SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
Quarterly Report under Section 13 or 15(d)of the Securities Exchange Act of 1934
FORM 10-Q
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 [ ]
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of each of the issuer’s classes of common stock, as of November 15, 2002.
TABLE OF CONTENTS
INDEX
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PART I
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOMEUnaudited (Note 1)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSUnaudited (Note 1)
(Dollar amounts in thousands)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2002
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations:
For the third quarter of 2002, the Company had a net income of $3,244,000 on sales of $85,022,000 compared to a net income of $3,912,000 on sales of $86,232,000 in the same period last year. Earnings were $.24 per share for the third quarter and $.29 in the same period last year, after giving effect to the 10% stock dividend declared August 20, 2002. For the nine months ended October 31, 2002, the Company earned net income of $5,367,000 on sales of $209,354,000 compared to net income of $4,637,000 on sales of $217,882,000 in the same period last year. Earnings were $.40 per share compared to $.34 per share in the same period last year, after giving effect to the 10% stock dividend declared August 20, 2002.
The third quarter and year to date results are consistent with Virco’s seasonal business cycle, which produces diminished first quarter sales followed by strong second and third quarter deliveries of educational furniture. The seasonal nature of Virco’s sales has intensified due to strategic marketing decisions to sell direct to customers in certain markets, changes in the buying patterns of educational customers that have reduced their own warehouse and support staffing, and changes in the economic environment that have reduced sales of commercial furniture to a greater extent than educational furniture. Sales for the third quarter decreased $1,210,000 compared to the same period last year. Sales for the nine months ended October 31, 2002, decreased $8,528,000 compared to the same period last year. The decrease in sales was primarily attributable to a continued weakness in the economy and commercial furniture sales. Backlog at October 31, 2002, was slightly lower compared to the same time last year.
Gross profit for the third quarter improved compared to the same period last year. Gross profit for the nine months ended October 31, 2002, measured as a percentage of sales, improved by 2.5% compared to the same period last year. Gross profit for the three months ended October 31, 2002, measured as a percentage of sales, improved by 0.8% compared to the same period last year. The improvement in margin is attributable to increased pricing, reduced costs of raw materials, and improved manufacturing efficiencies. The Company increased prices as part of an ongoing program to emphasize more profitable business and to cover the costs of service and installation expenses. For the first six months of 2002, the Company benefited from stable raw material prices. In the third quarter, the improvement in margin was less than the first six months as the Company incurred the impact of increased steel costs. The improvement in manufacturing efficiencies is attributable to stable production levels, continued attention to spending controls, and the continuing implementation of the “Assemble to Ship” strategy that has allowed the Company to reduce inventory. The Company believes that it can support a greater volume and variety of customer orders with a smaller investment in inventory utilizing this strategy. For more information, please see the section entitled “To Our Shareholders” contained in Virco’s Annual Report to Shareholder for the year ended January 31, 2002.
Selling, general and administrative and other expense increased by approximately $1,397,000 and $1,409,000 for the quarter and the nine months ended October 31, 2002, respectively. The increase was attributable to increased freight and installation costs (as a percentage of sales) and to the Company’s decision to adjust assumptions for both the discount rate and investment return rate relating to the Company’s pension benefit program. Shipping and installation costs increased as a percentage of sales due to a larger percentage of business
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to customers requiring installation and delivery and due to increasing freight rates. Pension expense compared to the same periods last year increased by $495,000 and $1,485,000 for the quarter and the nine months ended October 31, 2002, respectively.
Interest expense decreased by $408,000 and $1,270,000 due to a reduced level of borrowings and lower interest rates for the quarter and nine months ended October 31, 2002, compared to the same period last year. The decrease in borrowings was primarily attributable to reduced spending on inventory and capital expenditures. At October 31, 2002, the Company had one interest rate swap agreement with Wells Fargo Bank, which has the effect of establishing a fixed rate of interest for $20,000,000 of loans for both 2001 and 2002. The swap expires in March 2003, which could allow the Company to reduce interest expense in 2003 if the present low levels of interest rates continues. The balance of borrowing is based upon LIBOR, and will fluctuate with the market rate of interest.
Financial Condition:
Net cash provided by operating activities for the nine months ended October 31, 2002, was $13,332,000 compared to $21,738,000 in the prior year. The decrease in cash provided by operating activities was primarily due to inventory. In the prior year the Company made a substantial reduction in inventory and maintained those reduced levels in the current year. Due to high seasonal shipments in the third quarter, accounts receivable increased by approximately $8,000,000 compared to the year-ended January 31, 2002. This compares to accounts receivable increasing by nearly $11,000,000 during the same period in the prior year. The reduction in receivables is primarily attributable to improved delivery performance during the current year.
Capital spending for the nine months ended October 31, 2002, was $2,700,000 compared to $3,434,000 for the same period last year. The Company has established a goal of limiting capital spending to approximately $5,000,000 to $7,000,000 for fiscal year 2002, which is approximately one-half of anticipated depreciation expense. Capital expenditures are being financed through credit facilities established with Wells Fargo Bank and operating cash flow. Beginning October 1, 2002, the credit facility with Wells Fargo Bank was reduced to $40,000,000 from $70,000,000. At October 31, 2002, the Company had approximately $12,000,000 available under its credit facility with Wells Fargo Bank.
The Company is pursuing the sale of two other facilities no longer necessary for operations: the original factory in Los Angeles, California, which is currently held as a rental property, and the former woodshop in Conway, Arkansas, which is currently used as a warehouse. The combined appraised value of these properties is approximately $9,000,000. The Company intends to use the proceeds from these sales will be used to pay down long-term debt.
