<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For 13-Week Period Ended September 28, 1996 Commission File No. 0-26228
MARTIN INDUSTRIES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0133054
------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 East Tennessee Street
Florence, Alabama 35630
-------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(205) 767-0330
(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 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
-------------- --------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
8,716,075 shares of Common Stock, $.01
par value, as of November 8, 1996
<PAGE> 2
MARTIN INDUSTRIES, INC.
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 28,
1996 (Unaudited) and December 31, 1995 2
Unaudited Condensed Consolidated Statements of Operations
for the 13-Week and 39-Week Periods Ended
September 28, 1996 and September 30, 1995 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the 39-Week Periods Ended September 28, 1996
and September 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
1
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARTIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 28, December 31,
1996 1995
------------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments $ 13,395,000 $ 20,439,000
Accounts and notes receivable, less
allowance for doubtful accounts of
$889,000 and $594,000, respectively 32,016,000 13,824,000
Inventories 20,209,000 16,534,000
Refundable income taxes 220,000 512,000
Deferred tax benefits 2,076,000 2,049,000
Prepaid expenses and other assets 1,672,000 978,000
--------------- ---------------
Total current assets 69,588,000 54,336,000
--------------- ---------------
Property, plant and equipment, net 11,128,000 6,346,000
Deferred tax benefits 648,000 675,000
Other noncurrent assets 4,211,000 2,225,000
--------------- ---------------
15,987,000 9,246,000
--------------- ---------------
Total assets $ 85,575,000 $ 63,582,000
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
MARTIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 28, December 31,
1996 1995
--------------- ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Current liabilities:
Short-term borrowings $ 13,441,000 $ 12,000
Current portion of long-term debt 1,822,000 1,315,000
Accounts payable 5,774,000 4,072,000
Accrued liabilities:
Payroll and employee benefits 3,184,000 3,090,000
Product liability 603,000 660,000
Warranty 507,000 617,000
Workers' compensation 529,000 603,000
Other 1,115,000 662,000
--------------- ---------------
Total current liabilities 26,975,000 11,031,000
--------------- ---------------
Long-term debt 10,294,000 7,228,000
Deferred compensation 2,126,000 2,013,000
Other noncurrent liabilities 151,000 232,000
--------------- ---------------
12,571,000 9,473,000
--------------- ---------------
Total liabilities 39,546,000 20,504,000
--------------- ---------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000
shares authorized; no shares issued and
outstanding 0 0
Common stock, $.01 par value, 20,000,000
shares authorized; 9,748,000 shares issued 97,000 97,000
Paid-in capital 24,849,000 23,457,000
Retained earnings 30,290,000 30,130,000
Unrealized gain on foreign currency translation 113,000 0
--------------- ---------------
55,349,000 53,684,000
Less:
Treasury stock at cost (1,031,925 and 1,269,715
shares, respectively) 1,927,000 2,319,000
Unearned compensation - ESOP 7,393,000 8,287,000
--------------- ---------------
Total stockholders' equity 46,029,000 43,078,000
--------------- ---------------
Total liabilities and stockholders' equity $ 85,575,000 $ 63,582,000
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
MARTIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13-Week Period Ended 39-Week Period Ended
------------------------ -----------------------
9/28/96 9/30/95 9/28/96 9/30/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET SALES $ 26,261,000 $ 24,527,000 $ 73,952,000 $ 74,523,000
COST OF SALES 20,304,000 17,801,000 56,684,000 55,742,000
------------- ------------- ------------- -------------
Gross profit 5,957,000 6,726,000 17,268,000 18,781,000
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling 2,729,000 1,907,000 7,756,000 6,138,000
General and administrative 1,663,000 1,253,000 5,084,000 4,035,000
Non-cash ESOP compensation expense 646,000 903,000 2,213,000 1,911,000
------------- ------------- ------------- -------------
5,038,000 4,063,000 15,053,000 12,084,000
------------- ------------- ------------- -------------
Operating income 919,000 2,663,000 2,215,000 6,697,000
INTEREST EXPENSE 445,000 376,000 1,091,000 926,000
INTEREST INCOME (234,000) (236,000) (705,000) (311,000)
------------- ------------- ------------- -------------
Income before income taxes 708,000 2,523,000 1,829,000 6,082,000
PROVISION FOR INCOME TAXES 328,000 1,097,000 987,000 2,603,000
------------- ------------- ------------- -------------
Net income $ 380,000 $ 1,426,000 $ 842,000 $ 3,479,000
============= ============= ============= =============
NET INCOME PER SHARE $ 0.06 $ 0.23 $ 0.13 $ 0.73
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 6,882,452 6,092,980 6,706,274 4,759,258
============= ============= ============= =============
DIVIDENDS DECLARED
PER SHARE $ 0.038 $ 0.036 $ 0.110 $ 0.357
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
MARTIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
39-Week
Period Ended
--------------------------------
September 28, September 30,
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 842,000 $ 3,479,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,090,000 723,000
Provision for doubtful accounts and notes receivable 23,000 87,000
Non-cash ESOP compensation expense 2,213,000 1,911,000
Provision for performance compensation 0 208,000
Other changes in operating assets and liabilities (17,805,000) (21,334,000)
-------------- --------------
Net cash used in operating activities (13,637,000) (14,926,000)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,047,000) (1,519,000)
Proceeds from sales of assets 1,000 16,000
Purchase of subsidiary, net of cash acquired (1,374,000) 0
-------------- --------------
Net cash used in investing activities (3,420,000) (1,503,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 11,824,000 13,252,000
Net repayment of long-term debt (1,427,000) (1,178,000)
Exercise of stock options 180,000 0
Cash dividends paid (564,000) (1,041,000)
Purchase of short-term investments 0 (2,000,000)
Proceeds from sale of common stock, net 0 19,403,000
-------------- --------------
Net cash provided by financing activities 10,013,000 28,436,000
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (7,044,000) 12,007,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 20,439,000 3,630,000
-------------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 13,395,000 $ 15,637,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
MARTIN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Unaudited Interim Condensed Consolidated Financial Statements
- -------------------------------------------------------------
The accompanying unaudited interim condensed consolidated financial
statements of Martin Industries, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and are presented in accordance with the requirements of Form 10-Q
and Article 10 of Regulation S-X. The financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
year ended December 31, 1995 included on Form 10-K, as filed with the
Securities and Exchange Commission on March 29, 1996.
