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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 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 organization) Identification No.)
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)
-------------------------------------
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 August 1, 1994 was 8,498,588; 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 2, July 3, December 31,
1994 1993 1993
--------- ----------- ---------
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 4,392 $ 606 $ 3,454
Accounts Receivable, Net 37,937 41,852 32,264
Inventories 59,279 68,224 62,715
Other Current Assets 1,058 1,360 922
----------- ------------- -----------
Total Current Assets 102,666 112,042 99,355
----------- ------------- -----------
OTHER ASSETS * 5,185 6,485 5,981
PROPERTY, PLANT & EQUIPMENT, net 25,845 28,954 27,944
----------- ------------- -----------
$ 133,696 $ 147,481 $ 133,280
========== ============= ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long Term Debt $ 1,012 $ 1,252 $ 982
Accounts Payable 14,709 18,149 13,492
Accrued Compensation and Employee Benefits 8,791 4,691 4,021
Income Tax Payable 45 -- --
Other Current Liabilities 5,515 3,899 3,635
----------- ------------- -----------
Total Current Liabilities 30,072 27,991 22,130
----------- ------------- -----------
LONG-TERM DEBT 50,198 55,823 46,669
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value,
8,498,588, 8,494,819
and 8,496,521 shares
outstanding, respectively 850 849 850
Paid-In Capital 33,035 33,009 33,021
Retained Earnings * 19,589 29,857 30,658
----------- ------------- -----------
53,474 63,715 64,529
Treasury Stock, 2,386 shares, at cost (48) (48) (48)
----------- ------------- -----------
53,426 63,667 64,481
----------- ------------- -----------
$ 133,696 $ 147,481 $ 133,280
========== ============ ==========
The accompanying notes are an integral part of the financial statements.
* The Company has restated its 1987 and 1988 financial statements to
write off $1.6 million of pre-operating costs previously deferred.
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MORGAN PRODUCTS LTD.
Consolidated Income Statements
($000, except earnings per share amounts)
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
July 2, July 3, July 2, July 3,
1994 1993 1994 1993
--------- --------- --------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 95,238 $ 96,205 $178,041 $ 191,169
Cost of Goods Sold 81,635 82,501 151,594 163,353
--------- --------- --------- -----------
Gross Profit 13,603 13,704 26,447 27,816
--------- --------- --------- -----------
Operating Expenses
Sales & Marketing 9,285 9,765 18,844 19,906
General & Administrative 2,710 3,130 5,429 6,084
Provision for Restructuring 11,291 -- 11,291 --
--------- --------- --------- -----------
Total 23,286 12,895 35,564 25,990
--------- --------- --------- -----------
Operating (Loss) Income (9,683) 809 (9,117) 1,826
--------- --------- --------- -----------
Other Income (Expense)
Interest (1,032) (982) (2,023) (1,919)
Other 66 381 181 453
--------- --------- --------- -----------
Total (966) (601) (1,842) (1,466)
--------- --------- --------- -----------
(Loss) Income Before Income
Taxes (10,649) 208 (10,959) 360
Provision for Income Taxes 75 105 110 210
--------- --------- --------- -----------
Net (Loss) Income $(10,724) $ 103 $(11,069) $ 150
========= ========= ========= ===========
(Loss) Income Per Share $ (1.26) $ 0.01 $ (1.30) $ 0.02
========= ========= ========= ===========
Weighted Average Number of
Common Shares Outstanding 8,497,879 8,494,285 8,497,468 8,493,533
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
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MORGAN PRODUCTS LTD.
