1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 FORM 10-Q For Quarter Ended April 30, 2001 Commission File Number 1-8777 -------------------- ----------------- VIRCO MFG. CORPORATION - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) 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 - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. 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 [ ] ------- ------- The number of shares outstanding of each of the issuer's classes of common stock, as of June 12, 2001. Common Stock 11,224,680 Shares
2 VIRCO MFG. CORPORATION INDEX Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed consolidated balance sheets - April 30, 2001 and January 31, 2001 Condensed consolidated statements of operations - Three months ended April 30, 2001 and 2000 Condensed consolidated statements of cash flows - Three months ended April 30, 2001 and 2000 Notes to condensed consolidated financial statements - April 30, 2001 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk. Part II. Other Information Item 4. Submission of matters to a vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures 2
3 PART 1 Item 1. Financial Statements VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (Note 1) (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> ASSETS 4/30/2001 1/31/2001 ------ --------- --------- <S> <C> <C> Current assets Cash $ 485 $ 351 Accounts and notes receivable 19,000 25,345 Less allowance for doubtful accounts (318) (200) --------- --------- Net accounts and notes receivable 18,682 25,145 Inventories (Note 2) Finished goods 31,455 27,009 Work in process 22,320 14,442 Raw materials and supplies 18,051 16,588 --------- --------- Total inventories 71,826 58,039 Income taxes receivable 4,895 2,508 Prepaid expenses and deferred income tax 2,654 2,930 --------- --------- Total current assets 98,542 88,973 Property, plant & equipment Cost 154,425 153,504 Less accumulated depreciation (62,139) (58,859) --------- --------- Net property, plant & equipment 92,286 94,645 Other assets 15,934 15,931 --------- --------- Total assets $ 206,762 $ 199,549 ========= ========= </TABLE> See notes to condensed consolidated financial statements. 3
4 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (Note 1) (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> LIABILITIES AND STOCKHOLDERS' EQUITY 4/30/2001 1/31/2001 ------------------------------------ --------- --------- <S> <C> <C> Current liabilities Checks released but not yet cleared bank $ 2,503 $ 2,216 Accounts payable 16,184 13,930 Accrued compensation and employee benefits 9,799 10,775 Current maturities on long-term debt 12,101 12,101 Other current liabilities 6,152 6,778 --------- --------- Total current liabilities 46,739 45,800 Non-current liabilities Long term debt (less current portion) 54,510 43,741 Other non-current liabilities 12,002 11,334 --------- --------- Total non-current liabilities 66,512 55,075 Deferred income taxes 4,533 4,533 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; 12,032,233 issued at 4/30/2001 and 1/31/2001 120 120 Additional paid-in capital 97,654 97,656 Retained earnings 6,654 10,645 Less treasury stock at cost (808,551 shares at 4/30/2001 and 749,246 shares at 1/31/2001) (12,607) (12,009) Less unearned ESOP shares (696) (696) Less accumulated comprehensive loss (2,147) (1,575) --------- --------- Total stockholders' equity 88,978 94,141 --------- --------- Total liabilities and stockholders' equity $ 206,762 $ 199,549 ========= ========= </TABLE> See notes to condensed consolidated financial statements. 4
5 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited (Note 1) (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> 3 Months Ended ------------------------- 4/30/2001 4/30/2000 --------- --------- Restated (Note 1) <S> <C> <C> Net sales $ 42,457 $ 46,432 Cost of goods sold 30,974 31,951 -------- -------- Gross profit 11,483 14,481 Operating expense and other: Selling, general and administrative expense 16,572 16,990 Interest expense 1,107 1,152 Gain on sale of real estate (24) (7,945) -------- -------- 17,655 10,197 (Loss) Income before income taxes and cumulative effect of change in accounting (6,172) 4,284 principle Income taxes (benefit) expense (2,407) 1,667 -------- -------- Net (loss) income before cumulative effect of change in accounting principle (3,765) 2,617 Cumulative effect of change in accounting principle -- (297) -------- -------- Net (loss) income $ (3,765) $ 2,320 ======== ======== AMOUNTS PER COMMON SHARE - BASIC AND ASSUMING DILUTION (a) (Loss) Income before cumulative effect of change in accounting principle $ (.33) $ .23 Cumulative effect of change in accounting principle -- (.03) -------- -------- Net (loss) income $ (.33) $ .20 ======== ======== DIVIDEND PER COMMON SHARE (a) Cash $ .02 $ .02 </TABLE> (a) Adjusted for 10% stock dividend declared August 15, 2000 See notes to condensed consolidated financial statements. 5
