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| CUO > SEC Filings for CUO > Form 10-Q on 14-Aug-2012 | All Recent SEC Filings |
14-Aug-2012
Quarterly Report
Company Overview
See Note 7 for an overview of the Company.
Liquidity and Capital Resources
As noted above, various factors affect the sales of the Company's products. Historically, the Company has experienced operating losses during the first quarter except when construction activity is strong along the Southern Front Range of Colorado and the weather is mild. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in Colorado and the seasonal sales of the Evaporative Cooling segment. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company's heating equipment. Notwithstanding weather conditions, however; the Company expects that construction activity along the Southern Front Range of Colorado will remain weak for the balance of 2012.
The Company typically experiences operating cash flow deficits during the first half of the year reflecting operating results, the use of sales dating programs (extended payment terms) related to the Evaporative Cooling segment and payments of the prior year's accrued incentive bonuses and Company profit-sharing contributions, if any. As a result, the Company's borrowings against its revolving credit facility tend to peak during the second quarter and then decline over the remainder of the year. This trend has continued during the first six months of 2012.
Cash provided by operations was $416,000 during the first six months of 2012 compared to the $471,000 of cash provided during the first six months of 2011. The Company's operating cash flow during the first six months of 2012 was positive despite the operating loss primarily due to a decrease in receivables and an increase in accounts payable and accrued expenses. The operating cash flow during the first six months of 2011 was positive primarily due to a decrease in receivables partially offset by an increase in inventories and a decrease in accounts payable and accrued expenses.
The Company was in compliance with all loan covenants as of the fiscal quarter ended June 30, 2012. Because the maturity date of the revolving credit line portion of the Company's credit agreement is May 1, 2015, the outstanding revolving credit balances at June 30, 2012 and December 31, 2011 were classified as long-term obligations.
During the six months ended June 30, 2012, investing activities used $615,000 of cash compared to $954,000 of cash used in the prior year's period. Capital expenditures during the first six months of 2012 were $643,000, well below historical levels, and primarily represented purchases related to the site development at the Pueblo aggregates operations as well as routine replacements and upgrades to equipment in the Heating and Cooling segment and the Evaporative Cooling segment.
Financing activities during the first six months of 2012 provided $240,000 compared to the $575,000 provided during the 2011. Scheduled debt repayments were made during the first six months of both 2012 and 2011. During the first quarter of 2012, the Company provided a bank letter of credit to replace the $4,340,000 of cash deposited with the Company's casualty insurance provider for self-insured claims. The returned cash was used to reduce the outstanding revolving bank loan.
During the first six months of 2012, the highest amount of Company borrowings outstanding under the revolving credit line was $8,150,000 and the average amount outstanding was $4,526,000.
Results of Operations - Comparison of Quarter Ended June 30, 2012 to Quarter Ended July 2, 2011
In the ensuing discussions of the results of operations the term gross profit means the amount determined by deducting cost of sales before depreciation, depletion and amortization from sales. The gross profit ratio is gross profit divided by sales.
Consolidated sales in the second quarter of 2012 were $29,747,000 or $1,772,000 (6.3%) more than second quarter of 2011. Sales in three of the Company's four segments were moderately higher in 2012 while sales in the Heating and Cooling segment slightly declined. Business conditions in the Construction, Aggregates and Construction Supply ("CACS") and Door segment were particularly weak in the second quarter of 2011 and were only marginally improved in the second quarter of 2012. The consolidated gross profit ratio for the current year quarter was 18.5% compared to 21.8% in the second quarter of 2011. All four of the Company's business segments experienced lower gross profit ratios due to a number of varying factors including price competition, sales mix and higher manufacturing costs. Consolidated selling and administrative expenses were only $32,000 higher in the 2012 quarter compared to the prior year. Lower litigation expenses associated with the Pikeview insurance claim were offset by increased sales expenses in the Company's HVAC business units. Consolidated selling and administrative expenses, as a percentage of consolidated sales, decreased from 18.1% to 17.1%. The operating loss for the second quarter of 2012 was $629,000 compared to $83,000 of operating income in the second quarter of 2011.
Net interest expense (exclusive of amortization of deferred financing fees) was $141,000 in the second quarter of 2012 compared to $109,000 in the second quarter of 2011. The average interest rate in the second quarter of 2012, including the effect of an interest rate swap and finance charges on letters of credit was approximately 7.8% compared to approximately 4.1% in the second quarter of 2011. Excluding finance charges on letters of credit the average interest rate was 6.2% in the second quarter of 2012 compared to 4.1% in the second quarter of 2011. Average total outstanding indebtedness was approximately $8,064,000 in 2012 compared to approximately $12,560,000 in 2011. The reduction in outstanding indebtedness primarily reflects the replacement of a $4,340,000 cash collateral deposit previously placed with the Company's casualty insurance provider with a bank letter of credit on March 1, 2012.
