The Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help investors understand the Company's results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, the Company's unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report and the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019.





Company Overview

In December 2019, a novel strain of coronavirus (SARS-CoV-2) emerged in Wuhan, Hubei Province, China, which on March 11, 2020 was announced by the World Health Organization to be causing a global pandemic disease (COVID-19). The outbreak of novel coronavirus and resulting pandemic disease continues to spread throughout the United States and around the world.

At various times since the commencement of the COVID-19 coronavirus outbreak, the Governors of each state in which the Company has material operations have declared states of emergency and/or disaster and ordered that all non-essential businesses cease activities except for certain minimum basic operations. Management believes that the Company and its subsidiaries qualify as essential businesses as defined in the respective Governors' orders, but we have nevertheless reduced our operations and implemented additional cleaning and social distancing protocols in response to the COVID-19 coronavirus pandemic. Among other issues considered by management in reaching this belief, our business operates within a critical infrastructure sector as established by the Cybersecurity & Infrastructure Security Agency of the Department of Homeland Security. Thus, as of the date of the filing of this Quarterly Report, we believe our manufacturing and distribution facilities generally are permitted to continue to operate subject to enhanced safety protocols, both voluntary and government mandated, that are aimed to protect the health of our workforce.


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Based on the financial results reported in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report, management believes that the COVID-19 coronavirus pandemic and the related governmental reaction had only a limited impact on our business during the quarter ended March 28, 2020; however, management expects that the COVID-19 coronavirus pandemic and the related governmental reaction has and will negatively impact our business during second quarter of fiscal 2020 and, depending on the duration of the pandemic and related governmental reaction, thereafter, including our liquidity and financial position, results of operations, stock price and ability to convert backlog to revenue among other negative impacts. Management cannot currently quantify the magnitude of such negative impacts or predict when the negative impacts on the Company and its businesses related to the COVID-19 coronavirus pandemic and related governmental reaction will end. These risks to our business are more fully described in Part I, Item 1A "Risk Factors" of our

Annual Report on Form 10-K for Fiscal Year 2019 , which we filed with the SEC on March 23, 2020. We are closely monitoring the impact of the COVID-19 coronavirus pandemic and the related governmental reaction on all aspects of our business.

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

Liquidity and Capital Resources

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 Transit Mix Concrete (TMC) ready-mix and Daniels Sand operations along with the acquisitions completed in the 2019 fiscal year are expected to reduce the seasonality of the Company's operations. The first quarter 2019 profit was attributable to the legal settlement and sale of TMC ready-mix and Daniels sand operations' assets, both non-recurring items.

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 first quarter of 2019, a legal settlement and the sale of TMC assets provided sufficient cash reserves such that borrowings against the revolving credit facility were significantly less than historical experience. The fiscal 2019 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.

Cash provided by continuing operations was $2,955,000 during the first three months of 2020 compared to $11,624,000 provided during the first three months of 2019. The first quarter of 2020 included $2,321,000 cash received from the release of escrow amounts related to an aggregate property near Colorado Springs, Colorado. See Note 12 for additional discussion. The first quarter of 2019 included $15,000,000 cash received related to a legal settlement. See Note 14 for further discussion. Cash used by discontinued operations in the first quarter of 2019 was $15,000 that reflected operating results combined with changes in working capital items.

During the three months ended March 28, 2020, investing activities provided

$2,556,000 of cash compared to $24,697,000 of cash provided in the prior year's first quarter. Capital expenditures by continuing operations were $26,000 during the first three months of 2020. Capital expenditures for continuing and discontinued operations were $63,000 and $172,000, respectively, during the first three months of 2019. The reduction in capital expenditures is attributable to the sale of TMC's ready-mix business which, historically, was more capital intensive. The three months ended March 28, 2020 included $1,918,000 cash received from escrow released from the sale of TMC's


                                       20

ready-mix and Daniels Sand operations. The three months ended March 30, 2019 included $24,927,000 cash received from the sale of TMC's ready-mix and Daniels Sand operations.

Cash used by financing activities during the first three months of 2020 was

$1,093,000 as available cash was used to reduce borrowings on the revolving line of credit. Financing activities during the first three months of 2019 used

$1,479,000 as available cash was used to reduce borrowings on the revolving line of credit.