6 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (Note 1) (Dollar amounts in thousands) <TABLE> <CAPTION> 3 Months Ended -------------------------- 4/30/2001 4/30/2000 --------- --------- Restated (Note 1) <S> <C> <C> Operating activities Net (loss) income $ (3,765) $ 2,320 Adjustments to reconcile net (loss) income to net cash used in operating activities: Cumulative effect of accounting change -- 297 Depreciation 3,711 3,044 Gain on sale of fixed asets (24) (7,945) Provision for doubtful accounts 105 125 Changes in assets and liabilities: Accounts and notes receivable 6,358 5,790 Inventories (13,787) (24,579) Prepaid expenses and other current assets 657 302 Income taxes receivable/payable (2,387) 1,460 Other assets (384) (297) Accounts payable and accrued expenses 1,606 1,372 -------- -------- Net cash used in operating activities (7,910) (18,111) Investing activities Capital expenditures (1,833) (6,139) Proceeds from sale of fixed assets 505 9,385 Net investment in life insurance -- (6) -------- -------- Net cash (used in) provided by investing activities (1,328) 3,240 Financing activities Issuance of long-term debt 10,823 15,778 Repayment of long-term debt (628) (489) Purchase of treasury stock (597) (18) Payment of cash dividend (226) (207) Issuance of common stock -- 2 (Borrowings) loans to ESOP -- (74) -------- -------- Net cash provided by financing activities 9,372 14,992 Net change in cash 134 121 Cash at beginning of quarter 351 1,072 -------- -------- Cash at end of quarter $ 485 $ 1,193 ======== ======== </TABLE> See notes to condensed consolidated financial statements 6
7 VIRCO MFG. CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS April 30, 2001 and April 30, 2000 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-month period ended April 30, 2001 are not necessarily indicative of the results that may be expected for the year ended January 31, 2002. The balance sheet at January 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles 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, 2001. During the fourth quarter of fiscal year 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in the Financial Statements." Pursuant to Financial Accounting Standards Board Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements," effective February 1, 2000, the Company recorded the cumulative effect of the accounting change and accordingly, the quarterly information for the first quarter of 2000, which had previously been reported, has been restated. Additionally, net sales and gross profit have been adjusted to reflect reclassifications to conform to the presentation required by EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," which the Company also adopted during the fourth quarter of fiscal year 2000. Note 2. Inventory Year end financial statements reflect inventories verified by physical counts with the material content valued by the LIFO method. At this interim date, 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 adjustment has been made for the period ended April 30, 2001. Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated. Note 3. Income Taxes Income taxes for the three month period ended April 30, 2001 were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. Note 4. Significant Accounting Policies 7
8 The weighted-average number of shares used in the computation of net loss per share was 11,266,000 for the quarter ended April 30, 2001. The weighted average number of shares used in the computation of basic net income per share and diluted net income per share were 11,362,000 and 11,499,000 for the quarter ended April 30, 2000, respectively. Per share and weighted-average share amounts for the quarter ended April 30, 2000 have been restated to reflect a 10% stock dividend payable on September 29, 2000 to stockholders of record as of September 7, 2000. Comprehensive income (loss) includes net income (loss), minimum pension liability adjustments and adjustments to account for derivative financial instruments. Comprehensive (loss) income was ($4,337,000) and $2,320,000 for the quarters ended April 30, 2001, and April 30, 2000, respectively. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133, as amended by SFAS 138), which is required to be adopted in years beginning after June 15, 2000. The Company has adopted the new Statement effective February 1, 2001. the Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value and reflected as income or expense. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against commitments through earnings or recognized in other comprehensive income until the hedge item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. The Company enters into interest rate swap contracts to reduce its exposure to fluctuations in interest rates. At April 30, 2001, the Company had one interest rate swap contract which was accounted for as a cash flow hedge. The transition adjustment to implement SFAS 133 resulted in recording a liability and an offset to Other Comprehensive Loss which was $552,000, net of an applicable income tax benefit of $368,000 at February 1, 2001. There is no impact to current earnings due to hedge ineffectiveness. Note 5. Gain on Sale of Real Estate On April 25, 2000, the Company finalized the sale of its Torrance, California, warehouse. The Company received $9,385,000 in cash and recorded $7,945,000 pre-tax gain on disposition during the quarter ended April 30, 2000. Note 6. Interest Rate Swap Contract It is the Company's policy to enter into interest rate swap contracts only to the extent necessary to reduce exposure to fluctuations in interest rates. The Company does not enter into interest rate swap contracts for speculative purposes. Interest rate swaps are contractual agreements between the Company and third parties to exchange fixed and floating interest payments periodically without the exchange of the underlying principal amounts (notional amounts). In the unlikely event that a counterparty fails to meet the terms of an interest rate swap contract, the Company's exposure is limited to the interest rate differential on the notional amount. The Company does not anticipate non-performance by the counterparty. The Company only entered into one interest rate swap contract, which matures on March 3, 2002. At April 30, 2001, the notional amount of the swap was $20,000,000 with an affixed payment rate of 7.23% and a fluctuating receiving rate based upon LIBOR. 8
9 At April 30, 2001 the carrying value approximated the fair value of $953,000. During the quarter ended April 30, 2001, the Company recorded an additional loss amount of $20,000 net of an applicable income tax benefit of $13,000, in other comprehensive loss in order to account for the change in fair value. The fair value of the swap is estimated on pricing models using current assumptions. 9
10 VIRCO MFG. CORPORATION OTHER INFORMATION Item 4. Submission of matters to a vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K None 10
11 VIRCO MFG. CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations: For the first quarter of 2001, the Company had a net loss of $3,765,000 on sales of $42,457,000 compared to a net income of $2,320,000 on sales of $46,432,000 in the same period last year. Sales for the first quarter decreased $3,975,000 compared to the same period last year. Backlog at quarter end was $2,600,000 higher compared to the prior year. The decrease in sales was primarily attributable to a reduction in commercial sales. Year to date incoming orders for publicly funded schools are running approximately even with the prior year. Gross profit for the first quarter, as a percentage of sales, decreased 4% compared to the same period last year. The decline in margin is attributable to a significant reduction in manufacturing hours during the first quarter compared to the same period last year. In the prior year, the Company built a large quantity of finished goods inventory to stock during the first quarter in anticipation of large deliveries of furniture in the second and third quarters of 2000. The prior year sales were less than expected, resulting in disappointing third and fourth quarter results as the Company cut production and incurred severance costs to reduce its workforce. For the current year, the Company has maintained a reduced cost structure, employing approximately 400 (15%) fewer employees during the first quarter 2001 compared to the prior year. At June 1, 2001, the Company is employing approximately 524 (19%) fewer employees than at the same date last year, reflecting a reduction in summer hiring. The reduction in production hours resulted in unfavorable production variances compared to the prior year, but has allowed the Company to substantially reduce inventories compared to the prior year despite reduced levels of sales. In addition to reducing total inventory, the Company has more fully implemented a manufacturing strategy it refers to as "Assemble to Ship". Under this strategy, the Company builds components to stock instead of building finished goods to stock. The Company then assembles the finished product as customer orders determine production quanities and color combinations. The Company believes that it can support a greater volume and variety of customer orders with a smaller investment in inventory utilizing this strategy. Selling, general and administrative expense for the quarter ended April 30, 2001 declined modestly compared to the same period last year. Interest expense for the quarter ended April 30, 2001 is approximately the same as last year. The increased borrowings since January 31, 2001 were used to build inventory in anticipation of seasonally strong summer deliveries offset by a modest reduction in receivables. In prior year, the increase in borrowings was attributable to capital spending on the Conway, Arkansas facility expansion and an increase in inventory. On April 25, 2000, the Company finalized the sale of its Torrance, California, warehouse. The Company received $9,385,000 in cash and recorded $7,945,000 pre-tax gain on disposition during the quarter ended April 30, 2000. 11
