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 October 31, 1997 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 November 24, 1997. Common Stock 8,882,694 Shares* * Adjusted for Stock Split declared August 19, 1997, date of record September 5, 1997, payable September 30, 1997.
2 VIRCO MFG. CORPORATION AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed consolidated balance sheets - October 31, 1997 and January 31, 1997. Condensed consolidated statements of income - Three months ended October 31, 1997 and 1996. Consdensed consolidated statements of income - Nine months ended October 31, 1997 and 1996. Condensed consolidated statements of cash flows - Three months ended October 31, 1997 and 1996. Condensed consolidated statements of cash flows - Nine months ended October 31, 1997 and 1996. Notes to condensed consolidated financial statements - October 31, 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (Note 1) (Dollar amounts in thousands) ASSETS 10/31/97 1/31/97 --------- --------- Current assets Cash $ 1,467 $ 722 Accounts and notes receivable 36,559 25,610 Less allowance for doubtful accounts (763) (100) --------- --------- Net accounts and notes receivable 35,796 25,510 Income taxes receivable -- -- Inventories (note 2) Finished goods 19,973 26,902 Work in process 8,071 6,402 Raw materials and supplies 10,422 10,340 --------- --------- Total inventories 38,466 43,644 Prepaid expenses and deferred income tax 3,828 2,812 --------- --------- Total current assets 79,557 72,688 Restricted short-term investment 442 660 Property, plant & equipment Cost 73,122 79,666 Less accumulated depreciation (36,146) (42,188) --------- --------- Net property, plant & equipment 36,976 37,478 Other assets 7,877 7,194 --------- --------- $ 124,852 $ 118,020 ========= ========= The accompanying notes are an integral part of these condensed financial statements. 3
4 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (Note 1) (Dollar amounts in thousands) <TABLE> <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY 10/31/97 1/31/97 --------- --------- <S> <C> <C> Current liabilities Checks released but not yet cleared bank $ 4,118 $ 4,790 Accounts payable 12,209 11,029 Income taxes payable 3,230 317 Current maturities on long-term debt 2,475 980 Other current liabilities 13,196 10,429 --------- --------- Total current liabilities 35,228 27,545 Non-current liabilities Long term debt (less current portion) 9,732 21,513 Other non-current liabilities 3,883 3,883 --------- --------- Total non-current liabilities 13,615 25,396 Deferred income taxes 1,114 1,114 Shareholders' equity Preferred stock: Authorized 3,000,000 shares, $.01 par value; none issued or outstanding -- -- Common stock: Authorized 10,000,000 shares, $.01 par value; 8,879,694 shares issued at 10/31/97 and 8,859,444 shares issued at 1/31/97 89 59 Additional paid-in capital 50,258 50,104 Retained earnings 25,240 14,251 Less treasury stock at cost (22,389 Shares) (172) (172) Loan to ESOP trust (520) (277) --------- --------- Total shareholders' equity 74,895 63,965 --------- --------- $ 124,852 $ 118,020 ========= ========= </TABLE> The accompanying notes are an integral part of these condensed financial statements. 4
5 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (Note 1) (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> 3 Months Ended -------------- 10/31/97 10/31/96 ---------- ---------- <S> <C> <C> Net sales $ 87,239 $ 79,834 Cost of goods sold 58,806 54,802 ---------- ---------- Gross profit 28,433 25,032 ---------- ---------- Shipping, selling, general and administrative expenses 16,711 16,085 Provision for doubtful accounts 286 241 Provision for plant shut down -- -- Interest expense 407 626 ---------- ---------- 17,404 16,952 ---------- ---------- Income before income taxes 11,029 8,080 Income taxes 4,264 2,983 ---------- ---------- Net income $ 6,765 $ 5,097 ========== ========== Earnings per share $ .74 $ .57 Weighted average shares outstanding (a) 9,184,300 9,019,313 Dividend declared (a) Cash (per share) $ .02 $ .07 Stock 3 for 2 split 10% </TABLE> (a) Adjusted for three for two stock split declared August 19, 1997. The accompanying notes are an integral part of these condensed financial statements. 5
6 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (Note 1) (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> 9 Months Ended -------------- 10/31/97 10/31/96 ---------- ---------- <S> <C> <C> Net sales $ 212,006 $ 189,117 Cost of goods sold 143,380 133,600 ---------- ---------- Gross profit 68,626 55,517 ---------- ---------- Shipping, selling, general and administrative expenses 45,065 41,485 Provision for doubtful accounts 653 567 Provision for plant shut down 2,600 -- Interest expense 1,654 2,255 ---------- ---------- 49,972 44,307 ---------- ---------- Income before income taxes 18,654 11,210 Income taxes 7,162 4,204 ---------- ---------- Net income $ 11,492 $ 7,006 ========== ========== Earnings per share $ 1.26 $ .78 Weighted average shares outstanding (a) 9,131,493 8,992,091 Dividend declared (a) Cash (per share) $ .05 .07 Stock 3 for 2 split 10% </TABLE> (a) Adjusted for three for two stock split declared August 19, 1997. The accompanying notes are an integral part of these condensed financial statements. 6
