,264		643		1,887		66,987	892,097		15,195
Net income	—		—		—		(5,856)	—		—
Compensation of Board of Directors by issuance of treasury shares	—		—		43		—	(16,000)		(272)
Purchase of treasury shares	—		—		—		—	312		5
Balance at December 29, 2018	2,574,264	$	643	$	1,930	$	61,131	876,409	$	14,928
Net loss	—		—		—		(13,899)	—		—
Compensation of Board of Directors by issuance of treasury shares	—		—		(77)		—	(37,998)		(645)
Purchase of treasury shares	—		—		—		—	22,499		256
Balance at December 28, 2019	2,574,264	$	643	$	1,853	$	47,232	860,910	$	14,539

The accompanying notes are an integral part of the consolidated financial statements.

2425

Table of Contents

Notes to Consolidated Financial Statements

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Continental Materials Corporation (the Company) is a Delaware corporation, incorporated in 1954. The Company ~~operates~~experienced ~~primarily~~various ~~within~~changes ~~two~~in ~~industry~~2019 ~~groups,~~with ~~Heating,~~the ~~Ventilation~~sale ~~and~~of ~~Air~~substantially ~~Conditioning~~all ~~(HVAC)~~assets of its ready-mix concrete and ~~Construction~~Daniels ~~Products.~~Sand ~~The~~operations ~~Company~~in ~~has~~the ~~identified~~first ~~two~~quarter ~~reportable~~of ~~segments~~2019, the acquisition of four new operating businesses in ~~each~~the second quarter of 2019 and the ~~two~~cessation ~~industry~~of ~~groups:~~mining at Pikeview quarry in the ~~Heating~~third quarter of 2019. In conjunction with this activity, management reviewed its operating and ~~Cooling~~reporting ~~segment~~structure and made adjustments to align the ~~Evaporative~~structure ~~Cooling~~with how operations will be measured and evaluated going forward including revisions to the Company’s reporting segments. Segment information for prior periods has been reclassified to conform to current segment reporting structure. The Company operates primarily in the ~~HVAC~~Building Products industry group. ~~and~~Within this industry group the ~~Concrete,~~Company ~~Aggregates~~has ~~and~~identified ~~Construction~~three ~~Supplies~~reportable ~~(CACS)~~segments: ~~segment~~the ~~and~~HVAC segment, the Door segment inand the Construction ~~Products~~Materials ~~industry group~~segment.

The ~~Heating~~HVAC ~~and Cooling~~ segment ~~primarily~~ produces and sells ~~gas-fired~~a variety of products including wall furnaces, ~~console~~fan ~~heaters~~coils, evaporative coolers, boiler room equipment and ~~fan~~dryer ~~coils~~boxes and related accessories from the Company’s wholly-owned ~~subsidiary~~subsidiaries, 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~~Global ~~and~~Flow ~~construction~~Products ~~supplies~~/American ~~are~~HVAC ~~offered~~(GFP) ~~from~~of ~~numerous~~Broken ~~locations~~Arrow, ~~along~~Oklahoma, ~~the~~and ~~Southern~~InOvate ~~Front~~Dryer ~~Range~~Technologies (InOvate) of ~~Colorado~~Jupiter, ~~operated~~Florida. bySales ~~the~~of ~~Company’s~~this ~~wholly-owned~~segment ~~subsidiaries~~are ~~Castle~~nationwide ~~Concrete~~although ~~Company~~WFC and ~~Transit~~PMI ~~Mix~~sales ~~Concrete~~are ~~Co.,~~more ofconcentrated ~~Colorado~~in ~~Springs and Transit Mix of Pueblo, Inc. of Pueblo (~~the ~~three~~southwestern ~~companies~~United ~~collectively referred to as TMC)~~States. The Door segment sells hollow metal and wood doors, door frames and related hardware, ~~lavatory~~sliding ~~fixtures~~door systems and electronic access and security systems from the Company’s wholly-owned ~~subsidiary,~~subsidiaries: McKinney Door and Hardware, Inc. (MDHI), Fastrac Building Supply (Fastrac) and Serenity Sliding Door Systems (Serenity), which ~~operates~~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 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).

PRINCIPLES OF CONSOLIDATION

The Consolidated Financial Statements include Continental Materials Corporation and all of its subsidiaries ~~(the Company)~~. Intercompany transactions and balances have been eliminated. All subsidiaries of the Company are wholly-owned.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which removed the requirement to compare the implied fair value of goodwill with its carrying amount as part of ~~step~~Step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying ~~amount~~value and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;. ~~however~~However, the impairment loss ~~recognized~~ should not exceed the total amount of goodwill allocated to that reporting unit. ~~This~~The ~~guidance~~pronouncement was adopted by the Company in the fourth quarter of ~~fiscal~~ 2017 in connection with ~~our~~ annual impairment testing. No impairment charges resulted from our impairment testing.

InEffective ~~May~~December ~~2014~~31, 2017 (the ~~FASB~~beginning ~~issued~~of fiscal 2018), the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). ~~This~~and ~~new~~related ~~revenue~~amendments, ~~standard~~which ~~creates~~created a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. Subsequently, the FASB has issued various ASUs to provide further clarification around certain aspects of ASC 606. The Company adopted this standard in the first quarter of fiscal 2018. The adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems of 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. See additional discussion of the Company’s revenue recognition policies and practices below.

2526

Table of Contents

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.

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 2018 and did not have a material impact to the consolidated statement of cash flows.

InEffective ~~February~~December ~~2016~~30, ~~the~~2018 ~~FASB issued ASU No. 2016-02, Leases~~ (~~Topic 842). This new standard supersedes existing lease guidance to require lessees to recognize assets and liabilities on~~ the ~~balance~~beginning sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The standard will be effective for the Company in the first quarter of fiscal 2019.) ~~In July 2018,~~ the ~~FASB~~Company ~~issued~~adopted ASU ~~2018~~No. 2016-1102, Leases (Topic 842)~~: Targeted Improvements~~, which ~~includes~~superseded ~~new~~Topic ~~transition~~840, ~~guidance~~“Leases”. ~~for~~As ~~the~~allowed ~~adoption~~under ofthe ~~ASU~~new ~~2016-02.~~accounting ~~Such~~standard, ~~guidance~~the ~~creates~~Company anelected ~~additional~~to ~~transition~~apply ~~method~~practical ~~allowing~~expedients ~~entities~~ to ~~use~~carry forward the ~~effective~~original ~~date~~lease ofdeterminations, ~~ASU~~lease ~~2016-02~~classifications asand ~~the~~accounting ~~date~~ of initial ~~application~~direct oncosts ~~transition.~~for ~~Under~~all ~~this~~asset ~~method,~~classes ~~entities~~at ~~will not be required to recast comparative periods when transitioning to~~ the ~~new~~time ~~guidance~~of adoption. ~~Entities~~The ~~will~~Company also elected not ~~be required~~ to ~~present~~separate ~~comparative~~lease ~~period~~components ~~disclosures~~from ~~under~~non-lease ~~the~~components ~~new~~for ~~guidance~~asset incategories, ~~the~~except ~~period~~office ofspace, ~~adoption.~~and ~~The Company expects~~ to ~~select~~exclude ~~this~~short-term ~~new~~leases ~~transition~~from ~~method upon~~ its ~~adoption~~Consolidated inBalance ~~the first quarter of 2019~~Sheet. ~~The~~For ~~Company is currently in~~ the ~~process~~office ofspace ~~summarizing~~ lease ~~information~~category ~~to ensure compliance with~~ the ~~standard.~~election ~~This~~was ~~process~~made ~~is expected~~ to ~~continue~~report ~~through~~lease ~~the effective date~~ and ~~will~~non-lease ~~include~~components ~~analysis~~separately ofas ~~contractual~~the ~~arrangements,~~non-lease ~~evaluation~~components ofare ~~related~~billed ~~disclosures~~ and, ~~potentially,~~paid ~~changes/modifications~~separately toand ~~processes,~~are ~~accounting~~not ~~systems,~~a ~~and~~fixed ~~internal~~amount ~~controls~~over tothe ~~ensure~~lease ~~compliance~~term. The ~~Company~~implicit ~~expects~~discount ~~that~~rate ~~adoption~~ of ~~ASU~~leases ~~2016-02~~is ~~will~~used ~~have~~to acalculate ~~significant~~present ~~impact~~values onwhen ~~its~~available. ~~Consolidated~~When ~~Balance~~an ~~Sheets~~implicit ~~and~~discount ~~disclosures,~~rate ~~but~~is ~~does~~ not ~~anticipate~~readily aavailable ~~material~~an ~~impact~~incremental onborrowing ~~its~~rate ~~consolidated~~is ~~cash~~used ~~flow~~to orcalculate ~~consolidated~~present ~~results of operations~~values.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018 and the reported amounts of revenues and expenses during both of the two fiscal years in the period ended December 2928, ~~2018~~2019. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly-liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value. The Company has reclassified negative cash balances to Accounts Payable.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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 and 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 the financial instruments recognized in the accompanying balance sheet:

2627

Table of Contents

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

Revolving Bank Loan Payable: Fair value was estimated based on the borrowing rates then 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.

Lease liabilities: Fair value was estimated based on the borrowing rates then 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 Lease liabilities represents a reasonable estimate of the corresponding fair value and was valued as Level 2.

Phantom equity and phantom equity appreciation liability awards: Fair value is estimated based on the use of a Black-Scholes option pricing model based on publicly available inputs. The carrying amount of the liability represents a reasonable estimate of the vested portion of the corresponding fair value of the awards granted and was valued as Level 3.

Contingent consideration: Fair value is estimated based on the use of a Monte Carlo Simulation model based on significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.

ARO liability: Fair value is estimated using an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate using significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.

ARO for asset impairment: Fair value is estimated using an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate using significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.

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

INVENTORIES

Inventories are valued at the lower of cost or net realizable value and are reviewed periodically for excess or obsolete stock with a provision recorded, where appropriate. Cost for certain inventory inat ~~the~~WFC ~~HVAC~~and ~~industry~~PMI ~~group~~ is determined using the last-in, first-out (LIFO) method. These inventories represent approximately 6571% of total inventories at December 2928, ~~2018~~2019 and 7765% at December 3029, ~~2017~~2018. The cost of all other inventory is determined by the first-in, first-out (FIFO) or average cost methods. Some commodity prices such as copper, ~~steel, cement~~ and ~~diesel~~steel ~~fuel~~ have experienced significant fluctuations in recent years. ~~Cement~~which ~~and~~is ~~diesel fuel prices are~~ principally relevant to the ~~CACS~~four ~~segment while steel prices and copper prices are principally relevant to our two~~ HVAC businesses. The general effect of using LIFO is that higher prices are not reflected in the inventory carrying value. Current costs are reflected in the cost of sales. The inventories of the businesses using either FIFO or an average costing method for valuing inventories turn over frequently and at any point in time the amount of cement or fuel inventory is not significant. As a result of these circumstances, the commodity fluctuations have primarily affected the cost of sales with little effect on the valuation of inventory. Due to the nature of our products, obsolescence is not typically a significant exposure, however ~~our~~certain HVAC businesses will from time to time contend with some slow-moving inventories or parts that are no longer used due to engineering changes. At December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018, inventory reserves were approximately 6.8% ~~and~~ ~~1.8%~~ of the total FIFO inventory value~~, respectively~~. ~~The increase between years is due to management’s decision to increase valuation reserves as it works to streamline the number of products sold.~~

Table of Contents

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method as follows:


Land improvements		5 to 31 years
Buildings and improvements		10 to 31 years
Leasehold improvements		Shorter of the term of the lease or useful life
Machinery and equipment		3 to 20 years

~~Depletion~~The cost of ~~rock~~property ~~and~~sold ~~sand~~or ~~deposits~~retired and ~~amortization~~the ofrelated ~~deferred~~accumulated ~~development~~depreciation and ~~costs~~amortization are ~~computed~~removed byfrom the ~~units-of-production~~accounts ~~method~~and ~~based~~the ~~upon~~resulting ~~estimated~~gain ~~recoverable~~or ~~quantities~~loss ofis ~~rock~~reflected in operating income. Maintenance and ~~sand~~repairs are charged to expense as incurred. ~~The~~Major ~~estimated~~renewals ~~recoverable~~and ~~quantities~~betterments are ~~periodically~~capitalized ~~reassessed~~and depreciated over their estimated useful lives.

