================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 4, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9843
MORGAN PRODUCTS LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1095650
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or
organization)
469 McLaws Circle, Williamsburg, Virginia 23185
(Address of principal executive offices, including zip code)
(757) 564-1700
(Registrant's telephone number, including area code)
-------------------
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 (X) No ( )
The number of shares outstanding of registrant's Common Stock, par value $.10
per share, at November 3, 1997 was 10,357,396; 2,386 shares are held in
treasury.
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORGAN PRODUCTS LTD.
Consolidated Balance Sheets
($000 Except Shares Outstanding)
October 4, September 28, December 31,
1997 1996 1996
(Unaudited) (Unaudited)
----------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 419 $ 1,717 $ 1,467
Accounts receivable, net 44,560 39,122 32,559
Inventories 66,678 67,540 73,683
Other current assets 1,486 1,198 632
---------- ---------- ----------
Total current assets 113,143 109,577 108,341
---------- ---------- ----------
OTHER ASSETS 11,763 7,039 10,638
PROPERTY, PLANT & EQUIPMENT, net 23,637 23,171 23,137
TOTAL ASSETS $148,543 $139,787 $142,116
---------- ---------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 99 $ 88 $ 0
Current maturities of long-term debt 2,010 1,028 1,136
Accounts payable 16,781 18,884 19,449
Accrued compensation and employee
benefits 4,815 7,258 6,219
Other current liabilities 3,926 3,547 4,449
---------- ---------- ----------
Total current liabilities 27,631 30,805 31,253
---------- ---------- ----------
LONG-TERM DEBT 62,533 55,023 48,880
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value,
10,357,099, 8,649,308, and 10,149,816 1,036 865 1,015
shares outstanding, respectively
Paid-in capital 43,408 33,782 42,237
Retained earnings 13,983 19,567 18,927
---------- ---------- ----------
58,427 54,214 62,179
Treasury stock, 2,386 shares, at cost (48) (48) (48)
Unamortized value of restricted stock 0 (207) (148)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 58,379 53,959 61,983
---------- ---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $148,543 $139,787 $142,116
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
-2-
MORGAN PRODUCTS LTD.
Consolidated Income Statements
($000, except earnings per share amounts
and weighted average shares outstanding)
For the Three Months Ended For the Nine Months Ended
---------------------------------- ----------------------------------
October 4, September 28, October 4, September 28,
1997 1996 1997 1996
---------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 111,656 $ 97,377 $ 314,262 $ 267,121
Cost of goods sold 97,904 82,775 268,044 227,642
---------------- --------------- --------------- ---------------
Gross profit 13,752 14,602 46,218 39,479
---------------- --------------- --------------- ---------------
Operating expenses:
Sales & marketing 10,456 8,712 31,455 25,353
General & administrative 3,108 2,707 10,067 8,778
Restructuring 0 1,956 4,713 2,837
Reorganization 0 0 1,117 0
---------------- --------------- --------------- ---------------
Total 13,564 13,375 47,352 36,968
---------------- --------------- --------------- ---------------
Operating income (loss) 188 1,227 (1,134) 2,511
---------------- --------------- --------------- ---------------
Other income (expense):
Interest (1,341) (778) (3,912) (2,147)
Other 100 80 192 217
---------------- --------------- --------------- ---------------
Total (1,241) (698) (3,720) (1,930)
---------------- --------------- --------------- ---------------
Income (loss) before income taxes (1,053) 529 (4,854) 581
Provision for income taxes 30 (406) 90 (357)
---------------- --------------- --------------- ---------------
Net income (loss) $ (1,083) $ 935 $ (4,944) $ 938
================ =============== =============== ===============
Income (loss) per share $ (0.10) $ 0.11 $ (0.48) $ 0.11
================ =============== =============== ===============
Weighted average, common and
common equivalent shares outstanding 10,353,933 8,808,636 10,255,932 8,724,938
================ =============== =============== ===============
The accompanying notes are an integral part of the financial statements.
-3-
MORGAN PRODUCTS LTD.