Management expects a trend of decreased working capital and decreased cash from continuing operations, relative to fiscal year 2019, may occur over the remainder of fiscal 2020 due to uncertainty of the impact of the COVID-19 pandemic on economic conditions. On April 14, 2020, the Company received proceeds of $5,487,000 from loan by CIBC Bank USA (the "PPP Loan") pursuant to the Paycheck Protection Program (the "PPP") under Division A, Title I of Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). Under the PPP, the Company may apply for forgiveness of the PPP Loan in an amount equal to the sum of the following costs incurred during the 8-week period beginning on the date of the first disbursement of the PPP Loan: (a) payroll costs, (b) any payment of interest on a covered obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (c) any payment on a covered rent obligation, and (d) any covered utility payment, calculated in accordance with the terms of the CARES Act. Although no assurance can be provided that the Company will obtain forgiveness of the PPP Loan in whole or in part, management currently expects to use the proceeds of the PPP Loan for forgivable purposes in accordance with the CARES Act, and management expects that such proceeds will substantially fund any trend of increased working capital requirements and to offset the decreased cash from continuing operations, relative to fiscal year 2019, that may occur into the second quarter of fiscal 2020. The term of the PPP Loan is two years. The Company will be required to pay any unforgiven principal of and interest on the PPP Loan in eighteen equal monthly installments, with the first payment being due in the fourth quarter of fiscal 2020. The PPP Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

Management cannot currently predict when the negative impacts on the Company and its businesses related to the COVID-19 coronavirus pandemic and related governmental reaction will end. Although the Company believes that its existing cash balance, anticipated cash flow from continuing operations, available borrowing capacity under the Credit Agreement and the PPP Loan will be sufficient to cover expected cash needs, including planned capital expenditures, during the remainder of fiscal year 2020, that belief is based on the assumption that negative impacts related to the COVID-19 coronavirus pandemic and related governmental reaction will substantially improve commencing in the second quarter and continuing thereafter, and such assumption may not prove accurate.

Revolving Credit and Term Loan Agreement

As discussed in Note 10 to the condensed consolidated financial statements contained in this Quarterly Report, the Company maintains a Credit Agreement, which provides for a Revolving Commitment of up to $20,000,000. Borrowings under the Credit Agreement are secured by the Company's accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company's subsidiaries. Borrowings under the Revolving Commitment are limited to (a) 85% of eligible accounts receivable, (b) the lesser of 60% of eligible inventories and $8,500,000. Borrowings under the Credit Agreement bear interest based on a LIBOR or prime rate based option.

The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period. The Credit Agreement has a maturity date of May 1, 2023.

There were no outstanding borrowings against the revolving credit facility at March 28, 2020. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the entire revolving credit facility was available to the Company.

As of March 28, 2020 the Company was in compliance with all covenants in the Credit Agreement. Based on the assumption that negative impacts related to the COVID-19 coronavirus pandemic and related governmental reaction


                                       21

will substantially improve commencing in the second quarter and continuing thereafter, the Company currently expects to be in compliance with all covenants under the Credit Agreement throughout the facility's remaining term.

Results of Continuing Operations - Comparison of Quarter Ended March 28, 2020 to the Quarter Ended March 30, 2019

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

Consolidated sales in the first quarter of 2020 were $30,845,000, an increase of $8,317,000, or 36.9%, compared to the first quarter of 2019. The increase in sales is substantially attributable to acquisitions completed after the first quarter of 2019. On a pro forma basis, as if all the acquisitions had occurred at the beginning of fiscal 2019, sales in the first quarter would have declined $489,000. See Note 16 for additional discussion.

The consolidated gross profit ratio in the first quarter of 2020 was 26.8% compared to 20.8% in the same period of 2019. The increase is primarily due to results in the HVAC segment reflecting the acquisitions of Global Flow and InOvate. The variances in gross profit are discussed in segment discussion below.

Consolidated selling and administrative expenses were $986,000 higher in the first quarter of 2020 than the comparable prior year quarter driven primarily by the 2019 acquisition activity. As a percentage of consolidated sales, selling and administrative expenses decreased to 25.2% in the first quarter of 2020 from 30.1% in the first quarter of 2019. The decrease between periods is attributable to reduced investments in the HVAC segment related to previously owned business lines.

