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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 October 1, 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)
-------------------------
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 October 1, 1994 was 8,639,361; 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
October 1, October 2, December 31,
1994 1993 1993
----------- ----------- ----------
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,733 $ 2,103 $ 3,454
Accounts Receivable, Net 35,227 43,213 32,264
Inventories 58,072 66,502 62,715
Other Current Assets 663 862 922
------------ ------------ -----------
Total Current Assets 95,695 112,680 99,355
------------ ------------ -----------
OTHER ASSETS * 5,999 5,674 5,981
PROPERTY, PLANT & EQUIPMENT, net 21,472 28,149 27,944
------------ ------------ -----------
$ 123,166 $ 146,503 $ 133,280
============ ============ ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long Term Debt $ 1,012 $ 1,009 $ 982
Accounts Payable 13,893 15,894 13,492
Accrued Compensation and Employee Benefits 8,797 5,097 4,021
Income Tax Payable 170 -- --
Other Current Liabilities 4,656 4,150 3,635
------------ ------------ -----------
Total Current Liabilities 28,528 26,150 22,130
------------ ------------ -----------
LONG-TERM DEBT 39,733 55,671 46,669
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value, 8,639,361,
8,496,256, and 8,496,521 shares
outstanding, respectively 864 850 850
Paid-In Capital 33,725 33,017 33,021
Retained Earnings * 21,037 30,863 30,658
------------ ------------ -----------
55,626 64,730 64,529
Treasury Stock, 2,386 shares, at cost (48) (48) (48)
Unamortized Value of Restricted Stock (673) -- --
------------ ------------ -----------
54,905 64,682 64,481
------------ ------------ -----------
$ 123,166 $ 146,503 $ 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 Nine Months Ended
-------------------------- --------------------------
October 1, October 2, October 1, October 2,
1994 1993 1994 1993
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 95,139 $ 106,523 $ 273,180 $ 297,692
Cost of Goods Sold 81,109 93,079 232,703 256,432
------------ ------------ ------------ ------------
Gross Profit 14,030 13,444 40,477 41,260
------------ ------------ ------------ ------------
Operating Expenses
Sales & Marketing 9,003 9,545 27,847 29,451
General & Administrative 2,718 2,321 8,147 8,405
Provision for Restructuring -- -- 11,291 --
------------ ------------ ------------ ------------
Total 11,721 11,866 47,285 37,856
------------ ------------ ------------ ------------
Operating Income (Loss) 2,309 1,578 (6,808) 3,404
------------ ------------ ------------ ------------
Other Income (Expense)
Interest (984) (1,088) (3,007) (3,007)
Other 163 621 344 1,074
------------ ------------ ------------ ------------
Total (821) (467) (2,663) (1,933)
------------ ------------ ------------ ------------
Income (Loss) Before
Income Taxes 1,488 1,111 (9,471) 1,471
Provision for Income Taxes 40 105 150 315
------------ ------------ ------------ ------------
Net Income (Loss) $ 1,448 $ 1,006 $ (9,621) $ 1,156
============ ============ ============ ============
Income (Loss) Per Share $ 0.17 $ 0.12 $ (1.13) $ 0.14
============ ============ ============ ============
Weighted Average Number of
Common Shares Outstanding 8,562,012 8,495,590 8,518,982 8,494,214
============ ============ ============ ============
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 Nine Months
Ended
------------------------
October 1, October 2,
1994 1993
----------- -----------
(Unaudited) (Unaudited)
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net (Loss) Income $ (9,621) $ 1,156
Add (deduct) noncash items included in income:
Depreciation and amortization 3,807 4,104
Provision for doubtful accounts 95 94
(Gain) loss on sale of property, plant,
& equipment (52) (817)
Provision For Restructuring 11,291 --
Other 23 246
Cash (used) generated by changes in components
of noncash working capital:
Accounts Receivable (3,058) (17,223)
Inventories 1,717 (6,160)
Accounts Payable 401 4,624
