SECURITIES AND EXCHANGE COMMISSION
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
FORM 10-Q
For Quarter Ended July 31, 2004 Commission File Number 1-8777
VIRCO MFG. CORPORATION
| Delaware | 95-1613718 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| 2027 Harpers Way, Torrance, CA | 90501 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (310) 533-0474
No change
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
The number of shares outstanding of each of the issuer’s classes of common stock, as of August 4, 2004.
| Common Stock | 13,098,364 Shares |
VIRCO MFG. CORPORATION
INDEX
(a) Exhibits
Exhibit 31.1 – Certification of Robert A. Virtue, President, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 – Certification of Robert E. Dose, Vice President, Finance, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
2
Exhibit 32.1 – Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On April 14, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to Item 5, our interim report on the Company’s financial results for the fourth quarter and fiscal year ended January 31, 2004.
On June 7, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to Item 5, our interim report on the Company’s financial results for the first quarter ended April 30, 2004.
On September 7, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to Item 5, our interim report on the Company’s financial results for the second quarter ended July 31, 2004.
Signatures
3
PART 1
Item 1. Financial Statements
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| 7/31/2004 |
1/31/2004 |
7/31/2003 |
||||||||||
| Unaudited (Note 1) | Unaudited (Note 1) | |||||||||||
ASSETS |
||||||||||||
Current assets |
||||||||||||
Cash |
$ | 1,012 | $ | 2,059 | $ | 2,270 | ||||||
Accounts and notes receivable |
39,137 | 17,696 | 35,743 | |||||||||
Less allowance for doubtful accounts |
312 | 225 | 358 | |||||||||
Net accounts and notes receivable |
38,825 | 17,471 | 35,385 | |||||||||
Income tax receivable |
1,130 | 1,423 | 919 | |||||||||
Inventories (Note 2) |
||||||||||||
Finished goods |
21,091 | 10,470 | 24,236 | |||||||||
Work in process |
13,761 | 11,141 | 17,084 | |||||||||
Raw materials and supplies |
8,030 | 6,860 | 10,079 | |||||||||
Total inventories |
42,882 | 28,471 | 51,399 | |||||||||
Deferred income taxes |
— | — | 2,416 | |||||||||
Prepaid expenses |
775 | 1,962 | 565 | |||||||||
Total current assets |
84,624 | 51,386 | 92,954 | |||||||||
Property, plant & equipment |
||||||||||||
Cost |
158,768 | 157,271 | 156,828 | |||||||||
Less accumulated depreciation |
98,630 | 93,913 | 89,094 | |||||||||
Net property, plant & equipment |
60,138 | 63,358 | 67,734 | |||||||||
Goodwill and other intangible assets |
2,346 | 2,350 | 2,200 | |||||||||
Other assets |
9,174 | 9,174 | 13,492 | |||||||||
Total assets |
$ | 156,282 | $ | 126,268 | $ | 176,380 | ||||||
4
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| 7/31/2004 |
1/31/2004 |
7/31/2003 |
||||||||||
| Unaudited (Note 1) | Unaudited (Note 1) | |||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
Current liabilities |
||||||||||||
Checks released but not yet cleared bank |
$ | 3,596 | $ | 2,702 | $ | 3,743 | ||||||
Accounts payable |
18,401 | 9,513 | 9,942 | |||||||||
Accrued compensation and employee benefits |
5,841 | 5,636 | 9,376 | |||||||||
Current maturities on long-term debt |
21,261 | 3,138 | 58,363 | |||||||||
Other current liabilities |
5,016 | 4,993 | 5,478 | |||||||||
Total current liabilities |
54,115 | 25,982 | 86,902 | |||||||||
Non-current liabilities |
