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, 1999 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 December 1, 1999 Common Stock 10,919,241* * Adjusted for 10% stock dividend declared August 17, 1999, date of record September 3, 1999, payable September 30, 1999.
2 VIRCO MFG. CORPORATION INDEX Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed consolidated balance sheets - October 31, 1999 and January 31, 1999 Condensed consolidated statements of income - Three months ended October 31, 1999 and 1998. Condensed consolidated statements of income - Nine months ended October 31, 1999 and 1998. Condensed consolidated statements of cash flows - Nine months ended October 31, 1999 and 1998. Notes to condensed consolidated financial statements - October 31, 1999. 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. None Item 6. Exhibits & Reports on Form 8-K. None Signatures 2
3 PART I 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 10/31/99 1/31/99 ------ -------- -------- <S> <C> <C> Current assets Cash $ 2,538 $ 1,086 Accounts and notes receivable 49,639 30,973 Less allowance for doubtful accounts (485) (200) -------- -------- Net accounts and notes receivable 49,154 30,773 Inventories (Note 2) Finished goods 24,508 32,211 Work in process 8,529 6,713 Raw materials and supplies 11,800 9,544 -------- -------- Total inventories 44,837 48,468 Prepaid expenses and deferred income tax 1,928 2,181 -------- -------- Total current assets 98,457 82,508 Property, plant and equipment Cost 126,058 100,035 Less accumulated depreciation (47,809) (40,715) -------- -------- Net property, plant and equipment 78,249 59,320 Other assets 10,589 9,552 -------- -------- $187,295 $151,380 ======== ======== </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 SHAREHOLDERS' EQUITY 10/31/99 1/31/99 ------------------------------------ -------- -------- <S> <C> <C> Current liabilities Checks released but not yet cleared bank $ 6,099 $ 4,670 Accounts payable 15,005 14,398 Income taxes payable 3,175 804 Current maturities on long-term debt 2,353 2,354 Other current liabilities 13,797 12,877 -------- -------- Total current liabilities 40,429 35,103 Non-current liabilities Long term debt (less current portion) 44,217 21,344 Other non-current liabilities 5,334 4,346 -------- -------- Total non-current liabilities 49,551 25,690 Deferred income taxes 1,664 1,664 Shareholders' 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; 10,919,241 shares issued at 10/31/99 and 9,945,014 shares issued at 1/31/99 109 100 Additional paid-in capital 84,501 68,361 Retained earnings 21,259 26,928 Less treasury stock at cost (494,505 shares at 10/31/99 and 301,087 shares at 1/31/99) (9,620) (5,814) Less unearned ESOP shares (192) (246) Less accumulated comprehensive loss (406) (406) -------- -------- Total shareholders' equity 95,651 88,923 -------- -------- $187,295 $151,380 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 4
5 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (Note 1) (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended ---------------------- 10/31/99 10/31/98 -------- -------- <S> <C> <C> Net sales $93,895 $92,691 Cost of goods sold 60,212 60,315 ------- ------- Gross profit 33,683 32,376 Selling, general and administrative expense 22,661 19,860 Provision for doubtful accounts -- 217 Interest expense 506 423 ------- ------- 23,167 20,500 Income before income taxes 10,516 11,876 Income taxes 4,102 4,572 ------- ------- Net income $ 6,414 $ 7,304 ======= ======= Earnings per share .62 .68 Earnings per share - assuming dilution .61 .66 Weighted average shares outstanding (a) 10,406 10,771 Weighted average shares outstanding- assuming dilution (a) 10,598 11,048 Dividend per share Cash (a) $ .02 $ .02 Stock 10% 10% </TABLE> (a) Adjusted for 10% stock dividend declared August 17, 1999. See notes to condensed consolidated financial statements. 5
6 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (Note 1) (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> Nine Months Ended ----------------------- 10/31/99 10/31/98 -------- -------- <S> <C> <C> Net sales $219,598 $225,168 Cost of goods sold 144,086 149,462 -------- -------- Gross profit 75,512 75,706 Selling, general and administrative expense 55,322 50,384 Provision for doubtful accounts 381 604 Interest expense 1,815 1,203 -------- -------- 57,518 52,191 Income before income taxes 17,994 23,515 Income taxes 7,018 9,053 -------- -------- Net income $ 10,976 $ 14,462 ======== ======== Earnings per share $ 1.05 1.35 Earnings per share - assuming dilution $ 1.03 1.31 Weighted average shares outstanding (a) 10,476 10,752 Weighted average shares outstanding- assuming dilution (a) 10,671 11,054 Dividend per share Cash (a) $ .06 $ .05 Stock 10% 10% </TABLE> (a) Adjusted for 10% stock dividend declared August 17, 1999. See notes to condensed consolidated financial statements. 6
