==================================================================
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 March 30, 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)
-------------------------------------
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 26, 1996 was 8,647,916; 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)
March 30, April 1,December 31,
1996 1995 1995
(Unaudited)(Unaudited)
ASSETS
CURRENTS ASSETS:
Cash and Cash Equivalents $ 420 $ 927 $ 5,135
Accounts Receivable, Net 28,480 29,730 20,801
Inventories 52,982 58,320 53,422
Other Current Assets 1,127 1,303 422
Total Current Assets 83,009 90,280 79,780
OTHER ASSETS 4,393 6,112 6,235
PROPERTY, PLANT & EQUIPMENT, Net 23,626 21,754 23,500
TOTAL ASSETS $111,028 $118,146 $109,515
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Debt $ 397 $ 0 $ 0
Current Maturities of Long-Term Debt 898 1,103 954
Accounts Payable 13,070 9,465 11,121
Accrued Compensation and Employee
Benefits 5,223 8,832 5,625
Income Tax Payable 119 187 111
Other Current Liabilities 2,613 2,753 3,295
Total Current Liabilities 22,320 22,340 21,106
LONG-TERM DEBT 36,369 41,061 35,574
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value,
8,648,136, 8,647,483 and 8,641,828
shares outstanding, respectively 865 864 865
Paid-In Capital 33,775 33,739 33,771
Retained Earnings 18,070 20,747 18,629
52,710 55,350 53,265
Treasury Stock, 2,386 shares, at cost (48) (48) (48)
Unearned Compensation-Restricted Stock (323) (557) (382)
TOTAL STOCKHOLDERS' EQUITY 52,339 54,745 52,835
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $111,028 $118,146 $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
March 30, April 1,
1996 1995
(Unaudited) (Unaudited)
Net Sales $74,536 $80,664
Cost of Goods Sold 64,038 68,696
Gross Profit 10,498 11,968
Operating Expenses:
Sales & Marketing 8,088 9,018
General & Administrative 2,437 2,724
Provision for Restructuring 0 9
Total 10,525 11,751
Operating Income (Loss) (27) 217
Other Income (Expense):
Interest (593) (882)
Other 80 185
Total (513) (697)
Income (Loss) Before Income
Taxes (540) (480)
Provision for Income Taxes 19 30
Net Income (Loss) $ (559) $ (510)
Income (Loss) Per Share $ (0.06) $ (0.06)
Weighted Average Number of
Common Shares Outstanding 8,647,871 8,641,071
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
Consolidated Statements of Cash Flow
($000's)
For the Three Months Ended
March 30, April 1,
1996 1995
(Unaudited) (Unaudited)
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net Income (Loss) $ (559) $ (510)
Add (deduct) noncash items included in income:
Depreciation and amortization 886 987
Provision for doubtful accounts 14 86
(Gain) on sale of property, plant, & equipment 0 (35)
Provision for restructuring 0 9
Other 59 (69)
Cash generated (used) by changes in components of
working capital:
Accounts receivable (7,693) (5,455)
Inventories 440 (3,363)
Accounts payable 1,949 (2,045)
Other working capital (953) (689)
NET CASH GENERATED (USED) BY OPERATING
ACTIVITIES (5,857) (11,084)
CASH GENERATED (USED) BY INVESTING ACTIVITIES:
Acquisition of property, plant, & equipment (914) (1,797)
Proceeds from disposal of property, plant, &
equipment 26 37
Proceeds from surrender of life insurance
policies 862 0
Acquisition of other assets, net (17) (144)
NET CASH GENERATED (USED) BY INVESTING ACTIVITIES (43) (1,904)
CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Cash proceeds from issuance of debt 452 0
Increase in revolving credit debt, net 897 7,971
Payments on debt (152) (257)
Common stock issued for cash, net 4 6
Other (16) 0
NET CASH GENERATED (USED) BY FINANCING ACTIVITIES 1,185 7,720
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,715) (5,268)
CASH AND CASH EQUIVALENTS:
Beginning of period 5,135 6,195
End of period $ 420 $ 927
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 854 $ 852
Income taxes 11 47
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 30, 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 March 30, 1996 and April
1, 1995, 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 March 30, 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):
March 30, April 1, December 31,
1996 1995 1995
(unaudited) (unaudited)
Raw material $ 9,234 $ 9,883 $ 9,120
Work-in-process 6,607 6,599 6,536
Finished goods 37,141 41,838 37,766
$ 52,982 $ 58,320 $ 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.
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 provision.
An additional $51,000 of restructuring expense was recorded in 1995 due to
greater-than-expected restructuring costs. 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, all of which were employee benefits
resulting from severances with the exception of $21,000 for holding costs of
closed facilities.
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, 1997, and
includes a letter of credit facility of up to $9 million through July 13, 1997.
