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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 June 29, 1996
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)
469 McLaws Circle, Williamsburg, Virginia 23185
(Address of principal executive offices, including zip code)
(804) 564-1700
(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 27, 1996 was 8,648,988; 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)
June 29, July 1, December 31,
1996 1995 1995
(Unaudited)(Unaudited)
ASSETS
CURRENTS ASSETS:
Cash and cash equivalents $ 2,105 $ 2,489 $ 5,135
Accounts receivable, net 32,906 32,741 20,801
Inventories 52,924 55,859 53,422
Other current assets 804 1,214 22
Total current assets 88,739 92,303 79,780
OTHER ASSETS 4,211 6,178 6,235
PROPERTY, PLANT & EQUIPMENT, net 19,490 22,037 23,500
TOTAL ASSETS $112,440 $120,518 $109,515
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 221 $ 0 $ 0
Current maturities of long-term debt 928 1,002 954
Accounts payable 16,060 14,629 11,121
Accrued compensation and
employee benefits 6,231 6,535 5,625
Income tax payable 123 147 111
Other current liabilities 3,857 2,671 3,295
Total current liabilities 27,420 24,984 21,106
LONG-TERM DEBT 32,057 41,456 35,574
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value,
8,648,822, 8,642,788 and
8,647,483 shares outstanding,
respectively 865 864 865
Paid-in capital 33,779 33,743 33,771
Retained earnings 18,632 20,017 18,629
53,276 54,624 53,265
Treasury stock, 2,386 shares, at cost (48) (48) (48)
Unamortized value of restricted stock (265) (498) (382)
TOTAL STOCKHOLDERS' EQUITY 52,963 54,078 52,835
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $112,440 $120,518 $109,515
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
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
(Unaudited)(Unaudited) (Unaudited) (Unaudited)
Net sales $95,208 $ 84,262 $169,744 $164,926
Cost of goods sold 80,829 72,709 144,867 141,405
Gross profit 14,379 11,553 24,877 23,521
Operating expenses:
Sales & marketing 8,553 8,909 16,641 17,927
General & administrative 3,634 2,434 6,071 5,158
Provision for
restructuring 881 0 881 9
Total 13,068 11,343 23,593 23,094
Operating income (loss) 1,311 210 1,284 427
Other income (expense):
Interest (776) (984) (1,369) (1,866)
Other 57 75 137 260
Total (719) (909) (1,232) ( 1,606)
Income (loss) before
income taxes 592 (699) 52 (1,179)
Provision for income taxes 30 30 49 60
Net income (loss) $ 562 $ (729) $ 3 $ (1,239)
Income (loss) per share $ 0.06 $ (0.08) $ 0.00 $ (0.14)
Weighted average number
of common shares
outstanding 8,697,176 8,642,173 8,684,274 8,641,620
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
Consolidated Statements of Cash Flow
($000's)
For the Six Months Ended
June 29, July 1,
1996 1995
(Unaudited) (Unaudited)
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net income (loss) $ 3 $(1,239)
Add (deduct) noncash items included in income:
Depreciation and amortization 1,842 1,967
Provision for doubtful accounts 57 0
(Gain) loss on sale of property,
plant, & equipment (17) (50)
Provision for restructuring 881 9
Other 117 (142)
Cash generated (used) by changes in
components of working capital:
Accounts receivable (12,162) (8,380)
Inventories 431 (902)
Accounts payable 4,939 3,119
Other working capital 869 (3,739)
NET CASH GENERATED (USED) BY OPERATING ACTIVITIES (3,040) (9,357)
CASH GENERATED (USED) BY INVESTING ACTIVITIES:
Acquisition of property, plant, & equipment (1,518) (2,117)
Proceeds from disposal of property, plant,
& equipment 4,127 43
Proceeds from surrender of life insurance
policies 925 0
Acquisition of other assets, net (210) (291)
NET CASH GENERATED (USED) BY INVESTING ACTIVITIES 3,324 (2,365)
CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Proceeds from issuance of debt 496 26
Increase in revolving credit debt, net (3,223) 8,330
Payments on debt (565) (318)
Common stock issued for cash 8 10
Other (30) ( 32)
NET CASH GENERATED (USED) BY FINANCING ACTIVITIES (3,314) 8,016
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,030) (3,706)
CASH AND CASH EQUIVALENTS:
Beginning of period 5,135 6,195
End of period $ 2,105 $2,489
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,702 $1,428
Income taxes 37 116
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 29, 1996
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 June 29, 1996 and July 1,
1995, 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 June 29, 1996 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):
June 29, July 1, December 31,
1996 1995 1995
(unaudited) (unaudited)
Raw material $ 8,756 $ 9,409 $ 9,120
Work-in-process 7,222 7,234 6,536
Finished goods 36,946 39,216 37,766
$ 52,924 $ 55,859 $ 53,422
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
An $11.3 million restructuring charge was 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
reductions and consolidations 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 of 1995.