Consolidated Statements of Cash Flows
( $ 000 ' s )
For the Nine Months Ended
-----------------------------
October 4, September 28,
1997 1996
------------ --------------
(Unaudited) (Unaudited)
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net income (loss) $ (4,944) $ 938
Add noncash items included in income:
Depreciation and amortization 3,174 2,800
Provision for doubtful accounts 230 143
(Gain) Loss on sale of property, plant &
equipment (39) 5
Provision for restructuring 0 881
Other 148 175
Cash (used) generated by changes in components
of working capital, net of effects of
acquisition of businesses:
Accounts receivable (10,598) (11,633)
Inventories 8,933 (6,274)
Accounts payable (764) 5,503
Other working capital (3,117) 724
---------- ----------
NET CASH GENERATED (USED) BY OPERATING ACTIVITIES (6,977) (6,738)
CASH GENERATED (USED) BY INVESTING ACTIVITIES:
Acquisition of property, plant, & equipment (2,769) (3,864)
Acquisition of Tennessee Building Products (2,182) (15,610)
Acquisition of Wahlfeld Manufacturing Company (4,757) 0
Proceeds from disposal of property, plant, &
equipment 152 4,118
Proceeds from surrender of life insurance
policies 0 925
Acquisition of other assets, net (333) (1,118)
---------- ----------
NET CASH GENERATED (USED) BY INVESTING ACTIVITIES (9,889) (15,549)
---------- ----------
CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Net change in short-term debt 99 88
Proceeds from long-term debt 15,553 20,055
Repayments of long-term debt (1,026) (1,285)
Common stock issued for cash 1,192 11
---------- ----------
NET CASH GENERATED BY FINANCING ACTIVITIES 15,818 18,869
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,048) (3,418)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,467 5,135
---------- ----------
End of period $ 419 $ 1,717
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 4,224 $ 2,465
Income taxes 121 60
The accompanying notes are an integral part of the financial statements.
-4-
MORGAN PRODUCTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED OCTOBER 4, 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Morgan Products Ltd. (the "Company") manufactures and
distributes products (virtually all of which are considered to be millwork)
which are sold to the residential and light commercial building materials
industry and are used for both new construction and improvements, maintenance
and repairs. In view of the nature of its products and the method of
distribution, management believes that the Company's business constitutes a
single industry segment.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - The
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes new standards for
reporting information about operating segments in annual financial statements
and interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997 and
requires presentation of prior period financial statements for comparability
purposes. The Company is currently evaluating its required disclosures under
SFAS No. 131 and expects to adopt this standard during the year ended December
31, 1998.
CONSOLIDATION - The consolidated financial statements include the accounts of
all business units of Morgan Products Ltd. All intercompany transactions,
profits and balances are eliminated.
BASIS OF PRESENTATION - The financial statements at October 4, 1997 and
September 28, 1996, and for the three and nine months then ended, are unaudited;
however, in the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the financial
position at these dates and the results of operations and cash flows for these
periods have been included. The results for the three and nine months ended
October 4, 1997 are not necessarily indicative of the results that may be
expected for the full year or any other interim period.
EARNINGS PER SHARE - The FASB has issued SFAS No.128, "Earnings per Share." SFAS
128 replaces primary EPS with basic EPS, which excludes dilution and requires
presentation of both basic and diluted EPS on the face of the income statement.
Diluted EPS is computed similarly to the current fully diluted EPS. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, and requires restatement of all prior-period EPS data presented. The
adoption of this statement is not expected to materially affect either future or
prior-period EPS.
REPORTING COMPREHENSIVE INCOME - The FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which will require the Company to disclose, in financial
statement format, all non-owner changes in equity. Such changes include
cumulative foreign currency translation adjustments and certain minimum pension
liabilities. SFAS 130 is effective for fiscal years beginning after December 15,
1997 and requires presentation of prior period financial statements for
comparability purposes. The Company is currently evaluating its disclosures
under SFAS No. 131 and expects to adopt this standard during the year ended
December 31, 1998.
-5-
NOTE 2 - INVENTORIES
Inventories consisted of the following at (in thousands of dollars):
October 4, 1997 September 28, 1996 December 31, 1996
(unaudited) (unaudited)
Raw material $10,937 $ 12,461 $14,139
Work-in-process 8,671 7,801 9,899
Finished goods 47,070 47,278 49,645
------- ------- -------
$66,678 $67,540 $73,683
------- ------- -------
Inventories are valued at the lower of cost or market. Cost is determined on the
first-in, first-out (FIFO) method.