||||||||||||
Accrued self-insurance retention and other |
3,958 | 4,053 | 4,527 | |||||||||
Accrued pension expenses |
12,860 | 11,686 | 15,084 | |||||||||
Long term debt (less current portion) |
25,560 | 22,195 | — | |||||||||
Total non-current liabilities |
42,378 | 37,934 | 19,611 | |||||||||
Deferred income taxes |
— | — | 98 | |||||||||
Stockholders’ equity |
||||||||||||
Preferred stock: |
||||||||||||
Authorized 3,000,000 shares, $.01 par
value; none issued or outstanding |
— | — | — | |||||||||
Common stock: |
||||||||||||
Authorized 25,000,000 shares, $.01 par
value;
14,585,894 at 7/31/2004;
14,583,331 shares issued at
1/31/2004 and 7/31/2003 |
146 | 146 | 146 | |||||||||
Additional paid-in capital |
127,140 | 127,133 | 126,728 | |||||||||
Accumulated deficit |
(43,982 | ) | (41,412 | ) | (31,750 | ) | ||||||
Less treasury stock at cost (1,487,530
shares at 7/31/2004 and 1/31/2004;
1,484,332 at 7/31/2003) |
(19,271 | ) | (19,271 | ) | (19,379 | ) | ||||||
Less accumulated comprehensive loss |
(4,244 | ) | (4,244 | ) | (5,976 | ) | ||||||
Total stockholders’ equity |
59,789 | 62,352 | 69,769 | |||||||||
Total liabilities and stockholders’ equity |
$ | 156,282 | $ | 126,268 | $ | 176,380 | ||||||
5
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONS
(Amounts in thousands, except per share data)
| Three Months Ended |
||||||||
| 7/31/2004 |
7/31/2003 |
|||||||
Net sales |
$ | 68,813 | $ | 65,861 | ||||
Cost of goods sold |
47,016 | 44,895 | ||||||
Gross profit |
21,797 | 20,966 | ||||||
Operating expense |
||||||||
Selling, general and administrative expense |
19,204 | 21,426 | ||||||
Separation charges |
— | 7,788 | ||||||
Interest expense |
562 | 418 | ||||||
| 19,766 | 29,632 | |||||||
Income/(loss) before income taxes |
2,031 | (8,666 | ) | |||||
Income tax expense/(benefit) |
— | (380 | ) | |||||
Net income/(loss) |
$ | 2,031 | $ | (8,286 | ) | |||
Weighted average shares outstanding (a) |
||||||||
Basic |
13,098 | 13,095 | ||||||
Diluted |
13,406 | 13,095 | ||||||
Net income/(loss) per common share (a) |
||||||||
Basic |
$ | 0.16 | $ | (0.63 | ) | |||
Diluted |
$ | 0.15 | $ | (0.63 | ) | |||
Dividend per common share |
||||||||
Cash |
$ | — | $ | 0.02 | ||||
(a) For fiscal year 2003, net loss per share was calculated based on basic shares outstanding at July 31, 2003, due to the anti-dilutive effect on the inclusion of common stock equivalent shares.
See Notes to Condensed Consolidated Financial Statements.
6
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
| Six Months Ended |
||||||||
| 7/31/2004 |
7/31/2003 |
|||||||
Net sales |
$ | 99,134 | $ | 97,041 | ||||
Cost of goods sold |
67,020 | 65,664 | ||||||
Gross profit |
32,114 | 31,377 | ||||||
Operating expense |
||||||||
Selling, general and administrative expense |
33,745 | 38,022 | ||||||
Separation charges |
— | 7,788 | ||||||
Interest expense |
939 | 812 | ||||||
| 34,684 | 46,622 | |||||||
Loss before income taxes |
(2,570 | ) | (15,245 | ) | ||||
Income tax expense/(benefit) |
— | (2,946 | ) | |||||
Net loss |
$ | (2,570 | ) | $ | (12,299 | ) | ||
Weighted average shares outstanding (a) |
||||||||
Basic |
13,111 | 13,247 | ||||||
Net loss per common share (a) |
||||||||
Basic |
$ | (0.20 | ) | $ | (0.93 | ) | ||
Dividend per common share |
||||||||
Cash |
$ | — | $ | 0.04 | ||||
(a) Net loss per share was calculated based on basic shares outstanding due to the anti-dilutive effect on the inclusion of common stock equivalent shares.
See Notes to Condensed Consolidated Financial Statements.
