VIRCO MFG CORPORATION - 10-Q Quarterly Report

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, 2004		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 incorporation or organization)		(I.R.S. Employer 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 þ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No

The number of shares outstanding of each of the issuer’s classes of common stock, as of December 3, 2004.


Common Stock		13,098,364 Shares


		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.
		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.
		On December 10, 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 third quarter ended October 31, 2004.
Signatures
EX-31.1
EX-31.2
EX-32.1

PART 1

Item 1. Financial Statements

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts in thousands)
ASSETS	10/31/2004		1/31/2004		10/31/2003
	Unaudited (Note 1)				Unaudited (Note 1)
Current assets
Cash	$	1,633	$	2,059	$	2,284
Accounts and notes receivable		30,097		17,696		25,003
Less allowance for doubtful accounts		331		225		320

Net accounts and notes receivable		29,766		17,471		24,683
Income tax receivable		1,136		1,423		853
Inventories (Note 2)
Finished goods		14,180		10,470		10,873
Work in process		5,403		11,141		8,615
Raw materials and supplies		6,218		6,860		6,916

Total inventories		25,801		28,471		26,404
Deferred income taxes		—		—		2,416
Prepaid expenses		728		1,962		589

Total current assets		59,064		51,386		57,229
Property, plant & equipment
Cost		159,309		157,271		156,978
Less accumulated depreciation		101,060		93,913		91,949

Net property, plant & equipment		58,249		63,358		65,029
Goodwill and other intangible assets		2,343		2,350		2,200
Other assets		9,174		9,174		13,492

Total assets	$	128,830	$	126,268	$	137,950

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY	10/31/2004			1/31/2004			10/31/2003
	Unaudited (Note 1)						Unaudited (Note 1)
Current liabilities
Checks released but not yet cleared bank	$	4,860		$	2,702		$	2,229
Accounts payable		11,272			9,513			5,917
Accrued compensation and employee benefits		5,662			5,636			6,617
Current maturities on long-term debt		27,018			3,138			34,012
Other current liabilities		4,736			4,993			4,754

Total current liabilities		53,548			25,982			53,529
Non-current liabilities
Accrued self-insurance retention and other		2,023			4,053			3,557
Accrued pension expenses		13,449			11,686			18,550
Long term debt (less current portion)		—			22,195			247

Total non-current liabilities		15,472			37,934			22,354
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 shares issued at 10/31/2004; 14,583,331 shares issued at 1/31/2004 and 10/31/2003		146			146			145
Additional paid-in capital		127,140			127,133			126,728
Accumulated deficit		(43,961	)		(41,412	)		(39,424	)
Less treasury stock at cost (1,487,530 shares at 10/31/2004 and 1/31/2004; 1,487,530 at 10/31/2003)		(19,271	)		(19,271	)		(19,406	)
Less accumulated comprehensive loss		(4,244	)		(4,244	)		(5,976	)

Total stockholders’ equity		59,810			62,352			62,067

Total liabilities and stockholders’ equity	$	128,830		$	126,268		$	137,950

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONS
Unaudited (Note 1)


(Amounts in thousands, except per share data)
	Three Months Ended
	10/31/2004		10/31/2003
Net sales	$	69,502	$	65,802
Cost of goods sold		49,111		46,937

Gross profit		20,391		18,865
Operating expense
Selling, general and administrative expense		19,825		21,450
Separation charges		—		4,589
Interest expense		545		501

		20,370		26,540
Income/(loss) before income taxes		21		(7,675	)
Income tax expense/(benefit)		—		—

Net income/(loss)	$	21	$	(7,675	)

Weighted average shares outstanding ^(a)
Basic		13,105		13,099
Diluted		13,384		13,099
Net income/(loss) per common share ^(a)
Basic	$	0.00	$	(0.59	)
Diluted	$	0.00	$	(0.59	)

(a) For fiscal year 2003, net loss per share was calculated based on basic shares outstanding at October 31, 2003, due to the anti-dilutive effect on the inclusion of common stock equivalent shares.

See Notes to Condensed Consolidated Financial Statements.

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (Note 1)


(Amounts in thousands, except per share data)
	Nine Months Ended
	10/31/2004			10/31/2003
Net sales	$	168,636		$	162,843
Cost of goods sold		116,131			112,601

Gross profit		52,505			50,242
Operating expense
Selling, general and administrative expense		53,571			59,472
Separation charges		—			12,377
Interest expense		1,483			1,313

		55,054			73,162
Loss before income taxes		(2,549	)		(22,920	)
Income tax expense/(benefit)		—			(2,946	)

Net loss	$	(2,549	)	$	(19,974	)

Weighted average shares outstanding ^(a)
Basic		13,113			13,107
Net loss per common share ^(a)
Basic	$	(0.19	)	$	(1.52	)

(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.

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited (Note 1)


(Dollar amounts in thousands)	Nine Months Ended
	10/31/2004			10/31/2003
Operating activities
Net loss	$	(2,549	)	$	(19,974	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		7,376			8,901
Provision for doubtful accounts		96			102
Loss on sale of property, plant and equipment		9			49
Changes in assets and liabilities
Accounts and notes receivable		(12,391	)		(7,384	)
Inventories		2,670			16,635
Prepaid expenses and other current assets		1,234			906
Income taxes receivable/payable		287			(4,391	)
Accounts payable and accrued expenses		3,426			2,230

Net cash provided by (used in) operating activities		158			(2,926	)
Investing activities
Capital expenditures		(2,276	)		(943	)

Cash used in investing activities		(2,276	)		(943	)
Financing activities
Issuance of long-term debt		2,727			5365
Repayment of long-term debt		(1,042	)		—
Purchase of treasury stock		—			(446	)
Payment of cash dividend		—			(525	)
Issuance of common stock		7			120

Net cash provided by financing activities		1,692			4,514
Net change in cash		(426	)		645
Cash at beginning of year		2,059			1,639

Cash at end of quarter	$	1,633		$	2,284

See Notes to Condensed Consolidated Financial Statements.

