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
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). Yesx No o
The number of shares outstanding of each of the issuer’s classes of common stock, as of August 4, 2004.
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.
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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
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PART 1
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONS
(Amounts in thousands, except per share data)
(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.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(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.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (Note 1)
(Dollar amounts in thousands)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2004
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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):
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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):
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.
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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
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
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.
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
Item 6. Exhibits and Reports on Form 8-K
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.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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