The first quarter of 2019 included a $15,000,000 gain from a legal settlement recognized in January 2019. See Note 14 for additional discussion. The first quarter of 2020 included $145,000 in gains from the sale of property and equipment, primarily in the Construction Materials segment. The first quarter of 2019 included $5,000 in gains from the sale of property and equipment.

The consolidated operating profit in the first quarter of 2020 was $134,000. The consolidated operating loss in the first quarter of 2019, before the gain from legal settlement discussed above, was $2,625,000. The increase in operating performance was driven by the HVAC and Construction Materials segments. The HVAC segment reported an increase of $3,017,000 in operating profit. The Construction Materials segment, excluding the $15,000,000 legal settlement, reported a reduction in operating loss of $320,000. Individual segment results are discussed further in the segment section below.

Interest income for the first quarter of 2020 was $114,000 compared to $149,000 for the first quarter of 2019. The decrease in interest income is primarily due to interest earned on the higher 2019 cash reserves resulting from the proceeds from the legal settlement and the sale of TMC assets.

Interest expense in the first quarter of 2020 was $101,000 compared to $71,000 in the first quarter of 2019. Interest expense includes interest on outstanding funded debt, finance charges on outstanding letters of credit, the fee on the unused revolving credit line and other recurring fees charged by the lending bank. The increase from the prior year quarter is attributable to higher average borrowings. Outstanding funded debt in the first quarter of 2020 was $1,134,000 compared to $802,000 for the first quarter of 2019. At the end of the first quarter of 2020 the outstanding funded debt was zero compared to $800,000 at the end of the first quarter of 2019.

The Company's effective income tax rate reflects federal and state statutory income tax rates adjusted for non-deductible expenses, tax credits and other tax items. The estimated effective income tax rate in the first quarter of 2020 was 21.0% compared to 27.0% for the first quarter of 2019.


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The Company operates businesses primarily within the Building Products industry group. The businesses are grouped into three reportable segments: the HVAC segment, the Door segment and the Construction Materials segment. The following addresses various aspects of operating performance focusing on the reportable segments.

Results of Discontinued Operations - Comparison of Quarter Ended March 28, 2020 to the Quarter Ended March 30, 2019

The results of discontinued operations reflect the operations of the ready-mix and Daniels sand businesses of TMC. The Company sold the assets of these business units on February 1, 2019. There was no income or loss from discontinued operations recognized in the first quarter of 2020. 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 $6,508,000.





HVAC Segment

The table below presents a summary of operating information for the two reportable segments within the HVAC products industry group for the quarters ended March 28, 2020 and March 30, 2019 (dollar amounts in thousands):






                                                        Three Months ended
                                                     MARCH 28,      MARCH 30,
                                                        2020          2019
     Revenues from external customers                $   23,655    $    16,720
     Segment gross profit                                 7,421          3,819
     Gross profit as percent of sales                      31.4 %         22.8 %
     Segment operating income (loss)                 $    2,536    $     (481)
     Operating income (loss) as a percent of sales         10.7 %        (2.9) %
     Segment assets                                  $   46,250    $    30,171
     Return on assets                                       5.5 %        (1.6) %

The HVAC segment is comprised of four operating companies and sells a variety of products including residential and commercial wall furnaces, fan coils, evaporative coolers, boiler room equipment, dryer boxes and related accessories from the Company's wholly-owned subsidiaries, Williams Furnace Co. (WFC), Phoenix Manufacturing, Inc. (PMI) Global Flow Products (GFP) and InOvate Dryer Technologies (InOvate).

Sales in the HVAC segment during the first quarter of 2020 increased 41.5%

compared to the first quarter of 2019. The increase is primarily attributable to the acquisitions of GFP and InOvate in the second quarter of 2019.

The HVAC segment's gross profit ratio for the first quarter of 2020 was 31.4% compared to 22.8% in the first quarter of 2019. The increase is primarily due to the impact of the acquisitions noted above.

Selling and administrative expenses in the first quarter of 2020 were $661,000 higher than the first quarter of the previous year primarily due to 2019 acquisition activity. The year over year increase was mitigated by investment spending on personnel and processes to stimulate future growth in previously owned lines of business in the first quarter of 2019. As a percentage of sales, selling and administrative expenses decreased to 19.2% in the first quarter of 2020 compared to 23.3% in the first quarter of 2019.