The cost of property sold or retired and the related accumulated depreciation, depletion and amortization are removed from the accounts and the resulting gain or loss is reflected in operating income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized and depreciated over their estimated useful lives.

OTHER ASSETS

The Company annually assesses goodwill for potential impairment at the end of each year. In accordance with ASU 2017-04, the fair value of each reporting unit is compared to its carrying value. Impairment expense would be recognized, limited to the value of the reporting unit’s goodwill, should carrying value exceed fair value. In addition to annual assessment, the Company will reassess the recorded goodwill to determine if impairment has occurred if events arise or circumstances change in the relevant reporting segments or in their industries. No goodwill impairment was recognized for any of the periods presented.

27The Company had previously paid $2,500,000 related to an aggregate property near Colorado Springs. During fiscal year 2019, the Company decided to cease negotiations with the State of Colorado to obtain mining permits for the property. The amount, less $325,000 that was not expected to be recovered, was included in other current assets as of December 28, 2019.

~~Table~~Intangible ofassets ~~Contents~~with definite lives include trade names, intellectual property, and customer relationships. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value.

In 2016 the Company paid $2,500,000 related to an aggregate property near Colorado Springs. As the Company negotiated with the State of Colorado to obtain the necessary mining permits the amount was held in an escrow account and is included in other assets as of December 30, 2017. During 2018 the Company was denied the mining permits by the State of Colorado for a second time. See Note 16 for additional discussion. The Company is in process of dissolving the escrow account and collecting the funds, therefore, the amount is included in other current assets as of December 29, 2018.

The Company is party to three aggregate property leases which require royalty payments. The leased gravel operation in Pueblo, Colorado is currently the subject of litigation for which the Company filed its Third Amended Complaint on November 16, 2018 in which it dropped its claim to recover royalty overpayments but seeks 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. See Note 2 for further discussion.

RETIREMENT PLANS

The Company and its subsidiaries have a contributory profit sharing retirement plan for specific employees. The ~~plans~~plan ~~allow~~allows qualified employees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k). The Company may make annual contributions, at its discretion, based primarily on profitability. In addition, any individuals whose compensation iswas in excess of the amount eligible for the Company matching contribution to the 401(k) plan as established by Section 401 of the Internal Revenue Code, are eligible to participate in an unfunded ~~Supplemental~~Deferred ~~Profit~~Compensation ~~Sharing~~ Plan. This plan accrues an amount equal to the difference between the amount the person would have received as Company contributions to his/her account under the 401(k) plan had there been no limitations and the amount the person ~~will~~would receive under the 401(k) plan giving effect to the limitations. Costs under the plans are charged to operations as incurred. As of December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018, the unfunded liabilities related to the ~~Supplemental~~Deferred ~~Profit~~Compensation ~~Sharing~~ Plan were $1,~~001~~250,000 and $1,~~027~~001,000, respectively.

RESERVE FOR SELF-INSURED AND INSURED LOSSES

The Company’s risk management program provides for certain levels of loss retention for workers’ compensation, automobile liability, healthcare plan coverage and general and product liability claims. The components of the reserve for self-insured losses have been recorded in accordance with ~~Generally Accepted Accounting Principles (~~GAAP) requirements that an estimated loss from a loss contingency shall be accrued if information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably ~~estimated. The recorded reserve represents management’s best estimate of the future liability related to these claims up to the associated deductible.~~

GAAP also requires an entity to accrue the gross amount of a loss even if the entity has purchased insurance to cover the loss. Therefore the Company has recorded losses for workers’ compensation, automobile liability, medical plan coverage and general and product liability claims in excess of the deductible amounts, i.e., amounts covered by insurance contracts, in “Liability for unpaid claims covered by insurance” with a corresponding “Receivable for insured losses” on the balance sheet. The components of the liability represent both unpaid settlements and management’s best estimate of the future liability related to open claims. Management has evaluated the creditworthiness of our insurance carriers and determined that recovery of the recorded losses is probable and, therefore, the receivable from insurance has been recorded for the full amount of the insured losses. The amount of claims and related insured losses at December 29~~, 2018 was $874,000.~~

RECLAMATION

In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas whether the property is owned or leased. The Company records a reserve for future reclamation work to be performed at its various aggregate operations based upon an estimate of the total expense that would be paid to a third party to reclaim the disturbed areas. Reclamation expense is determined during the interim periods using the units-of-production method. At each fiscal year-end, a more formal and complete analysis is performed and the expense and reserve is adjusted to

Table of Contents

~~reflect the~~ estimated ~~cost to reclaim the then disturbed and unreclaimed areas~~. The ~~assessment~~recorded ofreserve ~~the~~represents reclamation liability may be done more frequently if events or circumstances arise that may indicate a change in estimated costs, recoverable material or period of mining activity. As part of the year-end analysis, the Company engages an independent specialist to assist in reevaluating the estimates of both the quantities of recoverable material and the cost of reclamation. Most of the reclamation on any mining property is generally performed concurrent with mining or soon after each section of the deposit is mined. The Companymanagement’s ~~reserve~~best ~~for~~estimate ~~reclamation activities was $6,540,000 at December 29, 2018 and $6,165,000 at December 30, 2017. The Company classifies a portion~~ of the ~~reserve~~future ~~as a current~~ liability, ~~$1,061,000~~related atto ~~December 29,~~these ~~2018~~claims ~~and~~up ~~$981,000~~to ~~at December 30, 2017 based upon historical expenditures and~~ the ~~anticipated~~associated ~~reclamation timeframe for the Pueblo aggregate operation which is still under litigation as discussed in Note 2~~deductible.

RECLAMATION

In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas whether the property is owned or leased. The Company had recorded asset retirement obligations (ARO) and offsetting assets for future reclamation work to be performed at its various aggregate operations based upon an estimate of the total expense that would be paid to a third party to reclaim the properties. The assessment of the reclamation liability may be done more frequently if events or circumstances arise that may indicate a change in estimated costs. The Company has engaged an independent specialist to assist in evaluating the estimates of the cost of reclamation. Prior to the current fiscal year, the reclamation of mining properties was performed concurrently with mining or soon after each section of the deposit was mined. In the current year, in connection with the decision to cease mining operations at its Pikeview quarry and purchase of formerly leased mining property in Pueblo, the Company was able to reasonably estimate the cost of final reclamation of these properties and has recorded ARO liabilities of $27,913,000 at December 28, 2019. Reclamation liabilities were estimated at $6,269,000 as of December 29, 2018. The Company classifies a portion of the reserve as a current liability, specifically $4,200,000 at December 28, 2019 and $1,017,000 at December 29, 2018 based upon anticipated reclamation timeframe. See Note 2 for discussion of acquisition of Pueblo property and Note 20 for additional discussion of AROs.

TREASURY STOCK

Treasury stock is valued at the aggregated average cost that the Company paid for each transaction.

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~~The ~~are~~Company ~~recognized~~is ~~when~~applying ~~control~~Topic of606 to the ~~promised~~customer ~~goods~~contracts orin ~~services~~each ~~transfers~~industry segment to provide assurance of compliance. Using the ~~Company’s~~five-step ~~customers~~model the customer contracts in aneach ~~amount~~segment ~~that~~were ~~reflects~~evaluated ~~the~~on ~~consideration~~critical ~~the~~aspects ~~Company~~of ~~expects~~how torevenue beis ~~entitled~~reported toand recognized in ~~exchange~~the ~~for~~financial ~~those~~statements ~~goods~~i.e. or1) ~~services.~~Identify ~~The~~the ~~Company’~~contract(s) ~~payment~~with ~~terms~~the ~~generally~~customer; ~~range~~2) ~~between~~Identify 30the toperformance 90obligations; ~~days~~3) ~~after~~Determine ~~invoice~~the istransaction ~~billed~~price; to4) Allocate the ~~customer.~~transaction ~~Sales~~price ~~are~~to ~~reported~~the ~~net~~performance ofobligations; ~~sales~~and ~~tax.~~5) ~~Shipping~~Recognize ~~and~~revenue ~~other~~as ~~transportation~~each ~~costs~~performance ~~paid~~obligation byis ~~the~~satisfied. In ~~Company~~applying ~~and~~the ~~rebilled~~model to ~~the~~each ~~buyer~~reporting ~~are~~segment ~~recorded~~level, ~~gross~~the ~~(as~~Company ~~both~~is ~~sales~~using ~~and~~a ~~cost~~portfolio ofapproach ~~sales).~~which ~~The~~is ~~Company~~acceptable ~~generally~~because ~~recognizes~~the ~~revenue~~contracts ~~from~~within ~~the~~each ~~sale~~segment ofare ~~products~~similar atwith ~~the~~respect ~~time~~to ~~the~~contract ~~products~~attributes, ~~are~~performance ~~shipped~~obligations, and revenue recognition.

~~While~~Sales ~~the~~are ~~return~~recognized ofwhen ~~products~~control isof ~~generally~~the ~~not~~promised ~~allowed,~~goods ~~some~~or ~~large~~services ~~customers~~transfers ~~have~~to ~~been granted~~ the ~~right~~Company’s tocustomers ~~return~~in aan ~~certain~~ amount atthat reflects the ~~end~~consideration of the ~~normal~~Company ~~selling~~expects ~~season~~to ~~for~~be ~~seasonal~~entitled ~~products.~~to ~~Sales~~in ~~returns~~exchange ~~and~~for ~~allowances~~those ~~are~~goods ~~estimated~~or ~~based on current program terms and historical experience~~services. ~~Provisions~~The ~~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. Changes in the aggregated product warranty liability for the fiscal years 2018 and 2017 were as follows (amounts in thousands):30

	2018		2017
Beginning balance	$	132	$	118
Warranty related expenditures		(148)		(211)
Warranty expense accrued		120		225
Ending balance	$	104	$	132

The Company does not perform installation services except for installation of electronic access and security systems in the Door segment. These installation service contracts are generally short-term in nature, usually less than 30 days. It was determined for the installation service contracts there are two performance obligations, 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.

Table of Contents

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.


	2019		2018
Beginning balance	$	104	$	132
Warranty related expenditures		(148)		(148)
Warranty expense accrued		120		120
Ending balance	$	76	$	104

The majority of sales within the Door division do not include extended installation components. Most of the sales of MDHI that contain installation are completed within 30 days and contain two specific components, the product and the installation service. The transaction price for these contracts is allocated to each performance obligation based on its stated stand-alone price. Revenue is recognized at a point in time as each performance obligation is completed. The Company does not offer maintenance or service contracts. The acquisition of Fastrac and Serenity in mid-2019 expanded the type of contracts that require analysis under Topic 606 guidelines as these operations may include extended installation services within the contracts. The company negotiates the terms of the contract and prepares a detailed project quote that might include number and type of doors, number and style of hardware, locks, electronic items and estimated installation cost. Contract price for each item of the quote is negotiated and stated in the contract. Modifications are treated as adjustments to an existing contract and are part of the changes in billing invoices. Revenue is recognized as performance obligations, per the contract agreement, are completed. Revenue for product is recognized as shipped. Revenue for installation services is recognized on a percentage of completion method with costs in excess of billings and/or billings in excess of costs being recorded as an asset or liability until recognized. Costs in excess of billings, of approximately $420,000, are included in Prepaid expenses and retainage on contracts of approximately $345,000 is included in Receivables on the Consolidated Balance Sheet as of December 28, 2019.

SHARE-BASED COMPENSATION

Share-based compensation expense is recognized using the fair value method of accounting. Share-based awards are recognized ratably over the requisite service period.

INCOME TAXES

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.