Consolidated Statements of Cash Flow
($000)
For the Six Months
Ended
----------------------
July 2, July 3,
1994 1993
---------- ----------
(Unaudited) (Unaudited)
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net (Loss) Income $ (11,069) $ 150
Add (deduct) noncash items included in income:
Depreciation and amortization 2,518 2,751
Provision for doubtful accounts 24 25
(Gain) loss on sale of property, plant, & equipment (17) (240)
Provision For Restructuring 11,291 --
Other 23 52
Cash (used) generated by changes in components of
noncash working capital:
Accounts Receivable (5,697) (15,793)
Inventories 510 (7,882)
Accounts Payable 1,217 6,879
Other working capital (576) (799)
---------- ----------
NET CASH (USED) GENERATED BY OPERATING ACTIVITIES (1,776) (14,857)
--------- ---------
CASH (USED) GENERATED BY INVESTING ACTIVITIES:
Acquisition of property, plant, & equipment (564) (996)
Proceeds from disposal of property, plant, &
equipment 146 495
Acquisition of other assets, net (441) 878
---------- ----------
CASH (USED) GENERATED BY INVESTING ACTIVITIES (859) 377
---------- ----------
CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Net change in short-term borrowings 10,685 7,000
Additions to long-term debt -- 4,100
Repayments of long-term debt (7,097) (150)
Common stock issued for cash, net 14 18
Other (29) (39)
---------- ----------
NET CASH GENERATED (USED) BY FINANCING ACTIVITIES 3,573 10,929
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENT 938 (3,551)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,454 4,157
---------- ----------
End of period $ 4,392 $ 606
========== ==========
Supplemental Disclosures of Cash Flow
Information:
Cash paid (received) during the year for
Interest $ 1,576 $ 1,477
Income taxes 88 83
The accompanying notes are an integral part of the financial statements.
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MORGAN PRODUCTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Morgan Products Ltd. All intercompany transactions, profits and
balances are eliminated.
BASIS OF PRESENTATION - The financial statements at July 2, 1994 and
July 3, 1993, 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 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):
July 2, July 3, December 31,
1994 1993 1993
------------ ------------ ------------
(unaudited) (unaudited)
Raw material $ 13,991 $ 13,812 $ 13,855
Work-in-process 6,036 7,339 6,043
Finished goods 39,252 47,073 42,817
--------- --------- ---------
$ 59,279 $ 68,224 $ 62,715
========= ========= =========
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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NOTE 3 - PROVISION FOR RESTRUCTURING
The Company's second quarter results included an $11.3 million
restructuring charge to cover the cost of closing the Springfield, Oregon
plant, the Weed, California veneer operation and provide for other cost
reductions and consolidation within Morgan Products. This charge incorporates
the costs of certain personnel actions including severance, outplacement, and
relocation; costs of moving and revaluing inventory; holding costs for idle
facilities until they can be sold; and the revaluation of idle assets to
estimated net realizable value based on independent appraisal information.
NOTE 4 - NEW CREDIT AGREEMENT
On July 14, 1994, the Company signed a new $65 million revolving credit
agreement with Barclay's Business Credit Inc. 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. This
credit facility is secured by certain accounts receivable, inventories,
equipment, real estate and general intangibles of the Company. Available
borrowings are based upon the level of security provided. Borrowings under the
revolving credit facility bear interest at the option of the Company at the
prime rate plus an incremental percentage of 1-1/4 percent or at the LIBOR rate
plus an incremental percentage of 2-3/4 percent. The Company also pays an
annual committment fee of 1/2 percent on the average unused portion of the
revolving credit line and certain additional fees.
The credit facility contains certain covenants including limitations on
the acquisition and disposition of assets, on the pledging of assets other than
those pledged under industrial revenue bonds, and the requirement that the
Company maintain a minimum tangible net worth and leverage, and interest
coverage ratio.
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 2, 1994 VS
THREE MONTHS ENDED JULY 3, 1993
The Company's net sales for the second quarter of 1994 were $95.2
million, representing a decline of 1.0% from the same period in 1993, when net
sales were $96.2 million. The reduction in net sales was primarily the result
of a 9.8% decrease in sales of manufactured products partially offset by a 3.4%
increase in sales of distributed products. Management 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 as consumers continue to buy low
cost substitutes.