NOTE 3 - PROVISION FOR RESTRUCTURING AND REORGANIZATION
In conjunction with the closing of two plants and to provide for other cost
reductions and consolidations within the Company an $11.3 million restructuring
charge was recorded in 1994. At such time, a multi-year plan involving necessary
management structure changes, a new management information system, and future
facility requirements was developed.
In the second quarter of 1996, the Company sold its Lexington, North Carolina
door manufacturing facility and consolidated it with the Company's Oshkosh,
Wisconsin door manufacturing facility. The Company recorded an additional
restructuring charge in the second quarter of 1996 of $881,000, of which
$356,000, related to the sale of the Lexington facility and the consolidation of
door manufacturing operations into the Oshkosh facility, and the balance of
which was used to cover incremental costs related to the Springfield, Oregon and
Weed, California plant closings and the reorganization of the management
structure at Morgan Manufacturing. Additional aggregate restructuring expenses
of $3.8 million were recorded in the third and fourth quarters of 1996. These
restructuring expenses, which included Lexington operating costs after cessation
of production and incremental hiring, training, and relocation costs associated
with the transfer of Lexington production to Oshkosh, were expensed as incurred.
In the first nine months of 1997, the Company recorded an additional
restructuring charge of $4.7 million for excessive costs incurred as a
consequence of the consolidation of manufacturing operations and a delay in the
start-up of the new high-speed door assembly line. The equipment has been
installed and management believes that the line should be functioning at a
normal capacity by January 1998. At October 4, 1997, the restructuring reserve
balance was $.6 million as compared to $1.1 million at December 31, 1996.
Additionally, the Company has recorded a $1.1 million reorganization charge in
the first nine months of 1997 in connection with the termination of the
employment of the Chief Financial Officer and Senior Vice President-Human
Resources and Administration of the Company. At October 4, 1997, the
reorganization reserve balance was $.2 million.
NOTE 4 - CREDIT AGREEMENT
On July 25, 1997, the Company and the bank group entered into an amendment to
its revolving credit facility, which altered the restrictive covenants,
increased the credit line to the current $75 million and extended the line
through July 14, 2000. The covenants have terms similar to or more favorable
than those previously in effect. The amendment also puts into place an
incremental acquisition line of up to
-6-
$15 million through July 14, 2000, consisting of a term loan of up to $10
million and a revolving credit facility of up to $5 million. On November 5,
1997, the Company and the bank group entered into an amendment, which eliminated
the $5 million revolving credit facility for acquisitions. At October 4, 1997,
the Company had borrowings of $55.6 million under the revolving credit facility,
which includes $4.9 million under the acquisition line. The credit agreement
requires the Company, among other things, to maintain minimum interest coverage
and fixed charge coverage ratios, minimum levels of tangible net worth and a
maximum leverage ratio.
NOTE 5 - ACQUISITION OF WAHLFELD MANUFACTURING COMPANY
On July 25, 1997, the Company acquired certain assets of Wahlfeld Manufacturing
Company ('Wahlfeld"). Wahlfeld, which had annual sales of approximately $22.7
million for the year ended December 31, 1996, is a distributor of windows,
doors, and other millwork products to residential builders and other customers.
The purchase price of $4.8 million, including $.2 million in acquisition costs,
subject to certain purchase price adjustments, was financed through the
borrowings on the company's revolving credit facility. The acquisition has been
recorded using the purchase method of accounting. The excess of the aggregate
purchase price over the fair market value of net assets acquired was recognized
as goodwill and is being amortized over 25 years. The operating results of
Wahlfeld have been included in the Company's consolidated financial statements
since the date of acquisition.
-7-
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward Looking Statements
Various statements made within this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly
Report on Form 10-Q constitute "forward looking statements" for purposes of the
Securities and Exchange Commission's "safe harbor" provisions under the Private
Securities Litigation Reform Act of 1995 and Rule 3b-6 under the Securities
Exchange Act of 1934, as amended. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, including those
detailed in the Company's filings with the Securities and Exchange Commission.
There can be no assurance that actual results will not differ from the Company's
expectations. Factors which could cause materially different results include,
among others, the success of consolidation of manufacturing operations; changes
in relationships with important suppliers and key customers; the existence and
pace of acquisitions; fluctuations in the price of raw materials; and
competitive and general economic conditions, such as housing starts.