A discussion of operations by segment follows.
Construction Products
The table below presents a summary of operating information for the two
reportable segments within the Construction Products group for the quarters
ended June 30, 2012 and July 2, 2011 (amounts in thousands):
Concrete,
Aggregates and
Construction
Supplies Doors
Quarter ended June 30, 2012
Revenues from external customers $ 9,930 $ 3,522
Gross profit 529 847
Gross profit as a percent of sales 5.3 % 24.0 %
Segment operating (loss) income (1,256 ) 281
Operating (loss) income as a percent of sales (12.6 )% 8.0 %
Segment assets as of June 30, 2012 $ 32,897 $ 6,471
Return on assets (3.8 )% 4.3 %
Quarter ended July 2, 2011
Revenues from external customers $ 9,099 $ 2,890
Gross profit 853 825
Gross profit as a percent of sales 9.4 % 28.5 %
Segment operating (loss) income (1,046 ) 285
Operating income as a percent of sales (11.5 )% 9.9 %
Segment assets as of July 2, 2011 $ 35,100 $ 6,182
Return on assets (3.0 )% 4.6 %
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Concrete, Aggregates and Construction Supplies Segment
Overall construction activity in the Company's principal markets of Colorado Springs and Pueblo, Colorado remained at a depressed level although revenues increased by $831,000 (9.1%) compared to the second quarter of 2011. Concrete yardage,
excluding flow-fill material for a particular project, increased by just 1%. The market in Colorado Springs exhibited meaningful improvement compared to the prior year but the market in Pueblo weakened even further. Sales of aggregates (sand, crushed limestone and gravel) including those used internally were 26.6% higher in the 2012 quarter compared to the comparable quarter of 2011. However, most of the increased aggregate volume was for secondary, lower priced materials. The gross profit ratio for the CACS segment as a whole was approximately 4 points lower in the second quarter of 2012. The gross profits of the aggregates operations fell substantially due to the unfavorable shift in product mix, competitive pricing and an increase in repairs and maintenance expenditures. The Pikeview Quarry remains closed although the Company continues to work with the Colorado Division of Reclamation, Mining and Safety on a plan to resume operations there. The litigation over the insurance claim pertaining to the 2008 landslide at the Pikeview Quarry is ongoing. A pre-trial conference is scheduled for the latter part of September. Selling and administrative expenses were lower in the second quarter of 2012 principally due to reduced litigation costs related to the Pikeview insurance claim. The operating loss for the CACS segment in the second quarter of 2012 includes a $17,000 gain on the sale of equipment. There was $140,000 of such gains in the second quarter of 2011.
Door Segment
Sales during the second quarter of 2012 in the Door segment increased $632,000 or 21.9% from the comparable 2011 quarter. The Door segment is to some extent subject to the same construction market influences. The gross profit ratio for the 2012 quarter was 4.5 points lower compared to the prior year principally due to more competitive bid prices.
HVAC Products
The table below presents a summary of operating information for the two
reportable segments within the HVAC products group for the quarters ended
June 30, 2012 and July 2, 2011 (amounts in thousands):
Heating and Evaporative
Cooling Cooling
Quarter ended June 30, 2012
Revenues from external customers $ 6,007 $ 10,198
Gross profit 1,642 2,442
Gross profit as a percent of sales 27.3 % 23.9 %
Segment operating (loss) income (291 ) 1,338
Operating income as a percent of sales (4.8 )% 13.1 %
Segment assets as of June 30, 2012 $ 16,106 $ 12,500
Return on assets (1.8 )% 10.7 %
Quarter ended July 2, 2011
Revenues from external customers $ 6,111 $ 9,786
Gross profit 1,918 2,464
Gross profit as a percent of sales 31.4 % 25.2 %
Segment operating (loss) income 88 1,436
Operating income as a percent of sales 1.4 % 14.7 %
Segment assets as of July 2, 2011 $ 17,157 $ 12,906
Return on assets .5 % 11.1 %
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Heating and Cooling Segment
Sales in the Heating and Cooling segment decreased by just $104,000 (1.7%) in the second quarter of 2012 compared to the comparable 2011 quarter. Lower furnace sales were largely offset by increased fan coil sales in an improving commercial construction market. The gross profit ratio for this segment decreased by approximately 4.1 points due to the change in product sales mix. Gross profit margins on fan coils are typically lower than those on the furnace product line. Selling and administrative expenses were $97,000 higher in the second quarter of 2012 due to an increase in legal expenses related to product liability claims.