7 VIRCO MFG. CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (Note 1) (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> Nine Months Ended ----------------------- 10/31/99 10/31/98 -------- -------- <S> <C> <C> Cash flows from operating activities Net income $ 10,976 $ 14,462 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 7,198 5,721 Provision for doubtful accounts 381 604 Loss on sales of fixed assets 175 129 Change in assets and liabilities: Accounts and notes receivable (18,762) (14,136) Inventories 3,631 7,368 Prepaid expenses and deposits 253 (2,247) Income taxes receivable/payable 2,371 3,211 Other assets 8 (356) Accounts payable and accrued expenses 3,944 5,054 -------- -------- Net cash provided by operating activities 10,175 19,810 Cash flows from investing activities Capital expenditures (26,343) (17,290) Proceeds from sale of assets 41 930 Net investment in life insurance (1,046) (1,035) -------- -------- Net cash used in investing activities (27,348) (17,395) Cash flows from financing activities Issuance of long-term debt 24,563 2,825 Repayment of long-term debt (1,690) (2,638) Payment of cash dividend (592) (553) Purchase of treasury stock (3,741) (1,997) Issuance of common stocks 31 145 Loans to ESOP 54 33 -------- -------- Net cash provided by (used in) financing activities 18,625 (2,185) Net change in cash 1,452 230 Cash at beginning of period 1,086 1,221 -------- -------- Cash at end of period $ 2,538 $ 1,451 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 7
8 VIRCO MFG. CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 31, 1999 and October 31, 1998 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 and nine-month periods ended October 31, 1999 are not necessarily indicative of the results that may be expected for the year ended January 31, 2000. The balance sheet at January 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by the Company's 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, 1999. 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 nine-month periods ended October 31, 1999. 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 nine-month period ended October 31, 1999 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 Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of convertible securities. 8
9 <TABLE> <CAPTION> 3 MONTHS ENDED 9 MONTHS ENDED -------------- -------------- (In thousands, except per share data) 10/31/99 10/31/98 10/31/99 10/31/98 - ------------------------- -------- -------- -------- -------- <S> <C> <C> <C> <C> Numerator: Net Income $6,414 $ 7,304 $10,976 $14,462 Denominator: Denominator for basic earnings per share - 10,406 10,771 10,476 10,752 weighted average shares Dilutive potential common shares 192 277 195 302 ------- ------- ------- ------- Denominator for diluted earnings per share - 10,598 11,048 10,671 11,054 adjusted weighted average shares and assumed conversions Basic earnings per share $ 0.62 $ 0.68 $ 1.05 $ 1.35 Diluted earnings per share $ 0.61 $ 0.66 $ 1.03 $ 1.31 </TABLE> Comprehensive income includes net income and minimum pension liability adjustments. Comprehensive income was $6,414,000 and $7,304,000 for the three months ended October 31, 1999, and 1998, respectively. Comprehensive income was $10,976,000 and $14,462,000 for the nine months ended October 31, 1999 and 1998, respectively. The Company operates in one business segment and is engaged in the design, production and distribution of quality furniture for the commercial and education markets. In 1999, the Company adopted the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed for or Obtained for Internal-use." The SOP requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal-use. The Company has historically capitalized costs associated with software developed for its own use. The adoption of this SOP 98-1 has no effect on the way the Company reports or has reported its financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, " Accounting for Derivative Instruments and Hedging Activities" (SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133 is effective for the Company for all fiscal quarters of fiscal years beginning February 1, 2001. Management does not believe that the adoption of this SFAS has no impact on the way the Company reports or has reported its financial statements. 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 third quarter of 1999, the Company earned net income of $6,414,000 on sales of $93,895,000 compared to net income of $7,304,000 on sales of $92,691,000 in the same period last year. Earnings were $.61 per share compared to $.66 per share in the same period last year, after giving effect to the 10% stock dividend declared August 17, 1999. For the nine months ended October 31, 1999, the Company earned net income of $10,976,000 on sales of $219,598,000 compared to net income of $14,462,000 on sales of $225,168,000 in the same period last year. Earnings were $1.03 per share compared to $1.31 per share in the same period last year, after giving effect to the 10% stock dividend declared August 17, 1999. 