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 no actions were implemented in 1995 with respect to these.
The Company completed the relocation of the Corporate headquarters from
Lincolnshire, Illinois to Williamsburg, Virginia during the third quarter of
1995. Most, but not all, of the expenses relating to the relocation were
charged against the restructuring reserve in that period.
During the fourth quarter, no significant activity occurred in the reserve. At
December 31, 1995, a $3.8 million reserve balance remained.
During the first quarter of 1996, restructuring expenses charged against the
restructuring reserve totaled $279,000, substantially all of which were employee
benefits resulting from severances.
In the second quarter of 1996, the Company sold its Lexington, North Carolina
door manufacturing facility for $4.1 million. The entire product line of doors
previously manufactured in Lexington will be shifted to the Company's Oshkosh,
Wisconsin door manufacturing facility during the third and fourth quarters of
1996. The Company recorded an additional restructuring charge in the second
quarter of $356,000 related to the sale of the Lexington facility. It is
expected that the Company will incur additional aggregate restructuring expenses
of approximately $1.6 million in the third and fourth quarters of 1996 related
to the sale.
Also in the second quarter, a $470,000 reserve was recorded for incremental
costs related to the 1994 plant closings in Springfield, Oregon and Weed,
California and the 1995 reorganization of the Manufacturing Division Office in
Oshkosh, Wisconsin (due to changes in cost estimates). At June 29, 1996, the
reserve balance was $3.774 million.
NOTE 4 - CREDIT AGREEMENT
The Company maintains a credit agreement with Fleet Capital which provides for a
revolving credit facility of up to $65 million through July 13, 1998, and
includes a letter of credit facility of up to $9 million through July 13, 1998.
During the second quarter, the Company and Fleet Capital signed an amendment
extending the existing agreement. The amendment became effective June 30, 1996
and has terms similar to or more favorable to the Company than those previously
in effect. At June 29, 1996 the Company had borrowings of $25.0 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.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Three Months Ended June 29, 1996 vs
Three Months Ended July 1, 1995
The Company's net sales for the second quarter of 1996 were $95.2 million,
representing a 13.0% increase over the same period in 1995, when sales were
$84.3 million. The increase in sales reflects an 11.8% increase in sales of
distributed products and a 21.0% improvement in sales of manufactured products.
The second quarter of 1995 had single family housing starts at an annual rate of
1.116 million. This increase is a reflection of an increase in construction
activity. For April and May of 1996 (June data is not yet available), F.W.
Dodge shows single family housing starts at 1.332 million units on an annual
basis, a 19.4% increase. However, the Northeast region, where the Company
derives a significant portion of its business, experienced only a 6% increase.
Cahners Building and Construction Marketing Fore-cast is projecting a slowdown
in the second half of 1996, with the year as a whole showing only a 3.1% rise in
single family housing starts.
For the second quarter of 1996, the Company reported net income of $.6 million
or $0.06 per share compared to a net loss of $.7 million or $0.08 per share for
the same period in 1995, on average shares outstanding of 8,648,970 and
8,642,173, respectively. As discussed in Note 3, included in the second quarter
1996 results is a restructuring charge of $.9 million to cover the costs of
closing the Company's Lexington, North Carolina manufacturing plant and
incremental exit costs at the previously discontinued operations at Springfield,
Oregon and Weed, California. Excluding the $.9 million restructuring charge for
1996, the Company reported net income of $1.5 million or $.17 per share. The
increase in net income, exclusive of the restructuring charge, was primarily
caused by higher sales volume and improved profit margins. The 1995 second
quarter included a $.5 unfavorable inventory adjustment at the Company's
distribution center in Virginia.
The gross profit increase of $2.8 million from the second quarter of 1995 to the
corresponding period of 1996 was primarily the result of the aforementioned
sales volume increase, cost reductions, material cost improvements, and the
impact of the 1995 inventory losses at Virginia.