Results of Operations
Three Months Ended October 4, 1997 vs.
Three Months Ended September 28, 1996
The Company's net sales for the third quarter of 1997 of $111.7 million
represent a $14.3 million or 14.7% increase over the same period in 1996. This
increase is primarily attributable to the August 30, 1996 acquisition of
Tennessee Building Products, ("TBP") which generated incremental sales of $9.6
million and a $5.1 million improvement in the sales of distributed products,
which management believes is due to increased marketing efforts with key
suppliers and the acquisition of Wahlfeld Manufacturing Company ("Wahlfeld") on
July 25, 1997. External sales of manufactured products for the third quarter of
1997 dropped $.5 million from the same period in 1996. Sales continue to decline
from prior year periods due to the disruption caused by the consolidation of the
Lexington, North Carolina facility and the delay in the start-up of the new
high-speed door assembly line.
For the third quarter of 1997, the Company reported a net loss before
restructuring and reorganization charges of $1.1 million or $0.10 per share
compared to net income before restructuring and reorganization charges of $2.8
million or $0.33 per share for the same period in 1996 on average shares
outstanding of 10,353,933 and 8,808,636, respectively. The decrease was
primarily due to lower volumes of manufactured products and higher interest
costs.
The gross profit decline for the third quarter of 1997 of $.9 million from the
third quarter of 1996 is due primarily to a shift to lower margin direct
business and market price pressure at Distribution, and higher cost of raw
materials and unfavorable variances at Manufacturing. These declines were
partially offset by increases at TBP due to the additional volume.
Operating expenses for the third quarter of 1997, excluding the restructuring
and reorganization charges, were $13.6 million, or 12.1% of net sales compared
to operating expenses in the third quarter of 1996 of $11.4 million, or 11.7%.
of net sales. The increase in operating expenses is almost exclusively related
to the TBP acquisition.
Interest expense for the third quarter of 1997 increased $.6 million over the
same period in 1996. The increase was due to a $23.6 million increase in average
long-term debt in the 1997 third quarter from the same period in 1996.
The provision for income taxes in both third quarters 1997 and 1996 relates to
the recording of state taxes. No federal tax benefit was recognized in 1997
given the Company's net operating loss position. The provision for federal taxes
in 1996 was are offset by the Company's net operating loss position.
-8-
Nine Months Ended October 4, 1997 vs.
Nine Months Ended September 28, 1996
The Company's net sales for the 1997 nine-month period increased $47.1 million
or 17.6% over the same period in 1996. The increase is primarily attributable to
the acquisition of TBP, and an 8.8% year-to-date improvement in the sales of
distributed products, which management believes is due to increased marketing
efforts with key suppliers and the acquisition of Wahlfeld. External sales of
manufactured products for the 1997 nine-month period dropped $6.4 million from
the same period in 1996. Sales continue to decline from prior year periods due
to the disruption caused by the consolidation of the Lexington, North Carolina
facility and the delay in the start-up of the new high-speed door assembly line.
The Company reported year-to-date net income before restructuring and
reorganization charges of $.9 million or $0.09 per share compared to net income
before restructuring and reorganization charges of $3.7 million or $0.43 per
share for the same period in 1996, on average shares outstanding of 10,255,932
and 8,724,938, respectively. The lower income, exclusive of the restructuring
and reorganization charges, was primarily due to lower volumes of manufactured
products and higher interest costs. Including restructuring and reorganization
charges of $5.8 million, the Company reported a year-to-date net loss of $4.9
million or $0.48 per share versus net income of $.9 million or $0.11 per share
for the same period in 1996.
The gross profit increase of $6.7 million for the 1997 nine-month period
compared corresponding period of 1996 was primarily the result of the TBP
acquisition, sales volume gains and a supplier incentive somewhat offset by
Manufacturing results.
Operating expenses for the first nine-months of 1997, excluding the
restructuring and reorganization charges, were $41.5 million or 13.2% of net
sales, compared to the same period in 1996 with operating expenses of $34.1
million or 12.8% of net sales. The increase in operating expenses is almost
exclusively related to the TBP acquisition.
