SECURITIES AND EXCHANGE COMMISSION
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
FORM 10-Q
For Quarter Ended July 31, 2004 Commission File Number 1-8777
VIRCO MFG. CORPORATION
| 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
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
The number of shares outstanding of each of the issuer’s classes of common stock, as of August 4, 2004.
| Common Stock | 13,098,364 Shares |
VIRCO MFG. CORPORATION
INDEX
(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.
2
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.
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 financial results for the first quarter ended April 30, 2004.
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.
Signatures
3
PART 1
Item 1. Financial Statements
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| 7/31/2004 |
1/31/2004 |
7/31/2003 |
||||||||||
| Unaudited (Note 1) | Unaudited (Note 1) | |||||||||||
ASSETS |
||||||||||||
Current assets |
||||||||||||
Cash |
$ | 1,012 | $ | 2,059 | $ | 2,270 | ||||||
Accounts and notes receivable |
39,137 | 17,696 | 35,743 | |||||||||
Less allowance for doubtful accounts |
312 | 225 | 358 | |||||||||
Net accounts and notes receivable |
38,825 | 17,471 | 35,385 | |||||||||
Income tax receivable |
1,130 | 1,423 | 919 | |||||||||
Inventories (Note 2) |
||||||||||||
Finished goods |
21,091 | 10,470 | 24,236 | |||||||||
Work in process |
13,761 | 11,141 | 17,084 | |||||||||
Raw materials and supplies |
8,030 | 6,860 | 10,079 | |||||||||
Total inventories |
42,882 | 28,471 | 51,399 | |||||||||
Deferred income taxes |
— | — | 2,416 | |||||||||
Prepaid expenses |
775 | 1,962 | 565 | |||||||||
Total current assets |
84,624 | 51,386 | 92,954 | |||||||||
Property, plant & equipment |
||||||||||||
Cost |
158,768 | 157,271 | 156,828 | |||||||||
Less accumulated depreciation |
98,630 | 93,913 | 89,094 | |||||||||
Net property, plant & equipment |
60,138 | 63,358 | 67,734 | |||||||||
Goodwill and other intangible assets |
2,346 | 2,350 | 2,200 | |||||||||
Other assets |
9,174 | 9,174 | 13,492 | |||||||||
Total assets |
$ | 156,282 | $ | 126,268 | $ | 176,380 | ||||||
4
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| 7/31/2004 |
1/31/2004 |
7/31/2003 |
||||||||||
| Unaudited (Note 1) | Unaudited (Note 1) | |||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
Current liabilities |
||||||||||||
Checks released but not yet cleared bank |
$ | 3,596 | $ | 2,702 | $ | 3,743 | ||||||
Accounts payable |
18,401 | 9,513 | 9,942 | |||||||||
Accrued compensation and employee benefits |
5,841 | 5,636 | 9,376 | |||||||||
Current maturities on long-term debt |
21,261 | 3,138 | 58,363 | |||||||||
Other current liabilities |
5,016 | 4,993 | 5,478 | |||||||||
Total current liabilities |
54,115 | 25,982 | 86,902 | |||||||||
Non-current liabilities |
||||||||||||
Accrued self-insurance retention and other |
3,958 | 4,053 | 4,527 | |||||||||
Accrued pension expenses |
12,860 | 11,686 | 15,084 | |||||||||
Long term debt (less current portion) |
25,560 | 22,195 | — | |||||||||
Total non-current liabilities |
42,378 | 37,934 | 19,611 | |||||||||
Deferred income taxes |
— | — | 98 | |||||||||
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;
14,585,894 at 7/31/2004;
14,583,331 shares issued at
1/31/2004 and 7/31/2003 |
146 | 146 | 146 | |||||||||
Additional paid-in capital |
127,140 | 127,133 | 126,728 | |||||||||
Accumulated deficit |
(43,982 | ) | (41,412 | ) | (31,750 | ) | ||||||
Less treasury stock at cost (1,487,530
shares at 7/31/2004 and 1/31/2004;
1,484,332 at 7/31/2003) |
(19,271 | ) | (19,271 | ) | (19,379 | ) | ||||||
Less accumulated comprehensive loss |
(4,244 | ) | (4,244 | ) | (5,976 | ) | ||||||
Total stockholders’ equity |
59,789 | 62,352 | 69,769 | |||||||||
Total liabilities and stockholders’ equity |
$ | 156,282 | $ | 126,268 | $ | 176,380 | ||||||
5
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONS
(Amounts in thousands, except per share data)
| Three Months Ended |
||||||||
| 7/31/2004 |
7/31/2003 |
|||||||
Net sales |
$ | 68,813 | $ | 65,861 | ||||
Cost of goods sold |
47,016 | 44,895 | ||||||
Gross profit |
21,797 | 20,966 | ||||||
Operating expense |
||||||||
Selling, general and administrative expense |
19,204 | 21,426 | ||||||
Separation charges |
— | 7,788 | ||||||
Interest expense |
562 | 418 | ||||||
| 19,766 | 29,632 | |||||||
Income/(loss) before income taxes |
2,031 | (8,666 | ) | |||||
Income tax expense/(benefit) |
— | (380 | ) | |||||
Net income/(loss) |
$ | 2,031 | $ | (8,286 | ) | |||
Weighted average shares outstanding (a) |
||||||||
Basic |
13,098 | 13,095 | ||||||
Diluted |
13,406 | 13,095 | ||||||
Net income/(loss) per common share (a) |
||||||||
Basic |
$ | 0.16 | $ | (0.63 | ) | |||
Diluted |
$ | 0.15 | $ | (0.63 | ) | |||
Dividend per common share |
||||||||
Cash |
$ | — | $ | 0.02 | ||||
(a) For fiscal year 2003, net loss per share was calculated based on basic shares outstanding at July 31, 2003, due to the anti-dilutive effect on the inclusion of common stock equivalent shares.