Operating expenses for the second quarter of 1996 were $12.2 million, excluding
the restructuring charge, or 12.8% of net sales, compared to 1995 second quarter
operating expenses of $11.3 million, or 13.5% of net sales, excluding the
aforementioned inventory losses. The increase in operating expenses was
primarily related to employment related costs. However, operating expenses as a
percentage of net sales for the second quarter of 1996 has declined from the
same period in 1995 due to net sales increasing at a greater rate than the
operating expenses.
The provision for income taxes in both years relates to the recording of state
taxes. The provision for federal taxes is offset by the Company's net operating
loss position.
Six Months Ended June 29, 1996 vs
Six Months Ended July 1, 1995
The Company's net sales for the 1996 six-month period were $169.7 million,
representing a 2.9% increase from the 1995 six-month period, when net sales were
$164.9 million. The increase in net sales was primarily the result of a 1.5%
increase in the sales of distributed products and a 7.3% increase in the sales
of manufactured products. This increase is a reflection of an increase in
construction activity. Single family housing starts for the first five months
of 1996 (June data is not yet available) were 19% greater than for the same
period in 1995. However, the Northeast region, where the Company derives a
significant portion of its business, experienced only a 6% increase.
The Company reported year-to-date breakeven net earnings in 1996 compared to a
net loss of $1.2 million or $.14 per share for 1995 on average shares
outstanding of 8,648,319 and 8,641,620 respectively. Excluding the $.9 million
restructuring charge in 1996, the Company reported earnings of $.9 million or
$.10 per share. The increase in net income, exclusive of the restructuring
charge, was primarily caused by the impact of a higher sales volume, material
and other cost reductions, and the 1995 inventory losses at Virginia on gross
profit, as well as reduced operating expenses and lower interest expense. These
favorable items were somewhat offset by less favorable pricing and mix and
higher overhead costs.
The gross profit increase of $1.4 million from the first half of 1995 to the
corresponding period of 1996 was primarily the result of the effect of the
aforementioned increase in sales at both the manufacturing and distribution
divisions, in addition to the impact of the 1995 inventory losses in the
Company's Virginia distribution center. The gross profit percentage improved
from 14.3% in the first half of 1995 to 14.7% in 1996. Excluding the
restructuring charges in both periods, operating expenses for the six-month
period decreased $.4 million from 1995 to 1996. Operating expenses for 1996
were $22.7 million or 13.4% of net sales, compared to 1995 expenses of $23.1
million or 14.0% of net sales, excluding the restructuring charges in both
periods. The decline in operating expenses was a consequence of tighter cost
controls on non-personnel costs and lower salaries. These were partially offset
by higher 1996 accruals for incentive bonuses and profit sharing. Due to the
losses in 1995, these accruals were not appropriate in the prior year.
Year-to-date 1996 interest expense was $.5 million lower than for the similar
period of 1995. Of this, $.3 million was due to the capitalization of interest
incurred in connection with the door manufacturing expansion. The remainder was
a result of lower bank debt levels and lower interest rates in 1996.
The provision for income taxes in both years relates to the recording of state
taxes. The provision for federal taxes is 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. Early indications are that housing starts
for single family dwellings will improve in 1996 over 1995, particularly in the
Midwest region. For the first five months, F.W. Dodge has single family housing
starts 19% higher than the similar period of 1995 for the total U.S. and 23%
higher in the Midwest. Dodge indicated that the rise in interest rates
contributed to the surge, as buyers, suspecting the year-long decline in rates
was ending, rushed to build. The expectation is that industry growth will
moderate as the year progresses.
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. 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. Fir prices at 1995 year-end remained at record high levels, while pine
lumber prices declined by 18.5% during 1995. Due to intense competitive
pricing, this has resulted in reduced selling prices rather than increased
profit margins. For the first six months of 1996, fir prices continued to
remain unchanged at the record level, while pine prices escalated 6.5% from the
1995 year-end price. 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 cost 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 June 29, 1996 was $61.3 million with a current ratio of 3.2
to 1.0, while at December 31, 1995 working capital was $58.7 million with a
current ratio of 3.8 to 1.0. The increase in working capital was primarily the
result of a $12.1 million increase in receivables reflecting the aforementioned
seasonality of the Company's operations. This increase was partially offset by
inventories which were lower by $.4 million, a $5.8 million increase in current
liabilities, and improved cash planning and management.
