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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 April 2, 1994
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 April 25, 1994 was 8,497,544; 2,386 shares are held in treasury.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORGAN PRODUCTS LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
($000) Except Shares Outstanding
April 2, April 3, December 31,
1994 1993 1993
-------- ---------- ----------
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,256 $ 1,097 $ 3,454
Accounts Receivable, Net 34,842 38,272 32,264
Inventories 72,741 65,602 62,715
Income Taxes Receivable -- 49 6
Other Current Assets 1,488 1,834 916
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Total Current Assets 110,327 106,854 99,355
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OTHER ASSETS 7,585 8,659 7,553
PROPERTY, PLANT & EQUIPMENT, net 27,133 29,386 27,944
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$ 145,045 $ 144,899 $ 134,852
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LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long Term Debt $ 997 $ 1,499 $ 982
Accounts Payable 10,399 13,573 13,492
Accrued Compensation and Employee Benefits 5,243 5,356 4,021
Other Current Liabilities 3,294 3,871 3,635
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Total Current Liabilities 19,933 24,299 22,130
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LONG-TERM DEBT 59,396 55,471 46,669
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value, 8,497,544, 8,493,692 and
and 8,496,521 shares outstanding, respectively 850 849 850
Paid-In Capital 33,029 33,002 33,021
Retained Earnings 31,885 31,326 32,230
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65,764 65,177 66,101
Treasury Stock, 2,386 shares, at cost (48) (48) (48)
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65,716 65,129 66,053
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$ 145,045 $ 144,899 $ 134,852
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The accompanying notes are an integral
part of the financial statements.
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MORGAN PRODUCTS LTD. AND SUBSIDIARIES
Consolidated Income Statements
($000, except earnings per share amounts)
For the Three Months Ended
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April 2, April 3,
1994 1993
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(Unaudited) (Unaudited)
Net Sales $ 82,803 $ 94,964
Cost of Goods Sold 69,959 80,852
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Gross Profit 12,844 14,112
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Operating Expenses
Sales & Marketing 9,559 10,141
General & Administrative 2,719 2,954
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Total 12,278 13,095
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Operating Income 566 1,017
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Other Income (Expense)
Interest (991) (937)
Other 115 72
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Total (876) (865)
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(Loss) Income Before
Income Tax (310) 152
Provision for Income Taxes 35 105
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Net (Loss) Income $ (345) $ 47
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(Loss) Income Per Share $ (0.04) $ 0.01
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Weighted Average
Common Shares Outstanding 8,497,062 8,492,812
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The accompanying notes are an integral
part of the financial statements.
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MORGAN PRODUCTS LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
($000)
For the Three Months
Ended
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April 2, April 3,
1994 1993
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(Unaudited) (Unaudited)
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net Income (Loss) $ (345) $ 47
Add (deduct) noncash items included in income:
Depreciation and amortization 1,222 1,430
(Gain) loss on sale of property, plant,
& equipment (45) (7)
Other 21 73
Cash (used) generated by changes in
components of
noncash working capital:
Accounts Receivable (2,578) (12,188)
Inventories (10,026) (5,260)
Accounts Payable (3,093) 2,303
Other working capital 315 (685)
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NET CASH (USED) BY OPERATING ACTIVITIES (14,529) (14,287)
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CASH (USED) GENERATED BY INVESTING ACTIVITIES:
Acquisition of property, plant, & equipment (228) (325)
Proceeds from disposal of property, plant,
& equipment 68 455
Acquisition of other assets, net (259) 280
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CASH (USED) GENERATED BY INVESTING ACTIVITIES (419) 410
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CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Increase in revolving credit debt, net 12,886 11,198
Payments on debt (129) (387)
Common stock issued for cash, net 8 11
Other (15) (5)
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NET CASH GENERATED BY FINANCING ACTIVITIES 12,750 10,817
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NET (DECREASE) IN CASH AND CASH EQUIVALENTS (2,198) (3,060)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,454 4,157
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End of period $ 1,256 $ 1,097
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Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the year for
Interest $ 884 $ 693
Income taxes 29 46
The accompanying notes are an integral
part of the financial statements.
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MORGAN PRODUCTS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED APRIL 2, 1994
NOTE 1 - SIGNIFICANT ACCOUNTING POLICES
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 Morgan Products Ltd. and its wholly-owned subsidiary, Nicolai
Company. All intercompany transactions, profits and balances are eliminated.
BASIS OF PRESENTATION - The financial statements at April 2, 1994 and
April 3, 1993, and for the three 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 months ended April 2, 1994 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):
April 2, April 3, December 31,
1994 1993 1993
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(unaudited) (unaudited)
Raw material $ 17,331 $ 11,572 $ 13,855
Work-in-process 5,521 7,765 6,043
Finished goods 49,889 46,265 42,817
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$ 72,741 $ 65,602 $ 62,715
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Inventories are valued at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) method.
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 2, 1994 VS
THREE MONTHS ENDED APRIL 3, 1993
The Company's net sales for the first quarter of 1994 were $82.8 million
representing a decrease of 12.8% from the same period in 1993, when net sales
were $95.0 million. The reduction in net sales was primarily the result of a
17.7% decrease in sales of manufactured products and a 7.8% decrease in
distributed products. Management believes that the net sales decline is
primarily due to severe weather this year, especially in the Midwest, New
England and the Mid-Atlantic states. Management also believes that the decline
in sales of products manufactured by the Company is due to the ongoing weakness
in demand for high quality wood doors in a very cost conscious market.