7
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (Note 1)
(Dollar amounts in thousands)
| Six Months Ended |
||||||||
| 7/31/2004 |
7/31/2003 |
|||||||
Operating activities |
||||||||
Net loss |
$ | (2,570 | ) | $ | (12,299 | ) | ||
Adjustments to reconcile net loss to net cash used
in operating activities |
||||||||
Depreciation |
4,934 | 6,030 | ||||||
Provision for doubtful accounts |
87 | 102 | ||||||
Loss on sale of property, plant and equipment |
2 | 49 | ||||||
Changes in assets and liabilities |
||||||||
Accounts and notes receivable |
(21,441 | ) | (18,086 | ) | ||||
Inventories |
(14,411 | ) | (8,360 | ) | ||||
Prepaid expenses and other current assets |
1,187 | 930 | ||||||
Income taxes receivable/payable |
293 | (4,457 | ) | |||||
Accounts payable and accrued expenses |
11,089 | 8,332 | ||||||
Net cash used in operating activities |
(20,830 | ) | (27,759 | ) | ||||
Investing activities |
||||||||
Capital expenditures |
(1,718 | ) | (777 | ) | ||||
Proceeds from sale of property, plant and equipment |
6 | — | ||||||
Net cash used in investing activities |
(1,712 | ) | (777 | ) | ||||
Financing activities |
||||||||
Issuance of long-term debt |
22,530 | 30,622 | ||||||
Repayment of long-term debt |
(1,042 | ) | (631 | ) | ||||
Purchase of treasury stock |
— | (419 | ) | |||||
Payment of cash dividend |
— | (525 | ) | |||||
Issuance of common stock |
7 | 120 | ||||||
Net cash provided by financing activities |
21,495 | 29,167 | ||||||
Net change in cash |
(1,047 | ) | 631 | |||||
Cash at beginning of year |
2,059 | 1,639 | ||||||
Cash at end of quarter |
$ | 1,012 | $ | 2,270 | ||||
See Notes to Condensed Consolidated Financial Statements.
8
VIRCO MFG. CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2004
| Note 1. | The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended July 31, 2004, are not necessarily indicative of the results that may be expected for the year ending January 31, 2005. The balance sheet at January 31, 2004, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended January 31, 2004. | |||
| Note 2. | Inventories | |||
| Year end financial statements at January 31, 2004 reflect inventories verified by physical counts with the material content valued by the LIFO method. At July 31, 2004 and 2003, there has been no physical verification of inventory quantities. Cost of sales is recorded at current cost. The effect of penetrating LIFO layers is not recorded at interim dates unless the reduction in inventory is expected to be permanent. No such adjustments have been made for the periods ended July 31, 2004 and 2003. LIFO reserves at July 31, 2004 and January 31, 2004 were $4,042,000. LIFO reserves at July 31, 2003 were $3,527,000. Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated. | ||||
| Note 3. | Debt | |||
| The Company has entered into a revolving credit facility with Wells Fargo Bank, amended and restated January 27, 2004, which provides a term loan of $12,500,000 and a secured revolving line of credit that varies with levels of inventory and receivables, up to a maximum of $45,000,000. The term loan is a three-year amortizing line with interest payable monthly at a fluctuating rate equal to the Bank’s prime rate plus a fluctuating margin of 0.75%, or at LIBOR plus 3.25%. Under the term loan, the Bank is entitled to require the Company to fix the interest rate on up to $6 million of debt. Effective February 1, 2004, Virco purchased an interest rate swap from Wells Fargo Bank, that effectively fixed the rate of interest on $6 million for a period of three years at a rate of 6.32%. The revolving line has an 18-month maturity with interest payable monthly at a fluctuating rate equal to the Bank’s prime rate (4.25% at July 31, 2004) plus a margin of 0.50%, or at LIBOR plus 2.75%. The revolving line also allows the Company the option to borrow under 30- 60- and 90-day fixed term rates at LIBOR plus 2.75%. As of July 31, 2003, the Company violated one of the covenants under the line of credit with Wells Fargo Bank. Wells Fargo provided a waiver of the covenant, but | ||||
9
| required the Company to limit stock buyback activity to $250,000 for the period between June 4, 2003 and December 1, 2003. | ||||
| Note 4. | Income Taxes | |||
| We recognize deferred income taxes under the asset and liability method of accounting for income taxes in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on this consideration, we believe it is more likely than not that the net deferred tax assets will not be realized, and a valuation allowance has been recorded against the net deferred tax assets at July 31, 2004 and January 31, 2004; a partial valuation allowance has been recorded at July 31, 2003. At July 31, 2004, the Company had net operating loss carry forwards for federal and state income tax purposes, expiring at various dates through 2024, if not utilized. Federal net operating losses that can potentially be carried forward total approximately $13.8 million at July 31, 2004. | ||||