In the opinion of management, the unaudited condensed consolidated
financial statements included herein reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the information
set forth therein. The results of operations for the periods presented are not
necessarily indicative of results for the full year. The Company's business is
seasonal and cyclical with the potential for significant fluctuations in
quarterly earnings.
Principles of Consolidation and Fiscal Periods
- ----------------------------------------------
The unaudited interim condensed consolidated financial statements
include the accounts and transactions of the Company and its wholly owned
Canadian subsidiary, 1166081 Ontario Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation. See Note 3
for discussion of the business combination.
The Company's fiscal quarters end on the Saturday nearest each
calendar quarter-end. The Company utilizes a December 31 fiscal year-end.
Recapitalization and Stock Split
- --------------------------------
On April 7, 1995, the Company's stockholders approved a change in the
authorized number of shares of common stock from 300,000 shares to 20,000,000
shares. In addition, 1,000,000 shares of $.01 par value preferred stock were
authorized. The accompanying condensed consolidated financial statements are
presented as if these changes had occurred at the beginning of the first period
presented. On April 7, 1995, the Board of Directors approved a 35-for-1 stock
split of the Company's common stock that was effected in the form of a stock
dividend on July 6, 1995, prior to the consummation of the Company's initial
public offering (the "Offering") discussed in Note 2. All share and per share
amounts have been retroactively restated for all periods presented to reflect
the stock split.
2. INITIAL PUBLIC OFFERING
On July 13, 1995, the Company commenced its underwritten initial
public offering of 2,000,000 shares of common stock at an initial price to the
public of $9.50 per share. The closing of the transaction
6
<PAGE> 8
was completed on July 18, 1995, at which time the underwriters of the Offering
exercised their over-allotment option to purchase an additional 300,000 shares
of common stock to be sold to the public at $9.50 per share. The proceeds of
the Offering, net of an underwriting discount of $1,530,000 and expenses of
$923,000, were $19,397,000. The net proceeds will be used to fund capital
expenditures and possible future acquisitions (see Note 3) and, to the extent
not so used, to reduce outstanding indebtedness, for working capital or other
general corporate purposes. Pending such uses, the Company has invested the
net proceeds in commercial paper, U.S. agency discount notes and other
low-risk, highly liquid securities.
3. BUSINESS COMBINATION
On February 1, 1996, the Company's newly formed, wholly owned Canadian
subsidiary, 1166081 Ontario Inc. ("Martin Canada"), acquired, directly and
indirectly, all of the capital stock of Hunter Energy and Technologies Inc.
("HEAT") and 1061099 Ontario Inc. ("1061099"), a sister company which owned the
land and building leased by HEAT for its manufacturing operation. The
transaction was accounted for under the purchase method of accounting. The
aggregate purchase price of approximately $2,102,000 included $850,000 in cash,
$728,000 in promissory notes, $364,000 paid into escrow and transaction
expenses of $160,000. The promissory notes bear interest at a rate of 9% per
annum and mature on February 1, 1997. The purpose of the escrow is to make
funds available to meet the sellers' indemnification obligations to the
Company. The aggregate purchase price exceeded the fair value of the net
assets acquired by $2,197,000, which goodwill amount is classified as other
noncurrent assets in the unaudited interim condensed consolidated balance sheet
to be amortized over 40 years. Pursuant to the purchase agreement, Martin
Canada caused to be repaid all of the outstanding bank indebtedness of HEAT and
1061099 in the aggregate amount of approximately $5,662,000. The results of
operations of the acquired companies are included in the unaudited interim
condensed consolidated statements of operations for the period from the
purchase date, February 1, 1996, through September 28, 1996. The pro forma
effect of the HEAT acquisition on the Company's result of operations for the
year-to-date periods ended September 28, 1996 and September 30, 1995 is not
significant and not disclosed herein.
The Company continually evaluates whether events and circumstances
have occured that indicate the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the net income to be
earned over the remaining life of the goodwill in measuring recoverability.
4. ESOP ACCOUNTING
In 1992 the Company established the Employee Stock Ownership Plan
("ESOP") and in January 1993 the Company borrowed $11.9 million from its
primary lender (the "bank loan"), which funds were then loaned by the Company
to the ESOP (the "ESOP loan") on terms substantially similar to those of the
bank loan. The ESOP utilized the ESOP loan proceeds, together with a $54,000
cash contribution from the Company, to purchase 3,489,115 shares of the
Company's common stock from existing stockholders. The bank loan and ESOP loan
are payable in equal semi-annual principal installments over a 10-year period.