OnThe ~~December 22,~~ 2017, ~~the~~ Tax Cuts and Jobs Act (~~the “~~Tax Act”) ~~was~~repealed ~~enacted in~~ the ~~United~~corporate ~~States.~~alternative ~~The~~minimum ~~Tax~~tax ~~Act~~(AMT) ~~significantly~~and ~~revised~~allows ~~the~~for ~~U.S.~~all ~~tax~~existing ~~code~~credit ~~by,~~carryforwards ~~among~~to ~~other~~be ~~items,~~used ~~reducing~~to ~~the~~offset ~~Company’s~~regular ~~federal~~ tax ~~rate~~liability ~~from 34% to 21%, providing~~ for ~~the~~tax ~~full~~years ~~expensing~~beginning ofafter ~~certain~~December ~~depreciable~~31, ~~property and eliminating the corporate Alternative Minimum Tax (AMT)~~2017.

~~The Tax Act repeals 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~~Table 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 DecemberContents

29Additionally, for tax years 2018, or2019 ~~December~~and 302020, ~~2017~~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 (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 December 28, 2019 or December 29, 2018.

CONCENTRATIONS

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables and temporary cash investments. The Company did not have any temporary cash investments in either fiscal ~~2018~~2019 or ~~2017~~2018.

The Company performs ongoing credit evaluations of its customers and generally does not require collateral. In ~~many~~some ~~instances~~Door ~~in the CACS~~ segment and inHVAC ~~the Heating and Cooling~~ segment (as it relates to the fan coil product line); transactions, the Company retains lien rights on the properties served until the receivable is collected. The Company writes off accounts when all efforts to collect the receivable have been exhausted. The Company maintains allowances for potential credit losses based upon the aging of accounts receivable, management’s assessment of individual accounts and historical experience. Such losses have been within management’s expectations. See Note 15 for a description of the Company’s customer base.

All long-lived assets are in the United States. No customer accounted for 10% or more of total sales of the Company in fiscal ~~2018~~2019 or ~~2017~~2018. One customer in the ~~Heating~~HVAC ~~and Cooling~~ segment accounted for 1615.19% and 1816.01% of consolidated accounts receivable at December 2928, ~~2018~~2019 and at December 3029, ~~2017~~2018, respectively.

Substantially all of the ~~Heating~~HVAC ~~and Cooling~~ Segment’s factory employees are covered by a collective bargaining agreement through the Carpenters Local 721 Union under a contract that expires on December 31, 2022. The Company considers relations with its employees and with their union to be good.

IMPAIRMENT OF LONG-LIVED ASSETS

In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to fair value is required. In the fiscal quarters ended March 31, 2018 and June 30, 2018 the Company wrote off a total of $6,840,000 of deferred development related to a granite mining property south of Colorado Springs. See Note 16 for additional discussion.

30 In the third quarter of 2019 the Company made a strategic decision to cease mining operations at its Pikeview quarry in Colorado Springs, Colorado as it was no longer in the best economic interest of the consolidated portfolio to continue operations. The Company recorded an ARO liability and offsetting asset of $20,715,000 which represented the estimated fair value of the total reclamation costs. The related ARO asset was considered fully impaired as the total future estimated cash flows exceeded the carrying value. Therefore, the Company also recorded an impairment charge of $20,217,000 related to the asset. In the fourth quarter of 2019, the Pikeview ARO was increased by a $45,000 change in estimate. The related ARO asset was considered fully impaired due to the same reason noted in the third quarter of 2019. Additionally in the fourth quarter, the Company purchased formerly leased mining property in Pueblo, Colorado as part of a legal settlement. See Note 2. With no intention to resume mining of this property, the Company was able to reasonably estimate the cost of final reclamation and recorded an ARO liability and offsetting asset of $6,660,000 related to this property. The related mining asset was considered fully impaired as total estimated cash flows exceeded the

Table of Contents

~~associated with the asset would be compared to the asset’s~~ carrying ~~amount to determine if a write-down to market~~ value ~~or discounted cash flow value is required~~. ~~In the fiscal quarters ended March 31~~Therefore, ~~2018 and June 30, 2018~~ the Company ~~wrote~~recorded ~~off~~ a ~~total~~net ofimpairment $6charge,~~840,000~~ ~~of deferred development~~ related to athe ~~granite~~Pueblo ~~mining~~ property, ~~south~~ of ~~Colorado Springs. See Note 16 for additional discussion. The company wrote off~~ $~~627~~2,230,000 offor ~~royalty overpayments related to~~ the ~~leased~~year ~~gravel~~ended ~~operation in Pueblo, Colorado as of~~ December 2928, ~~2018~~2019. See Note ~~2 for additional discussion~~20.

FISCAL YEAR END

The Company’s fiscal year-end is the Saturday nearest December 31. Fiscal ~~2018~~2019 and fiscal ~~2017~~2018 each consisted of 52 weeks.

2. CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE

OnSubsequent ~~September~~to 15the end of the third quarter, ~~2016~~on aOctober ~~Partial~~9, ~~Summary~~2019, ~~Judgment~~the ~~Order~~Company ~~was~~and ~~issued~~Valco filed a Joint Notice of Settlement 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~~Settlement ~~regards~~stated athat ~~Fee~~the ~~Sand~~parties ~~and~~had ~~Gravel~~reached ~~Lease~~a ~~(“Lease”)~~settlement ~~between~~agreement ~~the~~resolving ~~Company~~all ~~as Lessee and Valco, Inc~~claims. ~~(“Valco”)~~Trial ashad ~~Lessor~~previously ~~that~~been ~~calls~~scheduled for ~~the~~October ~~payment~~21, of2019. ~~royalties~~On ~~over~~October ~~the~~16, ~~life of the Lease on an agreed 50~~2019,~~000,000~~ ~~tons of sand and gravel reserves. In~~ the ~~suit the~~ Company ~~sought declaratory judgment~~ and ~~damages~~Valco ~~pursuant~~filed toa ~~the~~Stipulated ~~Lease~~Motion ~~on the grounds that Agreed Sand and Gravel Reserves of 50 million tons did not exist, and~~ for ~~other~~Dismissal ~~relief~~with ~~including~~Prejudice ~~return~~which ofstated: ~~approximately $1,470,000 in royalty payments made by~~ the ~~Company~~parties ~~to Valco in excess of tonnage actually produced (~~“~~Prepayments”).~~agree ~~Based~~that onthis ~~information obtained through discovery~~matter, ~~the~~including ~~Company~~all ~~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~~counterclaims, ~~and~~dismissed ~~breach~~with ofprejudice ~~warranty concerning the same. Valco asserted counterclaims against the Company alleging breach of contract~~ and ~~seeking~~without ~~declaratory~~costs, ~~judgment~~each ~~regarding~~party ~~the Company’s refusal~~ to ~~make~~bear ~~further~~its ~~royalty~~own ~~payments~~attorneys’ ~~under~~fees.” ~~the~~The ~~Lease.~~Court Inentered the ~~ordinary~~Order ~~course~~ of ~~business~~Dismissal ~~and~~with ~~absent~~Prejudice ~~any~~on ~~breach~~October ~~by Valco~~16, ~~the Company is required to make quarterly royalty payments amounting to not less than $300,000 in a calendar year~~2019. ~~In response to Valco’s breaches of contract, the Company stopped making royalty payments at the start of the 2015 calendar year.~~

~~The~~As ~~Company~~part ~~has asserted partial failure~~ of ~~consideration~~the asSettlement, anthe ~~affirmative~~Company ~~defense~~agreed to pay Valco’s ~~counterclaims~~$9,000,000, towhich ~~offset~~included ~~the~~purchase ~~alleged~~of ~~back-due~~previously ~~quarterly~~leased ~~royalty~~land. ~~payments~~There ~~and~~is ~~the~~no ~~amount~~intention ~~due~~to onresume ~~quarterly~~mining ~~royalty~~of ~~payments in~~ the ~~future.~~property ~~The~~that ~~Partial~~ceased ~~Summary~~several ~~Judgment~~years ~~Order~~prior ~~resolved~~when ~~many~~litigation ofbegan. As the ~~Company’s~~litigation ~~claims~~claim inwas ~~Valco’s~~a ~~favor,~~known ~~but~~event ~~did~~prior ~~not~~to ~~resolve Valco’s counterclaims or~~ the ~~Company’s affirmative defense. During the~~ third quarter ofbalance ~~2016~~sheet date, the Company ~~recorded~~recognized ~~a $632,000 write-down representing~~ the portion of the ~~royalty~~agreement ~~overpayment~~related ~~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~~settlement ~~believe the court improperly resolved factual issues~~ in its ~~Partial~~financial ~~Summary~~statements ~~Judgment~~for ~~Order~~the ~~that~~period ~~should~~ended ~~have~~September ~~been~~28, ~~decided by a jury~~2019. OnSince ~~February 23, 2017,~~ the ~~Partial~~asset ~~Summary~~purchase ~~Judgment~~agreement ~~Order~~ was ~~certified~~not ~~for~~a ~~immediate~~known ~~appeal,~~event ~~and~~prior ~~all~~to ~~other claims, counterclaims and affirmative defenses were stayed pending~~ the ~~resolution~~balance ofsheet ~~that~~date ~~appeal.~~it ~~The Company filed a notice of appeal which~~ was ~~denied~~not onrecorded ~~July~~in ~~2, 2018 for lack of jurisdiction and remanded to~~ the ~~trial~~financial ~~court~~statements for ~~further proceedings. Subsequently,~~ the ~~trial~~period ~~court~~ended ~~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~~used its ~~Third~~best ~~Amended~~estimate, ~~Complaint~~based on ~~November~~currently 16available information, ~~2018 in which it dropped its claim~~ to ~~recover~~record ~~royalty~~an ~~overpayments~~estimated ~~but~~loss ~~seeks~~on tolitigation ~~recover~~settlement of $16,~~470~~400,000 infor ~~Prepayments.~~the ~~The~~third ~~Company~~quarter ~~wrote~~of ~~off~~2019. During the ~~remaining~~fourth ~~royalty~~quarter ~~overpayment~~ of ~~$627~~2019,~~000,~~ ~~previously~~a ~~reported~~third-party asappraisal ~~Other~~of ~~assets~~the onproperty ~~the~~was ~~Consolidated~~obtained ~~Balance~~which ~~Sheet,~~valued asthe ofland ~~December~~at 29$2,200,000. ~~2018~~Using ~~due~~this tovaluation, ~~filing~~the ofCompany recorded the ~~Third~~property ~~Amended~~purchase ~~Complaint.~~in At the ~~trial~~fourth ~~preparation~~quarter ~~conference~~and onrevised ~~January~~the ~~18,~~loss ~~2019,~~on ~~the~~litigation ~~court~~settlement ~~informed~~to ~~the~~$6,800,000 ~~parties~~for ~~that~~ the ~~trial~~year-ended ~~would~~December be28, ~~rescheduled~~2019. ~~due~~See toNote an20 ~~ongoing~~for ~~shutdown~~discussion of ~~the~~asset ~~federal~~retirement ~~government.~~obligation ~~The~~and ~~jury~~related ~~trial~~asset onimpairment ~~all~~related ~~issues~~to ~~has~~the ~~been~~purchased ~~rescheduled for May 13, 2019~~property.

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.

Table of Contents

3. INVENTORIES

Inventories consisted of the following (amounts in thousands):

	December 29, 2018		December 30, 2017
	December 28, 2019		December 29, 2018
Finished goods	$	56,~~448~~419	$	85,~~391~~448
Work in process		1,~~365~~061		1,~~198~~365
Raw materials and supplies		96,~~907~~473		107,~~770~~993
	$	1613,~~720~~953	$	2014,~~359~~806

If inventories valued on the LIFO basis were valued at current costs, inventories would be higher by $76,~~176~~618,000 and $67,~~677~~176,000 at December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018, respectively. Reductions in inventories during 2018 resulted in liquidations of LIFO quantities by charging cost of goods sold with LIFO costs significantly below current costs. By matching these older costs with current revenues, 2018 net loss decreased by approximately $968,000, net of tax. There was not a similar significant reduction in inventory levels in 2019.