Year-to-date interest expense was $1.8 million higher than the same period in
1996. This increase is due to average debt rising from $36.8 million in the
first nine months of 1996 to $61.8 million in the same period in 1997 which was
needed to maintain higher working capital levels due to operating inefficiencies
in Manufacturing, the TBP and Wahlfeld acquisitions.
The provision for income taxes in both years relates to the recording of state
taxes. No federal tax benefit was recognized in 1997 given the Company's net
operating loss position. The provision for federal taxes in 1996 was offset by
the Company's net operating loss position.
Significant Business Trends/Uncertainties
Management believes that housing starts have a significant influence on the
Company's level of business activity. The Wall Street Journal recently reported
that the Commerce Department said housing starts jumped 7.9% in September to a
seasonally adjusted rate of 1.5 million homes. No assurances can be given,
however, that for 1997 there will be any continued improvement in the level of
housing starts, or that single-family housing starts will not decline in the
future.
Management also believes that the Company's ability to continue to penetrate the
residential repair and remodeling markets through sales to home center chains
may have a significant influence on the Company's level of business activity.
Management believes this market will continue to grow in importance to the
Company. Management further believes that in certain areas of the United States,
sales by distributors directly to the end-user may over time replace, as the
primary channel of distribution, the distribution method of selling to the
retail dealer, who then sells to the end user. The Company intends to respond
aggressively to such changes in distribution methods, including, where
opportunities permit, through the acquisition of distribution businesses that
sell directly to the end-user.
-9-
In the past, raw material prices have fluctuated substantially for pine and fir
lumber. Fir prices reached a high in the first quarter of 1995 and remained
within 5% of that level until the fourth quarter of 1996. For the first nine
months of 1997, average pine prices, the highest volume specie used by the
Company, have increased 19% over the same period in 1996. Since June 1997, pine
prices have steadily fallen to a one-year low. For the first nine months of
1997, average fir and oak prices were at their highest levels in a year. As a
result, the Company continues its efforts to expand the utilization, where
appropriate, of engineered materials in wood door components and to switch to
alternate wood species. In addition, the Company has established new offshore
sources of raw material. Management believes that these actions, together with
aggressive price increases where competitive factors allow, will partially
offset the impact of the high cost of raw material.
In order to expand its capacity, meet anticipated demand and reduce its cost of
production, the Company has installed a new high-speed door assembly line at its
Oshkosh facility. Delivery and installation of the new line was completed during
the first quarter of 1997. The new high-speed door assembly line is operational;
however, the new line is not yet operating at normal capacity. Management
currently believes that the line should be functioning at a normal capacity by
January 1998. A performance shortfall could have a detrimental impact, both on
the short-term profitability of the Company and on its long-term ability to
service and retain key customers. Management believes that the efficient
operation of the new high-speed door assembly line is critical to reducing
lead-times to acceptable levels and satisfying customers.
An important part of the Company's strategic plan is to expand its distribution
capabilities, particularly in the Southeast and Southwest, as well as other
areas, if attractive opportunities are presented. In August 1996, the Company
acquired substantially all of the business and assets of Tennessee Building
Products, a regional millwork and specialty building products distributor and
light manufacturer headquartered in Nashville, Tennessee. With the TBP
acquisition, the Company expanded its operations to include Nashville and
Chattanooga, Tennessee; Charlotte, North Carolina; Greenville, South Carolina;
and Huntsville, Alabama. In July 1997, the Company acquired certain assets of
Wahlfeld, a distributor of windows, doors and other millwork products in Peoria,
Illinois. The Company has consolidated Wahlfeld's operations into two of its
existing facilities.
Recently, Andersen Corporation ("Andersen") decided to market and to sell its
Fibrex(TM) replacement window systems through retail stores, which are aimed at
the replacement window buyer. These retail stores, called Renewal by
Andersen(TM) stores, will be devoted exclusively to the promotion and sale of
Fibrex(TM) window systems, with the stores being established in various areas of
the country and principally owned and operated by independent distributors.
Andersen has entered into an agreement with the Company to open one of the first
such stores in Overland Park, Kansas. This store is owned and operated by the
Company. Fibrex(TM) is a proprietary material developed by Andersen that is made
of a composite of wood fibers and vinyl and is considered to be superior in
certain characteristics to pure vinyl core window systems. In the event that the
Kansas location is successful, the Company and Andersen may consider
establishing additional stores.