At the time of the origination of the bank loan and the ESOP loan and
subsequent purchase by the ESOP of Company shares, the Company recorded the
principal amount of the bank loan as long-term debt and recorded unearned
compensation for the principal amount of the ESOP loan, which is reflected as a
reduction to stockholders' equity on the balance sheet. Pending repayment of
the ESOP loan, shares owned by the ESOP are held in a suspense account and are
unallocated to participants. Shares of common stock are committed to be
released from the suspense account and subsequently allocated to participants'
accounts based on the ratio that the annual principal debt repayment of the
ESOP loan bears to the original principal balance (approximately 347,340 shares
of common stock per year). The
7
<PAGE> 9
Company recognizes non-cash compensation expense and credits equity each month
in an amount equal to one-twelfth of the number of shares of common stock
committed to be released each year, net of shares committed to be released in
lieu of cash dividends declared on allocated shares, multiplied by the average
fair value of such shares during the period. Prior to the Offering, the
average fair value of the common stock was based on independent appraisals.
For all periods subsequent to the Offering, non-cash compensation expense will
be based on the average market price at which the shares of common stock are
traded in the open market during the applicable period.
Accordingly, if the average market price of the common stock
increases, the Company's non-cash ESOP compensation expense will also increase,
thereby having a negative impact on the Company's net income and net income per
share. Because the Company cannot predict the price at which its shares will
trade in the future, it cannot predict the amount of non-cash ESOP
compensation expense or the resulting effect on net income or net income per
share for future periods.
5. NET INCOME PER SHARE
Net income per share has been computed based on the weighted average
number of common and common equivalent shares outstanding, including the
dilutive effect of outstanding stock options in each respective period. Shares
of stock owned by the ESOP that have been committed to be released to
participants have been considered outstanding on a weighted average
basis for the purpose of computing net income per share. Shares of stock
owned by the ESOP that have not been committed to be released have not been
considered outstanding for such purpose. The computation of the weighted
average number of common and common equivalent shares outstanding for the
interim periods reported herein is summarized as follows:
<TABLE>
<CAPTION>
13-Week 39-Week
Period Ended Period Ended
----------------------------------- ----------------------------------
Sept 28, Sept 30, Sept 28, Sept 30,
1996 1995 1996 1995
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Weighted average shares,
excluding ESOP and
stock option effects 5,238,193 4,553,500 5,148,850 3,306,613
Weighted average effect
of ESOP shares committed
to be released 1,282,751 927,378 1,195,916 840,543
Dilutive effect of stock options 361,508 612,102 361,508 612,102
--------- --------- --------- ---------
Weighted average number
of common and common
equivalent shares outstanding 6,882,452 6,092,980 6,706,274 4,759,258
========= ========= ========= =========
</TABLE>
8
<PAGE> 10
6. INVENTORIES
Substantially all of the Company's inventories are valued at last-in, first-out
("LIFO") cost, which is not in excess of market. An analysis of inventories
at September 28, 1996 and December 31, 1995 follows:
<TABLE>
<CAPTION>
September 28, December 31,
1996 1995
------------------ ----------------
(Unaudited)
<S> <C> <C>
Inventories valued at first-in, first-out ("FIFO") cost:
Raw materials and purchased parts $ 11,648,000 $ 8,391,000
Work-in-process 4,820,000 4,043,000
Finished goods 9,823,000 10,020,000
------------ ------------
26,291,000 22,454,000
Less excess of FIFO over LIFO cost 6,082,000 5,920,000
------------ ------------
$ 20,209,000 $ 16,534,000
============ ============
</TABLE>
9
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the unaudited
interim condensed consolidated financial statements of the Company and notes
thereto appearing elsewhere in this Form 10-Q. All references to the third
quarter of 1996 and the third quarter of 1995 are referring to the 13-week
periods ended September 28, 1996 and September 30, 1995, respectively. All
references to the 1996 year-to-date period and the 1995 year-to-date period are
referring to the 39-week periods ended September 28, 1996 and September 30,
1995, respectively.
On February 1, 1996, as discussed in Note 3 to Notes to
Condensed Consolidated Financial Statements, the Company's wholly owned
Canadian subsidiary acquired all of the capital stock of HEAT and 1061099
through the direct and indirect purchase of all of the outstanding shares of
these companies. HEAT manufactures gas space heaters and pre-engineered
fireplaces at a 100,000 square foot manufacturing plant located on
approximately 12 acres in Orillia, Ontario, Canada which it leases from
1061099. The results of operations of the acquired companies are included in
the unaudited interim condensed consolidated statements of operations for the
period from the purchase date through September 28, 1996. All references to
HEAT in the following discussion refers to the acquired companies. The pro
forma effect of the HEAT acquisition on the Company's result of operations for
the year-to-date periods ended September 28, 1996 and September 30, 1995 is not
significant and not disclosed herein.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated,
information derived from the Company's financial statements expressed as a
percentage of net sales, together with industry segment information.
