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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 July 1, 1995
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 (I.R.S. Employer
of incorporation or Identification No.)
organization)
75 Tri-State International, Suite 222, Lincolnshire, Illinois 60069
(Address of principal executive offices, including zip code)
(708) 317-2400
(Registrant's telephone number, including area code)
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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 July 26, 1995 was 8,642,788; 2,386 shares are held in treasury.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORGAN PRODUCTS LTD.
Consolidated Balance Sheets
($000 except shares outstanding)
July 1, July 2, December 31,
1995 1994 1994
(Unaudited)(Unaudited)
ASSETS
CURRENTS ASSETS:
Cash and Cash Equivalents $2,489 $4,392 $ 6,195
Accounts Receivable, Net 32,741 37,937 24,361
Inventories 55,859 61,312 54,957
Other Current Assets 1,214 1,058 997
Total Current Assets 92,303 104,699 86,510
PROPERTY, PLANT & EQUIPMENT, Net 22,037 25,491 20,780
OTHER ASSETS 6,178 5,350 6,018
$ 120,518 $135,540 $113,308
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long Term Debt $1,002 $1,012 $ 1,205
Accounts Payable 14,629 14,709 11,510
Accrued Compensation and Employee
Benefits 6,535 7,436 8,176
Income Tax Payable 147 45 203
Other Current Liabilities 2,671 8,714 3,777
Total Current Liabilities 24,984 31,916 24,871
LONG-TERM DEBT 41,456 50,198 33,245
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value, 8,642,788,
8,498,588 and 8,640,713 shares
outstanding, respectively 864 850 864
Paid-In Capital 33,743 33,035 33,733
Retained Earnings 20,017 19,589 21,257
54,624 53,474 55,854
Treasury Stock, 2,386 shares, at cost (48) (48) (48)
Unearned Compensation-Restricted Stock (498) -- (614)
54,078 53,426 55,192
$ 120,518 $135,540 $113,308
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
Consolidated Income Statements
($000, except earnings per share amounts
and weighted average shares outstanding)
For the Three Months Ended For the Six Months Ended
July 1, July 2, July 1, July 2,
1995 1994 1995 1994
(Unaudited)(Unaudited) (Unaudited)(Unaudited)
Net Sales $84,262 $95,238 $164,926 $ 178,041
Cost of Goods Sold 72,709 81,635 141,405 151,594
Gross Profit 11,553 13,603 23,521 26,447
Operating Expenses:
Sales & Marketing 8,909 9,285 17,927 18,844
General & Administrative 2,434 2,710 5,158 5,429
Provision for Restructuring -- 11,291 9 11,291
Total 11,343 23,286 23,094 35,564
Operating Income 210 (9,683) 427 (9,117)
Other Income (Expense):
Interest (984) (1,032) (1,866) (2,023)
Other 75 66 260 181
Total (909) (966) (1,606) (1,842)
Income (Loss) Before Income Taxes(699) (10,649) (1,179) (10,959)
Provision for Income Taxes 30 75 60 110
Net Income (Loss) $ (729) $(10,724) $ (1,239) $ (11,069)
Income (Loss) Per Share $(0.08) $ (1.26) $ (0.14) $ (1.30)
Weighted Average
Common Shares Outstanding 8,642,173 8,497,879 8,641,620 8,497,468
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
Consolidated Statements of Cash Flow
($000)
For the Six Months Ended
July 1, July 2,
1995 1994
(Unaudited) (Unaudited)
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net Income (Loss) $(1,239) $ (11,069)
Add (deduct) noncash items included in income:
Depreciation and amortization 1,967 2,518
Provision for doubtful accounts -- 24
Provision for restructuring 9 11,291
(Gain) loss on sale of property, plant, &
equipment (50) (17)
Other (142) 23
Cash generated (used) by changes in components of
working capital:
Accounts Receivable (8,380) (5,697)
Inventories (902) 697
Accounts Payable 3,119 1,217
Other working capital components (3,739) (771)
NET CASH GENERATED (USED) BY OPERATING ACTIVITIES (9,357) (1,784)
CASH GENERATED (USED) BY INVESTING ACTIVITIES:
Acquistion of property, plant, & equipment (2,117) (564)
Proceeds from disposal of property, plant, and
equipment 43 146
Acquistion of other assets, net (291) (433)
NET CASH GENERATED (USED) BY INVESTING ACTIVITIES (2,365) (851)
CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Net change in revolving credit facility 8,330 10,685
Repayments of long-term debt (318) (7,097)
Common stock issued for cash 10 14
Other (6) (29)
NET CASH GENERATED (USED) BY FINANCING ACTIVITIES 8,016 3,573
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,706) 938
CASH AND CASH EQUIVALENTS:
Beginning of period 6,195 3,454
End of period $ 2,489 $ 4,392
Cash paid during the period for:
Interest $1,428 $ 1,576
Income taxes 116 88
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JULY 1, 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Morgan Products Ltd. (the "Company") manufactures
and purchases 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.