For the second quarter of 1994, the Company reported a net loss of $10.7
million or $1.26 per share, compared to net income of $0.1 million, or $0.01
per share, for the second quarter of 1993, on average shares outstanding of
8,497,879 and 8,494,285, 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 had net income of $0.6 million, or $0.07 per share. The
increase in net income, exclusive of the restructuring charge, was primarily
caused by a decrease in operating expenses partially offset by a decrease in
gross profit and an increase in other expense.
The gross profit decrease of $0.1 million from the second quarter of
1994 to the corresponding period of 1993 was primarily the result of the
aforementioned sales volume decrease in manufactured products along with a
decrease in their gross profit percentage. Partially offseting this was the
aforementioned sales volume increase in distributed products. However, the
Company's gross profit percentage increased from 14.2% in the second quarter of
1993 to 14.3% in 1994.
Excluding the restructuring charge, operating expenses for the second
quarter of 1994 were $12.0 million, or 12.6% of net sales, compared to 1993
second quarter operating expenses of $12.9 million, or 13.4% of net sales. The
decrease in operating expenses was primarily the result of decreases in
employment related costs and travel and entertainment expenses.
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Other expense for the second quarter of 1994 was higher than the second
quarter of 1993 by $0.4 million primarily because 1993 included gains from the
disposition of idle assets in excess of their carrying value.
The provision for income taxes in both the second quarter of 1994 and
1993 relate to the recording of state income taxes not based entirely on
income. There is no federal provision provided given the Company's net
operating loss position.
SIX MONTHS ENDED JULY 2, 1994 VS
SIX MONTHS ENDED JULY 3, 1993
The Company's net sales for the 1994 six month period were $178.0
million, representing a decrease of 6.9% from the 1993 six month period, when
net sales were $191.2 million. The reduction in net sales was primarily the
result of a 14.1% decrease in sales of manufactured products and a 1.9%
decrease in sales of distributed products. The decline occurred mainly in the
first quarter of 1994 primarily due to severe weather, 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.
The Company reported a year-to-date net loss of $11.1 million or $1.30
per share, for 1994 compared to net income of $0.1 million or $0.02 per share,
for 1993, on average shares outstanding of 8,497,468 and 8,493,533,
respectively. Excluding the $11.3 million restructuring charge for 1994, the
Company reported net income of $0.2 million or $0.03 per share. The increase
in net income, exclusive of the restructuring charge, was primarily caused by a
decrease in operating expenses, partially offset by a decrease in gross profit,
and an increase in other expense.
The gross profit decrease of $1.4 million from the first half of 1993
to the corresponding period of 1994 was primarily the result of the reduced
effect in 1994 vs. 1993 of the runoff of lower cost inventory at higher sales
prices due to inflationary pressures on materials, and the aforementioned
decrease in sales at both the manufacturing and distribution divisions.
Partially offsetting this was an improvement in gross margins for products
distributed and manufactured and product mix of distributed products. The
gross profit percentage improved from 14.6% in the first half of 1993 to 14.9%
in 1994.
Excluding the restructuring charge, operating expenses for the six
month period decreased $1.7 million from 1993 to 1994. Operating expenses,
exclusive of the restructuring charge, for 1994 were $24.3 million, or 13.6% of
net sales, compared to 1993 expenses of $26.0 million, or 13.6% of net sales.
Contributing to the year to year decline in operating expenses were decreases
in employment related costs, travel and entertainment expenses and advertising
and promotional expenses.
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Other expense increased $0.4 million in 1994 from 1993 due to the
previously mentioned decrease in other income in the second quarter, and a
slight increase in interest expense in 1994 due to higher interest rates.
The provision for income taxes in both the 1994 and 1993 six month
period relate to the recording of state income taxes not based entirely on
income. There is no federal provision provided 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 the U.S. Census,
actual national housing starts were up 10% to 635,000 in the first six months
of 1994 compared to 578,000 in the corresponding period in 1993. Starts in all
regions were up except for the New England and Mid-Atlantic states which
remained at 1993 levels. Management believes that as the market continues to
move upscale, increased sales of higher priced millwork products may follow.