<TABLE>
<CAPTION>
13-Week Period Ended 39-Week Period Ended
----------------------- -----------------------
Sept 28, Sept 30, Sept 28, Sept 30,
1996 1995 1996 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 77.3 72.6 76.6 74.8
------ ----- ----- -----
Gross profit 22.7 27.4 23.4 25.2
Operating expenses:
Selling 10.4 7.8 10.5 8.2
General and administrative 6.3 5.1 6.9 5.4
Non-cash ESOP compensation expense 2.5 3.7 3.0 2.6
------ ------ ------ ------
Operating income 3.5 10.8 3.0 9.0
Interest expense, net 0.8 0.5 0.5 0.8
------ ------ ------ ------
Income before income taxes 2.7 10.3 2.5 8.2
Provision for income taxes 1.3 4.5 1.4 3.5
------ ------ ------ ------
Net income 1.4% 5.8% 1.1% 4.7%
====== ====== ====== ======
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
Segment Information
--------------------------------------------------------
13-Week Period Ended 39-Week Period Ended
-------------------- --------------------
Sept 28, Sept 30, Sept 28, Sept 30,
1996 1995 1996 1995
-------- --------- -------- ---------
(In Thousands)
Net sales:
<S> <C> <C> <C> <C>
Home heating products $ 20,937 $ 18,052 $ 50,863 $ 46,870
Metal office furniture 3,776 4,682 11,973 15,379
Leisure and other products 1,548 1,793 11,116 12,274
--------- --------- --------- ---------
$ 26,261 $ 24,527 $ 73,952 $ 74,523
========= ========= ========= =========
Gross profit:
Home heating products $ 5,579 $ 5,625 $ 14,141 $ 14,188
Metal office furniture 260 773 1,352 2,528
Leisure and other products 118 328 1,775 2,065
--------- --------- --------- ---------
$ 5,957 $ 6,726 $ 17,268 $ 18,781
Segment contribution (loss)(1):
Home heating products $ 3,679 $ 4,356 $ 8,847 $ 10,282
Metal office furniture (187) 345 75 1,218
Leisure and other products (264) 118 590 1,143
--------- --------- --------- ---------
$ 3,228 $ 4,819 $ 9,512 $ 12,643
========= ========= ========= =========
</TABLE>
(1) Segment contribution (loss) consists of gross profit less selling
expenses.
13-WEEK PERIOD ENDED SEPTEMBER 28, 1996 COMPARED TO 13-WEEK PERIOD ENDED
SEPTEMBER 30, 1995
Net Sales
- ---------
Net sales in the 13-week period ended September 28, 1996 increased
to $26.3 million from $24.5 million in the 13-week period ended September 30,
1995, an increase of $1.7 million, or 7.1%.
Home Heating Products. Net sales of home heating products increased from
$18.1 million in the third quarter of 1995 to $20.9 million in the third
quarter of 1996, an increase of $2.9 million, or 16.0%. The increase in net
sales of home heating products was primarily the result of the acquisition of
HEAT and increased sales of Martin fireplace products. HEAT's net sales for
the third quarter of 1996 were $2.1 million. See Note 3 to Notes to
Condensed Consolidated Financial Statements.
Metal Office Furniture. Net sales of metal office furniture were $3.8
million in the third quarter of 1996 as compared to $4.7 million in the third
quarter of 1995, a decrease of $906,000, or 19.4%. The decrease in net sales
was primarily due to competition providing the Company's primary metal office
furniture customer with lower and higher grade file cabinets which the Company
does not manufacture. Customer purchases of the Company's medium grade file
cabinets have decreased as a result.
Leisure and Other Products. Net sales of leisure and other products decreased
$245,000, or 13.7%, in the third quarter of 1996 to $1.5 million as compared to
$1.8 million in the third quarter of 1995. Net sales of utility trailer kits
and barbecue gas grills decreased $97,000 and $131,000, respectively. Late
season
11
<PAGE> 13
utility trailer kit sales to a primary customer decreased $100,000. The
decrease in late season sales of grills was primarily the result of a $100,000
decrease in sales to a primary customer.
Gross Profit
- ------------
Gross profit in the third quarter of 1996 was $6.0 million as
compared to $6.7 million in the third quarter of 1995, a decrease of $769,000,
or 11.4%. Gross margin, defined as gross profit as a percentage of net sales,
decreased from 27.4% in the third quarter of 1995 to 22.7% in the third quarter
of 1996.
Home Heating Products. Gross profit on net sales of home heating products in
the third quarter of 1996 was $5.6 million as compared to $5.6 million in the
third quarter of 1995. The increase in net sales for the quarter of 16.0% was
offset by a decrease in the gross margin on home heating product sales from
31.2% in the third quarter of 1995 to 26.6% in the third quarter of 1996. The
decrease in gross margin was primarily the result of a shift in the mix of home
heating product sales from higher margin gas and wood heaters to Martin
fireplace and HEAT products. During the third quarter of 1996, net sales of
gas and wood heaters were 58.9% of home heating product sales as compared to
72.4% in the third quarter of 1995.
Metal Office Furniture. Gross profit on net sales of metal office furniture
decreased $513,000, or 66.4%, from $773,000 in the third quarter of 1995 to
$260,000 in the third quarter of 1996. The decrease was the result of the
19.4% decrease in net sales discussed above and a decrease in gross
margin from 16.5% in the third quarter of 1995 to 6.9% in the third quarter of
1996. The decrease in gross margin was primarily the result of price
concessions to the Company's primary metal office furniture customer and an
increase in the rate of fixed manufacturing costs as a percentage of net sales
from 12.0% in the third quarter of 1995 to 16.4% in the third quarter of 1996.