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 July 1, 1995 and July 2,
1994, and for the three and six 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 six months ended July 1, 1995 are not
necessarily indicative of the results that may be expected for the full year or
any other interim period.
NOTE 2 - INVENTORIES
Inventories consisted of the following at (in thousands of dollars):
July 1, July 2, December 31,
1995 1994 1994
(unaudited) (unaudited)
Raw material $ 9,409 $ 13,991 $ 9,685
Work-in-process 7,234 6,036 5,272
Finished goods 39,216 41,285 40,000
$ 55,859 $ 61,312 $ 54,957
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
The Company's first quarter 1995 results included a $9,000 addition to the $11.3
million restructuring charge incurred in the second quarter of 1994. The
original restructuring charge covered the cost of closing the Springfield,
Oregon plant, the Weed, California veneer operation and other cost reduction and
consolidation within Morgan Products. During the third and fourth quarters of
1994, the Company reviewed the charges reserved for in the restructuring and
determined that certain estimated costs would not be as high as originally
anticipated. At that time, certain other cost reduction and restructuring
actions were approved and provided for, which offset the lower expenses. The
additional expenses related to the restructuring of the Morgan Distribution
operations and costs associated with the relocation of the Corporate
headquarters. At the end of 1994, $4.9 million of the original $11.3 million
had been used and the closing of the two plants was substantially complete. The
remaining reserve at the end of 1994 related primarily to other cost reductions
and consolidation to be taken within the Company, and the Corporate headquarters
relocation.
During the first quarter of 1995, management again evaluated its restructuring
reserves and determined that certain estimated costs would not be as high as had
been expected and adjusted the reserve appropriately. In addition, incremental
restructuring activities for Morgan Distribution (as described below) were
approved during the first quarter.
Since his arrival in September, 1994, the Company's new Chief Executive Officer
and other members of senior management have been evaluating what actions are
necessary to improve Morgan Distribution's profitability. A multi-year plan
involving necessary management structure changes, a new management information
system and future facility requirements was developed. The first phase of this
restructuring plan was implemented during the first quarter of 1995. A new
organizational structure was announced that eliminated several management
positions including the unit president. The costs of severance and certain
other cost reductions were provided for during the first quarter which more than
offset the lower than originally anticipated expenses of the 1994 restructuring.
No charges were made for changes in physical facilities since there will be no
actions implemented in 1995 with respect to these.