However, higher mortgage rates may reduce sales in the housing market in the
near future.
Management also believes that the Company's ability to penetrate 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 as a percentage of total
sales increased from 28.3% in the first half of 1993 to 29.0% in the
corresponding 1994 period. However, sales to these customers declined 4.6% in
the first six months of 1994 compared to 1993. 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 wood door
components and to switch to alternate wood species. In addition, the Company
has developed foreign sources for some of its raw material requirements.
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 first quarter, Anderson Corporation, a primary supplier of
high-quality, premium-priced windows distributed by the Company, announced its
intent to realign its distribution territories. This has now been
substantially completed. Management believes that this revision will not
materially affect the financial performance of the Company in the long term.
However, there has been some reduction in sales due to these changes. Gross
margin on Anderson sales has been improving, partially offsetting the impact of
lost sales.
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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 July 2, 1994, was $72.6 million with a current
ratio of 3.4 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 decrease in working capital
was primarily the result of the provision for restructuring which increased
current liabilities by $6.5 million and decreased inventory by $2.7 million.
This was partially offset by an increase in Accounts Receivable of $5.7 million
for higher sales levels in the second quarter of 1994 versus the fourth quarter
of 1993.
Long-term debt, net of cash, increased to $45.8 million at July 2,
1994, from $43.2 million at December 31, 1993. The Company's ratio of long
term debt, net of cash, to total capitalization increased from 40.1% at
December 31, 1993 to 46.2% at July 2, 1994. This increase is primarily due to
the restructuring charge that reduced total capitalization.
As discussed in note 4 on July 14, 1994 the Company signed a new $65
million revolving credit agreement with Barclay's Business Credit. The new
agreement will assure the Company adequate capital over the next three years as
it moves to expand its core business. The convenants of the new agreement are
similar to prior agreements adjusted for the one time restructuring charge.
Cash used by operating activities amounted to $1.8 million in the
first half of 1994, primarily to support receivables. Included in the $1.8
million is the $11.3 million restructuring charge. By comparison, the period
ended July 3, 1993 reflected cash used by operating activities of $14.9
million. Investing activities in the 1994 first half utilized $0.9 million
compared to the corresponding period in 1993 when investing activities
generated $0.4 million due to disposition of certain idle assets. Financing
activities generated $3.6 million in the first six months of 1994 versus $10.9
million during the same period in 1993.
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Part II
Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Morgan Products Ltd. was held on
May 18, 1994 for the purposes of the election of six (6) directors to serve
until the next Annual Meeting and to ratify the selection of Price Waterhouse
as independent accountants for the fiscal year ending December 31, 1994.
Elected to serve as directors (with the number of shares of Common
Stock voted "For" or "Withhold Authority," respectively) were Messrs. Frank J.
Hawley (7,839,500 and 121,201), Arthur L. Knight, Jr. (7,840,111 and 120,590),
John S. Crowley (7,841,200 and 119,501), Alexander H. Dunbar (7,839,200 and
121,501), Howard G. Haas (7,841,500 and 119,201), and William R. Holland
(7,841,500 and 119,201)
The appointment of Price Waterhouse as independent auditors for the
fiscal year ending December 31, 1994 was ratified by a count of shares of
Common Stock of 7,644,723 "For", 289,563 "Against", and 26,415 "Abstain".
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) Report on Form 8-K.
A Form 8-K dated May 18, 1994 was filed. It reported in Item 5 the
closure of the Company's Springfield, Oregon Manufacturing operation
and the Weed, California veneer operation pursuant to the Company's
restructuring plan approved by the Board of Directors on May 18, 1994.
In addition, it disclosed that Arthur L. Knight, Jr., President and
Chief Executive Officer would not seek renewal of his contract
when it expires later this year, but would remain on the Board and
will work closely on an orderly transition to the next Chief Executive
Officer. Attached were press releases describing the closures and
restructuring plan.
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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: August 1, 1994 By /S/ Douglas H. MacMillan
Douglas H. MacMillan
Vice President, Secretary and
Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)