Leisure and Other Products. Gross profit on net sales of leisure and other
products in the third quarter of 1996 was $118,000 as compared to $328,000 in
the third quarter of 1995, a decrease of $210,000. The decrease was the result
of the 13.7% decrease in net sales discussed above and a decrease in gross
margin from 18.3% in the third quarter of 1995 to 7.6% in the third quarter of
1996. The decrease in gross margin was primarily the result of market price
pressures in utility trailer kits and a higher rate of production variances due
to reduced volume at the utility trailer kit production facility.
Selling Expenses
- ----------------
Selling expenses in the third quarter of 1996 increased to $2.7
million from $1.9 million in the third quarter of 1995, an increase of
$822,000, or 43.1%, primarily in the home heating products segment. The
acquisition of HEAT resulted in $223,000 of the increase. Promotion and
advertising expenses increased $270,000 primarily as a result of the increased
effort to promote the Company's new gas heater and fireplace products for the
1996 season. Selling expenses as a percentage of net sales increased to 10.4%
in the third quarter of 1996 from 7.8% in the third quarter of 1995.
Segment Contribution
- --------------------
Total segment contribution, defined as gross profit less selling
expenses, decreased from $4.8 million in the third quarter of 1995 to $3.2
million in the third quarter of 1996, a decrease of $1.6 million,
12
<PAGE> 14
or 33.0%. The decrease was primarily the result of the 11.4% decrease in gross
profit, the 43.1% increase in selling expenses and the other factors discussed
above.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased $410,000, or 32.7%,
in the third quarter of 1996 as compared to the third quarter of 1995. The
increase is primarily the result of the $251,000 in general and administrative
expenses incurred by HEAT during the 1996 quarter.
Non-cash ESOP Compensation Expense
- ----------------------------------
Non-cash ESOP compensation expense was $646,000 in the third
quarter of 1996 as compared to $903,000 in the third quarter of 1995, a
decrease of $257,000, or 28.5%. In the third quarter of 1996, 81,692 shares of
unallocated ESOP stock were committed to be released as compensation at an
average fair value of $7.91 per share, as compared to 84,769 shares committed
to be released as compensation at an average fair value of $10.65 per share in
the third quarter of 1995. See discussion of ESOP accounting in Note 4 to
Notes to Condensed Consolidated Financial Statements.
Interest Expense
- ----------------
Interest expense in the third quarter of 1996 was $445,000 as
compared to $376,000 in the third quarter of 1995, an increase of $69,000, or
18.4%. The increase was primarily attributable to the increase in interest
expense applicable to the $5,000,000 term loan obtained by the Company in March
1996 to refinance the bank debt of HEAT.
Interest Income
- ---------------
Interest income in the third quarter of 1996 was $234,000 as
compared to $236,000 in the third quarter of 1995. This represents interest
earned on the available net proceeds received in the Offering. See Note 2 to
Notes to Condensed Consolidated Financial Statements for discussion of the
Offering.
Provision for Income Taxes
- --------------------------
The provision for income taxes decreased from $1.1 million in the
third quarter of 1995 to $328,000 in the third quarter of 1996, a decrease of
$769,000, or 70.1%. The decrease was the result of a $1.8 million decrease in
income before taxes from $2.5 million in the third quarter of 1995 to $708,000
in the third quarter of 1996, a decrease of 71.9%. The effective tax rate
increased from 43.5% in the third quarter of 1995 to 46.3% in the third quarter
of 1996 primarily as a result of the non-recognition of a tax benefit on the
net loss of HEAT during the quarter as the realization of the tax benefit for
the HEAT loss is uncertain at this time.
Net Income and Net Income Per Share
- -----------------------------------
Net income in the third quarter of 1996 was $380,000 as compared
to net income of $1.4 million in the third quarter of 1995. The decrease in
net income was primarily the result of the factors discussed above.
13
<PAGE> 15
Net income per share was $0.06 in the third quarter of 1996 as
compared to $0.23 per share in the third quarter of 1995. The rate of decrease
is consistent with the decrease in net income for the period.
39-WEEK PERIOD ENDED SEPTEMBER 28, 1996 COMPARED TO 39-WEEK PERIOD ENDED
SEPTEMBER 30, 1995
Net Sales
- ---------
Net sales in the 39-week period ended September 28, 1996 decreased
to $74.0 million as compared to $74.5 million in the 39-week period ended
September 30, 1995, a decrease of $571,000, or 0.8%.