As the final major element of its strategic initiatives, the Company is
committed to improving its management information systems. A new Company-wide
integrated management information system has been selected and is in the process
of implementation. The Company has approved a total capital expenditure of $3.4
million for the new management information system project, which will be
financed through a combination of capital leases and borrowings under the
Company's revolving line of credit. Upon completion of this project, the Company
will have achieved significant progress in meeting its goal of being the
industry leader in customer-friendly order processing and fulfillment systems.
Liquidity and Capital Resources
The Company's working capital requirements are related to its sales level,
which, because of its dependency on housing starts and the repair and remodeling
market, are seasonal and, to a degree, weather dependent. This seasonality
affects the need for working capital inasmuch as it is necessary to carry larger
inventories and receivables during certain months of the year.
-10-
Working capital increased $8.4 million from $77.1 million at December 31, 1996
to $85.5 million at October 4, 1997. The increase in working capital reflects
seasonality, with account receivables increasing $10.6 million and an increase
of $4.8 million as a result of the Wahlfeld acquisition. The increase in
receivables is primarily due to a $7.6 million increase in sales in September
1997 as compared to December 1996, with Distribution sales accounting for $6.0
million, Manufacturing sales accounting for $.7 million and TBP sales accounting
for $.9 million of such increase, respectively. Accounts payable and other
working capital decreased in the first nine months of 1997 by an aggregate $3.9
million, primarily as a consequence of the payment of accrued bonuses and
commissions and a large decrease in the amount of checks issued and outstanding.
Increases in working capital were offset by a $8.9 million decrease in
inventories. This decline of inventory is a continuance of the Company's cost
cutting plan to reduce working capital and interest on long-term debt.
Long-term debt, net of cash, increased to $62.1 million at October 4, 1997, from
$47.4 million at December 31, 1996. The Company's ratio of long-term debt, net
of cash, to total capitalization increased from 43.3% at December 31, 1996 to
51.5% at October 4, 1997. The $14.7 million increase is primarily attributable
to the aforementioned $3.6 million change in working capital (exclusive of the
Wahlfeld working capital), the $4.8 million in borrowings to acquire Wahlfeld, a
final payment of $2.2 million related to the acquisition of TBP, and $2.8
million of capital spending.
Cash used by operating activities totaled $7.0 million for the nine months ended
October 4, 1997, as compared to $6.7 million cash used for the nine months ended
September 28, 1996. The difference between periods is due to lower operating
results and higher working capital as discussed above. Investing activities in
the first nine months of 1997 used $10.0 million, compared to the corresponding
period in 1996, when investing activities used $15.5 million. Activities in 1997
included $2.8 million to acquire new equipment, the final payment to purchase
TBP of $2.2 million and payments to purchase Wahlfeld of $4.8 million.
Activities in 1996 activities included $5.0 million used for asset acquisitions,
cash used purchase TBP of $15.6 million, $4.1 million generated on asset
disposals and $.9 million provided by the surrender of life insurance policies.
Financing activities generated $15.8 million through October 4, 1997, with $15.5
million provided by net increases in the revolving line of credit, $1.2
generated by stock options being exercised by former employees, $.1 million
generated by short term financing and $1.0 used by principal payments of capital
leases and the Walfeld term loan. During the same period in 1996, financing
activities generated $18.9 million, with $20.1 million provided by net increases
in the revolving line of credit offset by $1.3 million in cash used to pay
principal payments on capital leases. The $3.1 million difference in financing
requirements for the nine months ended October 4, 1997 and the comparable period
in 1996 is primarily due to the TBP acquisition in 1996.
On July 25, 1997, the Company and the bank group entered into an amendment to
its revolving credit facility, which altered the restrictive covenants,
increased the credit line to the current $75 million and extended the line
through July 14, 2000. The covenants have terms similar to or more favorable
than those previously in effect. The amendment also puts into place an
incremental acquisition line of up to $15 million through July 14, 2000,
consisting of a term loan of up to $ 10 million and a revolving credit facility
of up to $5 million. On November 5, 1997, the Company and the bank group entered
into an amendment, which eliminated the $5 million revolving credit facility for
acquisitions. At October 4, 1997, the Company had borrowings of $55.6 million
under the revolving credit facility, which includes $4.9 million under the
acquisition line. The credit agreement requires the Company, among other things,
to maintain minimum interest coverage and fixed charge coverage ratios, minimum
levels of tangible net worth and a maximum leverage ratio. The Company is in
compliance with the financial covenants under the credit agreement.