Evaporative Cooling Segment
Unit sales during the quarter ended June 30, 2012 in the Evaporative Cooling segment were virtually unchanged compared to the prior year quarter. Sales revenue increased by $412,000 (4.2%) largely due to increased selling prices. The gross profit ratio declined by 1.3 points as some higher material and factory overhead costs and a reduced production volume more than offset the increase in selling prices. Selling, general and administrative expenses increased by $101,000 principally due to an increase in the engineering staff and new product development efforts.
Results of Operations - Comparison of Six Months Ended June 30, 2012 to Six Months Ended July 2, 2011
In the ensuing discussions of the results of operations the term "gross profit" means the amount determined by deducting cost of sales before depreciation, depletion and amortization from sales. The "gross profit ratio" is gross profit divided by sales.
Consolidated sales in the first half of 2012 were $54,143,000, 2.7% higher than in the first six months of 2011. Sales results at all of the four Company's business segments showed improvement compared to the first half of 2011. The consolidated gross profit ratio was 19.0% in the first half of 2012 compared to 19.7% in the first six months of 2011. In the first half of 2012 three of the Company's four business segments experienced reduced gross profit ratios. The Heating & Cooling segment realized a higher gross profit ratio as profit margins on fan coils improved from rather depressed levels a year ago. Consolidated selling and administrative expenses were $502,000 higher in the first half of 2012 compared to the first half of the prior year. Consolidated selling and administrative expenses, as a percentage of consolidated sales, increased from 18.7% to 19.2%. The Company's two HVAC businesses incurred higher selling and administrative expenses in the first half of 2012 compared to the first half of the prior year. The other two business segments had lower or the same level of expense. Operating income in 2012 includes a $17,000 gain on the sale of some equipment. In the first half of 2011, gains on the sale of depreciable equipment were $140,000.
The operating loss for the first half of 2012 was $2,164,000 compared to a loss of $1,538,000 in 2011.
Net interest expense (exclusive of amortization of deferred financing fees) was $275,000 in the first half of 2012 compared to $302,000 in the first half of 2011. The average interest rate in the first half of 2012, including the effect of an interest rate swap and finance charges on letters of credit was approximately 6.4% compared to approximately 5.6% in the first six months of 2011. Excluding finance charges on letters of credit the average interest rate was 5.4% in the first half of 2012 compared to 5.6% in the first six months of 2011. Average total outstanding indebtedness was approximately $9,525,000 in 2012 compared to approximately $11,721,000 in 2011. The reduction in outstanding indebtedness primarily reflects the replacement of a $4,340,000 cash collateral deposit previously placed with the Company's casualty insurance provider with a bank letter of credit on March 1, 2012. After adjusting for the impact of the letter of credit issuance and the resultant reduction of outstanding revolving credit, the borrowings under the revolving credit line were higher in the first half of 2012 compared to the prior year.
Income taxes are recorded based upon the effective rate for the year estimated at the end of each quarter. The effective rate estimated as of June 30, 2012 was 37% compared to 35.5% for the first half of 2011.
A discussion of operations by segment follows.
Construction Products
The table below presents a summary of operating information for the two
reportable segments within the Construction Products group for the six months
ended June 30, 2012 and July 2, 2011 (amounts in thousands):
Concrete,
Aggregates and
Construction
Supplies Doors
Six Months ended June 30, 2012
Revenues from external customers $ 16,673 $ 6,452
Gross profit 584 1,470
Gross profit as a percent of sales 3.5 % 22.8 %
Segment operating (loss) income (3,021 ) 339
Operating (loss) income as a percent of sales (18.1 )% 5.3 %
Segment assets as of June 30, 2012 $ 32,897 $ 6,471
Return on assets (9.2 )% 5.2 %
Six Months ended July 2, 2011
Revenues from external customers $ 16,453 $ 6,003
Gross profit 1,075 1,607
Gross profit as a percent of sales 6.5 % 26.8 %
Segment operating (loss) income (2,721 ) 485
Operating (loss) income as a percent of sales (16.5 )% 8.1 %
Segment assets as of July 2, 2011 $ 35,100 $ 6,182
Return on assets (7.6 )% 7.8 %
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Concrete, Aggregates and Construction Supplies Segment
Sales in the Concrete, Aggregates and Construction Supplies segment increased by just 1.3% in the first six months of 2012 compared to the first six months of the prior year. The same unfavorable market and demand factors mentioned in the analysis for the second quarter were also relevant to the first half of 2012. Concrete yardage decreased by 10.7% compared to the first six months of 2011. Concrete volume in Pueblo was particularly weak. Sales of aggregates (sand, crushed limestone and gravel) including those used internally were approximately 23.7% higher in the first six months of 2012 compared to the first six months of 2011. As in the second quarter this additional aggregate demand was for lower priced secondary products. See discussion for the second quarter regarding the status of the Pikeview Quarry. The combined gross profit ratio for the CACS segment in the first half of 2012 was approximately 3.0 points lower compared to the first half of 2011 for the reasons noted in the second quarter commentary plus lower concrete volume in Pueblo. Selling and administrative expenses were lower in the first six months of 2012 as a result of reduced expenses in connection with the Pikeview insurance claim litigation.
