Burnham Holdings, Inc.

in the 2009 market was the result of an economic cycle that not only
impacted Burnham Holdings but also the entire industry. The downturn
was a result of a number of factors, including the sharp decline in the
real estate market (impacting both new home construction and existing
home sales), consumer confidence and spending behaviors, the deep
recession in the general economy, and reduced credit availability. We
feel our growth in the residential business over the last three years has
been accomplished through our focus on satisfying the needs of the
consumer through the continual introduction of new equipment and
controls (including highly efficient, energy saving products), commitment
to our long-term distribution channels, and the aggressive pursuit of
new opportunities.
The commercial portion of our business provides heating
applications for large commercial, institutional, and industrial facilities
such as hospitals, factories, hotels, and schools. Commercial sales
were strong leading up to the 2008 recession, which mitigated the
downturn in the residential portion of the business during that time.
However, in mid-2008, we began to feel the impact of constraints on
spending in non-residential construction, which has continued and
resulted in a downward trend in commercial sales. Commercial revenue
experienced a modest improvement in 2011, and the trend in business
activity through the first half of 2012, while still below 2008 levels, was
encouraging for this portion of our business. However, as a result of the
factors mentioned in the Overview, the second half and total year 2012
revenue for the commercial portion of the business has declined to near
2010 levels.
Rising and fluctuating fuel costs along with a variety of government
and utility-sponsored incentives, have increased consumer awareness of
the environmental benefits of energy–efficient products. In response to
this consumer shift, the Company’s subsidiaries have introduced more
new high-efficiency products over the last several years than at any
other time in our history, as we aim to be at the forefront of the industry
in this effort.
Although current business conditions remain challenging, we remain
optimistic about the long-term prospects for the business. Existing
boilers will continue to be replaced over time due to age or operating
costs. Our powerful lineup of high-efficiency residential and commercial
products sold by the subsidiary companies position us well in the
market. These are top-quality, high-value products for virtually any
application.
FINANCIAL PERFORMANCE
Net sales for 2012 were $204.8 million, up 3.0% from $198.8 million
in 2011. The majority of Burnham Holdings, Inc.’s consolidated revenue is
REVIEW OF OPERATIONS, (CONTINUED)
Burnham Holdings, Inc. 2012 Annual Report
8
derived from sales in the United States. International sales, which include
Canada and Mexico, were 1.7% of reported 2012 revenues.
Efforts by our subsidiaries over the past couple of years to
consolidate and streamline operations have enabled them to improve
quality and productivity, reduce material handling, and control inventory
levels while providing a high level of customer service. Additionally, and
most important, the Company and its subsidiaries strive to keep
operating costs at a level that enables them to be highly competitive in
their markets. The actions taken over the last several years have
lowered our cost structure and increased our gross profit (profit after
deducting cost of goods sold (“COGS”)), thereby increasing our
competitiveness.
The chart below presents the Company’s net sales by year for 2008
through 2012 with the corresponding gross profit percentage (gross
profit divided by net sales) for each year.
250
200
150
100
50
0
Net Sales and Gross Profit %
2008 2009 2010 2011 2012
26%
25%
24%
23%
22%
21%
20%
0%
Net Sales $ in millions Gross Profit %
Actual COGS as a percentage of sales was 75.9% in 2012 versus
77.3% in 2011, the lowest level in over five years. Over the last several
years, and primarily in 2011, we experienced increased material costs.
Costs for commodity raw materials have fluctuated near all-time highs.
Accordingly, we have steadily and systematically increased our product
prices to recover the unfavorable cost increases. With the market
relatively flat and the need to remain price-competitive, increased
emphasis has been placed on cost control and resource optimization,
both facility and manpower, in order to maintain gross profit margins.
Through a combination of specific spending policies and flexibility with
manufacturing capabilities, subsidiaries were successful in balancing the
building of inventory and covering the costs of fixed overhead, while
having the stock necessary to meet customer service expectations. As
a result, manufacturing overhead expenses and production variances
have continued to decline since the already low levels established in
2009 (the year of the sharp decline in the business cycle), when almost
$10 million was removed from 2008 spending levels. Our focus on
expenses, following the reductions accomplished in prior years,