The Company believes that it may require additional financing to pursue
attractive acquisition candidates, depending upon the size of the acquisitions.
Restructuring of Operations
Since 1994 the Company has adopted a comprehensive strategic plan to restore
profitability and regain industry leadership by providing customers with quality
products and optimum service at the best price/value relationship. The Company
has taken a series of major initiatives to implement this plan and
-11
respond to continuing challenges in the industry. At Morgan Manufacturing, the
Company has consolidated all of its door manufacturing operations into its
Oshkosh facility and has invested approximately $6 million in capital
expenditures for a new high-speed door assembly line. In addition, management is
committed to controlling manufacturing costs, achieving a substantial savings
through innovative raw material purchasing and manufacturing practices, and
developing a more customer-focused business approach. The Company believes that
its relationship with Andersen has improved in recent years. At Morgan
Distribution, the Company has strengthened its business through a broad series
of operating initiatives and plans to achieve additional growth both through its
existing operations and by acquisition, as opportunities permit.
Primarily as the result of the implementation of its strategic plan, the Company
has incurred substantial restructuring charges. In 1994 the Company incurred
$11.3 million in restructuring charges to cover the costs of closing the
Company's Springfield, Oregon door and Weed, California veneer plants, the
downsizing of Morgan Manufacturing, Company-wide management structure changes
(including terminations and the elimination of certain positions), the
restructuring of the Morgan Distribution operations, the relocation of the
Company's corporate headquarters, and other cost reduction and consolidation
actions.
In the second quarter of 1996, the Company sold its Lexington, North Carolina
door manufacturing facility. The entire line of doors previously manufactured in
Lexington was shifted to the Company's Oshkosh door manufacturing facility. The
Company recorded restructuring charges in 1996 of $4.7 million, primarily
related to the sale of the Lexington facility and the consolidation of door
manufacturing operations into the Oshkosh facility.
Management believes that with the installation and start-up of the new
high-speed door assembly line at the Oshkosh facility, which occurred in the
first quarter of 1997, lead time increases experienced due to increased
production requirements and related inefficiencies encountered during the
consolidation process may be reversed and, in fact, may be reduced by up to two
weeks. The new high-speed door assembly line is not yet operating at normal
capacity; however, management believes that the line should be functioning at a
normal capacity by January 1998. When the new high-speed door assembly line is
fully operational, management believes that the Oshkosh facility will be
operating at approximately 80% of capacity, based upon current production
levels. It is believed that the consolidation of all door manufacturing
facilities at a single facility will offer the Company significant cost savings
as well as provide customers with the advantage of purchasing the full range of
solid wood door products and wood species from a single manufacturing facility.
In the first nine months of 1997, the Company recorded an additional
restructuring charge of $4.7 million for excessive costs incurred as a
consequence of the consolidation of manufacturing operations and the delayed
start-up of the new high-speed door assembly line. The Company does not
currently expect to incur any additional restructuring charges for the remainder
of 1997. Additionally, the Company recorded a $1.1 million reorganization charge
in the first nine months of 1997 in connection with the termination of the
employment of the Chief Financial Officer and Senior Vice President-Human
Resources and Administration of the Company. Such provision is to cover
severance and related payments to such officers.
-12-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Two reports on Form 8-K were filed during the quarter.
1. Current Report on Form 8-K was filed by the Company on August 9, 1997
with respect to the acquisition by the Company of substantially all of the
assets of Wahlfeld Manufacturing Company (Commission File No. 1-9843).
2. Amendment on Form 8-K/A to Current Report on Form 8-K filed on August 9,
1997, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, was filed with the Commission on October 4, 1997 to include
the Wahlfeld Manufacturing Company financial statements and the
unaudited pro forma combined financial statements (Commission File No.
1-9843).
-13-
Signatures
Pursuant to the requirements 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.
MORGAN PRODUCTS LTD.
Date: By: /s/ Mitchell J. Lahr
-------------------------
Mitchell J. Lahr
Vice President, Secretary
and Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)
-14-