For the first quarter of 1994, the Company reported a net loss of $345,000 or
$0.04 per share compared to net income of $47,000, or $0.01 per share in the
prior year's comparable quarter, on average shares outstanding of 8,497,062 and
8,492,812, respectively. The reduction in net income was primarily the result
of a decrease in gross profit due to the lower sales levels, partially offset by
an improvement in the gross profit percentage. Partially offsetting the
decrease in overall gross profit was a decrease in operating expenses, and a
decrease in the provision for income taxes.
The gross profit decrease of $1.3 million from the first quarter of 1993 to the
corresponding period of 1994 was the result of the aforementioned sales volume
decrease and unfavorable absortpion of fixed overhead costs at the Company's
Manufacturing business unit. These declines were partially offset by selling
price increases at the Manufacturing unit and an improvement in product mix for
products distributed. The gross profit percentage increased from 14.9% in the
first quarter of 1993 to 15.5% in 1994.
Operating expenses for the first quarter of 1994 were $12.3 million, or 14.8%
of net sales, compared to 1993 first quarter operating expenses of $13.1
million, or 13.8% of net sales. Contributing to the decline in operating
expenses were decreases in employment related costs and advertising and
promotional expenses.
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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, actual
housing starts were up 13% to 282,000 in the first quarter of 1994 compared to
249,000 in the corresponding period for 1993. Starts in all regions were up
except for New England and the Mid-Atlantic states. Management believes that
the harsh weather has extended the time to complete construction and thus has
decreased sales in the first quarter. It also believes that as the market
moves upscale, increased sales will follow. However, recent increases in
mortgage rates may contribute to a slower pace in the future.
Management also believes that the Company's ability to continue to penetrates
the residential repair and remodeling markets through sales to home center
improvement chains may have a significant beneficial influence on the Company's
level of business activity. Sales to these customers declined 9.8% in the
first quarter of 1994 compared to 1993. However, sales to these customers as a
percentage of total sales increased from 26% in the first quarter of 1993 to
26.8% in the corresponding 1994 period. Management believes this market will
continue to grow in importance to the Company.
Over the last several years, the cost of the Company's primary raw materials,
pine and fir lumber, has increased substantially to record levels. This
coupled with continuing competitive pricing pressure during this period has had
an adverse impact on the Company's ability to recover cost increases or to
improve gross profits. As a result, the Company continues its efforts to
expand the utilization, where appropriate, of engineered materials in more 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.
In the fourth quarter of 1993, the Company announced that it had retained the
investment banking firm of Dillon, Read and Company, Inc., to help evaluate
strategic alternatives for the Company, including the possible sale of its
Morgan Manufacturing business unit. In the first quarter of 1994, management
further announced that while Dillon, Read continues in discussion with certain
parties, it may decide to retain the manufacturing business and realign the two
business units. If the Company does decide to retain the manufacturing
business, such realignment could result in reductions in capacity with
provision for the associated costs.
Andersen Corporation has recently announced its intent to realign its
distributor territories. Management believes that this revision will not
materially affect the financial performance of the Company in the long-term.
However, there could be some short-term disruption to sales due to these
announced changes.
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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 April 2, 1994 was $90.4 million with a current ratio of 5.5
to 1.0, while at December 31, 1993, working capital was $77.2 million with a
current ratio of 4.5 to 1.0. The increase in working capital was primarily the
result of a $10.0 million increase in inventory for anticipated higher sales
levels in the first quarter of 1994 versus the fourth quarter of 1993.
Long-term debt, net of cash, increased to $58.1 million at April 2, 1994, from
43.2% at December 31, 1993. The Company's ratio of long-term debt, net of
cash, to total capitalization increased from 39.5% at December 31, 1993 to
46.9% at April 2, 1994. These increases are primarily due to the
aforementioned increase in working capital.
The Company was in compliance with the covenants contained in its revolving
credit agreement, which was renegotiated in the fourth quarter of 1993.
Although management believes the Company will be able to remain in compliance
with these covenants, certain amended financial covenants are more restrictive
than those contained in prior agreements. The Company has begun discussions
with its bank group for a new credit agreement.
Cash used by operating activities amounted to $14.5 million in the first
quarter of 1994, primarily to support the higher levels of inventory. By
comparison, the quarter ended April 3, 1993 reflected cash used by operating
activities of $14.3 million. Investing activities in the 1994 first quarter
utilized $0.4 million compared to the corresponding period in 1993 when
investing activities generated $0.4 million due to the disposition of certain
idle assets. Financing activities provided $12.8 million in the first three
months of 1994, primarily to finance the increase in working capital
requirements. During the same period in 1993, financing activities generated
$10.8 million in cash.
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Part II
Other Information
Item 6. Exhibits and Reports on Form 8-K
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(a) None
(b) None
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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: April 29, 1994 By /s/ Douglas H. MacMillan
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Douglas H. MacMillan
Vice President, Secretary and
Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)