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 September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9843
MORGAN PRODUCTS LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1095650
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
469 McLaws Circle, Williamsburg, Virginia 23185
(Address of principal executive offices, including zip code)
(804) 564-1700
(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 26, 1995 was 8,646,981; 2,386 shares are held in treasury.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORGAN PRODUCTS LTD.
Consolidated Balance Sheets
($000 except shares outstanding)
<TABLE>
<CAPTION>
September 30, October 1, December 31,
1995 1994 1994
(Unaudited) (Unaudited)
ASSETS
<S> <C> <C> <C>
CURRENTS ASSETS:
Cash and Cash Equivalents $1,420 $1,733 $ 6,195
Accounts Receivable, Net 31,701 35,227 24,361
Inventories 55,881 58,072 54,957
Other Current Assets 858 663 997
Total Current Assets 89,860 95,695 86,510
OTHER ASSETS 6,246 5,999 6,018
PROPERTY, PLANT & EQUPIMENT, Net 22,886 21,472 20,780
$ 118,992 $123,166 $ 113,308
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long Term Debt $ 942 $1,012 $ 1,205
Accounts Payable 14,481 13,893 11,510
Accrued Compensation and Employee
Benefits 6,626 8,797 8,176
Income Tax Payable 83 170 203
Other Current Liabilities 3,091 4,656 3,777
Total Current Liabilities 25,223 28,528 24,871
LONG-TERM DEBT 39,496 39,733 33,245
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value, 8,646,783,
8,639,361 and 8,640,713 shares outstanding,
respectively 865 864 864
Paid-In Capital 33,768 33,725 33,733
Retained Earnings 20,128 21,037 21,257
54,761 55,626 55,854
Treasury Stock, 2,386 shares, at cost (48) (48) (48)
Unearned Compensation-Restricted
Stock (440) (673) (614)
54,273 54,905 55,192
$ 118,992 $123,166 $113,308
The accompanying notes are an integral part of the financial statements.
</TABLE>
MORGAN PRODUCTS LTD.
Consolidated Income Statements
($000, except earnings per share amounts
and weighted average shares outstanding)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $90,723 $95,139 $255,649 $ 273,180
Cost of Goods Sold 78,278 81,109 219,683 232,703
Gross Profit 12,445 14,030 35,966 40,477
Operating Expenses:
Sales & Marketing 8,766 9,003 26,693 27,847
General & Administrative 2,726 2,718 7,885 8,147
Provision for Restructuring -- -- 9 11,291
Total 11,492 11,721 34,587 47,285
Operating Income (Loss) 953 2,309 1,379 (6,808)
Other Income (Expense):
Interest (1,006) (984) (2,872) (3,007)
Other 116 163 376 344
Total (890) (821) (2,496) (2,663)
Income (Loss) Before Income Taxes 63 1,488 (1,117) (9,471)
Provision for Income Taxes (48) 40 12 150
Net Income (Loss) $ 111 $ 1,448 $ (1,129) $ (9,621)
Income (Loss) Per Share $ 0.01 $ 0.17 $ (0.13) $ (1.13)
Weighted Average
Common Shares Outstanding 8,644,423 8,562,012 8,642,362 8,518,982
The accompanying notes are an integral part of the financial statements.
</TABLE>
MORGAN PRODUCTS LTD.
Consolidated Statements of Cash Flow
($000)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, October 1,
1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net Income (Loss) $(1,129) $(9,621)
Add (deduct) noncash items included in income:
Depreciation and amortization 2,892 3,807
(Gain) loss on sale of property, plant, &
equipment (11) (52)
Provision for restructuring -- 11,291
Other (104) 23
Cash generated (used) by changes in components of
working capital:
Accounts Receivable (7,340) (2,963)
Inventories (924) 1,717
Accounts Payable 2,971 401
Other working capital components (2,936) (909)
NET CASH GENERATED (USED) BY OPERATING
ACTIVITIES (6,581) 3,694
CASH GENERATED (USED) BY INVESTING ACTIVITIES:
Acquistion of property, plant, & equipment (3,786) (865)
Proceeds from disposal of property, plant,
& equipment 49 3,827
Acquistion of other assets, net (481) (1,489)
NET CASH GENERATED (USED) BY INVESTING
ACTIVITIES (4,218) 1,473
CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Cash proceeds from issuance of debt 38 --
Increase (decrease) in commercial paper and
revolving credit debt, net 6,483 (6,463)
Payments on debt (484) (398)
Common stock issued for cash, net 36 18
Other (49) (45)
NET CASH GENERATED (USED) BY FINANCING ACTIVITIES 6,024 (6,888)
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,775) (1,721)
CASH AND CASH EQUIVALENTS:
Beginning of period 6,195 3,454
End of period $ 1,420 $ 1,733
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $2,848 $ 2,766
Income taxes 132 63
The accompanying notes are an integral part of the financial statements.