12 Financial Condition: As a result of seasonally low deliveries in the first quarter and improvement in days of sales outstanding, accounts and notes receivable decreased by approximately $6,463,000 compared to year-end. The Company traditionally builds large quantities of inventory during the first quarter in anticipation of strong summer shipments. For the current quarter, the Company increased inventory by nearly $13,787,000 compared to year-end. In the prior year first quarter, the Company increased inventory by approximately $24,579,000. This increase in inventory was financed through the credit facility with Wells Fargo Bank. In the prior year, the Company completed a significant investment cycle at the Conway, Arkansas manufacturing faclity. With the completion of this investment, the Company intends to significantly curtail capital spending. The Company has established a goal of limiting capital spending to approximately $7,000,000 for 2001, which is approximately one-half of anticipated depreciation expense. Capital spending for the quarter ended April 30, 2001 was $1,833,000 compared to $6,139,000 for the same period last year. Capital expenditures are being financed through credit facilities established with Wells Fargo Bank and operating cash flow. In April 1998, the Board of Directors approved a stock buyback program giving authorization to buy back up to $5,000,000 of common stock. The amount authorized was subsequently increased to $14,000,000. As of April 30, 2001, the Company has repurchased approximately 777,000 shares at a cost of approximately $12,100,000 since the inception of this program in April 1998. 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 February 13, 2001, the Company's Board of Directors authorized a $.02 per share cash dividend, payable on April 30, 2001 to stockholders on record as of March 30, 2001. For the quarter ended April 30, 2001, the Company paid $226,000 in cash dividends. The Company believes that cashflows 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. Forward-Looking Statements From time to time, the Company or its representatives have made or 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 costs, 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, 2001. 12
13 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 initial notional swap amount is $30,000,000 for the period February 22, 2000 through February 28, 2001. The notional swap amount then decreases to $20,000,000 until the end of the swap agreement, March 3, 2003. The swap agreement is in consideration for a fixed rate at 7.23% plus a fluctuating margin of 1.25% to 1.50%. As of April 30, 2001, the Company has borrowed $59,000,000 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 contain 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 $127,000 for the fiscal quarter ended April 30, 2001. The Company would benefit from a similar interest savings if the base rate were to fluctuate downward by a like amount. 13
14 VIRCO MFG. CORPORATION Exhibit (11) - Statement re: Computation of Earnings Per Share <TABLE> <CAPTION> Three Months Ended April 30 ---------------------------- 2001 2000 ---- ---- <S> <C> <C> Earnings per share Average shares outstanding 11,266,031 11,361,971 Net effect of dilutive stock options - based on the treasury stock method using average market price -- 137,482 ------------ ------------ Totals 11,266,031 11,499,453 ============ ============ Net (loss) income before cumulative effect of change in accounting principle (a) $ (3,765,000) $ 2,617,000 ============ ============ Per share amount before cumulative effect of change in accounting principle (a) $ (.33) $ .23 ============ ============ </TABLE> Weighted average shares outstanding for the three months ended April 30, 2000 are adjusted for 10% stock dividend declared August 15, 2000. For the quarter ended April 30, 2001, 116,742 shares of common stock equivalents were not included in the denominator to calculate earning per share since the Company had a loss in this quarter and including these shares would have been anti-dilutive. 14
15 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: June 13, 2001 By: /s/ Robert E. Dose ------------------------------- ---------------------------- Robert E. Dose Vice President - Finance Date: June 13, 2001 By: /s/ Bassey Yau ------------------------------- ---------------------------- Bassey Yau Corporate Controller 15