Other working capital (909) 356
----------- -----------
NET CASH GENERATED (USED) BY OPERATING ACTIVITIES 3,694 (13,620)
---------- ----------
CASH GENERATED (USED) BY INVESTING ACTIVITIES:
Acquisition of property, plant, & equipment (865) (1,289)
Proceeds from disposal of property, plant,
& equipment 3,827 2,327
Acquisition of other assets, net (1,489) (15)
----------- -----------
NET CASH GENERATED (USED) BY INVESTING ACTIVITIES 1,473 1,023
----------- -----------
CASH (USED) GENERATED BY FINANCING ACTIVITIES:
Net change in short-term borrowings 236 (476)
Additions to long-term debt -- 11,197
Repayments of long-term debt (7,097) (150)
Common stock issued for cash, net 18 27
Other (45) (55)
----------- -----------
NET CASH (USED) GENERATED BY FINANCING ACTIVITIES (6,888) 10,543
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,721) (2,054)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,454 4,157
----------- -----------
End of period $ 1,733 $ 2,103
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for
Interest $ 2,766 $ 2,404
Income taxes 63 72
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 October 1, 1994 and
October 2, 1993, 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 1, 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):
October 1, October 2, December 31,
1994 1993 1993
---------- ---------- ------------
(unaudited) (unaudited)
Raw material $ 10,864 $ 11,812 $ 13,855
Work-in-process 5,335 7,271 6,043
Finished goods 41,873 47,419 42,817
-------- -------- --------
$ 58,072 $ 66,502 $ 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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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.
During the third quarter, the Company has reviewed the charges with respect to
matters reserved for in the restructuring and determined that certain estimated
costs for closing the Weed veneer operation may not be as high as originally
anticipated. However, certain other cost reduction and restructuring actions
were approved and provided for during the third quarter which offset the lower
expenses anticipated to close the Weed operation. Accordingly, $400,000 of the
restructuring reserve was reclassified from Manufacturing to Distribution
operations, and $500,000 was reclassified from Manufacturing to the Corporate
Headquarters to cover restructuring and relocation of the operation.
NOTE 4 - NEW CREDIT AGREEMENT
On July 14, 1994, the Company signed a new $65 million revolving credit
agreement with Barclays 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 1.25 percent or at the LIBOR rate
plus an incremental percentage of 2.75 percent. The Company also pays an
annual commitment fee of 0.5 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, leverage, and interest coverage
ratio.
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NOTE 5 - EMPLOYEE STOCK GRANT
On August 19, 1994, the Company established a restricted stock plan
under which the Chief Executive Officer was granted 140,000 restricted shares
of the Company's common stock. These shares were awarded to a "Rabbi Trust" of
which the Chief Executive Officer is the beneficiary, subject to certain
restrictions and forfeiture provisions. The shares vest ratably over a three
year period ending August 19, 1997. The restrictions limit the sale or
transfer of shares during the restricted period. The trust will immediately
vest in the shares of common stock upon the death, disability or termination of
the Chief Executive Officer as described in the plan. The unamortized value of
the common stock totaling $700,000 was recorded at the date of award based upon
the market value of shares as a separate component of stockholders' equity and
is being amortized to expense over the three year vesting period.
On August 19, 1994, the Company also granted the Chief Executive
Officer options to purchase 250,000 shares of common stock at an exercise price
of $5 per share under the Company's stock option plan. This was the fair
market value at the date of grant. Vesting in these option will be over a
three year period.