</TABLE>
MORGAN PRODUCTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Morgan Products Ltd. (the "Company") manufactures
and purchases products (virtually all of which are considered to be millwork)
which are sold to the residential and light commercial building materials
industry and are used for both new construction and improvements, maintenance
and repairs. In view of the nature of its products and the method of
distribution, management believes that the Company's business constitutes a
single industry segment.
CONSOLIDATION - The consolidated financial statements include the accounts of
all business units of Morgan Products Ltd. All intercompany transactions,
profits and balances are eliminated.
BASIS OF PRESENTATION - The financial statements at September 30, 1995 and
October 1, 1994, 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
September 30, 1995 are not necessarily indicative of the results that may be
expected for the full year or any other interim period.
NOTE 2 - INVENTORIES
Inventories consisted of the following at (in thousands of dollars):
September 30, October 1, December 31,
1995 1994 1994
(unaudited) (unaudited)
Raw material $ 9,870 $ 10,864 $ 9,685
Work-in-process 7,098 5,335 5,272
Finished goods 38,913 41,873 40,000
$ 55,881 $ 58,072 $ 54,957
Inventories are valued at the lower of cost or market. Cost is determined
on the first-in, first-out (FIFO) method.
NOTE 3 - PROVISION FOR RESTRUCTURING
The Company's first quarter 1995 results included a $9,000 addition to the $11.3
million restructuring charge incurred in the second quarter of 1994. The
original restructuring charge covered the cost of closing the Springfield,
Oregon plant, the Weed, California veneer operation and other cost 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.
Since his arrival in September, 1994, the Company's new Chief Executive Officer
and other members of senior management have been evaluating what actions are
necessary to improve Morgan Distribution's profitability. A multi-year plan
involving necessary management structure changes, a new management information
system and future facility requirements was developed. The first phase of this
restructuring plan was implemented during the first quarter of 1995. A new
organizational structure was announced that eliminated several management
positions including the unit president. The costs of severance and certain
other cost reductions were provided for during the first quarter which more than
offset the lower than originally anticipated expenses of the 1994 restructuring.
No charges were made for changes in physical facilities since there will be no
actions implemented in 1995 with respect to these.
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 provision.
NOTE 4 - CREDIT AGREEMENT
The Company maintains a credit agreement with Shawmut Capital Corporation which
provides for a revolving credit facility of up to $65 million through July 13,
1997, and includes a letter of credit facility of up to $9 million through July
13, 1997. At September 30, 1995 the Company had borrowings of $32.4 million
under the revolving credit facility. The credit agreement requires the Company,
among other things, to maintain minimum tangible net worth, leverage and
interest coverage ratios. As a result of lower than planned performance, the
Company negotiated and executed an amendment to the credit agreement subsequent
to September 30, 1995 which adjusts the present and ongoing covenants so that
they now more realistically reflect the current market conditions in which the
Company competes. If the Company's performance does not meet expectations, or
if the Company is unable to obtain necessary waivers or amendments under its
lending agreement, the Company's lenders have the right to accelerate the
maturity of the credit agreement.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 VS
THREE MONTHS ENDED OCTOBER 1, 1994
The Company's net sales for the third quarter of 1995 were $90.7 million,
representing a decline of 4.6% from the same period in 1994, when net sales were
$95.1 million. The reduction in net sales reflects a 10.3% decrease in sales of
manufactured products and a 2.5% decrease in sales of distributed products.