Home Heating Products. Net sales of home heating products increased to $50.9
million in the 1996 year-to-date period as compared to $46.9 million in the
1995 year-to-date period, an increase of $4.0 million, or 8.5%. The increase
in net sales of home heating products was the result of the acquisition of
HEAT. HEAT's net sales for the period from February 1, 1996 through September
28, 1996 were $4.7 million. See Note 3 to Notes to Condensed Consolidated
Financial Statements. The increase in net sales of home heating products due
to the HEAT acquisition was partially offset by a decrease in net sales of the
Company's non-HEAT gas heaters and logs. Orders received by the Company's gas
heating divisions from March through September, the Company's primary order
period, were $33.0 million in 1996 as compared to $38.0 million in the same
period in 1995. As a result, gas heater and log shipments in the 1996
year-to-date period have decreased as compared to the same period in 1995. Due
to unseasonably warm weather in 1995, which resulted in significantly less
fill-in orders, the order rate for the 1995 year-to-date period was
approximately 95% of annual gas heater sales. In recent years prior to 1995,
the order rate during such period approximated 80% of such sales. Therefore,
if current 1996 order rates follow the historical trends in effect prior to
1995, 1996 annual net sales of gas heaters and logs would not be materially
different from 1995 annual net sales of such products, with a higher percentage
of shipments coming in the fourth quarter of the year. However, due to the
risks and uncertainties inherent in the seasonal, cyclical and competitive
nature of the Company's gas heater business, the Company is unable at the time
of filing this report to predict or give any assurances regarding whether this
trend or another trend will affect its gas heater and log sales for the balance
of 1996.
Metal Office Furniture. Net sales of metal office furniture decreased to $12.0
million in the 1996 year-to-date period from $15.4 million in the 1995
year-to-date period, a decrease of $3.4 million, or 22.1%. As discussed above,
the decrease was the result of competition providing the Company's primary
customer for metal office furniture with lower and higher grade file cabinets
not manufactured by the Company.
Leisure and Other Products. Net sales of leisure and other products decreased
$1.2 million, or 9.4%, in the 1996 year-to-date period to $11.1 million as
compared to $12.3 million in the 1995 year-to-date period. The decrease was
primarily the result of a $1.5 million, or 24.3%, decrease in net sales of
utility trailer kits partially offset by a $487,000, or 8.9%, increase in net
sales of barbecue gas grills. Shipments to four utility trailer kit customers
have decreased $1.4 million primarily as a result of the short selling season
caused by the unseasonably cool weather during early 1996.
14
<PAGE> 16
Gross Profit
- ------------
Gross profit in the 1996 year-to-date period was $17.3 million as
compared to $18.8 million in the 1995 year-to-date period, a decrease of $1.5
million, or 8.1%. Gross margin decreased from 25.2% in the 1995 year-to-date
period to 23.4% in the 1996 year-to-date period.
Home Heating Products. Gross profit on net sales of home heating products in
the 1996 year-to-date period was $14.1 million, relatively equal to the 1995
year-to-date period. The increase in gross profit realized as a result of the
8.5% increase in net sales discussed above was offset by a decrease in the
gross margin from 30.3% in the 1995 year-to-date period to 27.8% in the 1996
year-to-date period. The decrease in gross margin was caused by the shift in
sales mix from higher margin gas heating products to HEAT and Martin fireplace
products. Gas heating product sales, excluding HEAT, were 50.7% of home
heating product sales in the 1996 year-to-date period as compared to 63.3% in
the 1995 year-to-date period.
Metal Office Furniture. Gross profit on net sales of metal office furniture
decreased $1.2 million, or 46.5%, in the 1996 year-to-date period to $1.4
million, as compared to $2.5 million in the 1995 year-to-date period. The
decrease in the 1996 year-to-date period was primarily the result of the 22.1%
decrease in net sales discussed above and the decrease in the gross margin from
16.4% in the 1995 year-to-date period to 11.3% in the 1996 year-to-date period.
The decrease in gross margin was primarily the result of price concessions to
the Company's primary metal office furniture customer and an increase in the
rate of fixed manufacturing costs from 11.8% of net sales in the 1995
year-to-date period to 14.8% in the 1996 year-to-date period.
Leisure and Other Products. Gross profit on net sales of leisure and other
products decreased $290,000, or 14.0%, in the 1996 year-to-date period to $1.8
million as compared to the 1995 year-to-date period of $2.1 million. The
decrease was primarily the result of the 9.4% decrease in net sales as
discussed above together with a decrease in the gross margin from 16.8% in the
1995 year-to-date period to 16.0% in the 1996 year-to-date period.
Selling Expenses
- ----------------
Selling expenses in the 1996 year-to-date period were $7.8 million
as compared to $6.1 million in the 1995 year-to-date period, an increase of
$1.6 million, or 26.4%. The acquisition of HEAT resulted in $700,000 of the
increase. Cooperative advertising expenses increased $221,000 primarily as a
result of an increase in customer credit claims in the home heating products
segment. In addition, promotion, advertising and travel expenses increased
$572,000 primarily as a result of the increased effort to expand the
distribution of home heating products and to promote the Company's new gas
heating and fireplace products for the 1996 season. Selling expenses as a
percentage of net sales increased to 10.5% in the 1996 year-to-date period from
8.2% in the 1995 year-to-date period primarily as a result of a 0.8% decrease
in net sales together with the increases discussed herein.
Segment Contribution
- --------------------
Total segment contribution decreased from $12.6 million in the
1995 year-to-date period to $9.5 million in the 1996 year-to-date period, a
decrease of $3.1 million, or 24.8%. The decrease was primarily the result of
the decrease in gross profit together with the increased selling expenses
discussed above.
15
<PAGE> 17
General and Administrative Expense
- ----------------------------------
General and administrative expenses increased $1.0 million, or
26.0%, in the 1996 year-to-date period as compared to the 1995 year-to-date
period. The increase was primarily the result of $696,000 in general and
administrative expenses incurred by HEAT, a $155,000 increase in insurance
expense and a $234,000 increase in professional fees.