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 and changes in the buying pattern of educational customers. Although third quarter sales improved slightly, year to date sales have decreased by $5,570,000 compared to the same period last year. While shipments have declined, incoming orders were approximately level. We believe that two factors have contributed to the modest growth in third quarter sales and decline in year to date sales. First, the growth in the educational sales market was not as large as we had anticipated for the year. This, in combination with some very aggressive price competition from regional competitors has resulted in year to date educational sales, which are comparable to the prior year. Second, sales and orders of commercial furniture declined as a result the Company's strategic decision to reduce sales to mass merchandisers. The reduction in sales to mass merchandisers has been partially offset by increases in sales to hospitality markets, convention centers, churches, and the Government Services Administration. The Company continues to believe that its long-term interests will be served by avoiding this low-margin commodity business by emphasizing higher margin products and customers. Gross profits for the three months ended October 31, 1999, as a percent of sales, increased by 1% compared to the same period last year. The increase in gross profit is attributable to the Company's efforts to focus on more profitable products and customers, offset in part by production inefficiencies related to the start up of the new manufacturing facility. Selling, general and administrative expense for the quarter ended October 31, 1999 increased both in total dollars and as a percentage of sales compared to the same period last year. The increase in selling, general and administrative expense was partially attributable product mix. The reduction in mass merchant business, which was typically sold FOB factory, has been replaced in part by sales to educational and commercial customers, which typically include freight and installation. In addition, the inefficiencies related to the plant start up mentioned above, combined with the concurrent go live of the SAP system contributed to some additional costs incurred in the delivery and installation of furniture. Finally, the Company has incurred additional selling expenses relating to increased direct sales representatives, product development expenses, and information technology expenses relating to the implementation of an SAP Enterprise Resources Planning System. Interest expense increased by $83,000 for the quarter ended October 31, 1999 compared to the same period last year. The increase was attributable to a higher average borrowing balance offset by interest capitalized relating to assets under construction. Financial Condition: As a result of seasonally high shipments in the third quarter, accounts receivable increased by approximately $17,875,000 compared to year-end. The increase in accounts receivable during the third quarter of 1999 was greater than the increase in accounts receivable in the comparable quarter last year and indicates that the 11
12 seasonal nature of the Company's educational business continues to intensify. Inventory decreased by $3,631,000 compared to year-end due to high shipments in the third quarter. Capital spending for the quarter ended October 31, 1999 was $26,343,000 compared to $17,290,000 for the same period last year. The $9,053,000 increase in capital spending was primarily relating to the Conway, Arkansas facility expansion and SAP project. The Company believes that its investments in infrastructure and information systems will ultimately deliver improved operating efficiency. For further discussions on these two projects, please refer to the Company's 1998 Annual Report. These capital investments and the ongoing capital expenditures are being financed through credit facilities established with Wells Fargo Bank and GECC. At October 31, 1999, the Company has approximately $29,166,000 available under its $70,000,000 credit facility with Wells Fargo Bank. At November 1, 1999, the credit facility with Wells Fargo Bank was reduced to $50,000,000. Net cash flows provided by operating activities for the nine months ended October 31, 1999 totaled $10,175,000 compared to $19,810,000 for the same periods last year. The net $9,635,000 decrease in cash flows provided by operating activities is primarily due to the Company's reduced profits and increased account receivables. Long term debt was $44,217,000 as of October 31, 1999 compared to $21,344,000 as of January 31,1999. The $22,873,000 increase in long term debt is primarily due to the Company's reduced profitability, increased accounts receivable and increased capital spending. In April 1998, the Board of Directors approved a stock buyback program giving authorization to buy back up to $5,000,000 common stock. The amount authorized was subsequently increased to $14,000,000. As of October 31, 1999, the Company has incurred approximately $9,600,000 for the buyback. 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 17, 1999, the Company's Board of Directors authorized a 10% stock dividend payable on September 30, 1999 to stockholders on record as of September 3, 1999. This resulted in the issuance of 947,703 additional shares of common stock. All per share and weighted average share amounts have been restated to reflect this stock dividend. In the same meeting, the Board also authorized a $0.02 per share cash dividend payable on October 29, 1999 to stockholders on record as of October 11, 1999. For the nine months ended October 31, 1999, the Company paid $592,000 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. 12