Inventory valuation reserves at December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018 were $1,~~747~~023,000 and $~~518~~1,747,000, respectively. The ~~increase~~decrease between years is due to ~~management’s~~progress ~~decision~~made toin ~~increase~~streamlining ~~reserves~~products assold itreducing ~~works~~the torisk ~~streamline~~of ~~products~~excess ~~sold~~and obsolete inventory.

Table of Contents

4. GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS

As of December 29, 2018 the Company ~~has~~had recorded $71,~~229~~000,000 of goodwill, ~~consisting~~not including discontinued operations goodwill of $6,229,000 that was eliminated with the sale of the ready-mix and Daniels Sand operations, related to the ~~CACS~~Door segment. ~~and~~During the second quarter of 2019, the Company recorded approximately $14,932,000 of goodwill related to the acquisitions of four operating businesses. See Note 18. As of December 28, 2019, the Company has recorded $5,932,000 of goodwill comprised of $3,198,000 or 54% related to the Door segment and $2,734,000 or 46% related to the HVAC segment. The Company assesses goodwill for potential impairment at the end of each year. ~~For~~The ~~the~~Company ~~CACS~~prepared ~~segment,~~a ~~the~~discounted ~~Company~~cash ~~engages~~flow ~~the~~analysis, ~~services~~based ofon ana ~~investment~~third ~~banking~~party ~~firm~~valuation toof ~~assist~~the ~~management~~Company’s inoperating ~~determining~~units, to estimate the fair value of ~~the~~each reporting unit. ~~For~~The ~~the~~fair ~~Door~~value ~~segment,~~was compared to the ~~Company~~carrying ~~prepares~~value afor ~~discounted~~each ~~cash~~reporting ~~flow~~unit. ~~analysis~~There towas ~~estimate~~no goodwill impairment recorded, for any of the periods reported, as fair value ofexceeded ~~the~~carrying ~~reporting~~cost for each unit. InIf ~~addition, if~~ events occur or circumstances change in the relevant reporting segments or in their industries, the Company will ~~then~~ reassess the recorded goodwill to determine if impairment has occurred. ~~No goodwill impairment was recognized for any of the periods presented.~~ The valuation of goodwill and other intangibles is considered a significant estimate. Future economic conditions could negatively impact the value of the business which could trigger an impairment that would materially impact earnings.

~~There~~Intangible ~~were~~assets nowith definite lives include trade names, intellectual property, and customer relationships. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortizable intangible assets are tested for impairment whenever events or changes in ~~recorded~~circumstances ~~goodwill~~indicate ~~for~~that ~~either~~the ofcarrying value may be greater than the ~~years~~fair ~~ended~~value. There were no amortizable intangible assets as of December 29, 2018. orSee Note 18 for additional discussion of intangible assets acquired during the current fiscal year. Amortizable intangible assets on the Consolidated Balance Sheet as of December 30 28, ~~2017.~~2019 were as follows (amounts in thousands):


	Gross
	Carrying		Accumulated
	Amount		Amortization		Useful Life
Trade names	$	3,590		119		15 years
Intellectual property		1,449		102		11.5 and 12.5 years
Customer related intangible		7,769		150		10.5 and 30.5 years
	$	12,808	$	371

Amortization Expense for the fiscal year ended December 28, 2019 was $371,000. The estimated amortization expense for each of the next five years is $664,000.

5. REVOLVING BANK LOAN

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,~~16 ~~2019~~2020. 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 Credit Agreement as amended provides for the following:

The Revolving Commitment is $20,000,000.

32 · Borrowings under the Revolving Commitment are limited to (a) 85% of eligible accounts receivable, (b) the lesser of 60% of eligible inventories and $8,500,000.

Financial Covenants include:

Minimum EBITDA for the three months ending March 31, 2020 must exceed $(525,000)

Table of Contents

·o ~~Borrowings~~Minimum ~~under~~EBITDA ~~the~~for ~~Revolving Commitment are limited to (a) 80% of eligible accounts receivable, (b)~~ the ~~lesser~~three ofmonths ~~50%~~ending ofJune ~~eligible inventories and $8~~30,~~500,000~~ ~~plus~~2020 ~~(c)~~must ~~80% of new qualifying Capital Expenditures not to~~ exceed $5265,~~500,~~000 ~~in any fiscal year (excluding the aggregate amount of any Capital Expenditures financed with the proceeds of a Revolving Line advance).~~

·o The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.06 to 1.0 for each ~~trailing~~computation ~~twelve month~~ period measured at the end of each fiscal quarter, provided that the Fixed Charge Coverage Ratio shall not be tested if the average daily Excess Availability during the Fiscal Quarter exceeds $5,000,000. A computation period is the nine months ending September 30, 2020 or twelve months for all subsequent fiscal quarters.

· The maturity date of the credit facility is May 1, ~~2020~~2023.

· Interest rate pricing for the revolving credit facility is currently LIBOR plus 2.250% or the prime rate.

Definitions under the Credit Agreement as amended are as follows:

· EBITDA means, for any Computation Period (or another time period to the extent expressly provided ~~for in the Credit Agreement~~herein), 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~~Consolidated ~~revolving~~Net ~~debt was $2~~Income,~~200,000~~ asplus of(without ~~December 29, 2018~~duplication) ~~compared~~each ~~to $3,500,000 as~~ of December 30, 2017. The highest balance outstanding during 2018 and 2017 was $9,800,000 and $10,000,000 respectively. Average outstanding funded debt was $6,058,000 and $5,909,000 for 2018 and 2017, respectively. At December 29, 2018, the ~~Company~~following ~~had~~items ~~outstanding~~to ~~letters of credit (LOC) totaling $4,745,000. At all times since~~ the ~~inception~~extent ofdeducted ~~the~~in ~~Credit~~determining ~~Agreement, the Company has had sufficient qualifying and eligible assets~~ such ~~that~~Consolidated ~~the~~Net ~~available borrowing capacity exceeded the cash needs of the Company and this situation is expected to continue for the foreseeable future.~~ Income:

federal, state and other income taxes deducted in the determination of Consolidated Net Income;

ii.

Interest Expense deducted in the determination of Consolidated Net Income;

iii.

depreciation, depletion and amortization expense deducted in the determination of Consolidated Net Income;

iv.

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); and

vi.

the amount of any earnout or other deferred payment paid in connection with any Permitted Acquisition; minus

any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued operations included in the determination of Consolidated Net Income

Table of Contents

December 28, 2019, the Company had outstanding letters of credit (LOC) totaling $5,620,000. 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 was not in compliance with the Fixed Coverage Charge Ratio as of December 28, 2019. The lender provided a waiver of the covenant violation for the period ended December 28, 2019.

6. COMMITMENTS AND CONTINGENCIES

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, cash flows 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. Also see Note 2 for discussion of litigation settlement regarding the Pueblo sand and gravel lease.

Table of Contents

7. SHAREHOLDERS’ EQUITY

Four hundred thousand shares of preferred stock ($.50 par value) are authorized and unissued.

~~The Company purchased 1,000 shares of its common stock from a former employee to become treasury stock during fiscal year 2017. There were no such purchases in fiscal year 2018.~~ Under the 2010 Non-Employee Directors Stock Plan (the “Plan”) the Company reserved 150,000 treasury shares representing the maximum number of shares allowed to be granted to non-employee directors in lieu of the base director retainer fee. The Company issued a total of 16,998 shares to the six eligible board members effective December 13, 2019 as partial payment for their 2020 retainer fee. The Company issued a total of 21,000 shares to the ~~eight~~seven eligible board members effective ~~January 16~~February 7, ~~2018~~2019 as full payment for their ~~2017~~2019 retainer fee. The Company issued a total of 1216,000 shares to the eight eligible board members effective ~~March 8~~January 16, ~~2017~~2018 as full payment for their ~~2017~~2018 retainer fee.

8. EARNINGS PER SHARE

The Company does not have any common stock equivalents, warrants or other convertible securities outstanding,; therefore, there are no differences between the calculation of basic and diluted EPS for the reported fiscal years ~~2018~~2019 or ~~2017~~2018.

9. RENTAL EXPENSE, LEASES AND COMMITMENTS

The Company ~~leases~~adopted ~~certain~~ASU ofNo. ~~its~~2016-02 ~~facilities~~Leases ~~and~~(Topic ~~equipment~~842) ~~and~~on isDecember ~~required~~30, to2018 ~~pay~~ (the ~~related~~beginning ~~taxes~~of fiscal 2019), ~~insurance~~resulting ~~and~~in ~~certain~~the ~~other~~recognition ~~expenses.~~of ~~Rental~~operating ~~expense~~right-of-use ~~was~~assets of $45,~~044~~353,000 and operating lease liabilities of $35,~~779~~427,000. The Company has entered into lease arrangements for ~~2018~~office space, manufacturing facilities, water rights and ~~2017~~certain equipment. A number of the leases include one or more options to renew the lease terms, ~~respectively~~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.

~~Future~~Substantially ~~minimum~~all ~~rental~~of ~~commitments~~the ~~under~~Company’s ~~non-cancelable operating~~ leases ~~for 2019 and thereafter~~ are asconsidered ~~follows:~~operating ~~2019 – $1,827,000; 2020 – $1,495,000; 2021 – $1,400,000; 2022 – $1,360,000; 2023 – $823,000 and thereafter – $1,323,000~~leases. ~~The~~Finance ~~commitments~~leases dowere not ~~include~~material ~~any~~as ~~amounts~~of ~~related~~December 28, 2019 toor ~~minimum~~for ~~royalty payments due on a contested aggregates property lease in conjunction with~~ the ~~Pueblo,~~year ~~Colorado~~ended ~~operation as discussed in Note 2~~December 28, 2019. The ~~commitments~~following dotable ~~include~~displays ~~amounts expected to be reimbursed to~~ the ~~Company~~undiscounted bycash ~~related~~flows party tenants as discussed in Note 13. These related party amounts for 2019 and thereafter are as follows: 2019 – $143,000; 2020 – $145,000; 2021 – $147,000; 2022 – $150,000; 2023 – $152,000 and thereafter – $579,000.

Table of Contents

related to operating leases as of December 28, 2019, along with a reconciliation to the discounted amount recorded on the December 28, 2019 Consolidated Balance Sheet (amounts in thousands):


	OPERATING
	LEASE
	LIABILITIES
2020	$	1,402
2021		1,389
2022		1,307
2023		761
2024		255
Thereafter		655
Total lease payments		5,769
Less: interest		(608)
Present value of operating lease liabilities	$	5,161

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 year ended December 28, 2019 operating lease cost was $1,979,000, including $623,000 of short-term lease costs.

New leases entered into during the year ended December 28, 2019 resulted in the recognition of operating right-of-use assets and lease liabilities of $665,000 and $572,000, respectively. At December 28, 2019 the weighted-average remaining lease term and discount rate for operating leases was 4.65 years and 6.02%, respectively.

The commitments include amounts expected to be reimbursed to the Company by related party tenants as discussed in Note 13. These related party amounts for 2020 through 2024 are as follows: 2020 – $67,000; 2021 – $68,000; 2022 – $69,000; 2023 – $70,000 and 2024 - $71,000.

10. RETIREMENT PLANS

As discussed in Note 1, the Company maintains a defined contribution retirement benefit plan for eligible employees. Total plan expenses charged to continuing operations were $~~951~~945,000 and $1951,~~537,~~000 in ~~2018~~2019 and ~~2017~~2018, respectively.