The HVAC segment reported operating income of $2,536,000 for the first quarter of 2020 compared to an operating loss of $481,000 for the first quarter of 2019. The increase is attributable to the 2019 acquisition activity combined with lower selling and administrative costs in previously owned lines of business.





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Door Segment



The table below presents a summary of operating information for the Door segment
for the quarters ended March 28, 2020 and March 30, 2019 (dollar amounts in
thousands):




                                                      Three Months ended
                                                   MARCH 28,      MARCH 30,
                                                     2020           2019
         Revenues from external customers         $     5,721    $     4,242
         Segment gross profit                           1,409          1,219
         Gross profit as percent of sales                24.6 %         28.7 %
         Segment operating income                 $        79    $       379
         Operating income as a percent of sales           1.4 %          8.9 %
         Segment assets                           $    11,506    $     6,805
         Return on assets                                 0.7 %          5.6 %

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

Door sales in the first quarter of 2020 were $1,479,000 (34.9%) higher than in the first quarter of the previous year. The increase is primarily due to the acquisition of Fastrac and Serenity in the second quarter of 2019. The gross profit ratio in the first quarter of 2020 was 24.6% compared to 28.7% in the first quarter of 2019.

Sales and administrative expenses were $461,000 higher in the first quarter of 2020 compared to the first quarter of 2019. As a percentage of sales, these expenses were 22.0% and 18.8% in the first quarters of 2020 and 2019, respectively.

Construction Materials Segment

The table below presents a summary of operating information for the Construction Materials segment for the quarters ended March 28, 2020 and March 30, 2019 (dollar amounts in thousands):






                                                        Three Months ended
                                                     MARCH 28,      MARCH 30,
                                                        2020          2019
     Revenues from external customers                $    1,470    $     1,554
     Segment gross loss                                   (550)          (367)
     Gross loss as percent of sales                      (37.4) %       (23.6) %
     Segment operating (loss) income                      (636)         14,044
     Operating (loss) income as a percent of sales       (43.3) %        903.5 %
     Segment assets                                  $    7,291    $    11,760
     Return on assets                                     (8.7) %        119.4 %

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 for periods presented. See Note 15 for further discussion of the transaction. The discontinued operations, together with the continuing operations formerly known as the Concrete, Aggregate and Construction Supply (CACS) segment, were reclassified to the Construction Materials segment for current reporting. The product offerings of continuing operations of the former CACS segment consisted of aggregates and construction supplies. Aggregates were produced at multiple locations in or


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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 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 quarries may continue to report some revenue from dumping fees or for remaining inventory sales, but otherwise will turn to full reclamation status. Revenue of the Construction Materials segment decreased 5.4% in the first quarter of 2020 compared to the first quarter of 2019 as management continued the process of winding down the aggregates operations.

Selling and administrative expenses were $353,000 lower in the first quarter of 2020 compared to the same period in 2019. The decrease was attributable primarily to decreased legal fees. Litigation fees during the first quarter of 2020 were $50,000 compared to $305,000 incurred during the comparable period of 2019. As a percentage of sales, selling and administrative expenses decreased to 12.5% in the first quarter of 2020 compared to 34.5% in the first quarter of 2019.

The operating loss reported in the first quarter of 2020 was $636,000. The first quarter of 2019 included a $15,000,000 gain from a legal settlement. See Note 14. Excluding this non-recurring item, the operating loss for the first quarter of 2019 would have been $956,000. The reduced operating loss between comparable periods is attributable to reduced sales volume in the aggregates operations offset by reduced selling and administrative spending.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The condensed consolidated financial statements contained in this Quarterly Report have been prepared in accordance with accounting principles generally accepted in the United States of America which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of March 28, 2020 and December 28, 2019 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 28, 2019.

RECENTLY ISSUED ACCOUNTING STANDARDS

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

MATERIAL CHANGES TO CONTRACTUAL OBLIGATIONS

There were no material changes to contractual obligations that occurred during the quarter ended March 28, 2020.





FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 3b-6 promulgated under the Exchange Act. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by and information available to the Company at the time such statements were made. When used in this Quarterly Report, words such as "anticipates," "believes," "contemplates," "estimates," "expects," "plans," "projects," "will," "continue" and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors including but not limited to: the severity and duration of the COVID-19 coronavirus pandemic and governmental reaction thereto, 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


                                       25

policies and the ability of the Company to obtain credit on commercially reasonable terms. Changes in 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.

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