Management believes that the decline in sales of products manufactured and
distributed by the Company is due to the ongoing weakness in the level of
residential construction in every region of the country. Recent reports by F.W.
Dodge show that housing starts through August are 8% below the previous year's
pace. All regions were lower, but the Northeast and Midwest, which have
traditionally been the Company's primary markets, were down 15% and 10%
respectively. Higher mortgage interest rates in late 1994 and early 1995, as
well as poor early spring weather in certain key areas, depressed home sales in
the first half of 1995. Lower mortgage interest rates in the second and third
quarters have resulted in four consecutive monthly improvements, but year-to-
date levels still remain below the prior year's. As interest rates have drifted
higher recently, mortgage applications, which are a precursor of home starts and
sales, have declined for two consecutive months.
For the third quarter of 1995, the Company reported net income of $111,000 or
$0.01 per share compared to net income of $1.4 million or $0.17 per share, for
the third quarter of 1994, on average shares outstanding of 8,644,423 and
8,562,012, respectively.
The gross profit decrease of $1.6 million from the third quarter of 1994 to the
corresponding period of 1995 was primarily the result of the aforementioned
sales volume decrease. Overall, the Company's gross profit percentage decreased
from 14.7% in the third quarter of 1994 to 13.7% in 1995.
Operating expenses for the third quarter of 1995 were $11.5 million, or 12.7% of
net sales, compared to 1994 third quarter operating expenses of $11.7 million,
or 12.3% of net sales. The decrease in operating expenses was primarily the
result of decreases in employment related costs. However, as a percentage of
net sales, operating expenses for 1995's third quarter have risen from the same
period in 1994 due to the lower level of net sales.
NINE MONTHS ENDED SEPTEMBER 30, 1995 VS
NINE MONTHS ENDED OCTOBER 1, 1994
The Company's net sales for the 1995 nine month period were $255.6 million,
representing a decrease of 6.4% from the 1994 nine month period, when net sales
were $273.2 million. The reduction in net sales was primarily the result of a
9.8% decrease in sales of manufactured products and a 4.9% decrease in sales of
distributed products. More than 60% of the year-to-date sales decline occurred
in the second quarter of 1995, primarily due to this year's housing construction
decline in every region of the country.
The Company reported a year-to-date net loss of $1.1 million or $0.13 per share,
for 1995 compared to a net loss of $9.6 million or $1.13 per share, for 1994 on
average shares outstanding of 8,642,362 and 8,518,982, respectively. Excluding
the $11.3 million restructuring charge in 1994, the Company reported net income
of $1.7 million or $0.20 per share. The decrease in net income, exclusive of
the restructuring charge, was primarily caused by the impact of lower sales
volume, partially offset by a decrease in operating expenses and a decrease in
interest expense.
The gross profit decrease of $4.5 million from the first nine months of 1994 to
the corresponding period of 1995 was primarily the result of the effect of the
aforementioned decrease in sales at both the manufacturing and distribution
divisions. The gross profit percentage declined from 14.8% in the first nine
months of 1994 to 14.1% in 1995.
Excluding the restructuring charge, operating expenses for the nine month period
decreased $1.4 million from 1994 to 1995. Operating expenses for 1995 were
$34.6 million or 13.5% of net sales, compared to 1994, exclusive of the
restructuring charge, expenses of $36.0 million, or 13.2% of net sales.
Contributing to the year to year decline in operating expenses were decreases in
employment related costs.
The provision for income taxes in both years relates to recording of state
taxes. There is no provision for federal taxes in either period given the
Company's net operating loss position.
SIGNIFICANT BUSINESS TRENDS/UNCERTAINTIES
Management believes that housing starts have a significant influence on the
Company's level of business activity. According to an industry source, F.W.
Dodge, actual housing construction was down 8.0% through the first eight months
of the year compared to the same period in 1994. Construction activity in all
regions was down. Lower mortgage rates began to have a positive effect on new
home sales in the third quarter.