| Note 5. | Net Income/(Loss) Per Share | |||
| For the three and six month periods ended July 31, 2004, net income/(loss) per share was calculated based on diluted shares outstanding at July 31, 2004. For the three and six month periods ended July 31, 2003, net loss per share was calculated based on basic shares outstanding at July 31, 2003 due to the anti-dilutive effect of the inclusion of common stock equivalent shares. The following table sets forth the computation of income/(loss) per share (in thousands, except per share data): | ||||
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| July 31 |
July 31 |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income/(loss) |
$ | 2,031 | $ | (8,286 | ) | $ | (2,570 | ) | $ | (12,299 | ) | |||||
Average shares
outstanding |
13,098 | 13,095 | 13,111 | 13,247 | ||||||||||||
Net effect of
dilutive stock
options – based on
the treasury stock
method using
average market
price |
308 | 15 | 169 | 73 | ||||||||||||
Totals |
13,406 | 13,110 | 13,280 | 13,320 | ||||||||||||
10
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| July 31 |
July 31 |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income/(loss)
per share - basic |
$ | 0.16 | $ | (0.63 | ) | $ | (0.20 | ) | $ | (0.93 | ) | |||||
Net income/(loss)
per share - diluted |
$ | 0.15 | $ | (0.63 | ) | $ | (0.20 | ) | $ | (0.93 | ) | |||||
SFAS No. 123, as amended by SFAS No. 148, requires pro forma information regarding net income and net income per share to be disclosed for new options granted after fiscal year 1996. The fair value of these options was determined at the date of grant using the Black-Scholes option-pricing model. The estimated fair value of the options is amortized to expense over the options’ vesting period for pro forma disclosures. The per share “pro forma” for the effects of SFAS No. 123, as amended by SFAS 148, is not indicative of the effects on reported net income/loss for future years. The Company’s information for the three and six months ended July 31, 2004 and July 31, 2003 are as follows (in thousands, except per share data):
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| July 31 |
July 31 |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income/(loss) |
$ | 2,031 | $ | (8,286 | ) | $ | (2,570 | ) | $ | (12,299 | ) | |||||
Total stock-based
employee
compensation
expense determined
under the fair
value based method
for all awards, net
of related tax
effects |
13 | 10 | 26 | 20 | ||||||||||||
Net income/(loss) |
$ | 2,018 | $ | (8,296 | ) | $ | (2,596 | ) | $ | (12,319 | ) | |||||
Net income/(loss)
per share - basic |
$ | 0.15 | $ | (0.63 | ) | $ | (0.20 | ) | $ | (0.93 | ) | |||||
Net income/(loss)
per share - diluted |
$ | 0.15 | $ | (0.63 | ) | $ | (0.20 | ) | $ | (0.93 | ) | |||||
| Note 6. | Comprehensive Income/(Loss) | |||
| Comprehensive income/(loss) for the three and six months ended July 31, 2004 and July 31, 2003 was the same as net income/(loss) reported on the statement of income and operations. | ||||
| Accumulated comprehensive loss at July 31, 2004, January 31, 2004 and 2003 is composed of minimum pension liability adjustments. | ||||
| Note 7. | Retirement Plans | |||
| The Company and its subsidiaries cover all employees under a noncontributory defined benefit retirement plan, the Virco Employees’ Retirement Plan (the Plan). Benefits under the Plan are based on years of service and career average earnings. As more fully described in the Form 10K dated January 31, 2004, benefit accruals under this plan were frozen effective December 31, 2003. | ||||
11
The Company also provides a supplementary retirement plan for certain key employees, the VIP Retirement Plan (VIP Plan). The VIP Plan provides a benefit of up to 50% of average compensation for the last five years in the VIP Plan, offset by benefits earned under the Virco Employees’ Retirement Plan. As more fully described in the Form 10K dated January 31, 2004, benefit accruals under this plan were frozen effective December 31, 2003.
The Company also provides a non-qualified plan for non-employee directors of the Company. The Plan provides a lifetime annual retirement benefit equal to the director’s annual retainer fee for the fiscal year in which the director terminates his or her position with the Board, subject to the director providing 10 years of service to the Company. As more fully described in the Form 10K dated January 31, 2004, benefit accruals under this plan were frozen effective December 31, 2003.