7 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (note 1) <TABLE> <CAPTION> (Dollar amounts in thousands, except per share data) 3 Months Ended -------------- 10/31/97 10/31/96 -------- -------- <S> <C> <C> Cash flows from operating activities Net income $ 6,765 $ 5,097 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,948 2,123 Provision for doubtful accounts 333 305 Gain on sales of fixed assets (604) -- Change in assets and liabilities: Accounts and notes receivable 5,072 3,448 Inventories 15,017 10,856 Prepaid expenses and deposits (462) 53 Income taxes payable 946 1,376 Other assets (209) 2 Accounts payable and accrued expenses 2,301 5,303 -------- -------- Net cash provided by operating activities 31,107 28,563 Cash flows from investing activities Capital expenditures (3,531) (1,968) Proceeds from sale of assets 2,259 -- Net investment in life insurance (63) (65) Restricted short term investments (6) (8) -------- -------- Net cash used in investing activities (1,341) (2,041) Cash flows from financing activities Repayment of long-term debt (29,887) (26,855) Issuance of common stock 100 -- Payment of cash dividend (177) (591) Loans to ESOP (48) (285) -------- -------- Net cash used in financing activities (30,012) (27,731) Net change in cash (246) (1,209) Cash at beginning of quarter 1,713 1,252 -------- -------- Cash at end of quarter $ 1,467 $ 43 ======== ======== </TABLE> The accompanying notes are an integral part of these condensed financial statements. 7
8 VIRCO MFG. CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (note 1) <TABLE> <CAPTION> (Dollar amounts in thousands, except per share data) 9 Months Ended -------------- 10/31/97 10/31/96 -------- -------- <S> <C> <C> Cash flows from operating activities Net income $ 11,492 $ 7,006 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,337 5,053 Provision for doubtful accounts 667 567 Gain on sales of fixed assets (561) -- Change in assets and liabilities: Accounts and notes receivable (10,953) (7,202) Inventories 5,178 9,619 Prepaid expenses and deposits (1,016) (344) Income taxes payable 2,913 2,479 Other assets 90 53 Accounts payable and accrued expenses 3,275 4,982 -------- -------- Net cash provided by operating activities 16,422 22,213 Cash flows from investing activities Capital expenditures (6,533) (5,691) Proceeds from sale of assets 2,259 -- Net investment in life insurance (773) (665) Restricted short term investments 218 620 -------- -------- Net cash used in investing activities (4,829) (5,736) Cash flows from financing activities Repayment of long-term debt (10,286) (16,211) Issuance of common stock 154 -- Payment of cash dividend (473) (591) Loans to ESOP (243) (293) -------- -------- Net cash used in financing activities (10,848) (17,095) Net change in cash 745 (618) Cash at beginning of quarter 722 661 -------- -------- Cash at end of quarter $ 1,467 $ 43 ======== ======== </TABLE> The accompanying notes are an integral part of these condensed financial statements. 8
9 VIRCO MFG. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS October 31, 1997 and October 31, 1996 Note 1: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 October 31, 1997 are not necessarily indicative of the results that may be expected for the year ended January 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant Company and Subsidiaries' annual report on Form 10-K for the year ended January 31, 1997. 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 October 31, 1997. Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated. Note 3. Income Taxes The Company adopted Statement of Financial Accounting Standards (SFAS) No 109. Income taxes for the nine-month period ended October 31, 1997 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 Net Income/Loss Per Common Share. The per share data for the three and nine month periods ended October 31, 1997 are based on the weighted average number of common and common share equivalents outstanding during the period. Stock options are considered common share equivalents if dilutive. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective for annual and interim financial statements issued for periods ending after December 15, 1997 and early adoption is not permitted. When adopted, the statement will require restatement of prior years; earnings per share ("EPS"), SFAS 128 was issued to simplify the standards for calculating EPS previously found in APB No. 15, Earnings Per Share, SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. The new rules also require dual presentation of basic and diluted EPS on the face of the statement of operations for companies 9