NOTE 4 - CREDIT AGREEMENT
The Company maintains a credit agreement with Shawmut Capital Corporation which
provides for a revolving credit facility of up to $65 million through July 13,
1997, and includes a letter of credit facility of up to $9 million through July
13, 1997. At July 1, 1995 the Company had borrowings of $33.5 million under the
revolving credit facility. The credit agreement requires the Company, among
other things, to maintain minimum tangible net worth, leverage and interest
coverage ratios. As a result of lower than planned performance, the Company is
currently not in compliance with specific financial covenants relating to
tangible net worth and interest coverage in its agreement. Shawmut Capital
Corporation has waived such defaults through September 30, 1995, at which time
the Company anticipates it will be in compliance with all debt covenants. If
the Company's performance does not meet expectations, or if the Company is
unable to obtain necessary waivers or amendments under its lending agreement,
the Company's lenders have the right to accelerate the maturity of the credit
agreement.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 1, 1995 VS
THREE MONTHS ENDED JULY 2, 1994
The Company's net sales for the second quarter of 1995 were $84.3 million,
representing a decline of 11.5% from the same period in 1994, when net sales
were $95.2 million. The reduction in net sales reflects a 13.4% decrease in
sales of manufactured products and a 11.9% decrease in sales of distributed
products. Management believes that the decline in sales of products
manufactured and distributed by the Company is due to the ongoing weakness in
the level of residential construction in every region of the country. Recent
reports by F.W. Dodge have shown the lowest level of housing starts in more than
two years, as a result of increased mortgage interest rates in 1994 and early
1995 as well as poor weather in certain key housing areas in the early spring.
For the second quarter of 1995, the Company reported a net loss of $0.7 million
or $0.08 per share compared to a net loss of $10.7 million or $1.26 per share,
for the second quarter of 1994, on average shares outstanding of 8,642,173 and
8,497,879, respectively. As discussed in Note 3, included in the second quarter
1994 results is a restructuring charge of $11.3 million to cover the cost of
closing the Springfield, Oregon door manufacturing operation and the Weed,
California veneer facility, and to provide for other cost reductions and
consolidation. Excluding the $11.3 million restructuring charge for 1994, the
Company reported net income of $0.6 million, or $0.07 per share. The decrease
in net income, exclusive of the restucturing charge, was primarily caused by the
lower sales volume and by a $500,000 inventory adjustment at the Company's
distribution center in Virginia.
The gross profit decrease of $2.1 million from the second quarter of 1994 to the
corresponding period of 1995 was primarily the result of the aforementioned
sales volume decrease, the impact of the inventory losses at Virginia and the
change in the mix of products sold to lower margin items. Overall, the
Company's gross profit percentage decreased from 14.3% in the second quarter of
1994 to 13.7% in 1995.
Operating expenses for the second quarter of 1995 were $11.3 million, or 13.5%
of net sales, compared to 1994 second quarter operating expenses of $12.0
million, excluding the restructuring charge, or 12.6% of net sales. The
decrease in operating expenses was primarily the result of decreases in
employment related costs. However, the percentage of net sales for 1995's second
quarter has risen from the same period in 1994 due to the lower level of net
sales.
SIX MONTHS ENDED JULY 1, 1995 VS
SIX MONTHS ENDED JULY 2, 1994
The Company's net sales for the 1995 six month period were $164.9 million,
representing a decrease of 7.4% from the 1994 six month period, when net sales
were $178.0 million. The reduction in net sales was primarily the result of a
12.6% decrease in sales of manufactured products and a 6.2% decrease in sales of
distributed products. The decline occurred mainly in the second quarter of 1995
primarily due to this year's housing construction decline in every region of the
country.
The Company reported a year-to-date net loss of $1.2 million or $0.14 per share,
for 1995 compared to a net loss of $11.1 million or $1.30 per share, for 1994 on
average shares outstanding of 8,641,620 and 8,497,468, respectively. Excluding
the $11.3 million restructuring charge in 1994, the Company reported net income
of $0.2 million or $0.03 per share. The decrease in net income, exclusive of
the restructuring charge, was primarily caused by the impact of lower sales
volume and inventory losses at Virginia on gross profit, partially offset by a
decrease in operating expenses and a decrease in interest expense.