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 1, 1994 VS
THREE MONTHS ENDED OCTOBER 2, 1993
The Company's net sales for the third quarter of 1994 were $95.1
million, representing a decline of 10.7% from the same period in 1993, when net
sales were $106.5 million. The reduction in net sales was primarily the result
of a 12.3% decrease in sales of distributed products and a 6.3% decrease in
sales of manufactured products. Management believes that the decline in sales
of products distributed by the Company is due primarily to a major supplier's
(Anderson) reallocation of sales regions among its distributors, and by an
aggressive program to improve margins by raising prices. 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 third quarter of 1994, the Company reported net income of $1.4
million or $0.17 per share, compared to net income of $1.0 million, or $0.12
per share, for the third quarter of 1993, on average shares outstanding of
8,562,012 and 8,495,590, respectively. The increase in net income was
primarily caused by an increase in gross profit, a decrease in operating
expenses, a decrease in interest expense, and a decrease in the provision for
income taxes, partially offset by a decrease in other income.
The gross profit increase of $0.6 million from the third quarter of
1993 to the corresponding period of 1994 was primarily the result of increased
gross profit percentages in both manufactured and distributed products
partially offset by the aforementioned sales volume decrease of manufactured
and distributed products. The increase in gross profit margin of manufactured
products is due mainly to more stable pine and fir lumber costs in 1994 versus
1993. The increase in gross profit margin of distributed products is due to
the Company's effort to obtain better pricing for its products. The Company's
gross profit as a percentge of net sales increased from 12.6% in the third
quarter of 1993 to 14.7% in 1994.
Operating expenses for the third quarter of 1994 were $11.7 million, or
12.3% of net sales, compared to 1993 third quarter operating expenses of $11.9
million, or 11.1% of net sales. The decrease in operating expenses was
primarily the result of decreases in employment related costs and advertising
and promotional expenses.
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Other non-interest income for the third quarter of 1994 was lower than
the third quarter of 1993 by $0.5 million primarily because 1993 included gains
from the disposition of the idle Shawano manufacturing facility in excess of
its carrying value.
Interest expense for the third quarter of 1994 was lower than the third
quarter of 1993 by $0.1 million primarily due to lower interest rates and debt
levels.
The provision for income taxes in both the third quarter of 1994 and
1993 relate to the recording of state income taxes not based entirely on
income. There is no provision for federal taxes in either period given the
Company's net operating loss position.
NINE MONTHS ENDED OCTOBER 1, 1994 VS
NINE MONTHS ENDED OCTOBER 2, 1993
The Company's net sales for the 1994 nine month period were $273.2
million, representing a decrease of 8.2% from the 1993 nine month period net
sales of $297.7 million. The reduction in net sales was primarily the result of
a 11.8% decrease in sales of manufactured products and a 5.9% decrease in sales
of distributed products. As previously mentioned, management believes that the
decline in the second and third quarter sales of products distributed by the
Company is due to a major supplier's reallocation of sales regions among its
distributors and an aggressive program to improve margins by raising prices.
In addition, much of the decline which occurred in the first quarter of 1994
was 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 net loss of $9.6 million or $1.13 per share, for
nine months of 1994 compared to net income of $1.2 million or $0.14 per share,
for 1993, on average shares outstanding of 8,518,982 and 8,494,214,
respectively. Excluding the $11.3 million restructuring charge for 1994, the
Company reported net income of $1.7 million or $0.20 per share. The increase
in net income was primarily caused by a decrease in operating expenses and a
decrease in the provision for income taxes, partially offset by a decrease
in gross profit, and an increase in other expense.
The gross profit decrease of $0.8 million from the nine months of 1993
to the corresponding period of 1994 was primarily the result of the runoff in
1993 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 these was an
improvement in gross margins for products distributed and manufactured and
product mix for products distributed. The Company's gross profit as a
percentage of net sales improved from 13.9% in the nine months of 1993 to 14.8%
in 1994.
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Excluding the restructuring charge, operating expenses for the nine
month period decreased $1.9 million from 1993 to 1994. Operating expenses
exclusive of the restructuring charges for the nine months of 1994 were $36.0
million, or 13.2% of net sales, compared to 1993 expenses of $37.9 million, or
12.7% 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.