13 Year 2000 Compliance: The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software of embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, manufacture product, or engage in similar normal business activities. The Company completed an assessment of its primary information systems in early 1997. The Company's legacy mainframe system would require modifications to be year 2000 compliant. The cost of these modifications was estimated to be approximately $200,000. As part of this assessment, the Company reviewed various software packages that would be Year 2000 compliant and improve our information system capabilities. After extended review, the Company determined that the benefits attainable by implementing an enterprise resource planning system justified the additional cost of acquiring and implementing such a system. In August 1997, the Board of Directors approved the implementation of a SAP Enterprise Resource Planning System. This implementation was started in October 1997 and Virco contracted with Hewlett Packard and SAP to provide hardware, software and consulting services related to this implementation. The hardware, software and operating systems selected were represented to be year 2000 compliant prior to beginning the implementation. Subsequent to year-end, on March 1, 1999 the Company went live on the SAP system for all required modules except for payroll, which was converted in April 1999. As part of the Year 2000 effort, the Company has installed, and will continue to install, patches and upgrades as provided by hardware and software providers to ensure the systems will be Year 2000 compliant. As of October 31, 1999 the Company has expended approximately $11,000,000 on the implementation in addition to dedicating considerable management time and effort to this project. The Company believes that assessment, remediation and testing of local area networks, which were installed as part of the SAP project, is 100% complete. The Company's primary information systems do not have any significant interfaces with third party vendors. The Company does have remote access with financial institutions, credit institutions and other parties. The Company has queried the financial institutions and is not aware of any related Year 2000 issue that would materially affect the Company. In addition to the primary information systems, the Company is dependent on computer-controlled production and manufacturing equipment. The Company believes that assessment, remediation and testing of this equipment is 100% complete. The Company has queried significant suppliers and vendors that do not share information systems with the Company (external agents). To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, of capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. The Company has not queried customers to determine whether they are Year 2000 ready. The Company does not have any one significant customer upon which it is dependent. With regard to the Company's product line, the Company manufactures furniture, including furniture designed for computers. There is no software or hardware embedded in the furniture. Accordingly, the Company believes that there is no Year 2000 exposure for any products it has sold. 13
14 The Company has utilized both internal and external resources to reprogram, replace, test and implement the software and operating equipment for the Year 2000. The total cost of the Year 2000 project is estimated at $12,000,000. This includes costs to implement the SAP Enterprise Resource Planning System, which is expected to significantly enhance the Company's operating capabilities. This expenditure is being financed with lease financing through GE Capital and operating cash flows. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company believes that it has completed all necessary phases of the Year 2000 program. In the event that the Company has not successfully remediated all Y2K issues, the Company could be unable to manufacture or sell certain products, which are dependent upon automated systems. The Company sells a significant amount of furniture to publicly funded facilities. While no one customer is significant to the Company, if a large government agency which funds educational institutions were to have Year 2000 issues which affected school funding, the Company could incur a material loss of sales and cash flow. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation related to computer systems failure. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company does not have a contingency plan in the event it has not adequately completed all phases of the Year 2000 program. The Company continually evaluates the status of the program and will prepare a contingency plan if it becomes apparent that the program, or portions thereof, will not be completed on a timely basis. 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, 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, 1999. 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. 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: December 15, 1999 By: /s/ ROBERT E. DOSE --------------------------------- Robert E. Dose Vice President - Finance Date: December 15, 1999 By: /s/ BASSEY YAU --------------------------------- Bassey Yau Corporate Controller 15