The net periodic pension costs for the Virco Employees Retirement Plan, the VIP Retirement Plan, and the Non-Employee Directors Retirement Plan for the three and six months ended July 31, 2004 and 2003 were as follows (in thousands):
| Non-Employee |
||||||||||||||||||||||||
| Directors Retirement |
||||||||||||||||||||||||
| Pension Plan |
VIP Retirement Plan |
Plan |
||||||||||||||||||||||
| Three months ended July 31, |
||||||||||||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
|||||||||||||||||||
Service cost |
$ | 57 | $ | 346 | $ | 65 | $ | 200 | $ | 5 | $ | 5 | ||||||||||||
Interest cost |
321 | 466 | 83 | 122 | 6 | 6 | ||||||||||||||||||
Expected return on plan assets |
(250 | ) | (294 | ) | — | — | — | — | ||||||||||||||||
Amortization of transition amount |
(9 | ) | (10 | ) | — | — | — | — | ||||||||||||||||
Amortization of prior service cost |
95 | 140 | (115 | ) | (124 | ) | 22 | 22 | ||||||||||||||||
Recognized net actuarial loss |
52 | 270 | 22 | 102 | (6 | ) | (6 | ) | ||||||||||||||||
Settlement and curtailment |
— | 1,538 | — | (132 | ) | — | — | |||||||||||||||||
Net periodic pension cost |
$ | 266 | $ | 2,456 | $ | 55 | $ | 168 | $ | 27 | $ | 27 | ||||||||||||
| Non-Employee |
||||||||||||||||||||||||
| Directors Retirement |
||||||||||||||||||||||||
| Pension Plan |
VIP Retirement Plan |
Plan |
||||||||||||||||||||||
| Six months ended July 31, |
||||||||||||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
|||||||||||||||||||
Service cost |
$ | 115 | $ | 692 | $ | 130 | $ | 400 | $ | 10 | $ | 10 | ||||||||||||
Interest cost |
642 | 932 | 166 | 244 | 12 | 12 | ||||||||||||||||||
Expected return on plan assets |
(500 | ) | (587 | ) | — | — | — | — | ||||||||||||||||
Amortization of transition amount |
(18 | ) | (21 | ) | — | — | — | — | ||||||||||||||||
Amortization of prior service cost |
190 | 281 | (230 | ) | (248 | ) | 44 | 44 | ||||||||||||||||
Recognized net actuarial loss |
104 | 539 | 44 | 204 | (12 | ) | (12 | ) | ||||||||||||||||
Settlement and curtailment |
— | 1,538 | — | (132 | ) | — | — | |||||||||||||||||
Net periodic pension cost |
$ | 533 | $ | 3,374 | $ | 110 | $ | 468 | $ | 54 | $ | 54 | ||||||||||||
The Company previously disclosed in its financial statements for the year ended January 31, 2004 that it expects to contribute approximately $1 million to its deferred benefit plans during the year ending January 31, 2005.
12
| Note 8. | Warranty | |||
| The Company provides a product warranty on most products. It generally warrants that customers can return a defective product during the specified warranty period following purchase in exchange for a replacement product or that the Company can repair the product at no charge to the customer. The Company determines whether replacement or repair is appropriate in each circumstance. The Company uses historic data to estimate appropriate levels of warranty reserves. Because product mix, production methods, and raw material sources change over time, historic data may not always provide precise estimates for future warranty expense. The following is a summary of the Company’s warranty-claim activity for the six months ended July 31, 2004 and 2003. | ||||
| Six months ended July 31, | ||||||||
| 2004 |
2003 |
|||||||
Beginning Accrued Warranty Balance |
$ | 1,751,000 | $ | 901,000 | ||||
Provision |
435,000 | 596,000 | ||||||
Costs Incurred |
(835,000 | ) | (596,000 | ) | ||||
Ending Accrued Warranty Balance |
$ | 1,351,000 | $ | 901,000 | ||||
13
VIRCO MFG. CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations:
For the second quarter of 2004, the Company earned net income of $2,031,000 on sales of $68,813,000 compared to a net loss of $8,286,000 on sales of $65,861,000 in the same period last year. Sales for the second quarter ended July 31, 2004 increased by $2,952,000, a 4% increase, compared to the same period last year. Incoming orders for the same period increased by approximately 3%. For the six month period ending July 31, 2004, the Company incurred a net loss of $2,570,000 on sales of $99,134,000, compared to a net loss of $12,299,000 on sales of $97,041,000 in the same period last year. Incoming orders for same period increased by approximately 3%. Backlog at July 31, 2004 was slightly higher compared to the prior year.