In April 1998, the Board of Directors approved a stock buyback program. In December 2002, the Board of Directors increased the authorized amount to $22,000,000. As of October 31, 2002, the Company has repurchased approximately 1,135,000 shares at a cost of approximately $15,743,000 since the inception of this program in April 1998. Subsequent to the quarter ended October 31, 2002, the Company repurchased approximately 215,000 shares at a cost of approximately $2,075,000. The Company intends to continue buying back shares of common stock as long as the Company believes the shares are undervalued, and operating cashflows and borrowing capacity under the Wells Fargo line allow.
On August 20, 2002, the Company’s Board of Directors authorized a 10% stock dividend payable on September 27, 2002 to stockholders of record as of September 6, 2002. In the same meeting, the Board also authorized a $0.02 per share cash dividend payable on October 31, 2002 to stockholders of record as of October 11, 2002.
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For the three months and nine months ended October 31, 2002, the Company paid $267,000 and $754,000 in cash dividends, respectively.
In April 2002, the Company entered into an agreement with Dew-El Corporation to purchase Furniture Focus, Inc., an Ohio reseller that offers complete package solutions for the Furniture, Fixtures and Equipment (FF&E) segments of bond-funded public school construction projects, primarily in the upper Midwest. The Company paid $2,400,000 in cash for certain assets of the corporation and recorded $2,200,000 of intangibles in May 2002. In addition, the Company purchased approximately $2,150,000 of accounts receivable related to this acquisition. The results of the Furniture Focus acquisition are not expected to materially impact the current year results. Furniture Focus revenues for the third quarter and for the nine months ended October 31, 2002, were $5,579,000 and $6,983,000, respectively.
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.
Critical Accounting Policies and Estimates:
Revenue Recognition: The Company recognizes all sales when title passes under its various shipping terms. The Company reports sales as net of sales returns and allowances.
Allowances for Doubtful Accounts: Judgment is required when assessing the ultimate realization of receivables, including assessing the probability of collection, current economic trends, historical bad debts and the current credit worthiness of each customer. The Company maintains allowances for doubtful accounts that may result from the inability of our customers to make required payments. The primary reason that Virco’s allowance for doubtful accounts represents such a small percentage of accounts receivable is that a large portion of the accounts receivable consist of low-credit-risk governmental entities, giving Virco’s receivables a high degree of collectability.
Inventory Valuation: The Company uses the LIFO method of accounting for the material component of inventory. The Company maintains allowances for estimated obsolete inventory to reflect the difference between the cost of inventory and the estimated market value. If market conditions are less favorable than those anticipated by management, additional allowances may be required.
Self-Insured Retention: For the insurance year beginning April 1, 2002, the Company was self-insured for Product Liability losses up to $250,000. In the prior year, the Company was self-insured for losses up to $100,000. For the insurance year beginning April 1, 2002, the Company has a $250,000 deductible for Workers Compensation. In the prior year, the Company did not have a deductible for Workers Compensation. The Company obtains annual actuarial estimates of total expected future losses for liability claims and records the net present value of losses.
Defined Benefit Obligations: The Company has three defined benefit plans, the Virco Employees Retirement Plan, the Virco Important Performers (VIP) Plan and the Non-Employee Directors Retirement Plan, which provide retirement benefits to employees and outside directors. Virco discounts the pension obligations under the plans using a 6.50% discount rate and estimating a 6.50% return on plan assets. The Company obtains annual actuarial valuations for all three plans. The Company does not anticipate any significant change in these rates in the coming year and expects that any change that might occur in that period would not have a significant
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effect on the Company’s financial position, results of operations or cash flows. For the current fiscal year, the Company reduced the expected return on investment from 8.0% to 6.5%. In addition, the Company reduced the discount rate from 8.0% to 6.5%. As a result of these changes in assumptions, pension expense, which is included in Selling, General and Administrative, will increase by approximately $1,400,000 for the fiscal year ending January 31, 2003.
Deferred Tax Assets and Liabilities: The Company has not provided an allowance against the deferred tax assets recorded in the financial statements. The Company had a net deferred tax liability of $590,000 at October 31, 2002. Management believes that it is more likely than not that future earnings will be sufficient to recover deferred tax assets.
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,” “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 year ended January 31, 2002.
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.
On February 22, 2000, the Company entered into an interest rate swap agreement with Wells Fargo Bank. The notional swap amount is $20,000,000 and expires March 3, 2003. The swap agreement is in consideration for a fixed rate at 7.23% plus a fluctuating margin of 1.50% to 2.50%.
As of October 31, 2002, the Company has borrowed $28,000,000 under its Wells Fargo credit facility, of which $20,000,000 is subject to the interest rate swap agreement as described above and the remaining amount contains variable interest rates. Accordingly, a 100 basis point upward fluctuation in the lender’s base rate would cause the Company to incur additional interest charges of approximately $96,000 and $206,000 for the quarter and nine months ended October 31, 2002. The Company would benefit from a similar interest savings if the base rate were to fluctuate downward by the same amount.
Item 4. Controls and Procedures
Our 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 our company’s management, including its President and Chief Executive Officer and Chief 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.
Within 90 days prior to the date of this report, 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 pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, the company’s President and Chief Executive Officer along with the company’s Chief Financial Officer concluded that our 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 Exchange Act reports. There have been no significant changes in our company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date that our company carried out its evaluation.
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PART II
OTHER INFORMATION
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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.
Each of the undersigned, in their capacity as the Chief Executive Officer and Chief Financial Officer of Virco Mfg. Corporation, as the case may be, provides the following certifications required by 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and 17 C.F.R. §240.13a-14.
Certification of Chief Executive Officer
I, Robert A. Virtue, certify that:
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Certification of Chief Financial Officer
I, Robert E. Dose, certify that:
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