See Notes to Condensed Consolidated Financial Statements.
6
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
| Six Months Ended |
||||||||
| 7/31/2004 |
7/31/2003 |
|||||||
Net sales |
$ | 99,134 | $ | 97,041 | ||||
Cost of goods sold |
67,020 | 65,664 | ||||||
Gross profit |
32,114 | 31,377 | ||||||
Operating expense |
||||||||
Selling, general and administrative expense |
33,745 | 38,022 | ||||||
Separation charges |
— | 7,788 | ||||||
Interest expense |
939 | 812 | ||||||
| 34,684 | 46,622 | |||||||
Loss before income taxes |
(2,570 | ) | (15,245 | ) | ||||
Income tax expense/(benefit) |
— | (2,946 | ) | |||||
Net loss |
$ | (2,570 | ) | $ | (12,299 | ) | ||
Weighted average shares outstanding (a) |
||||||||
Basic |
13,111 | 13,247 | ||||||
Net loss per common share (a) |
||||||||
Basic |
$ | (0.20 | ) | $ | (0.93 | ) | ||
Dividend per common share |
||||||||
Cash |
$ | — | $ | 0.04 | ||||
(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.
See Notes to Condensed Consolidated Financial Statements.
7
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (Note 1)
(Dollar amounts in thousands)
| Six Months Ended |
||||||||
| 7/31/2004 |
7/31/2003 |
|||||||
Operating activities |
||||||||
Net loss |
$ | (2,570 | ) | $ | (12,299 | ) | ||
Adjustments to reconcile net loss to net cash used
in operating activities |
||||||||
Depreciation |
4,934 | 6,030 | ||||||
Provision for doubtful accounts |
87 | 102 | ||||||
Loss on sale of property, plant and equipment |
2 | 49 | ||||||
Changes in assets and liabilities |
||||||||
Accounts and notes receivable |
(21,441 | ) | (18,086 | ) | ||||
Inventories |
(14,411 | ) | (8,360 | ) | ||||
Prepaid expenses and other current assets |
1,187 | 930 | ||||||
Income taxes receivable/payable |
293 | (4,457 | ) | |||||
Accounts payable and accrued expenses |
11,089 | 8,332 | ||||||
Net cash used in operating activities |
(20,830 | ) | (27,759 | ) | ||||
Investing activities |
||||||||
Capital expenditures |
(1,718 | ) | (777 | ) | ||||
Proceeds from sale of property, plant and equipment |
6 | — | ||||||
Net cash used in investing activities |
(1,712 | ) | (777 | ) | ||||
Financing activities |
||||||||
Issuance of long-term debt |
22,530 | 30,622 | ||||||
Repayment of long-term debt |
(1,042 | ) | (631 | ) | ||||
Purchase of treasury stock |
— | (419 | ) | |||||
Payment of cash dividend |
— | (525 | ) | |||||
Issuance of common stock |
7 | 120 | ||||||
Net cash provided by financing activities |
21,495 | 29,167 | ||||||
Net change in cash |
(1,047 | ) | 631 | |||||
Cash at beginning of year |
2,059 | 1,639 | ||||||
Cash at end of quarter |
$ | 1,012 | $ | 2,270 | ||||
See Notes to Condensed Consolidated Financial Statements.