As more fully disclosed in the Company’s Annual Report for the fiscal year ended January 31, 2004, in the prior year the Company incurred a severe decline in sales volume, primarily due to decreased funding levels at state and local governments. In the prior year, Virco offered employees a voluntary severance package, resulting in a $7.8 million separation charge in the second quarter last year. This voluntary program was followed by a mandatory reduction in force in the third quarter. These programs were intended to reduce the cost structure of the Company so that Virco could operate profitably at an annual sales volume of approximately $200 million. For the first six months of the current year, the rate of orders from publicly funded entities has stabilized. The efforts to reduce the cost structure of the Company have been effective, with the Company shipping increased sales during the first six months while reducing selling and general and administrative spending by more than $4 million. The Company has made similar reductions in manufacturing overhead spending, but these savings have been offset by increased material costs.
Gross profit for the second quarter and first six months, as a percentage of sales, remained consistent compared to the same periods last year. For the quarter ended July 31, 2004 as well as the first six months, the Company has incurred significantly higher steel prices. In addition to higher prices, the Company has not always been able to purchase the precise steel desired, resulting in yield variances. Since the Company sells to schools under annual contracts, and because of the current economic climate, the Company has been unable to pass the impact of these increased material costs to its customers. As steel prices and availability over the next six months is still quite uncertain, it is not possible to accurately quantify the impact on the Company for the year, but the cost could be in the range of seven to ten million dollars. For the first six months, a combination of selective price increases and decreased overhead spending substantially offset the increased material cost, resulting in flat gross margin percentages.
Selling, general and administrative expense for the quarter ended July 31, 2004 declined by approximately $2 million compared to the same period last year, and included a $450,000 recovery of a legal claim. SG&A decreased as a percentage of sales nearly 5%. Selling, general and administrative expense for the six months ended July 31, 2004 declined by more than $4 million compared to the same period last year, and decreased as a percentage of sales approximately 5%. The decreased expense is due to improved warehousing and freight efficiencies, reductions in staffing, and freezing of the defined benefit plans.
Interest expense for the first six months increased by approximately $127,000 compared to the same period last year. The increase is attributable to increased rates offset by reduced borrowings.
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At July 31, 2004, the Company had net operating loss carry forwards for federal and state income tax purposes, expiring at various dates through 2024, if not utilized. Federal net operating losses that can potentially be carried forward total approximately $13.8 million at July 31, 2004. In the prior year, the Company recorded an income tax benefit of $2.9 million, primarily attributable to net operating loss carry backs available. For the current year, the Company did not accrue an income tax benefit.
Financial Condition:
As a result of seasonally higher shipments during the summer, accounts receivable were $21.4 million greater than January 31, 2004. Accounts receivable were approximately $3.4 million higher than July 31, 2003 due to increased July shipping activity. The Company traditionally builds large quantities of inventory during the first and second quarters in anticipation of seasonally high summer shipments. For the current year, the Company increased inventory by nearly $14.4 million compared to January 31, 2004. Inventories were approximately $8.5 million less than July 31, 2003 due to improved inventory management. The increase in receivables and inventory were financed through the credit facility with Wells Fargo Bank.
The Company significantly reduced inventories at the end of fiscal year ended January 31, 2004 in response to reduced sales volume. The Company maintained the year over year reduction in inventory through the first quarter. Inventories and production levels were increased during the second quarter as the Company received orders for summer deliveries.
The Company has established a goal of limiting capital spending to approximately $5,000,000 for 2004, which is approximately one-half of anticipated depreciation expense. Capital spending for the six months ended July 31, 2004, was $1,718,000 compared to $777,000 for the same period last year. Capital expenditures are being financed through the Company’s credit facility established with Wells Fargo Bank.
Net cash used in operating activities for the first six months ended July 31, 2004 was $20.8 million compared to $27.8 million for the same period last year. The decrease in cash used in operating activities was due to reduction in operating loss for the first six months, offset by increased working capital needs.
In April 1998, the Board of Directors approved a stock buyback program. As of July 31, 2004, the Company has repurchased approximately 1,454,000 shares at a cost of approximately $18,788,000 since the inception of this program. Under the current Wells Fargo Bank credit facility, the Company is restricted from buying back additional shares or paying cash dividends.
The Company believes that cash flows from operations, together with the Company’s unused borrowing capacity with Wells Fargo Bank will be sufficient to fund the Company’s debt service requirements, capital expenditures and working capital needs. Approximately $10,000,000 was available for borrowing as of July 31, 2004.
Critical Accounting Policies and Estimates:
The Company’s critical accounting policies are outlined in its Form 10-K for fiscal year ended January 31, 2004.