At March 30, 1996 the Company had borrowings of $29.2 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 MARCH 30, 1996 VS
THREE MONTHS ENDED APRIL 1, 1995
The Company's net sales for the first quarter of 1996 were $74.5 million,
representing a decline of 7.6% from the same period in 1995, when net sales were
$80.7 million. The reduction in net sales reflects a 4.5% decrease in sales of
manufactured products and a 9.8% 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 severe weather conditions in the
Northeast and Midwest, which constitute the Company's major markets. The
Company's Eastern distribution centers were shut down for more than 20% of the
normal shipping days in January and February due to weather problems. The
Company believes that most construction activity was slowed or stopped in these
areas with resultant loss of sales. The Company expects some of this lost
volume may be recovered, as indeed certain indexes have shown increased new
construction activity in Eastern markets in 1996 over 1995, when the millwork
phase of the new construction is reached.
For the first quarter of 1996, the Company reported a net loss of $559,000 or
$0.06 per share compared to a net loss of $510,000 or $0.06 per share, for the
first quarter of 1995, on average shares outstanding of 8,647,871 and 8,641,071,
respectively.
The gross profit decrease of $1.5 million from the first quarter of 1995 to the
corresponding period of 1996 was primarily the result of the aforementioned
sales volume decrease. Overall, the Company's gross profit percentage decreased
from 14.8% in the first quarter of 1995 to 14.1% in 1996.
Operating expenses for the first quarter of 1996 were $10.5 million, or 14.1% of
net sales, compared to 1995 first quarter operating expenses of $11.8 million,
or 14.6% of net sales. The decrease in operating expenses was primarily the
result of decreases in employment related costs.
Interest expense for the first quarter of 1996 was $.3 million lower than for
the same period in 1995. This is largely a result of the capitalization of
interest on a major door manufacturing capital project.
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. Early indications are that housing starts
for single family dwellings will improve in 1996 over 1995, particularly in the
Midwest region. For the first two months, F.W. Dodge has single family housing
starts 17% higher than 1995 for the total U.S. and 27% higher in the Midwest,
despite the severe weather conditions. 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 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. 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 March 30, 1996 was $60.7 million with a current ratio of 3.7
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 $7.7 million increase in receivables reflecting the aforementioned
seasonality of the Company's operations. This increase was partially offset by
an inventory drop of $.4 million, a $1.2 million increase in current
liabilities, and improved cash planning and management.
Long-term debt, net of cash, increased to $35.9 million at March 30, 1996, from
$30.4 million at December 31, 1995. The Company's ratio of long-term debt, net
of cash, to total capitalization increased from 36.6% at December 31, 1995 to
40.7% at March 30, 1996. These increases since December 31, 1995 are primarily
due to the aforementioned increase in working capital.
Cash used by operating activities amounted to $5.9 million for the three months
ended March 30, 1996 primarily to support the higher level of receivables. By
comparison, the three months ended April 1, 1995, reflected cash used by
operating activities of $11.1 million. Investing activities in the first three
months of 1996 used $43,000, compared to the corresponding period in 1995, when
investing activities used $1.9 million. The 1996 investing activities included
$.9 million in cash provided by the surrender of life insurance policies on
former executives, and a like amount was expended for asset acquisitions.
Financing activities provided $1.2 million through March 30, 1996, primarily to
finance the normal seasonal increase in working capital requirements of the
operation. During the same period in 1995, financing activities provided $7.7
million in cash. The $5.5 million difference in the financing requirements from
year-to-year primarily reflects the need to finance the cash used by operating
activities, which was $5.2 million greater in 1995 due to higher working
capital.
The Company was in compliance with specific financial covenants in its amended
credit agreement with Fleet Capital at March 30, 1996.
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: April 26, 1996 By /s/ Douglas H. MacMillan
Douglas H. MacMillan
Vice President, Secretary and
Chief Financial Officer
(For the Registrant and as
Principal Finance Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Morgan
Products Form 10-Q as of March 30, 1996 and is qualified in its entirety by
reference to such Form 10-Q filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-END> MAR-30-1996
<CASH> 420
<SECURITIES> 0
<RECEIVABLES> 23,934
<ALLOWANCES> 308
<INVENTORY> 52,982
<CURRENT-ASSETS> 83,009
<PP&E> 52,037
<DEPRECIATION> 28,411
<TOTAL-ASSETS> 111,028
<CURRENT-LIABILITIES> 22,320
<BONDS> 36,369
0
0
<COMMON> 865
<OTHER-SE> 51,845
<TOTAL-LIABILITY-AND-EQUITY> 111,028
<SALES> 74,536
<TOTAL-REVENUES> 74,536
<CGS> 64,038
<TOTAL-COSTS> 74,563
<OTHER-EXPENSES> (80)
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 593
<INCOME-PRETAX> (540)
<INCOME-TAX> 19
<INCOME-CONTINUING> (559)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (559)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