8
VIRCO MFG. CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2004
| 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 and six month periods ended July 31, 2004, are not necessarily indicative of the results that may be expected for the year ending January 31, 2005. The balance sheet at January 31, 2004, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States 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, 2004. | |||
| Note 2. | Inventories | |||
| Year end financial statements at January 31, 2004 reflect inventories verified by physical counts with the material content valued by the LIFO method. At July 31, 2004 and 2003, 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 adjustments have been made for the periods ended July 31, 2004 and 2003. LIFO reserves at July 31, 2004 and January 31, 2004 were $4,042,000. LIFO reserves at July 31, 2003 were $3,527,000. Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated. | ||||
| Note 3. | Debt | |||
| The Company has entered into a revolving credit facility with Wells Fargo Bank, 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 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, Virco 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 (4.25% at July 31, 2004) 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%. As of July 31, 2003, the Company violated one of the covenants under the line of credit with Wells Fargo Bank. Wells Fargo provided a waiver of the covenant, but | ||||
9
| required the Company to limit stock buyback activity to $250,000 for the period between June 4, 2003 and December 1, 2003. | ||||
| Note 4. | Income Taxes | |||
| We recognize deferred income taxes under the asset and liability method of accounting for income taxes in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on this consideration, we believe it is more likely than not that the net deferred tax assets will not be realized, and a valuation allowance has been recorded against the net deferred tax assets at July 31, 2004 and January 31, 2004; a partial valuation allowance has been recorded at July 31, 2003. At July 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 can potentially be carried forward total approximately $13.8 million at July 31, 2004. | ||||
| Note 5. | Net Income/(Loss) Per Share | |||
| For the three and six month periods ended July 31, 2004, net income/(loss) per share was calculated based on diluted shares outstanding at July 31, 2004. For the three and six month periods ended July 31, 2003, net loss per share was calculated based on basic shares outstanding at July 31, 2003 due to the anti-dilutive effect of the inclusion of common stock equivalent shares. The following table sets forth the computation of income/(loss) per share (in thousands, except per share data): | ||||
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| July 31 |
July 31 |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income/(loss) |
$ | 2,031 | $ | (8,286 | ) | $ | (2,570 | ) | $ | (12,299 | ) | |||||
Average shares
outstanding |
13,098 | 13,095 | 13,111 | 13,247 | ||||||||||||
Net effect of
dilutive stock
options – based on
the treasury stock
method using
average market
price |
308 | 15 | 169 | 73 | ||||||||||||
Totals |
13,406 | 13,110 | 13,280 | 13,320 | ||||||||||||
10
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| July 31 |
July 31 |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income/(loss)
per share - basic |
$ | 0.16 | $ | (0.63 | ) | $ | (0.20 | ) | $ | (0.93 | ) | |||||
Net income/(loss)
per share - diluted |
$ | 0.15 | $ | (0.63 | ) | $ | (0.20 | ) | $ | (0.93 | ) | |||||
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 six months ended July 31, 2004 and July 31, 2003 are as follows (in thousands, except per share data):
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| July 31 |
July 31 |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income/(loss) |
$ | 2,031 | $ | (8,286 | ) | $ | (2,570 | ) | $ | (12,299 | ) | |||||
Total stock-based
employee
compensation
expense determined
under the fair
value based method
for all awards, net
of related tax
effects |
13 | 10 | 26 | 20 | ||||||||||||
Net income/(loss) |
$ | 2,018 | $ | (8,296 | ) | $ | (2,596 | ) | $ | (12,319 | ) | |||||
Net income/(loss)
per share - basic |
$ | 0.15 | $ | (0.63 | ) | $ | (0.20 | ) | $ | (0.93 | ) | |||||
Net income/(loss)
per share - diluted |
$ | 0.15 | $ | (0.63 | ) | $ | (0.20 | ) | $ | (0.93 | ) | |||||
| Note 6. | Comprehensive Income/(Loss) | |||
| Comprehensive income/(loss) for the three and six months ended July 31, 2004 and July 31, 2003 was the same as net income/(loss) reported on the statement of income and operations. | ||||
| Accumulated comprehensive loss at July 31, 2004, January 31, 2004 and 2003 is composed of minimum pension liability adjustments. | ||||
| Note 7. | Retirement Plans | |||
| The Company and its subsidiaries cover all employees under a noncontributory defined benefit retirement plan, the Virco Employees’ Retirement Plan (the Plan). Benefits under the Plan are based on years of service and career average earnings. As more fully described in the Form 10K dated January 31, 2004, benefit accruals under this plan were frozen effective December 31, 2003. | ||||
11
The Company also provides a supplementary retirement plan for certain key employees, the VIP Retirement Plan (VIP Plan). The VIP Plan provides a benefit of up to 50% of average compensation for the last five years in the VIP Plan, offset by benefits earned under the Virco Employees’ Retirement Plan. As more fully described in the Form 10K dated January 31, 2004, benefit accruals under this plan were frozen effective December 31, 2003.