11. CURRENT ECONOMIC CONDITIONS

~~Construction~~The ~~activity~~markets infor products manufactured or fabricated by the ~~Colorado~~HVAC ~~Springs,~~and ~~Colorado~~Door ~~vicinity~~segments isare expected to ~~continue~~remain tofairly ~~rise~~constant ~~from~~compared with the 2019 levels ~~seen~~although ~~during~~sales ~~2018. Pricing~~of isfan ~~expected~~coils toin ~~increase~~the ~~although~~HVAC ~~slow~~segment ~~some~~are ~~from~~anticipated ~~prior~~to ~~years~~grow as ~~material~~construction ~~costs~~spending continues to increase during 2020. While general economic indicators are ~~expected~~favorable tofor ~~level~~growth ~~off~~there ~~compared~~are tosignificant ~~increases~~uncertainties ~~seen~~around inglobal ~~the~~trade ~~past~~and ~~couple~~public ofhealth, ~~years.~~particularly ~~Pricing~~with onCOVID-19 ~~larger~~impact ~~bid~~uncertainties, ~~jobs~~which ~~will~~may ~~remain~~adversely ~~competitive~~impact 2020 sales.

The markets for products manufactured or fabricated by the Heating and Cooling, Evaporative Cooling and Door segments are expected to remain fairly constant compared with the 2018 levels although sales of fan coils in the Heating and Cooling segment are anticipated to grow as construction spending in the lodging industry continues to increase during 2019. As has historically been the case, sales of all segments, other than the Door segment, are influenced by weather conditions.

12. INCOME TAXES

Income taxes are accounted for under the asset and liability method ~~that~~which 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

3437

Table of Contents

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.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the United States. The Tax Act significantly revised the U.S. tax code by, among other items, reducing the Company’s federal tax rate from 34% to 21%, providing for the full expensing of certain depreciable property and eliminating the corporate alternative minimum tax (AMT). In accordance with GAAP, the Company recorded a $27,000 income tax benefit for the period ending December 30, 2017, primarily related to the re-measurement of the Company’s deferred tax items.

The (benefit) provision for income taxes is summarized as follows (amounts in thousands):

	2018		2017
	2019		2018
Federal: Current	$	(~~387~~66)	$	~~988~~(387)
Deferred		(13,~~454~~449)		27(1,454)
State: Current		13		321
Deferred		(~~345~~804)		(26345)
	$	(24,~~185~~316)	$	1(2,~~021~~185)

The ~~percentage~~benefit ~~effect~~for ofincome antaxes ~~item~~for on2019 ~~the~~and ~~statutory~~2018 ~~tax~~included ~~rate in~~ a ~~given~~benefit ~~year will fluctuate based upon the magnitude~~ of ~~the~~$5,396,000 ~~pre-tax~~and ~~profit or loss in that year. At December 30~~$2,500,000 ~~2017 the Company’s deferred tax items were revalued~~ for ~~the~~continuing ~~estimated~~operations ~~impact~~and ofa ~~the~~provision ~~Tax Act legislation. The effect~~ of ~~this revaluation was to reduce the Company’s effective tax rate~~ $1~~.0%.~~,080,000 ~~The~~and ~~difference~~$315,000, ~~between~~respectively, ~~the tax rate on income~~ for ~~financial~~discontinued ~~statement purposes and the federal statutory tax rate was as follows:~~operations.

	2018		2017
Statutory tax rate	(21.0)	%	34.0	%
Percentage depletion	(0.9)		(4.7)
Non-deductible expenses	0.4		1.7
Valuation allowance for tax assets	1.2		2.5
State income taxes, net of federal benefit	(4.5)		2.0
Domestic production deduction	—		(0.3)
Revaluation of deferred items for new Tax Act	—		(1.0)
Other	(2.4)		1.8
	(27.2)	%	36.0	%

The percentage effect of an item on the statutory tax rate in a given year will fluctuate based upon the magnitude of the pre-tax profit or loss in that year. The difference between the tax rate on income for financial statement purposes and the federal statutory tax rate was as follows:


	2019		2018
Statutory tax rate	(21.0)	%	(21.0)	%
Percentage depletion	—		(0.9)
Non-deductible expenses	0.1		0.4
Valuation allowance for tax assets	0.5		1.2
State income taxes, net of federal benefit	(4.5)		(4.5)
Other	1.2		(2.4)
	(23.7)	%	(27.2)	%

Table of Contents

For financial statement purposes, deferred tax assets and liabilities are recorded at 25.74%, which represents a blend of the current statutory federal and states’ tax rates ~~– 25~~.~~74%.~~ The principal temporary differences and their related deferred taxes are as follows (amounts in thousands):

	2018		2017
	2019		2018
Deferred tax assets
Reserves for self-insured losses	$	~~466~~417	$	~~328~~466
Accrued reclamation		1,~~445~~972		1,~~386~~445
Unfunded supplemental profit sharing plan liability		~~263~~431		~~275~~263
Asset valuation reserves		~~685~~439		~~293~~685
Future state tax credits		833		~~863~~833
Net state operating loss carryforwards		~~226~~812		~~126~~226
Federal AMT carryforward		~~387~~116		~~620~~387
Federal NOL carryforward		~~468~~3,226		—468
Other		~~700~~939		~~701~~700
		5,473		4,592
		9,185		5,473
Deferred tax liabilities
Depreciation		~~1,200~~833		~~859~~1,200
Deferred development		~~116~~—		~~1,298~~116
Prepaid royalties		—		161
Other		285		443
Other		443		458
		1,118		1,759
		1,759		2,776
Net deferred tax asset before valuation allowance		8,067		3,714
Net deferred tax asset before valuation allowance		3,714		1,816
Valuation allowance
Beginning balance		(~~200~~300)		(~~130~~200)
(Increase) decrease during the period		(100)		(70100)
Ending Balance		(~~300~~400)		(~~200~~300)
Net deferred tax asset	$	37,~~414~~667	$	13,~~616~~414

The deduction of charitable contributions made during ~~2018~~2019 and ~~2017~~2018 was limited by the level of taxable income; however, no valuation reserve was established for the amount carried forward as the Company expects to be able to utilize these deductions in future years. The Tax Act ~~repeals~~repealed AMT and allows any existing AMT credit carryforwards to be used to offset regular tax obligations for a three year period beginning in 2018. Any AMT credit carryforwards that are not utilized to offset regular tax obligations will be 100 percent refundable by 2021. For State purposes, net operating losses can be carried forward for various periods for the states that the Company is required to file in. Of the $833,000 of state tax credits recorded by the Company at December 28, 2019 and December 29, 2018, $~~792~~797,000 relates to California Enterprise Zone hiring credits earned in prior years. California has repealed the credit and limited its use to tax years through 2023. At December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018 the Company carried a valuation ~~reserves~~reserve of $~~430~~556,000 ($~~300~~400,000 tax effected) and $~~303~~430,000 ($~~200~~300,000 tax effected), respectively, related to the carry forward of the California Enterprise Zone hiring credits due to the uncertainty that the Company will be able to utilize the credits prior to their expiration in 2023.

The realization of the deferred tax assets is subject to our ability to generate sufficient taxable income during the periods in which the temporary differences become realizable. In evaluating whether a valuation allowance is required, we consider all available positive and negative evidence, including prior operating results, the nature and reason of any losses, our forecast of future taxable income and the dates, if any, on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. The estimates are based on our best judgment at the time made based on current and projected circumstances and conditions.

As a result of the evaluation of the ~~realizability~~ability ofto realize our deferred tax assets as of December 2928, ~~2018~~2019, we concluded that it was more likely than not that all of our deferred tax assets would be realized to the extent not reserved for by a valuation allowance.

The Company accounts for uncertainty in income taxes recognized in its financial statements by applying GAAP’s recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax

3639

Table of Contents

position taken or expected to be taken in a tax return. The financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold should initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon effective settlement with a taxing authority. There were no unrecognized tax benefits at either December 2928, ~~2018~~2019 or December 3029, ~~2017~~2018.

We file income tax returns in the United States at the Federal level and with various state jurisdictions. Federal and state income tax returns are subject to examination based upon the statute of limitations in effect for the various jurisdictions.

13. RELATED PARTY TRANSACTIONS

A director of the Company is a partner in a law firm engaged to represent the Company in various legal matters including the lawsuit filed by the Company related to the sand and gravel lease ~~discussed~~which settled in October 2019. See Note 2. For the year ending December 2928, ~~2018~~2019 the Company ~~has~~ paid the director’s firm $~~474~~826,000 for services rendered. During fiscal ~~2017~~2018 the same director’s firm was paid $~~510~~474,000 for services rendered.

The corporate office leases space in Chicago, Illinois that is shared with ~~three~~another ~~organizations~~organization related to the Company’s principal shareholders. Each of the organizations pays its pro-rata share of rent and other expenses based on a square footage allocation. See Note 9 for additional discussion. Furthermore, the Company purchases certain insurance ~~coverage for workers’ compensation, general and umbrella liability~~ together with another company controlled by the Company’s principal shareholders to minimize insurance costs. Allocation of the expense of the program is either provided by the underwriter or based upon a formula that considers, among other things, sales levels, loss exposure and claim experience. Claims under the self-insured portion of the policies are charged directly to the incurring party. Amounts receivable from ~~these~~related organizations at December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018 were $2813,000 and $1428,000, respectively.

14. UNAUDITED QUARTERLY FINANCIAL DATA

The following table and footnotes provide summarized unaudited fiscal quarterly financial data for ~~2018~~2019 and ~~2017~~2018 (amounts in thousands, except per share amounts):

	First		Second		Third		Fourth
2019	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
2018
Sales	$	22,528	$	25,257	$	31,987	$	33,504
Sales	$	36,873	$	43,300	$	40,978	$	42,832
Gross profit		4,681		3,722		7,535		8,615
Gross profit		5,528		8,205		6,233		7,841
Depreciation, depletion and amortization		519		254		597		592
Depreciation, depletion and amortization		676		707		682		568
Net income (loss)		13,322		(4,836)		(20,284)		(2,100)
Net (loss) income		(6,193)		2,113		(1,236)		(540)
Basic and diluted income (loss) per share		7.80		(2.82)		(11.85)		(1.23)
Basic and Diluted (loss) income per share		(3.65)		1.24		(0.73)		(0.32)

	First		Second		Third		Fourth
2018	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
2017
Sales	$	23,410	$	25,557	$	23,965	$	27,955
Sales	$	34,103	$	39,887	$	38,627	$	40,193
Gross profit		5,006		5,974		5,225		6,649
Gross profit		6,031		8,153		7,201		6,710
Depreciation, depletion and amortization		405		405		393		269
Depreciation, depletion and amortization		638		677		617		622
Net (loss) income		(6,193)		2,113		(1,236)		(540)
Net income		(422)		1,028		835		377
Basic and diluted (loss) income per share		(3.65)		1.24		(0.73)		(0.32)
Basic and Diluted income per share		(0.25)		0.61		0.50		0.22

Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total for the year.