Management also believes that the Company's ability to continue to penetrate the
residential repair and remodeling markets through sales to home center
improvement chains may have a significant influence on the Company's level of
business activity. Sales to these customers declined 7.4% in the first nine
months of 1995 compared to 1994. Sales to these customers as a percentage of
total sales, decreased slightly from 29.8% in the first six months of 1994, to
29.5% in the corresponding 1995 period. However, management believes this
market will continue to grow in importance to the Company.
In the past, raw material prices have fluctuated substantially for pine and fir
lumber, and have remained at historically high levels. This, coupled with
continuing competitive pricing pressure, has had an adverse impact on profits.
As a result, the Company continues its efforts to expand the utilization, where
appropriate, of engineered materials in wood door components and to switch to
alternate wood species. In addition, the Company has established reliable
offshore material resources. Management believes that these actions, together
with aggressive pricing increases where competitive factors allow, will
partially offset the impact of the high costs of raw material.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements are related to its sales which,
because of its dependency on housing starts and the repair and remodeling
market, are seasonal and to a degree weather dependent. This seasonality
affects the need for working capital inasmuch as it is necessary to carry larger
inventories and receivables during certain months of the year.
Working capital at September 30, 1995 was $64.6 million with a current ratio of
3.6 to 1.0, while at December 31, 1994 working capital was $61.6 million with a
current ratio of 3.5 to 1.0. The increase in working capital was primarily the
result of a $.9 million increase in inventory and a $7.3 million increase in
receivables reflecting the aforementioned seasonality of the Company's
operations.
Long-term debt, net of cash, increased to $38.1 million at September 30, 1995,
from $27.1 million at December 31, 1994. The Company's ratio of long-term debt,
net of cash, to total capitalization increased from 32.9% at December 31, 1994
to 41.2% at September 30, 1995. These increases since December 31, 1994 are
primarily due to the aforementioned increase in working capital.
Cash used by operating activities amounted to $6.6 million as of September 30,
1995 primarily to support the higher levels of inventory and receivables. By
comparison, the nine months ended October 1, 1994, reflected cash used by
operating activities of $7.6 million before the $11.3 million non-cash provision
for restructuring. Investing activities in the first nine months of 1995
utilized $4.2 million compared to the corresponding period in 1994 when
investing activities generated $1.5 million as a consequence of the disposal of
assets for $3.8 million. The 1995 investing activities include the first
purchases of equipment for a new production method to produce doors in a more
rapid and efficient manner. Financing activities provided $6.0 million through
September 30, 1995, primarily to finance the normal seasonal increase in working
capital requirements of the operation. During the same period in 1994,
financing activities used $6.9 million in cash.
The Company was not in compliance with specific financial covenants in its
credit agreement with Shawmut Capital Corporation at September 30, 1995. The
Company subsequently negotiated and executed an amendment to the credit
agreement which lowers the specific financial requirements which the Company
must meet for this and future periods to a more realistic level, given the
current market conditions in which the Company competes.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MORGAN PRODUCTS LTD.
Date: November 10, 1995 By /s/ Douglas H. MacMillan
Douglas H. MacMillan
Vice President, Secretary and
Chief Financial Officer
(For the Registrant and as
Principal Finance Officer)
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Morgan
Products Ltd.'s Form 10-Q and is qualified in its entirety by reference to such
Form 10-Q filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,420
<SECURITIES> 0
<RECEIVABLES> 32,797
<ALLOWANCES> 1,096
<INVENTORY> 55,881
<CURRENT-ASSETS> 89,860
<PP&E> 50,646
<DEPRECIATION> 27,760
<TOTAL-ASSETS> 118,992
<CURRENT-LIABILITIES> 25,223
<BONDS> 39,496
<COMMON> 34,633
0
0
<OTHER-SE> 20,128
<TOTAL-LIABILITY-AND-EQUITY> 118,992
<SALES> 255,649
<TOTAL-REVENUES> 255,649
<CGS> 219,683
<TOTAL-COSTS> 254,270
<OTHER-EXPENSES> 376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,872)
<INCOME-PRETAX> (1,117)
<INCOME-TAX> 12
<INCOME-CONTINUING> (1,129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,129)
<EPS-PRIMARY> (013)
<EPS-DILUTED> (013)
</TABLE>