The Company also provides a non-qualified plan for non-employee directors of the Company. The Plan provides a lifetime annual retirement benefit equal to the director’s annual retainer fee for the fiscal year in which the director terminates his or her position with the Board, subject to the director providing 10 years of service to the Company. As more fully described in the Form 10K dated January 31, 2004, benefit accruals under this plan were frozen effective December 31, 2003.
The net periodic pension costs for the Virco Employees Retirement Plan, the VIP Retirement Plan, and the Non-Employee Directors Retirement Plan for the three and six months ended July 31, 2004 and 2003 were as follows (in thousands):
| Non-Employee |
||||||||||||||||||||||||
| Directors Retirement |
||||||||||||||||||||||||
| Pension Plan |
VIP Retirement Plan |
Plan |
||||||||||||||||||||||
| Three months ended July 31, |
||||||||||||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
|||||||||||||||||||
Service cost |
$ | 57 | $ | 346 | $ | 65 | $ | 200 | $ | 5 | $ | 5 | ||||||||||||
Interest cost |
321 | 466 | 83 | 122 | 6 | 6 | ||||||||||||||||||
Expected return on plan assets |
(250 | ) | (294 | ) | — | — | — | — | ||||||||||||||||
Amortization of transition amount |
(9 | ) | (10 | ) | — | — | — | — | ||||||||||||||||
Amortization of prior service cost |
95 | 140 | (115 | ) | (124 | ) | 22 | 22 | ||||||||||||||||
Recognized net actuarial loss |
52 | 270 | 22 | 102 | (6 | ) | (6 | ) | ||||||||||||||||
Settlement and curtailment |
— | 1,538 | — | (132 | ) | — | — | |||||||||||||||||
Net periodic pension cost |
$ | 266 | $ | 2,456 | $ | 55 | $ | 168 | $ | 27 | $ | 27 | ||||||||||||
| Non-Employee |
||||||||||||||||||||||||
| Directors Retirement |
||||||||||||||||||||||||
| Pension Plan |
VIP Retirement Plan |
Plan |
||||||||||||||||||||||
| Six months ended July 31, |
||||||||||||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
|||||||||||||||||||
Service cost |
$ | 115 | $ | 692 | $ | 130 | $ | 400 | $ | 10 | $ | 10 | ||||||||||||
Interest cost |
642 | 932 | 166 | 244 | 12 | 12 | ||||||||||||||||||
Expected return on plan assets |
(500 | ) | (587 | ) | — | — | — | — | ||||||||||||||||
Amortization of transition amount |
(18 | ) | (21 | ) | — | — | — | — | ||||||||||||||||
Amortization of prior service cost |
190 | 281 | (230 | ) | (248 | ) | 44 | 44 | ||||||||||||||||
Recognized net actuarial loss |
104 | 539 | 44 | 204 | (12 | ) | (12 | ) | ||||||||||||||||
Settlement and curtailment |
— | 1,538 | — | (132 | ) | — | — | |||||||||||||||||
Net periodic pension cost |
$ | 533 | $ | 3,374 | $ | 110 | $ | 468 | $ | 54 | $ | 54 | ||||||||||||
The Company previously disclosed in its financial statements for the year ended January 31, 2004 that it expects to contribute approximately $1 million to its deferred benefit plans during the year ending January 31, 2005.
12
| Note 8. | Warranty | |||
| The Company provides a product warranty on most products. It generally warrants that customers can return a defective product during the specified warranty period following purchase in exchange for a replacement product or that the Company can repair the product at no charge to the customer. The Company determines whether replacement or repair is appropriate in each circumstance. The Company uses historic data to estimate appropriate levels of warranty reserves. Because product mix, production methods, and raw material sources change over time, historic data may not always provide precise estimates for future warranty expense. The following is a summary of the Company’s warranty-claim activity for the six months ended July 31, 2004 and 2003. | ||||
| Six months ended July 31, | ||||||||
| 2004 |
2003 |
|||||||
Beginning Accrued Warranty Balance |
$ | 1,751,000 | $ | 901,000 | ||||
Provision | ||||||||