The provision for income taxes in both the 1994 and 1993 nine month
period relate to the recording of state income taxes not based entirely on
income. There is no provision for federal taxes in either period given the
Company's net operating loss position.
Other expense increased $0.7 million in 1994 from 1993 due to the
previously mentioned gains in 1993 from the disposition of idle assets in
excess of their carrying values.
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 national housing starts were up 6.7% to 968,000 in the
first nine months of 1994 compared to 907,000 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 will 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 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 as a percentage of total
sales increased from 29.4% in the nine months of 1993 to 29.7% in the
corresponding 1994 period. However, sales to these customers declined 7.3% to
$81.0 million in the nine months of 1994 compared to $87.4 million in 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 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.
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In the first quarter of 1994, Anderson Corporation 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, as noted
there has been some reduction in sales due to this realignment. Gross margin
on Anderson sales has been improving, however, partially offsetting the impact
of lost sales.
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 October 1, 1994, was $67.2 million, with a ratio of
current assets to current liabilities of 3.4 to 1.0, while at October 2, 1993,
working capital was $86.5 million with a ratio of 4.3 to 1.0. The decrease in
working capital was primarily the result of the provision for restructuring
which increased current liabilities by $4.2 million and decreased inventory by
$2.6 million. In addition, there was a decrease in accounts receivable of $8.0
million and inventory of $5.8 million net of the restructuring reserve related
to the lower sales levels in the third quarter of 1994 versus the third quarter
of 1993.
Long-term debt, net of cash, decreased to $38.0 million at October 1,
1994, from $53.6 million at October 2, 1993. The Company's ratio of long term
debt, net of cash, to total capitalization decreased from 45.3% at October 2,
1993 to 40.9% at October 1, 1994. This decrease is primarily due to the lower
debt levels resulting from the lower working capital requirements mentioned
above and the sale of the Springfield, Oregon facility.
Cash generated by operating activities amounted to $3.7 million in the
nine months of 1994. By comparison, the period ended October 1, 1993
reflected cash used by operating activities of $13.6 million mainly to support
receivables and inventory. Investing activities in the 1994 nine months used
$2.4 million before the sale of the idle Springfield facility for $3.5 million,
compared to the corresponding period in 1993 when investing activities used
$1.3 million before the sale of the Shawano facility for $2.3 million. The
increase in 1994 is due primarily to the costs and fees related to the new bank
agreement described in note 4. Financing activities used $6.9 million in the
nine months of 1994 to repay debt versus $10.5 million generated during the
same period in 1993 to finance the higher working capital requirements.
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Part II
Other Information
ITEM 5 - NEW CEO AND MEMBERS OF THE BOARD OF DIRECTORS
The Company named Larry R. Robinette President, Chief Executive
Officer, and Board Member on September 6, 1994, replacing Arthur L. Knight Jr.,
who had been CEO since December, 1988. Mr. Knight will remain on the Board of
Directors. Mr. Robinette's employment agreement ends on December 31, 1997 and
can be renewed for successive one year terms after 1997.
See also Note 5 of the financial statements.
The Company also named four new Directors, which bring the Board to its
authorized level of ten members. The Company also announced that Alex Dunbar, a
Board member since 1983, has resigned. The new Board members are:
- Alton F. Doody, Jr., Ph.d., consultant and author, and Founder and
Chairman of the Doody Group, Inc., a Louisiana consulting firm.
- Patrick J. McDonough, Jr., Chairman and CEO of Olympic Manufacturing
Group, Inc., a private company located in Massachusetts.
- Byron H. Tony Stebbins, Senior Vice President, Market Development, at
The Newell Companies.
- Edward T. Tokar, Vice President - Investments, Allied Signal, Inc.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(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: November 9, 1994 By /s/ Douglas H. MacMillan
-------------------------------
Douglas H. MacMillan
Vice President, Secretary and
Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)