Non-cash ESOP Compensation Expense
- ----------------------------------
Non-cash ESOP compensation expense increased $302,000, or 15.8%,
in the 1996 year-to-date period to $2.2 million, as compared to $1.9 million in
the 1995 year-to-date period. In the 1996 year-to-date period, 247,367 shares
of unallocated ESOP stock were committed to be released as compensation at an
average fair value of $8.95 per share, as compared to 225,574 shares committed
to be released as compensation at an average fair value of $8.47 per share in
the 1995 year-to-date period. The 21,793 share increase in the 1996
year-to-date period represents the decrease during the period in shares
committed to be released in lieu of dividends payable on shares allocated to
ESOP participants that were used to pay the ESOP loan.
Interest Expense
- ----------------
Interest expense increased $165,000, or 17.8%, in the 1996
year-to-date period to $1.1 million, as compared to $926,000 in the 1995
year-to-date period. As discussed above, the increase was primarily
attributable to the interest expense incurred on the $5.0 million term loan
utilized to refinance the bank debt of HEAT in March 1996 partially offset by
the $1.2 million decrease in pre-acquisition, long-term debt.
Interest Income
- ---------------
Interest income increased $394,000 in the 1996 year-to-date period
to $705,000, as compared to $311,000 in the 1995 year-to-date period. As
discussed above, the increase was attributable to the interest earned on the
Offering proceeds received in July 1995, partially offset by a decrease in
available operating cash during the first quarter of 1996. Operating cash
decreased primarily as a result of an increase in inventory levels.
Provision for Income Taxes
- --------------------------
The provision for income taxes decreased $1.6 million, or 62.1%,
in the 1996 year-to-date period as compared to the 1995 year-to-date period.
Although income before income taxes decreased 69.9% in the 1996 year-to-date
period, the provision for income taxes decreased at a lower rate as a result of
the increase in the Company's effective tax rate. The effective tax rate
increased from 42.8% in the 1995 year-to-date period to 54.0% in the 1996
year-to-date period. The increase in the effective tax rate was primarily the
result of the non-recognition of a tax benefit on the $498,000 net loss of HEAT
during the 1996 period as the realization of the tax benefit for the HEAT loss
is uncertain at this time.
16
<PAGE> 18
Net Income and Net Income Per Share
- -----------------------------------
Net income in the 1996 year-to-date period was $842,000 as
compared to $3.5 million in the 1995 year-to-date period, a decrease of $2.6
million, or 75.8%. The decrease was primarily the result of the factors
discussed above.
Net income per share was $0.13 per share in the 1996 year-to-date
period as compared to $0.73 per share in the 1995 year-to-date period.
Although net income decreased 75.8%, net income per share decreased $0.60 per
share, or 82.2%, as a result of a 1,947,016, or 40.9%, increase in the weighted
average number of common and common equivalent shares outstanding. See Notes 2
and 4 to Notes to Condensed Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations in the first
three quarters of the year from internally generated funds and seasonal
borrowings under its bank line of credit. The Company's primary capital
requirements are for working capital, debt service, capital expenditures and
dividends.
The Company's operations in the 39-week period ended September 28,
1996 used $13.6 million in cash to finance increases in extended term
("dating") receivables and inventories required to supply the Company's peak
shipping season which occurs primarily in the third and fourth quarters of each
year. The Company's operating cash and bank line of credit were utilized to
provide the funds needed for these working capital requirements, capital
expenditures, long-term debt repayments and dividends for the period.
Historically, the Company's operations for the remainder of the year have
provided the funds required to repay the bank line of credit. As of October
18, 1996, the Company had repaid the bank line of credit in full.
As discussed above, the Company finances temporary working capital
requirements under an unsecured bank line of credit with its principal lender.
The credit agreement provides a line of $20.0 million for a term expiring July
31, 1997. Interest on the line of credit is payable monthly at a variable rate
equivalent to 30-day LIBOR plus 1.25%, which at November 8, 1996 was 6.625%.
In addition to the operating requirements for the period, the
Company utilized $1.4 million in cash to purchase the capital stock of HEAT and
1061099, as discussed in Note 3 to Notes to Condensed Consolidated Financial
Statements. The funds utilized to purchase the stock were provided from the
Offering discussed in Note 2 to Notes to Condensed Consolidated Financial
Statements. In connection with the acquisition of the stock, the Company also
caused to be repaid approximately $5.7 million in bank debt of HEAT, 1061099
and affiliates. In March 1996, the Company obtained a $5.0 million unsecured
term loan from its principal lender to refinance such bank debt. The term loan
is due in semi-annual principal payments of $250,000 over a seven-year period
with a balloon payment of $1.5 million due at maturity. Interest on the term
loan is payable monthly at a fixed rate of 6.9%.
FINANCIAL POSITION
Cash and short-term investments in the first three quarters of
1996 decreased $7.0 million as a result of the factors discussed above.
Accounts receivable and inventories in the 1996 year-to-date period increased
$18.2 million and $3.7 million, respectively. The increase in accounts
receivable of $18.2 million, or 131.6%, was the result of the $2.3 million of
HEAT receivables acquired and a $17.0 million
17
<PAGE> 19
increase in dating receivables. In an effort to better control the production
schedule in light of the seasonal nature of the home heating products and
barbecue gas grill business, the Company utilizes early booking programs under
which customers receive favorable dating terms for placing their orders early
and permitting the Company to ship the products when manufactured.