Long-term debt, net of cash, decreased to $30.0 million at June 29, 1996, from
$30.4 million at December 31, 1995. The Company's ratio of long-term debt, net
of cash, to total capitalization decreased from 36.6% at December 31, 1995 to
36.1% at June 29, 1996. These decreases since December 31, 1995 are primarily
due to the $.5 million decrease in long-term debt, net of cash and higher
stockholders' equity. The higher working capital requirements were more than
offset by the $4.1 million proceeds from the sale of the Lexington plant.
Cash used by operating activities amounted to $3.0 million for the six months
ended June 29, 1996, primarily to support the higher level of receivables. By
comparison, the six months ended July 1, 1995, reflected cash used by operating
activities of $9.4 million. Investing activities in the first six months of
1996 generated $3.3 million, compared to the corresponding period in 1995, when
investing activities used $2.4 million. The 1996 investing activities included
$.9 million in cash provided by the surrender of life insurance policies on
former executives, $1.5 million expended for asset acquisitions, and $4.1
million generated by asset disposals. Financing activities used $3.3 million
through June 29, 1996, primarily to repay debt. During the same period in 1995,
financing activities provided $8.0 million in cash. The $11.1 million
difference in the financing requirements between the first six months of 1995
and of 1996 primarily reflects the need to finance the cash used by operating
activities, which was $5.9 million greater in 1995 due to higher working
capital, as well as a $.6 million decline in capital spending in 1996, proceeds
of $.9 million from the surrender of life insurance policies, and $4.1 million
from the disposal of property and equipment.
The Company was in compliance with the specific financial covenants in its
amended credit agreement with Fleet Capital at June 29, 1996.
The Company executed an amended credit agreement with Fleet Capital effective
June 30, 1996. The terms are similar to or more favorable to the Company than
the terms previously in effect. The amendment extends the revised credit
agreement through July 13, 1998.
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 15, 1996, a vote was
taken for the election of directors for a one-year term. All directors were re-
elected by the following common stock vote:
For Withhold Authority
F.J. Hawley, Jr. 7,916,447 32,437
L.R. Robinette 7,918,150 30,734
J.S. Crowley 7,917,449 31,435
H.G. Haas 7,917,949 30,935
W.R. Holland 7,916,651 32,233
A.F. Doody, Jr. 7,918,651 30,233
E.T. Tokar 7,913,359 35,525
B.H. Stebbins 7,916,151 32,733
P.J. McDonough, Jr. 7,918,150 30,734
The second item on the ballot was the ratification of the selection of Price
Waterhouse LLP as independent accountants for the Company for the 1996 fiscal
year. The ratification passed by a common stock vote as follows: For
7,591,786; Against 350,084; Abstain 7,014.
ITEM 5. OTHER INFORMATION
The Company signed an agreement July 22, 1996 to purchase, subject to certain
contingencies, the assets and assume certain liabilities of Tennessee Building
Products and its subsidiary, Titan Building Products. The companies to be
acquired are distributors of windows, doors, kitchen cabinets, and other
millwork and glass products, with facilities in Nashville, TN; Chattanooga, TN;
Charlotte, NC; and Greenville, SC.
The purchase, which is currently in the statutory waiting period under the
federal Hart-Scott-Rodino Act, is currently expected to be consummated in the
third quarter. The acquired entities had actual 1995 net sales of slightly more
than $47 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
10.1 Purchase agreement with JELD-WEN, inc.
for the Lexington, North Carolina door
manufacturing facility.
10.2 Agreement between Local 705, International Brotherhood of
Teamsters, Chauffeurs, Warehousemen and Helpers of America,
AFL-CIO and Morgan Distribution at West Chicago, IL.
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 13, 1996 By /s/ Douglas H. MacMillan
Douglas H. MacMillan
Vice President, Secretary and
Chief Financial Officer
(For the Registrant and as
Principal Finance Officer)
EXHIBIT INDEX
Exhibit No. Page No.
10.1 Purchase agreement with JELD-WEN, inc. for the Lexington,
North Carolina door manufacturing facility.
10.2 Agreement between Local 705, International Brotherhood of
Teamsters, Chauffeurs, Warehousemen and Helpers of
America, AFL-CIO and Morgan Distribution at West Chicago,
IL.
27 Financial Data Schedule