Door Segment
Sales during the first six months of 2012 in the Door segment increased $449,000 or 7.5% from the comparable 2011 period. The gross profit ratio in 2012 declined by 4.0 points due to more competitive bid prices.
HVAC Products
The table below presents a summary of operating information for the two
reportable segments within the HVAC products group for the six months ended
June 30, 2012 and July 2, 2011 (amounts in thousands):
Heating and Evaporative
Cooling Cooling
Six Months ended June 30, 2012
Revenues from external customers $ 14,873 $ 15,966
Gross profit 4,435 3,763
Gross profit as a percent of sales 29.8 % 23.6 %
Segment operating income 208 1,707
Operating income as a percent of sales 1.4 % 10.7 %
Segment assets as of June 30, 2012 $ 16,106 $ 12,500
Return on assets 1.3 % 13.7 %
Six Months ended July 2, 2011
Revenues from external customers $ 14,506 $ 15,603
Gross profit 3,841 3,799
Gross profit as a percent of sales 26.5 % 24.3 %
Segment operating income 164 1,917
Operating income as a percent of sales 1.1 % 12.3 %
Segment assets as of July 2, 2011 $ 17,157 $ 12,906
Return on assets 1.0 % 14.9 %
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Heating and Cooling Segment
Sales in the Heating and Cooling segment increased by $367,000 (2.5%) in the first half of 2012 from the comparable period in 2011. Furnace sales for the first six months of 2012 declined by 10.6% compared to the first six months of 2011. In 2011 some rehabilitation projects at multi-family dwellings boosted furnace sales. There were little of these same sales opportunities available in 2012. Fan coil sales were significantly higher on a percentage basis as that particular market is showing signs of a recovery from a particularly slow period. The gross profit ratio for this segment improved by 3.3 points due a substantial improvement in fan coil margins from an unacceptably low level experienced in the first half of 2011. Selling and administrative expenses increased by $551,000 due to increased sales incentives for furnace customers and higher legal expenses related to product liability claims.
Evaporative Cooling Segment
Sales in the Evaporative Cooling segment increased by 2.3% in the first six months of 2012 compared to the 2011 first half. However, unit shipments were down by 2%. The gross profit ratio was modestly lower than a year ago. Some increased material costs and higher factory overheads more than offset the increase in selling prices. Selling and administrative costs increased by $214,000. Additional sales promotion and advertising expenses and new product development efforts contributed to the higher sales and administrative expenses. As a percentage of sales, these expenses increased from 10.6% to 11.7%.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of June 30, 2012 and December 31, 2011 and affect the reported amounts of revenues and expenses for the periods reported. Actual results could differ from those estimates.
Information with respect to the Company's critical accounting policies which the Company believes could have the most significant effect on the Company's reported results and require subjective or complex judgments by management is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
OUTLOOK
The revenues of the CACS segment are dependent on the level of construction activity along the Front Range in Southern Colorado. Bidding activity has begun to exhibit modest improvement. However, despite announced concrete pricing increases to the building trades, the pricing on most bid jobs remains highly competitive. Future increases in cement and/or diesel costs could also pressure margins.
The Door segment's sales are also, to a significant extent, reliant on new construction. The sales backlog of the Door segment at the end of the second quarter of 2012 was comparable to both the 2011 year-end and July 2, 2011 levels. Pricing is expected to remain highly competitive.
July typically marks the end of the selling season for evaporative coolers. Unit sales in the first part of July 2012 were running slightly below expectations.
In-season furnace sales later this year will be largely weather-dependent. Fan coil sales are generally driven by the level of commercial construction, particularly the development of new hotels. Recent bidding activity indicates that the commercial construction market may be slowly improving from a period of very weak demand over the past few years. Competitive pricing is expected to persist.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 4 for a discussion of recently issued accounting standards.
MATERIAL CHANGES TO CONTRACTUAL OBLIGATIONS
There were no material changes to contractual obligations that occurred during the quarter ended June 30, 2012.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by and information available to the Company at the time such statements were made. When used in this Report, words such as "anticipates," "believes," "contemplates," "estimates," "expects," "plans," "projects," and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of factors including but not limited to: weather, interest rates, availability of raw materials and their related costs, national and local economic conditions, competitive forces and changes in governmental regulations and policies. Some of these factors are discussed in more detail in the Company's 2011 Annual Report on Form 10-K. Changes in accounting pronouncements could also alter projected results. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to update them.
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