The increase in inventories of $3.7 million, or 22.2%, was
primarily the result of the $3.4 million of HEAT inventory acquired.
During the 1996 year-to-date period, net property, plant and
equipment increased $4.8 million, or 75.4%. The increase was the result of
$3.7 million of HEAT fixed assets acquired and $2.0 million in capital
expenditures, partially offset by depreciation recorded during the period.
As previously discussed, the Company utilizes its bank line of
credit during the peak production period in the second and third quarters to
finance working capital requirements. During the 1996 year-to-date period, the
Company utilized $13.4 million of its bank line of credit for this purpose as
reflected by the increase in short-term borrowings for the period. As
discussed above, the bank line of credit was repaid in full as of October 18,
1996.
18
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*3(a) Form of Restated Certificate of Incorporation of Martin
Industries, Inc. which was filed as Exhibit 3(a) to the
Registrant's Registration Statement on Form S-1 filed with
the Commission on July 10, 1995 (Registration No. 33-90432).
*3(b) Bylaws of Martin Industries, Inc. which were filed as
Exhibit 3(b) to the Registrant's Quarterly Report on Form
10-Q filed with the Commission on May 14, 1996 (Commission
File No. 0-26228).
*4 Article 4 of the Restated Certificate of Incorporation of
Martin Industries, Inc. which was included in Exhibit 3(a)
to the Registrant's Registration Statement on Form S-1 filed
with the Commission on July 10, 1995 (Registration No.
33-90432).
**27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period.
- -----------------------------
*Incorporated by reference.
**Filed with electronic filing only
19
<PAGE> 21
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
With the exception of historical information, the matters and
statements discussed, made or incorporated by reference in this Quarterly
Report on Form 10-Q constitute forward-looking statements and are discussed,
made or incorporated by reference, as the case may be, pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve certain assumptions, risks and
uncertainties that could cause actual results to differ materially from those
included in or contemplated by the statements. These assumptions, risks and
uncertainties include, but are not limited to, those associated with general
economic cycles; the cyclical nature of the industries in which the Company
operates and the factors related thereto, including consumer confidence levels,
inflation, employment and income levels, the availability of credit, and
factors affecting the housing industry; the potential in the Company's business
to experience significant fluctuations in quarterly earnings; the Company's
business strategy, including its strategy of pursuing acquisitions and new
product development; potential losses from product liability and personal
injury lawsuits; the effects of seasonality and weather conditions on the
Company's home heating product sales and other sales; fluctuations in quarterly
earnings due to ESOP accounting; the reliance on a significant customer for the
Company's metal office furniture sales; the effect of existing and new
governmental and environmental regulations applicable to the Company; the
dependence of the Company on key personnel; the highly competitive nature of
each of the industries in which the Company operates; the volatility of the
stock price at which outstanding shares of the Company may trade from time to
time; and the other risks and uncertainties discussed or indicated in all
documents filed by the Company with the Commission. The Company expressly
disclaims any obligation to update any forward-looking statements as a result
of developments occurring after the filing of this report.
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.
MARTIN INDUSTRIES, INC.
Date: November 12, 1996 By /s/ James W. Truitt
-----------------------------
James W. Truitt
Senior Vice President
(Executed on Behalf of
Registrant)
By /s/ Roderick V. Schlosser
-----------------------------
Roderick V. Schlosser
(Executed as Principal Financial
and Accounting Officer)
20
<PAGE> 22
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits Page No.
------- ----------------------- ---------
*3(a) Form of Restated Certificate of Incorporation
of Martin Industries, Inc. which was filed as
Exhibit 3(a) to the Registrant's Registration
Statement on Form S-1 filed with the Commission
on July 10, 1995 (Registration No. 33-90432).
*3(b) Bylaws of Martin Industries, Inc. which were
filed as Exhibit 3(b) to the Registrant's
Quarterly Report on Form 10-Q filed with the
Commission on May 14, 1996 (Commission File
No. 0-26228).
*4 Article 4 of the Restated Certificate of
Incorporation of Martin Industries, Inc. which
was included in Exhibit 3(a) to the Registrant's
Registration Statement on Form S-1 filed with the
Commission on July 10, 1995 (Registration No.
33-90432).
**27 Financial Data Schedule (for SEC use only).
-----------------------------
*Incorporated by reference.
**Filed with electronic filing only.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE 39-WEEK PERIOD ENDED SEPTEMBER 28, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-28-1996
<CASH> 13,395
<SECURITIES> 0
<RECEIVABLES> 32,016
<ALLOWANCES> 889
<INVENTORY> 20,209
<CURRENT-ASSETS> 69,588
<PP&E> 22,853
<DEPRECIATION> 11,725
<TOTAL-ASSETS> 85,575
<CURRENT-LIABILITIES> 26,975
<BONDS> 10,294
0
0
<COMMON> 97
<OTHER-SE> 45,932
<TOTAL-LIABILITY-AND-EQUITY> 85,575
<SALES> 73,952
<TOTAL-REVENUES> 73,952
<CGS> 56,684
<TOTAL-COSTS> 56,684
<OTHER-EXPENSES> 15,030
<LOSS-PROVISION> 23
<INTEREST-EXPENSE> 386
<INCOME-PRETAX> 1,829
<INCOME-TAX> 987
<INCOME-CONTINUING> 842
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 842
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
