SECURITIES AND EXCHANGE COMMISSION
Quarterly Report under Section 13 or 15(d)of the Securities Exchange Act of 1934
FORM 10-Q
VIRCO MFG. CORPORATION
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 þ No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No
The number of shares outstanding of each of the issuer’s classes of common stock, as of December 3, 2004.
INDEX
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PART 1
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONSUnaudited (Note 1)
(a) For fiscal year 2003, net loss per share was calculated based on basic shares outstanding at October 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 OPERATIONSUnaudited (Note 1)
(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)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 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 nine months ended October 31, 2004 and October 31, 2003 are as follows (in thousands, except per share data):
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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 2004, the Company earned net income of $21,000 on sales of $69,502,000 compared to a net loss of $7,675,000 on sales of $65,802,000 in the same period last year. Sales for the third quarter ended October 31, 2004 increased by $3,700,000, a 6% increase, compared to the same period last year. Incoming orders for the same period increased by approximately 3%. For the nine month period ending October 31, 2004, the Company incurred a net loss of $2,549,000 on sales of $168,636,000, compared to a net loss of $19,974,000 on sales of $162,843,000 in the same period last year. Incoming orders for same period increased by approximately 3%. Backlog at October 31, 2004 was slightly lower 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, resulting in a $4.6 million charge. 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 nine 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 nine months while reducing selling, general and administrative spending by nearly $6 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 third quarter and first nine months, as a percentage of sales, remained slightly higher than the same periods last year. For the quarter ended October 31, 2004 as well as the first nine 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, 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 three 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 nine months decreased overhead spending substantially offset the increased material cost, resulting in slightly improved gross margin percentages.
In response to the increased costs of raw material and freight, the Company intends to raise prices for the fiscal year ending January 31, 2006. In addition to price increases, the Company intends to promote pricing structures that encourage larger average order sizes, facilitating freight and warehousing efficiencies. Due to the nature of the Company’s annual contracts, the planned price increase will not begin to take effect until the first quarter of 2005, and will not be fully effective until the summer of 2005.
Selling, general and administrative (SG&A) expense for the quarter ended October 31, 2004 declined by approximately $1.6 million compared to the same period last year. SG&A expense decreased as a percentage of sales by more than 4%. SG&A expense for the nine months ended October 31, 2004 declined by nearly $6 million compared to the same period last year, and decreased as a percentage of sales by approximately 4%.
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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 nine months increased by approximately $170,000 compared to the same period last year. The increase is attributable to increased rates offset by reduced borrowings.
At October 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 potentially can be carried forward total approximately $13.8 million at October 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 $12.3 million greater than January 31, 2004. Accounts receivable were approximately $5 million higher than October 31, 2003 due to increased October shipping activity this year in addition to a larger number of projects, which take longer to collect. The Company traditionally builds large quantities of inventory during the first and second quarters in anticipation of seasonally high summer shipments. In the prior year, the Company severely curtailed production and inventory to reflect reduced sales volumes. For the current year, sales volume has stabilized and the related volume of inventory has stabilized. The Company decreased inventory by nearly $2.7 million compared to January 31, 2004. Inventories were approximately $0.6 million less than the level at October 31, 2003 despite the increased cost of raw materials due to improved inventory management. The increase in receivables and inventory were financed through the credit facility with Wells Fargo Bank.
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 nine months ended October 31, 2004 was $2,276,000 compared to $943,000 for the same period last year. Capital expenditures are being financed through the Company’s credit facility established with Wells Fargo Bank.
Net cash provided in operating activities for the first nine months ended October 31, 2004 was $158,000 compared to net cash used of $2,900,000 for the same period last year. The improvement in cash provided by operating activities was due to an improvement in operating loss for the first nine months primarily attributable to the reduced cost structure, offset by a smaller reduction in inventories along with a larger increase in receivables.
In April 1998, the Board of Directors approved a stock buyback program. As of October 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.
At October 31, 2004, the Company was in violation of certain of the debt covenants related to the credit agreement with Wells Fargo. Effective December 2, 2004, Wells Fargo provided the Company with a waiver of these covenenants as of October 31, 2004. Based upon management’s forecasts for operating results for the remainder of the year, it is more likely than not that the Company will violate the loan covenants at the fourth quarter ending January 31, 2005. Accordingly, the debt has been classified as a current liability on the October 31, 2004 balance sheet. The Company is currently negotiating with Wells Fargo to restructure the credit facility
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to provide adequate liquidity for its fiscal year ending January 31, 2006 business plan and to establish covenants consistent with the plan.
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 $11,000,000 was available for borrowing as of October 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.
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, 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 (4.75% at October 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 $108,000 for the fiscal quarter ended October 31, 2004. The Company would benefit from a similar interest savings if the base rate
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were to fluctuate downward by a like amount. As of October 31, 2004, the Company has borrowed $26,682,000 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 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
Item 5. Other Information
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.
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.
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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.
On December 10, 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 third quarter ended October 31, 2004.
Signatures
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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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