3740

Table of Contents

15. INDUSTRY SEGMENT INFORMATION

~~The~~In the first quarter of 2019, the Company ~~operates~~reviewed ~~primarily~~its reporting structure in ~~two~~connection ~~industry~~with ~~groups,~~the ~~HVAC~~sale ~~and~~of ~~Construction~~the ~~Products.~~TMC ~~The~~ready-mix ~~Company~~and ~~has~~Daniels ~~identified~~Sand ~~two~~operating ~~reportable~~assets. Reporting segments inwere ~~each~~modified ofto ~~the~~conform ~~two~~to ~~industry~~the ~~groups:~~way ~~the~~management ~~Heating~~measures and ~~Cooling~~evaluates ~~segment~~Company ~~and~~performance ~~the~~post-sale. ~~Evaporative~~The ~~Cooling~~Company ~~segment~~operates primarily in the ~~HVAC~~Building Supplies industry group and ~~the~~has ~~CACS~~identified ~~segment~~three ~~and~~reporting ~~the~~segments ~~Door~~within ~~segment~~this ~~in the Construction Products~~ industry group. The ~~Heating~~HVAC ~~and Cooling~~ segment ~~primarily~~ produces and sells ~~gas-fired~~a variety of products including wall furnaces, ~~console~~fan ~~heaters~~coils, evaporative coolers, boiler room equipment and ~~fan~~dryer ~~coils~~boxes and related accessories from the Company’s wholly-owned ~~subsidiary~~subsidiaries, Williams Furnace Co. (WFC) of Colton, California, Phoenix Manufacturing, Inc. ~~The~~(PMI) ~~Evaporative~~of ~~Cooling~~Phoenix, Arizona, Global Flow Products /American HVAC (GFP) of Broken Arrow, Oklahoma, and InOvate Dryer Technologies (InOvate) of Jupiter, Florida. Sales of this segment ~~primarily~~are ~~produces~~nationwide although WFC and PMI sales are more concentrated in the southwestern United States. The Door segment sells ~~evaporative~~hollow ~~coolers~~metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems from the Company’s wholly-owned ~~subsidiary~~subsidiaries, ~~PMI~~McKinney ofDoor ~~Phoenix~~and Hardware, ~~Arizona~~Inc. ~~Sales~~(MDHI), Fastrac Building Supply (Fastrac) and Serenity Sliding Door Systems (Serenity), which operate out of ~~these~~facilities ~~two~~in ~~segments~~Pueblo ~~are~~and ~~nationwide~~Colorado Springs, ~~but~~Colorado. Sales of this segment are concentrated in Colorado, California and the ~~southwestern~~Northwestern United States. ~~Concrete,~~although ~~aggregates~~door ~~and~~sales ~~construction supplies~~ are ~~offered~~also bymade throughout the ~~CACS~~United States. The Construction Materials segment ~~from~~offers ~~numerous~~construction supplies from locations along the Southern ~~portion of the~~ 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 ~~TMC~~the Castle Companies). ~~The~~During ~~Door~~the ~~segment~~quarter ~~sells~~ended ~~hollow~~September ~~metal~~28, ~~and~~2019 ~~wood~~the ~~doors~~Company determined to cease mining operations at its Pikeview aggregates quarry, ~~door~~which ~~frames~~is ~~and~~part ~~related~~of ~~hardwares~~the Construction Materials segment, ~~lavatory~~as ~~fixtures~~continuing ~~and~~mining ~~electronic~~operations ~~access~~was ~~and~~no ~~security~~longer ~~systems~~in ~~from~~the best interest of the ~~Company’s~~consolidated ~~wholly-owned~~portfolio. ~~subsidiary,~~During ~~MDHI~~the fourth quarter of 2019, ~~which~~the ~~operates~~Company ~~out~~purchased ofa ~~facilities~~formerly inleased ~~Pueblo~~mining ~~and~~property ~~Colorado~~in ~~Springs~~Pueblo, Colorado as part of a legal settlement. ~~Sales~~See Note 2 for further discussion of the legal settlement. In conjunction with both of these ~~latter~~events, ~~two~~the ~~segments~~Company ~~are~~recognized ~~highly~~charges ~~concentrated~~to inrecord additional asset retirement liabilities and impairment of related assets associated with the ~~Southern~~properties. ~~Front~~See ~~Range~~Note ~~area~~20 infor ~~Colorado~~further ~~although~~discussion. ~~door~~The ~~sales~~Company ~~are~~expects ~~also~~an ~~made~~outside ~~throughout~~party to complete most of the ~~United~~remaining ~~States~~reclamation over approximately the next five years.

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 fiscal years ~~2018~~2019 and ~~2017~~2018 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):

	Construction Products Industry						HVAC Industry
					Construction		Unallocated		Held for
	Concrete,
Year Ended December 28, 2019	HVAC		Doors		Materials		Corporate (a)		Sale		Total
	Aggregates &				Combined		Heating						Unallocated
Revenues from external customers	$	82,149	$	24,369	$	6,751	$	7			$	113,276
	Construction				Construction		and		Evaporative		Combined		Corporate
Depreciation, depletion and amortization		1,272		285		321		84				1,962
	Supplies		Doors		Products		Cooling		Cooling		HVAC		(a)		Total
Operating income (loss)		948		2,174		(18,492)		(7,475)				(22,845)
Year Ended December 29, 2018
Segment assets		50,822		14,248		10,463		13,554		896		89,983
Revenues from external customers	$	70,246	$	20,158	$	90,404	$	45,953	$	27,525	$	73,478	$	101	$	163,983
Capital expenditures		342		79		2,257		15				2,693
Depreciation, depletion and amortization		1,462		171		1,633		588		361		949		51		2,633
Operating (loss) income		(6,717)		2,233		(4,484)		613		318		931		(4,050)		(7,603)
Segment assets		35,351		8,003		43,354		19,668		9,335		29,003		3,346		75,703
Capital expenditures		1,672		119		1,791		752		312		1,064		45		2,900

	Construction Products Industry						HVAC Industry
	Concrete,
	Aggregates &				Combined		Heating						Unallocated
	Construction				Construction		and		Evaporative		Combined		Corporate
	Supplies		Doors		Products		Cooling		Cooling		HVAC		(a)		Total
Year Ended December 30, 2017
Revenues from external customers	$	66,407	$	18,652	$	85,059	$	42,517	$	25,216	$	67,733	$	18	$	152,810
Depreciation, depletion and amortization		1,405		152		1,557		550		409		959		38		2,554
Operating income (loss)		2,656		1,861		4,517		2,140		(550)		1,590		(3,091)		3,016
Segment assets		39,020		7,360		46,380		21,543		11,896		33,439		2,670		82,489
Capital expenditures		4,566		135		4,701		804		230		1,034		46		5,781

(a) Includes unallocated corporate office expenses and assets which consist primarily of cash and cash equivalents, prepaid expenses, property, plant and equipment.

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

Table of Contents




					Construction		Unallocated		Held for
Year Ended December 29, 2018	HVAC		Doors		Materials		Corporate (a)		Sale		Total

Revenues from external customers	$	73,478	$	20,158	$	7,150	$	101			$	100,887
Depreciation, depletion and amortization		949		171		301		51				1,472
Operating income (loss)		931		2,233		(7,878)		(4,050)				(8,764)
Segment assets		29,003		8,003		11,315		3,346		24,036		75,703
Capital expenditures		1,064		119		181		45				1,409

(a)

Includes unallocated corporate office expenses and assets which consist primarily of cash and cash equivalents, prepaid expenses, property, plant and equipment.

16. WRITE OFF OF DEFERRED DEVELOPMENT

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~~an 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~~half of 2018~~. As of December 30~~, 2017 the Company had capitalized $5,430,000 of deferred development which was included in Property, plant and equipment on the Consolidated Balance Sheet. As of March 31, 2018 TMC had invested $6,308,000 in the project. This amount plus an estimated $626,000 of additional expenses incurred during April 2018, a total of $6,934,000, was written off as of March 31, 2018. During the second quarter of 2018, final billings and adjustments related to the permit application resulted in a net recovery of $94,000 reducing the total write-off to $6,840,000 ~~as of June 30, 2018~~.

As of December 28, 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.

17. ~~SUBSEQUENT~~ ~~EVENT –~~ SETTLEMENT RECEIPT

OnAs previously disclosed, 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 $~~200~~218,000. The Settlement Agreement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties.

18. ~~SUBSEQUENT EVENT – DISPOSITION OF ASSETS~~ ACQUISITIONS

OnDuring ~~February~~the 1year ended December 28, 2019, the Company ~~sold~~completed ~~substantially~~three ~~all~~different ofasset ~~the~~purchase ~~real property~~transactions, ~~tangible~~acquiring ~~personal~~the ~~property~~assets ~~and~~of ~~executory~~four ~~contracts~~operating ofbusinesses. ~~the~~On ~~Transit~~May ~~Mix~~20, ~~Concrete~~2019 the Company ~~ready-mix~~acquired ~~business to~~the ~~Aggregate~~assets ~~Industries~~of —Serenity ~~WCR~~and Fastrac, ~~Inc.~~both ~~(the~~based ~~Buyer),~~in a Colorado ~~corporation for~~Springs, ~~$27~~Colorado,~~129,000. The~~ ~~purchase~~using ~~price~~available ~~was~~cash ~~paid~~reserves. toSerenity ~~the~~is ~~Company on~~a ~~the~~proprietary ~~Closing~~sliding ~~Date~~door ~~less~~system ~~certain~~providing ~~amounts~~superior tosound beattenuation, ~~held~~sold inprimarily ~~escrow,~~into ashealthcare ~~provided~~markets inacross the ~~Asset~~country. Fastrac ~~Purchase~~is ~~Agreement~~a ~~(Purchase~~leading ~~Agreement),~~supplier of commercial doors and hardware to ~~secure~~healthcare and hospitality customers across the ~~Company’s~~country. ~~obligations~~Serenity continues to ~~pay~~operate ~~its~~as ~~working~~a ~~capital~~stand-alone ~~adjustment~~business ~~and~~while ~~indemnification~~Fastrac ~~obligations~~operations ~~under~~were consolidated with the ~~Purchase~~Company’s ~~Agreement.~~existing ~~The~~portfolio ~~escrow~~company, ~~also~~McKinney ~~retained~~Door ~~additional~~and ~~amounts~~Hardware, towhich behas ~~held~~similar ~~pending~~operations. ~~the~~The ~~subdivision~~results of ~~certain~~the ~~real~~acquisition ~~property~~of toSerenity beand ~~sold~~Fastrac toare included in the ~~Buyer~~Company’s atConsolidated aFinancial ~~subsequent~~Statements from the date asof acquisition. Both companies are included in the ~~Purchase~~Door ~~Agreement~~segment for reporting purposes.

~~Among~~On ~~other~~June ~~things~~3, 2019 the ~~Purchase~~Company ~~Agreement~~acquired ~~includes~~the ~~customary~~assets ~~representations,~~of ~~warranties,~~American ~~covenants~~Wheatley HVAC and ~~indemnities~~Global ofFlow ~~the~~Products ~~Company~~(together ~~and of the Buyer~~“GFP”), ~~including~~based ain ~~customary~~Broken ~~agreement~~Arrow, byOklahoma ~~the~~using ~~Company~~available ~~not~~cash toreserves. ~~compete~~GFP ~~for~~sells ~~five~~American ~~years~~Wheatley ~~after~~HVAC ~~the~~branded ~~Closing Date in the manufacture~~products, ~~sale,~~including ~~distribution~~a ~~and/or~~broad ~~supply~~line of ~~ready~~ASME ~~mix~~pressure ~~concrete~~vessels, orcustom ~~similar~~fabricated products ~~or services within Colorado Springs or Pueblo~~, ~~Colorado~~valves, orstrainers ~~the~~and ~~area~~other ~~within~~hydronic aaccessories ~~150~~to ~~mile~~commercial ~~radius~~HVAC ~~from~~customers. The ~~the~~results ~~city limits~~ of the ~~two~~acquisition ~~cities. Additionally,~~of asGFP ~~part~~are ofincluded ~~the~~in ~~Purchase Agreement,~~ the Company’s ~~agreed~~Consolidated toFinancial ~~change~~Statements from the ~~corporate~~date ~~name~~ of ~~Transit~~acquisition. ~~Mix~~GFP ~~Concrete~~is toincluded ain ~~name~~the ~~which~~HVAC ~~does~~segment ~~not~~for ~~include~~reporting ~~“Transit Mix Concrete”~~purposes.

The Company retained the aggregates operations and retail building materials business of Transit Mix and all related assets and liabilities. These operations include the Pike View 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.42

Table of Contents

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 $12,855,000, which included a traditional post-closing working capital adjustment for $608,000, with 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 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 $1,300,000 has been accrued based on estimated fair values of these earn out agreements. We acquired trade receivables of $1,916,000, inventory of $1,745,000, property and equipment of $2,530,000, other assets of $256,000, intangibles of $4,000,000 and goodwill of $3,614,000 and retained liabilities of $1,205,000. The current value assigned to trade receivables represents fair market value. The working capital adjustment has been finalized on both transactions and final valuation of the fair value of assets and liabilities including receivables, inventory, fixed assets, intangibles, goodwill and accounts payable has been recorded as of December 28, 2019. Transaction costs included in Selling and administrative expenses on the Consolidated Statements of Operations for the year ended December 28, 2019 was $1,229,000.