The gross profit decrease of $2.9 million from the first half of 1994 to the
corresponding period of 1995 was primarily the result of the effect of the
aforementioned decrease in sales at both the manufacturing and distribution
divisions. The gross profit percentage declined from 14.9% in the first half of
1994 to 14.3% in 1995.
Excluding the restructuring charge, operating expenses for the six month period
decreased $1.2 million from 1994 to 1995. Operating expenses for 1995 were
$23.1 million or 14.0% of net sales, compared to 1994, exclusive of the
restructuring charge, expenses of $24.3 million, or 13.6% of net sales.
Contributing to the year to year decline in operating expenses were decreases in
employment related costs.
The provision for income taxes in both years relates to recording of state
taxes. There is no provision for federal taxes in either period given 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. According to an industry source, F.W.
Dodge, actual housing construction was down 12.0% through the first five months
of the year compared to the same period in 1994. Construction activity in all
regions was down. Lower mortgage rates have just begun to have a positive
effect on new home sales.
Management also believes that the Company's ability to continue to penetrate the
residential repair and remodeling markets through sales to home center
improvement chains may have a significant influence on the Company's level of
business activity. Sales to these customers declined 10.3% in the first six
months of 1995 compared to 1994. Sales to these customers as a percentage of
total sales, decreased from 29.7% in the first six months of 1994, to 28.8% in
the corresponding 1995 period. However, management believes this market will
continue to grow in importance to the Company.
In the past, raw material prices have fluctuated substantially for pine and fir
lumber, and have remained at record levels. This, coupled with continuing
competitive pricing pressure, has had an adverse impact on profits. 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 reliable
offshore material resources. Management believes that these actions, together
with aggressive pricing increases where competitive factors allow, will
partially offset the impact of the high costs of raw material.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements are related to its sales 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.
Working capital at July 1, 1995 was $67.3 million with a current ratio of 3.7 to
1.0, while at December 31, 1994. working capital was $61.6 million with a
current ratio of 3.5 to 1.0. The increase in working capital was primarily the
result of a $.9 million increase in inventory and a $8.4 million increase in
receivables reflecting the aforementioned seasonality of the Company's
operations.
Long-term debt, net of cash, increased to $39.0 million at July 1, 1995, from
$27.1 million at December 31, 1994. The Company's ratio of long-term debt, net
of cash, to total capitalization increased from 32.9% at December 31, 1994 to
41.9% at July 1, 1995. These increases are primarily due to the aforementioned
increase in working capital.
Cash used by operating activities amounted to $9.4 million as of July 1, 1995,
primarily to support the higher levels of inventory and receivables. By
comparison, the six months ended July 2, 1994, reflected cash used by operating
activities of $1.8 million. Investing activities in the first six months of
1995 utilized $2.4 million compared to the corresponding period in 1994 when
investing activities utilized $0.9 million. The 1995 investing activities
include the first purchases of equipment for a new production method to produce
doors in a more rapid and efficient manner. Financing activities provided $8.0
million through July 1, 1995, primarily to finance the normal seasonal increase
in working capital requirements of the operation. During the same period in
1994, financing activities generated $3.6 million in cash.
The Company is not in compliance with specific financial convenants in its
credit agreement with Shawnut Capital Corporation for which it has obtained
waivers. See Note 4 of the financial statements for discussion of this
condition.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Securities Holders
At the Company's Annual Meeting of Stockholders on May 17, 1995, a vote was
taken to consider and act upon a proposal to amend and restate the 1990
Incentive Stock Option Plan. The vote to amend and restate the plan was as
follows, based on the number of shares of common stock voted: For - 5,059,522;
Against - 318,380; Abstain - 37,418.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
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: August 9, 1995 By /s/ Douglas H. MacMillan
Douglas H. MacMillan
Vice President, Secretary and
Chief Financial Officer
(For the Registrant and as
Principal Finance Officer)