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
For Quarter Ended July 31, 2002 Commission File Number 1-8777
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 [X] No [ ]
The number of shares outstanding of each of the issuer’s classes of common stock, as of September 4, 2001.
• Adjusted for 10% stock dividend declared August 20, 2002, date of record September 6, 2002, payable September 30, 2002.
TABLE OF CONTENTS
INDEX
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PART I
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETSUnaudited (Note 1)
(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)
(a) Adjusted for 10% stock dividend declared on August 20, 2002
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSUnaudited (Note 1)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 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 second quarter of 2002, the Company had a net income of $4,260,000 on sales of $83,164,000 compared to a net income of $4,490,000 on sales of $89,193,000 in the same period last year. Earnings were $.32 per share compared to $.33 per share in the same period last year, after giving effect to the 10% stock dividend declared August 20, 2002. For the six months ended July 31, 2002, the Company earned net income of $2,123,000 on sales of $124,332,000 compared to net income of $725,000 on sales of $131,650,000 in the same period last year. Earnings were $.16 per share compared to $.05 per share in the same period last year, after giving effect to the 10% stock dividend declared August 20, 2002.
The second 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 supporter staffing, and changes in economic environment that have reduced sales of commercial furniture to a greater extent than educational furniture. Sales for the second quarter decreased $6,029,000 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 July 31, 2002 was slightly lower compared to the same time last year.
Gross profit for the second quarter improved by over 3% compared to the same period last year. The improvement in margin is attributable to increased pricing, improved manufacturing efficiencies and reduced costs of raw materials. The improvement in manufacturing efficiencies are attributable to an increase in 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 expense and other for the quarter ended July 31, 2002 increased by approximately $1,587,000 compared to the same period last year. The increase was largely attributable 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. Pension expense compared to the same periods last year increased by $738,000 and $1,038,000 for the quarter and the six months ended July 31, 2002, respectively.
Interest expense decreased by $480,000 and $948,000 due to a reduced level of borrowings and lower interest rates for the quarter and six months ended July 31, 2002 compared to the same period last year. The decrease in borrowings was primarily attributable to reduced spending on inventory and capital expenditures. The Company expects to continue to reduce borrowing levels in 2002. At July 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 balance of borrowing is based upon LIBOR, and will fluctuate with the market rate of interest.
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Financial Condition:
As a result of seasonally high shipments in the second quarter, accounts receivable increased by approximately $26,437,000 compared to the year-ended January 31, 2002. In anticipation of strong third quarter deliveries, inventory increased by $11,343,000 compared to the year-ended January 31, 2002. This increase in accounts receivable and inventory was financed through the credit facility with Wells Fargo Bank.
Capital spending for the six months ended July 31, 2002 was $1,517,000 compared to $2,880,000 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 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 May 1, 2002, the credit facility with Wells Fargo Bank was expanded to $70,000,000 from $50,000,000. The maximum principal amount available under this note was reduced on August 1, 2002 to $65,000,000, and will be reduced on September 1, 2002 to 60,000,000 and on October 1, 2002 to $40,000,000. At July 31, 2002, the Company had approximately $22,034,000 available under its credit facility with Wells Fargo Bank.
Net cash used in operating activities for the six months ended July 31, 2002 was $15,850,000 compared to $12,034,000 for the same period last year. The increase in cash used in operating activities was primarily due to increased inventory and account receivables and offset by an increase in accrued compensation and employee benefits. Long term debt was $50,628,000 as of July 31, 2002 compared to $26,647,000 as of January 31, 2002. Cashflow provided by the additional borrowings from Wells Fargo was used to finance the increased accounts receivable and inventory.
In April 1998, the Board of Directors approved a stock buyback program. In December 2001, the Board of Directors increased the authorized amount to $20,000,000. As of July 31, 2002, the Company has repurchased approximately 1,031,000 shares at a cost of approximately $14,723,000 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 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. For the three months and six months ended July 31, 2002, the Company paid $243,000 and $487,000 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. Incremental Furniture Focus revenues for the second quarter ended July 31, 2002 were approximately $1,000,000. For the fiscal year ending January 31, 2003, the Company anticipates that sales revenue will increase by $5,000,000 to $7,000,000 with a very modest impact on net income.
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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 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 July 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 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 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 July 31, 2002, the Company has borrowed $48,258,000 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 $109,000 and $174,000 for the quarter and six months ended July 31, 2002. The Company would benefit from a similar interest savings if the base rate were to fluctuate downward by the same amount.
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PART II
OTHER INFORMATION
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Exhibit 11 — Statement re: Computation of Earnings Per Share
Weighted average shares outstanding for the three and six months ended July 31, 2001 were adjusted for a 10% stock dividend declared on August 20, 2002.
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Exhibit 99.1 — CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS 906 OF THE ADOPTED SECTION PURSUANT TO SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Virco Mfg. Corporation (the “Company”) on Form 10-Q for the period ending July 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert A. Virtue, President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
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Exhibit 99.2 — CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS 906 OF THE ADOPTED SECTION PURSUANT TO SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Virco Mfg. Corporation (the “Company”) on Form 10-Q for the period ending July 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert E. Dose, Vice President — Finance of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
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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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