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 $11,206,000, including a post-closing working capital adjustment of $84,000, 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 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 earn out agreement. The results of the acquisition of InOvate are included in the Company’s Consolidated Financial Statements from the date of acquisition. Transaction costs included in Selling and administrative expense on the Consolidated Statement of Operations for the year ended December 28, 2019 were $536,000.

In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on their fair values. The working capital adjustment was finalized in the fourth quarter of 2019. The condensed balance sheet of InOvate at the acquisition date was as follows:


Purchase price	$	11,206

Accounts receivable, net		1,448
Other tangible assets		984
Intangible assets		8,808
Right of use asset		387
Accounts payable and accrued expenses		(1,353)
Right of use liability		(387)
Total identifiable net assets		9,887
Goodwill	$	1,319

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.


	Year Ended
	DECEMBER 28,		DECEMBER 29,
	2019		2018
Revenue	$	120,439	$	114,535
Pre-tax loss from continuing operations	$	(21,505)	$	(7,127)
Basic and diluted loss per share:
Loss from continuing operations	$	(9.59)	$	(3.04)
Average shares outstanding		1,711		1,697

Table of Contents

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


	Year Ended
	DECEMBER 28,		DECEMBER 29,
	2019		2018
Revenue	$	129,615	$	126,613
Pre-tax loss from continuing operations	$	(19,325)	$	(4,838)

Revenue of the acquired companies’ increased total revenue by 18.5% for the year ended 2019. The impact of the acquired companies on earnings for the current year was not material. Total goodwill added to the Consolidated Balance Sheet due to acquisition activity during fiscal 2019 was $4,932,000. 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 existing consolidated business portfolio. This amount is attributable to the HVAC and Door segments in the amounts of $2,734,000 and $2,198,000, respectively. Goodwill that is deductible for tax purposes, over the next fifteen years, is $3,092,000. The goodwill amounts were finalized in the fourth quarter of 2019.

19. DISPOSITIONS OF ASSETS

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 December 28, 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 (see Note 20), 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):


	Year Ended
	DECEMBER 28,		DECEMBER 29,
	2019		2018
Revenue	$	4,058	$	63,096
Costs and expenses		3,900		58,143
Depreciation, depletion and amortization		578		1,161
Selling and administrative		304		3,550
Gain on sales of equipment		-		919
Gain on sale of assets		5,283		-
Pre-tax income	$	4,559	$	1,161

Table of Contents

The results of discontinued operations are summarized as follows:


	Year Ended
	DECEMBER 28,		DECEMBER 29,
	2019		2018
Operating (loss) income	$	(724)	$	1,161
Gain on sale of assets		5,283		—
Income tax provision		(1,080)		(315)
Income from discontinued operations	$	3,479	$	846

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


	DECEMBER 28,		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

20. ARO ASSET/LIABILITY

During the third quarter of fiscal year ended December 28, 2019, the Company made a strategic decision to cease mining operations at its Pikeview quarry in Colorado Springs, Colorado, as it was no longer in the best economic interest of the consolidated portfolio to continue operations. The Company has a legal obligation to complete reclamation of the property as required by its mining permits with the State of Colorado. GAAP requires the recognition of a liability in the period in which it is incurred if a reasonable estimate of fair value can be made. Prior to the cessation of mining operations, reclamation was performed concurrently by backfilling mined areas with overfill from current mining. The reclamation costs were reported as operating expense as the Company could not reasonably estimate the ultimate liability of final reclamation. Once the Company ceased mining operations and could reasonably estimate the cost of final reclamation, an asset retirement obligation (ARO), was recorded as of September 29, 2019 and revised at December 28, 2019. The ARO liability of $20,804,000 represents the estimated fair value of total reclamation costs using Level 3 inputs. The fair value of the liability was calculated by applying an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate. The related ARO asset was considered 100% impaired as total carrying value including future costs to maintain and dispose of the asset will exceed the fair value. Therefore, the Company also recorded an impairment charge of $20,217,000 related to the asset.

In the fourth quarter of 2019, the Company settled its litigation with Valco regarding the Transit Mix of Pueblo (TMOP) mining operation. See Note 2 for discussion of the settlement. As part of the settlement agreement, the Company purchased the land it previously leased from Valco. Once the Company took possession of the property with no plan to resume mining it was able to reasonably estimate the final cost of reclamation. A valuation was completed and resulted in the Company recording a $6,660,000 ARO liability and offsetting ARO asset during the fourth quarter of 2019. The asset was considered fully impaired as its carrying value exceeded the estimated undiscounted future cash inflows. The Company had previously recorded a $4,430,000 accrual for reclamation at TMOP which was eliminated. Therefore, the net impact of the impairment on the Consolidated Statement of Operations for the year ended December 28, 2019 was $2,230,000.

Table of Contents

The following table details activity related to the Company’s ARO liabilities for fiscal years 2019 and 2018 (amounts in thousands):


	DECEMBER 28,		DECEMBER 29,
	2019		2018
Beginning balance	$	6,269	$	6,166
Obligations incurred		21,455		103
Accretion expense		189		-
Ending balance		27,913		6,269
Less current portion		4,200		1,017
Long-term portion	$	23,713	$	5,252

In connection with the Company’s decision to cease mining activities, management performed a review of remaining assets to determine which, if any, should be classified as assets held for sale (AHS). Based on this review a total of $896,000, previously reported as Machinery and equipment on the Consolidated Balance Sheet, has been reclassified as AHS as of December 28, 2019. The net book value of the AHS was considered to be at or below fair market value, thus there was no impact to the Consolidated Statement of Operations from the reclassification.

21. VALUE CREATION INCENTIVE PLAN

The Company adopted the Continental Materials Corporation Value Creation Incentive Plan (VCIP) effective July 1, 2019. The VCIP is designed to attract and retain key management personnel by providing an incentive and reward for selected executive officers and employees of the Company. The VCIP involves only the payment of cash, not the issuance of common stock, based on appreciation of Phantom Equity or Phantom Equity Appreciation Rights (PE or PEARs, respectively) of the defined business unit, over a certain period of time. Fair value of the PE or PEAR awards was measured as of the balance sheet date presented. The awards vest over a period of four or five years and are payable over a three-year period following vesting. At December 28, 2019 total future compensation expense related to unvested awards yet to be recognized by the Company was approximately $1,635,000. This expense is expected to be recognized over a weighted-average remaining vesting period of approximately 4.1 years.

The Company used the Black-Scholes option pricing model as its method for determining fair value of the awards. The compensation expense related to the awards is recognized over the vesting period for each award. For the year ended December 28, 2019 the Company’s net loss included $204,000 of stock-based compensation. The total liability related to the PE and PEAR awards was $496,000, which includes $292,000 from an acquisition recorded at the opening balance sheet date, and is included as Long-term compensation on the Consolidated Balance Sheet as of December 28, 2019.

22. FAIR VALUE MEASUREMENT

PE and PEAR awards were recorded at fair value using the Black-Scholes option pricing model. There were no PE or PEAR appreciation awards at December 29, 2018. The following assumptions were used in determining the fair value of the award liability as of December 28, 2019:


Risk-free interest rate			1.67%
Dividend rate			0.00%
Volatility range			25% - 37%
Weighted average expected term (years)			4.1

The following table is a reconciliation for the PE and PEAR liability measured at fair value using Level 3 unobservable inputs (in thousands):


Balance at December 29, 2018	$	-
Awards related to acquired companies		300
Change due to vesting of awards granted		331
Change in fair value measurement of liability		(135)
Balance at December 28, 2019	$	496

Table of Contents

Contingent consideration was recorded at fair value using a Monte Carlo Simulation model. There was no contingent consideration liability at December 29, 2018. The following assumptions were used in determining the fair value of contingent consideration at December 28, 2019:


Risk-free interest rate			1.6% - 2.3%
Expected term (years)			.4 - 3.2

The following table is a reconciliation for the contingent consideration liability measured at fair value using Level 3 unobservable inputs (in thousands):


Balance at December 29, 2018	$	-
Contingent consideration granted with acquisitions		1,540
Change in fair value measurement of liability		(58)
Balance at December 28, 2019	$	1,482

The ARO liabilities were recorded at fair value using an expected present value technique. The following assumptions were used in determining the fair value of the ARO liabilities at December 28, 2019:


Credit adjusted risk-free interest rate			3.66%
Expected term (years)			4.7

23. SUBSEQUENT EVENT

On February 18, 2020, Bee Street Holdings LLC (Bee Street), commenced an unsolicited tender offer for all outstanding shares of Common Stock of the Company (Common Stock) not already owned by Bee Street. Bee Street is an entity controlled by James G. Gidwitz, our chairman and Chief Executive Officer, and other members of Mr. Gidwitz’ s family. As of February 17, 2020, Bee Street beneficially owned 1,027,171, or approximately 61.3%, of the outstanding shares of Common Stock. Bee Street is offering to purchase all outstanding shares of Common Stock that Bee Street does not already own for $9.50 per share, net to the seller in cash, without interest, subject to applicable withholding taxes. Additional information about the tender offer is available in Bee Street’s and the Company’s SEC filings, including the Company’s Schedule 14D-9 filed on March 3, 2020. The offer is subject to certain conditions set forth in Bee Street’s tender offer documents. Bee Street has stated that if it purchases shares of Common Stock in the tender offer such that it will own at least 90% of the issued and outstanding Common Stock, Bee Street (or its affiliate), intends to merge with the Company (the “Merger”). As a result of the Merger, each then issued and outstanding share of Common Stock (other than Common Stock held by Bee Street and held by stockholders who validly perfect their dissenters’ rights under the Delaware General Corporation Law) would be cancelled and converted into and represent the right to receive $9.50 per share.

Table of Contents

Report of Independent Registered Public Accounting Firm

~~Audit~~To ~~Committee~~the Shareholders, Board of Directors and ~~Shareholders~~Audit Committee

Continental Materials Corporation

Chicago, Illinois

Opinion on the ~~Consolidated~~ Financial Statements

We have audited the accompanying consolidated balance sheets of Continental Materials Corporation as of December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018, and the related consolidated statements of operations, shareholders’' equity and cash flows for each of the years in the two-year period ~~then~~ ended December 28, 2019, and the related notes and schedule listed in the Form 10-K ~~Index~~index at Part IV, ~~Item~~item 15 (a)2 (collectively referred to as the financial statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 28, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These ~~consolidated~~ financial statements are the responsibility of the Company’'s management. Our responsibility is to express an opinion on the Company’'s ~~consolidated~~ financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’'s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the ~~consolidated~~ financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the ~~consolidated~~ financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BKD, LLP

We have served as the Company’s auditor since 2009.

Indianapolis, Indiana

March 2823, ~~2019~~2020

4048

Table of Contents

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d‑15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) as of December 2928, ~~2018~~2019. The Chief Executive Officer and Chief Financial Officer, based on that evaluation, concluded that our 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 our 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.

Management’s Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15f under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (1992). Based on this assessment, management concluded that, as of December 2928, ~~2018~~2019, the Company’s internal control over financial reporting is effective. Management reviewed the results of its assessment with the Audit Committee of the Company’s Board of Directors.

AsRemediation of December 29, 2018, the Company was not an “accelerated filer” as defined in Rule 12b-2 under the Exchange Act. Accordingly, pursuant to SEC rules and regulations, the Company is not required to include, and this Annual Report on Form 10-K does not include, an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We are required to annually reassess our status as a ~~“smaller~~Material reporting company” as of the end of our fiscal year to determine whether we will be required to provide Management’s Annual Report on Internal Control Over Financial Reporting and the associated report of our independent registered public accounting firm in our Annual Report.Weakness

We previously reported a material weakness in the effectiveness of the Company’s internal control over financial reporting as of September 28, 2019. Specifically, the lack of formalized processes and technical resources available to handle the increased volume of the complex non-routine transactions resulted in several material adjustments being recorded. Based on this material weakness, management concluded that our disclosure controls and procedures were not effective as of September 28, 2019.