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Forward-Looking Statements:
From time to time, the Company or its representatives have made and may make forward-looking statements, orally or in writing, including those contained herein. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission. The words or phrases “anticipates,” “expects,” “will continue,” “believes,” “estimates,” “projects,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company’s forward-looking statements are subject to certain risks and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, material availability and cost of materials, especially steel; availability and cost of labor, demand for the Company’s products, and competitive conditions affecting selling prices and margins, capital costs and general economic conditions. Such risks and uncertainties are discussed in more detail in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
The Company’s forward-looking statements represent its judgment only on the dates such statements were made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For fiscal 2004, the Company has entered into a revolving credit facility with Wells Fargo Bank, as amended and restated January 27, 2004, which provides a term loan of $12,500,000 and a secured revolving line of credit that varies with levels of inventory and receivables, up to a maximum of $45,000,000. The term loan is a three-year amortizing line with interest payable monthly at a fluctuating rate equal to the Bank’s prime rate (4.25% at July 31, 2004) plus a fluctuating margin of 0.75%, or at LIBOR plus 3.25%. Under the term loan, the Bank is entitled to require the Company to fix the interest rate on up to $6 million of debt. Effective February 1, 2004, the Company purchased an interest rate swap from Wells Fargo Bank that effectively fixed the rate of interest on $6 million for a period of three years at a rate of 6.32%. The revolving line has an 18-month maturity with interest payable monthly at a fluctuating rate equal to the Bank’s prime rate plus a margin of 0.50%, or at LIBOR plus 2.75%. The revolving line also allows the Company the option to borrow under 30- 60- and 90-day fixed term rates at LIBOR plus 2.75%. Accordingly, a 100 basis point upward fluctuation in the lender’s base rate would cause the Company to incur additional interest charges of approximately $104,000 for the fiscal quarter ended July 31, 2004. The Company would benefit from a similar interest savings if the base rate were to fluctuate downward by a like amount. As of July 31, 2004, the Company has borrowed $46,821,000 under its Wells Fargo term loan and asset-based credit facility.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission (the “SEC”) pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Chief
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Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Assessing the costs and benefits of such controls and procedures necessarily involves the exercise of judgment by management, and such controls and procedures, by their nature, can provide only reasonable assurance that management’s objectives in establishing them will be achieved.
We carried out an evaluation, under the supervision and with the participation of our company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Company’s President and Chief Executive Officer, along with the Company’s Chief Financial Officer and other members of management, concluded that the Company’s disclosure controls and procedures are effective in alerting them in a timely fashion to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings with the Securities Exchange Commission.
(b) Changes In Internal Control Over Financial Reporting
No changes in the Company’s internal control over financial reporting have come to management’s attention during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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PART II
VIRCO MFG. CORPORATION
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The following is a description of matters submitted to a vote of registrant’s stockholders at the Annual Meeting of Stockholders held June 8, 2004.
Election of three directors whose terms expire in 2007.
| Votes For |
Authority Withheld |
|||||||
Douglas A. Virtue |
11,158,495 | 902,017 | ||||||
Evan M. Gruber |
11,306,493 | 606,015 | ||||||
Albert J. Moyer |
11,522,774 | 173,453 | ||||||
Ratification of the appointment of Ernst & Young LLP as the Company’s independent auditors for fiscal year 2004 was approved: 11,577,992 shares were voted for the proposal, 44,404 shares were voted against it and 11,457 shares abstained.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 – Certification of Robert A. Virtue, President, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Exhibit 31.2 – Certification of Robert E. Dose, Vice President, Finance, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 – Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On April 14, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to Item 5, our interim report on the Company’s financial results for the fourth quarter and fiscal year ended January 31, 2004.
On June 7, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to Item 5, our interim report on the Company’s first quarter results.
On September 7, 2004, Virco Mfg. Corporation filed a Current Report on Form 8-K pursuant to Item 5, our interim report on the Company’s financial results for the second quarter ended July 31, 2004.
Signatures
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VIRCO MFG. CORPORATION
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.
VIRCO MFG. CORPORATION
| Date: September 8, 2004 | By: | /s/ Robert E. Dose | ||
| Robert E. Dose | ||||
| Vice President - Finance | ||||
| Date: September 8, 2004 | By: | /s/ Bassey Yau | ||
| Bassey Yau | ||||
| Corporate Controller | ||||
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