10 with a complex capital structure. For the Company, basic EPS will exclude the dilutive effects of stock options and warrants. Diluted EPS for the Company will reflect all potential dilutive securities. Under the provisions of SFAS 128, basic and dilutive EPS would have been as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- 10/31/97 10/31/96 10/31/97 10/31/96 -------- -------- -------- -------- <S> <C> <C> <C> <C> EPS-Basic Shares O/S 0.76 0.58 1.30 0.79 EPS-Fully Diluted Shares O/S 0.74 0.56 1.25 0.78 </TABLE> On August 19, 1997, the Company's Board of Directors authorized a three for two stock split effected in the form of a 50% stock dividend payable on September 30, 1997 to stockholders of record September 5, 1997. This resulted in the issuance of 2,959,898 additional shares of common stock as of September 3, 1997. All per share and weighted average share amounts have been restated to reflect this stock split. Note 5. On May 28, 1997, the Company announced that the Virsan Mexico manufacturing facility would be shut down, and the related property, plant, equipment, and inventory would either be sold or transferred to other Virco manufacturing facilities. As more fully discussed in the Management's Discussion and Analysis, the Company recorded a $2,600,000 pre-tax charge in the second quarter related to this plant closure. 10
11 VIRCO MFG. CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations: For the third quarter of 1997, the Company earned a net profit of $6,765,000 on sales of $87,239,000 compared to a net income of $5,097,000 on sales of $79,834,000 in the same period last year. Earnings were $.74 share compared to $.57 per share in the same period last year. For the nine month period ended October 31, 1997, the Company earned a net profit of $11,492,000 on sales of $212,006,000 compared to a net profit of $7,006,000 on sales of $189,117,000 in the same period prior year. Earnings were $1.26 per share compared to $0.78 per share in the same period last year. 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 increase in sales compared to the prior year is attributable to increases in volume combined with selected price increases. The significant improvement in profitability is attributable to an improvement in gross margin from 29.4% for the first nine months of 1996 to 32.4% for the same period of 1997. The increase in gross margin is attributable to stable material costs and improvements in production efficiency. Sales backlog at October 31, 1997 is approximately $600,000 greater than the prior year. In May 1997, the Company decided to discontinue operations at the Mexico manufacturing facility. Subsequently, the Company sold the assets of the Mexican facility on October 8, of this year. The facility ceased operations on October 20, 1997. The production requirements from this facility were transferred to the Torrance, CA and Conway, AR manufacturing plants. As of October 31, 1997, 530 of 550 employees were terminated. Included in the second quarter results, the Company recorded a plant closing reserve of $2,600,000, and $2,515,000 were charged against this reserve during the second and third quarters. The primary component of this reserve is related to severance benefits which were paid to the employees in accordance with Mexican law. Other components include voluntary severance payments to U.S. employees who work at this facility and other miscellaneous costs associated with the shutdown. At the August 19, 1997 Board meeting, the Board of Directors authorized an expansion and reconfiguration of the Conway, Arkansas facility. It is anticipated that this expansion will incorporate cell-based manufacturing concepts which have been extremely successful at the Torrance, CA manufacturing plant. It is expected that the expansion and re-configuration will cost between $15 to $20 million, and occur over a 20 month period starting October 1, 1997. At the same meeting, the Board of Directors authorized the Company to install a new business information system to replace existing mainframe applications. The business information system is expected to cost approximately $5,000,000. Phase one of this implementation is scheduled to occur between October 1, 1997 and May 1, 1998. Financial Condition: As a result of seasonally high sales activity, accounts receivable increased by $10,286,000 compared to January 31, 1997. Inventory decreased by $5,178,000 from January 31, 1997 due to seasonally high third quarter sales. Cash flow is strong with $16,422,000 of cash generated from operations in the nine months ended October 31, 1997. The strong cash flow coupled with a modest level of capital expenditures enabled us to pay down 11
12 $10,286,000 of debt in the nine month period ended October 31, 1997. Long term debt was $12,207,000 as of October 31, 1997 compared to $22,493,000 as of January 31, 1997. The expansion of the Conway, AR manufacturing facility and the installation of the new business information system will be financed through our revolving line of credit with Wells Fargo, lease financing through GE Capital, and internally generated funds. At October 31, 1997, the Company had approximately $43,000,000 available under its credit facility with Wells Fargo. 12
13 PART II VIRCO MFG. CORPORATION SUBSIDIARIES Other Information Item 4. Submission of matters to a vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K None 13
14 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: By: -------------------------- -------------------------- James R. Braam Vice President - Finance Date: By: -------------------------- -------------------------- Robert E. Dose Corporate Controller 14