In the fourth quarter of 2019, management formalized internal control processes and enhanced the level of technical resources available to address non-routine complex transactions, in order to record and report these transactions timely and appropriately in accordance with generally accepted accounting principles in each reporting period. We hired an interim financial reporting manager to assist with research of transactions outside the ordinary course of business. We enhanced research tools available to assist with research of non-routine complex transactions. We prepared formal accounting memoranda to support our conclusions on technical accounting matters and related disclosures. As a result of the remediation activities and controls in place as of December 28, 2019, management determined the material weakness had been remediated as of December 28, 2019.

As of December 28, 2019, the Company was not an “accelerated filer” as defined in Rule 12b-2 under the Exchange Act. Accordingly, pursuant to SEC rules and regulations, the Company is not required to include, and this Annual Report on Form 10-K does not include, an attestation report of our independent registered public accounting firm regarding internal

Table of Contents

control over financial reporting. We are required to annually reassess our status as a “smaller reporting company” as of the end of our fiscal year to determine whether we will be required to provide Management’s Annual Report on Internal Control Over Financial Reporting and the associated report of our independent registered public accounting firm in our Annual Report.

Changes in Internal Control Over Financial Reporting

AsThere ~~noted~~have ~~above,~~been ~~the Company continually reassesses its internal control over financial reporting and makes changes as deemed prudent. No material weaknesses were identified in the review, therefore~~ no changes in ~~the~~our ~~Company’s~~ internal ~~controls~~control over financial reporting ~~occurred~~ during the fourth quarter ~~ended~~of ~~December~~fiscal ~~29,~~2019 ~~2018~~ that have materially affected, or are reasonably likely to materially affect, ~~the~~our ~~Company’s~~ internal ~~controls~~control over financial reporting, except as disclosed in Remediation of a Material Weakness above.

Item 9B. OTHER INFORMATION

The Company does not have any information, not already reported, that is required to be reported on Form 8-K during the fourth quarter of the year covered by this Form 10-K.

Table of Contents

PART III

~~Items~~The information required by items 10 through 14 of ~~Part~~Form ~~III~~10‑K is ~~have~~hereby ~~been~~incorporated ~~omitted~~by reference from ~~this~~the ~~Annual~~earlier ~~Report~~filed ~~because~~of: ~~the~~(i) an ~~registrant~~amendment ~~expects~~ to ~~file,~~this ~~not~~Annual ~~later~~Report ~~than~~on ~~120~~Form 10‑K ~~days~~or ~~following~~(ii) a ~~the close of its fiscal year ended December 29, 2018, its~~ definitive ~~2019~~ proxy statement. ~~The~~filed ~~information~~pursuant ~~required~~to byRegulation 14A ~~Items~~within 10120 days ~~through 14~~ of ~~Part III~~December ~~will~~28, ~~be included in that proxy statement and such information is hereby incorporated by reference~~2019.

PART IV

Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1	The following financial statements are included in Item 8 of Part II:
	Consolidated statements of income for fiscal years 2018 and 2017
	Consolidated statements of income for fiscal years 2019 and 2018
	Consolidated statements of cash flows for fiscal years ended 2018 and 2017
	Consolidated statements of cash flows for fiscal years ended 2019 and 2018
	Consolidated Balance Sheets as of December 29, 2018 and December 30, 2017
	Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018
	Consolidated statements of shareholders’ equity for fiscal years 2018 and 2017
	Consolidated statements of shareholders’ equity for fiscal years 2019 and 2018
(a) 2	The following is a list of financial statement schedules filed as part of this Annual Report:
	Schedule II Valuation and Qualifying Accounts & Reserves For the Fiscal Years 2018 and 2017
	Schedule II Valuation and Qualifying Accounts & Reserves For the Fiscal Years 2019 and 2018
All other schedules are omitted because they are not applicable or the information is shown in the financial statements or notes thereto.
(a) 3	The following is a list of all exhibits filed as part of this Annual Report:
Exhibit 2.1		Asset Purchase Agreement, dated February 1, 2019, by and among Continental Materials Corporation, Castle Concrete Company, Transit Mix Concrete Company, Transit Mix of Pueblo, Inc., Daniels Sand Company and Aggregate Industries – WCR, Inc. ~~filed~~incorporated asby reference to Exhibit 10.1 to Form 8-K filed February 1, 2019 ~~incorporated~~(Accession ~~herein~~# ~~by reference~~0001104659-19-005070).
Exhibit 3.1		Restated Certificate of Incorporation dated May 28, 1975, as amended on May 24, 1978, May 27, 1987 and June 3, 1999 incorporated by reference to Exhibit 3 to Form 10-K for the year ended January 1, 2005 (Accession # 0001104659-05-016256).
Exhibit 3.2		Registrant’s By-laws as amended September 19, 1975 ~~filed~~incorporated asby reference to Exhibit 3a to Form 10-Q for the period ended June 28, 2014 (Accession # 0001104659-14-059740)~~, incorporated herein by reference~~.
Exhibit 4.1		Description of Capital Stock

4250

Table of Contents

Exhibit 10		Second Amended and Restated Credit Agreement dated ~~November~~March 1816, ~~2011~~2020 among Continental Materials Corporation, as the Company (borrower), The Various Financial Institutions Party Thereto, as Lenders, and CIBC Bank USA f/k/a The PrivateBank and Trust Company, as Administrative Agent and Arranger, filed as Exhibit 10 to ~~Form~~this ~~10-Q for the quarter ended October 1, 2011, incorporated herein by reference; First Amendment thereto dated March 21, 2013 filed as Exhibit 10 to~~ Form 10-K for the fiscal year ended December ~~29, 2012; Second Amendment thereto dated March 20, 2014 filed as Exhibit 10 to Form 10-K for the fiscal year ended December~~ 28, 2013; Third Amendment thereto dated June 28, 2014 filed as Exhibit 10 to Form 10-Q for the quarter ended June 28, 2014; Fourth Amendment thereto dated November 13, 2014 filed as Exhibit 10 to Form 10-Q for the quarter ended September 27, 2015; Fifth Amendment thereto dated March 20, 2015 filed as Exhibit 10 to Form 10-K for the fiscal year ended January 2, 2016; Sixth Amendment thereto dated August 8, 2015 filed as Exhibit 10 to Form 10-Q for the quarter ended October 3, 2015; Seventh Amendment thereto dated March 24, 2016 filed as Exhibit 10 to Form 10-K for the fiscal year ended January 2, 2016; Eighth Amendment thereto dated May 27, 2017 filed as Exhibit 10 to Form 10-K for the quarter ended July 1, 2017; Ninth Amendment thereto dated May 15, 2018 filed as Exhibit 10 to Form 10-K for the quarter ended March 31, 2018 and the Tenth Amendment thereto dated March 27, 2019 ~~filed as Exhibit 10 to this Form 10-K for the fiscal year ended December 29, 2018~~.
Exhibit 10a		Fee Sand and Gravel Lease Between Valco, Inc. And Continental Materials Corporation filed as Exhibit 2C to Form 8-K filed November 4, 1996, incorporated herein by reference.
Exhibit 10b		Form of Supplemental Deferred Compensation Agreement filed as Exhibit 10 to Form 10-Q for the quarter ended July 1, 1983, incorporated herein by reference.*
Exhibit 10c		Continental Materials Corporation Employees Profit Sharing Retirement Plan, 2009 Amendment and Restatement filed as Exhibit 10c to Form 10-K for the year ended January, 2, 2010.*
Exhibit 10d		Continental Materials Corporation Deferred Compensation Plan filed as Exhibit 10.1 to Form 8-K filed December 17, 2018, incorporated herein by reference.*
Exhibit 10e		Continental Materials Value Creation Incentive Plan, incorporated by reference to Exhibit 10.1 to Form 8-K filed June 10, 2019 (Accession # 0001410578-19-000342).
Exhibit 21		Subsidiaries of Registrant (filed herewith).
Exhibit 23		Consent of Independent Registered Public Accounting Firm (filed herewith).
Exhibit 31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) and Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Exhibit 31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) and Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Exhibit 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).
Exhibit 95		Mine Safety Disclosures (filed herewith).
Exhibit 101		The following financial information from the Company’s Annual Report for the fiscal year ended December 2928, ~~2018~~2019 filed with the SEC on March 2823, ~~2019~~2020, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations for the fiscal years ~~2018~~2019 and ~~2017~~2018, (ii) the Consolidated Statements of Cash Flows for the fiscal years ~~2018~~2019 and ~~2017~~2018, (iii) the Consolidated Balance Sheets as of December 2928, ~~2018~~2019 and December 3029, ~~2017~~2018, (iv) the Consolidated Statements of Shareholders’ Equity for fiscal years ~~2018~~2019 and ~~2017~~2018, and (v) Notes to Consolidated Financial Statements.

Table of Contents

* Compensatory plan or arrangement

Item 16. FORM 10-K SUMMARY

None.

4451

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
		Registrant

	By:	/S/Paul Ainsworth
		Paul Ainsworth, Vice President, Secretary and Chief Financial Officer

Date: March 2823, ~~2019~~2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE	CAPACITY(IES)	DATE
/S/ James G. Gidwitz	Chief Executive Officer and a Director
James G. Gidwitz	(Principal Executive Officer)	March 2823, ~~2019~~2020
/S/ Paul Ainsworth	Vice President, Secretary and Chief Financial Officer
Paul Ainsworth	(Principal Financial and Accounting Officer)	March 2823, ~~2019~~2020
/S/ Thomas H. Carmody
Thomas H. Carmody	Director	March 28, 2018
/S/ Ralph W. Gidwitz
Ralph W. Gidwitz	Director	March 2823, ~~2019~~2020
/S/ Scott Gidwitz
Scott Gidwitz	Director	March 2823, ~~2019~~2020
/S/ Steven Gidwitz
Steven Gidwitz	Director	March 2823, ~~2019~~2020
/S/ Theodore R. Tetzlaff
Theodore R. Tetzlaff	Director	March 2823, ~~2019~~2020
/S/ Peter E. Thieriot
Peter E. Thieriot	Director	March 2823, ~~2019~~2020
/S/ Darrell M. Trent
Darrell M. Trent	Director	March 2823, ~~2019~~2020

4552

Table of Contents

CONTINENTAL MATERIALS CORPORATION

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (e)

for the fiscal years ~~2018~~2019 and ~~2017~~2018

COLUMN A	COLUMN B		COLUMN C(1)		COLUMN D			COLUMN E
	Balance at		Additions
	Beginning of		Charged to Costs		Deductions -			Balance at End of
Description	Period		and Expenses		Describe			Period
Year 2019
Allowance for doubtful accounts (c)	$	410,000	$	189,000	$	105,000	(a)	$	494,000
Inventory valuation reserve (c)	$	1,747,000	$	138,000	$	862,000	(b)	$	1,023,000
Reserve for self-insured losses	$	2,451,000	$	3,261,000	$	3,745,000	(d)	$	1,967,000
Year 2018
Allowance for doubtful accounts (c)	$	~~240~~140,000	$	~~165~~68,000	$	(~~155~~202,000)	(a)	$	~~560~~410,000
Inventory valuation reserve (c)	$	518,000	$	1,544,000	$	315,000	(b)	$	1,747,000
Reserve for self-insured losses	$	1,881,000	$	5,483,000	$	4,913,000	(d)	$	2,451,000
Year 2017
Allowance for doubtful accounts (c)	$	220,000	$	134,000	$	114,000	(a)	$	240,000
Inventory valuation reserve (c)	$	312,000	$	282,000	$	76,000	(b)	$	518,000
Reserve for self-insured losses	$	1,861,000	$	5,034,000	$	5,014,000	(d)	$	1,881,000

Notes:

(a)

Accounts written off, net of recoveries.

(b)

Amounts written off upon disposal of assets.

(c)

Reserve deducted in the balance sheet from the asset to which it applies.

(d)

Payments of self-insured claims including healthcare claims accrued and paid in connection with the Company’s self-insured employee healthcare benefit plan.

(e)

Column C (2) has been omitted as the answer would be “none”.

4653

Filing Compare · CONTINENTAL MATERIALS CORP