VIRCO MFG. CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 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 nine month periods ended October 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 October 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 October 31, 2004 and 2003. LIFO reserves at October 31, 2004 and January 31, 2004 were $4,042,000. LIFO reserves at October 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 to expire on August 1, 2005 with interest payable monthly at a fluctuating rate equal to the Bank’s prime rate (4.75% at October 31, 2004) plus a margin of 0.50%, or at LIBOR plus 2.75%. Subsequent to October 31, 2004, the revolving line was further extended by an additional three months expiring November 1, 2005. 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%.


		At October 31, 2004, the Company was in violation of certain of its loan covenants. In December 2004, Wells Fargo provided the Company with a waiver of these covenants as of October 31, 2004. However, based on management’s forecasts for operating results for the remainder of the year, it is considered to be more likely than not that the Company will violate the loan covenants at the fourth quarter ending January 31, 2005. Accordingly, the debt has been classified as a current liability on the October 31, 2004 balance sheet. The Company is currently negotiating with Wells Fargo to restructure the credit facility so that the Company will comply with the future quarterly debt covenants. No assurance can be given that such negotiations will be successful. If they are not, the Company would be in default with the bank, which could significantly affect its liquidity. If additional sources of financing are not available, the Company plans to continue to implement measures to conserve cash or reduce costs.
		For the quarter ended October 31, 2003, the Company violated one of the covenants under the line of credit with Wells Fargo Bank. Accordingly, the debt has been classified as a current liability on the October 31, 2003 balance sheet. Wells Fargo provided a waiver of the covenant.

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 October 31, 2004 and January 31, 2004; a partial valuation allowance has been recorded at October 31, 2003. At October 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 potentially can be carried forward total approximately $13.8 million at October 31, 2004.

Note 5.		Net Income/(Loss) Per Share

		For the three month period ended October 31, 2004, net income/(loss) per share was calculated based on diluted shares outstanding at October 31, 2004. For the nine month period ended October 31, 2004 and three and nine month periods ended October 31, 2003, net loss per share was calculated based on basic shares outstanding 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					Nine Months Ended
	October 31					October 31
	2004		2003			2004			2003
Net income/(loss)	$	21	$	(7,675	)	$	(2,549	)	$	(19,974	)

Average shares outstanding		13,105		13,099			13,113			13,107
Net effect of dilutive stock options — based on the treasury stock method using average market price		279		35			206			23

Totals		13,384		13,134			13,319			13,130

Net income/(loss) per share — basic	$	0.00	$	(0.59	)	$	(0.19	)	$	(1.52	)

Net income/(loss) per share — diluted	$	0.00	$	(0.59	)	$	(0.19	)	$	(1.52	)

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 nine months ended October 31, 2004 and October 31, 2003 are as follows (in thousands, except per share data):


	Three Months Ended					Nine Months Ended
	October 31					October 31
	2004		2003			2004			2003
Net income/(loss)	$	21	$	(7,675	)	$	(2,549	)	$	(19,974	)
Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		13		6			40			43

Net income/(loss)	$	8	$	(7,691	)	$	(2,589	)	$	(20,017	)

Net income/(loss) per share — basic	$	0.00	$	(0.59	)	$	(0.20	)	$	(1.52	)

Net income/(loss) per share — diluted	$	0.00	$	(0.59	)	$	(0.19	)	$	(1.52	)


Note 6.		Comprehensive Income/(Loss)

		Comprehensive income/(loss) for the three and nine months ended October 31, 2004 and October 31, 2003 was the same as net income/(loss) reported on the statement of income and operations.

		Accumulated comprehensive loss at October 31, 2004, January 31, 2004 and October 31, 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.

		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 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 Non-Employee Directors Retirement Plan). The Non-Employee Directors Retirement 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 Plan, the VIP Plan, and the Non-Employee Directors Retirement Plan for the three and nine months ended October 31, 2004 and 2003 were as follows (in thousands):


													Non-Employee Directors Retirement
	Pension Plan						VIP Retirement Plan						Plan
	Three months ended October 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		—			1,539			—			(132	)		—			—

Net periodic pension cost	$	266		$	2,457		$	55		$	168		$	27		$	27


Part I. Financial Information

Item 1.		Financial Statements (unaudited)

		Condensed consolidated balance sheets - October 31, 2004, January 31, 2004 and October 31, 2003

		Condensed consolidated statements of income and operations - Three months ended October 31, 2004 and 2003

		Condensed consolidated statements of operations - Nine months ended October 31, 2004 and 2003

		Condensed consolidated statements of cash flows - Nine months ended October 31, 2004 and 2003

		Notes to condensed consolidated financial statements - October 31, 2004

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures about Market Risk

Item 4.		Controls and Procedures

Part II. Other Information
Item 1.		Legal Proceedings

Item 2.		Changes in Securities and Use of Proceeds

Item 3.		Defaults Upon Senior Securities

Item 4.		Submission of Matters to a Vote of Security Holders

Item 5.		Other Information

Item 6.		Exhibits and Reports on Form 8-K

		(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.

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