VIRCO MFG CORPORATION - Quarter Report: 2003 May (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION

Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934

FORM 10-Q

VIRCO MFG. CORPORATION

     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 June 07, 2003.

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VIRCO MFG. CORPORATION

INDEX

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PART 1

Item 1. Financial Statements

VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

See notes to condensed consolidated financial statements.

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VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

See Notes to Condensed Consolidated Financial Statements.

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VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited (Note 1)

(Dollar amounts in thousands, except per share data)

See Notes to Condensed Consolidated Financial Statements.

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VIRCO MFG. CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited (Note 1)

(Dollar amounts in thousands)

See Notes to Condensed Consolidated Financial Statements.

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VIRCO MFG. CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2003

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VIRCO MFG. CORPORATION

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

Results of Operations:

For the first quarter of 2003, the Company incurred a net loss of $4,013,000 on sales of $31,180,000 compared to a net loss of $2,137,000 on sales of $41,168,000 in the same period last year.

Sales for the first quarter decreased $9,988,000 compared to the same period last year. Backlog at quarter end decreased by 13% compared to the prior year. The decrease in shipments is attributable to several events. The primary reason for the decline in shipments and orders is attributable to a severe decline in the market for publicly funded agencies, particularly schools. The funding difficulties faced at the state level is contributing to reduced orders, and we believe deferred orders as schools are holding orders until budget and spending levels are established. In addition, the market for commercial furniture, which has suffered severe decline in 2001 and 2002, continues to be very weak. Severe weather in February 2003, combined with economic uncertainty surrounding the war in Iraq contributed to the decline in orders and shipments. Through May, shipments and incoming orders are lagging by 23% and 17%, respectively.

Gross profit for the first quarter, as a percentage of sales, decreased 2% compared to the same period last year. The reduction in gross margin is primarily attributed to increased cost of raw materials. The Company has been unable to pass these increased material costs to the customer in the current economic climate. In addition to increased material costs, manufacturing variances, as a percent of sales increased modestly as the Company has reduced manufacturing activity in its factories.

Selling, general and administrative expense for the quarter ended April 30, 2003, declined modestly compared to the same period last year. The decreased expense is due to reductions in staffing, reduced sales incentives and overall spending.

Interest expense decreased by approximately $331,000 compared to the same period last year. The reduction is primarily due to lower interest rates.

In response to reduced order levels, the Company has reduced manufacturing levels, and plans to further reduce manufacturing levels during the second and third quarter. The Company is evaluating a variety of reductions in operating spending in response to reduced manufacturing and shipping activity.

Financial Condition:

As a result of lower deliveries in the first quarter compared to the fourth quarter last year, accounts and notes receivable were $4,400,000 less than January 31, 2003. The Company traditionally builds large quantities of inventory during the first quarter in anticipation of seasonally high summer shipments. For the current quarter, the Company increased inventory by nearly $18,321,000 compared to year-end. In the prior year first quarter, the Company increased inventory by approximately $16,265,000. This increase in inventory was financed through the credit facility with Wells Fargo Bank.

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The Company has established a goal of limiting capital spending to approximately $5,000,000 to $7,000,000 for 2003, which is approximately one-half of anticipated depreciation expense. Capital spending for the quarter ended April 30, 2003, was $484,000 compared to $855,000 for the same period last year. Capital expenditures are being financed through credit facilities established with Wells Fargo Bank and operating cash flow.

Net cash used in operating activities for the first quarter ended April 30, 2003, was $13,409,000 compared to $11,031,000 for the same period last year. The increase in cash used in operating activities was partially due to an increase in inventory and larger operating loss, offset by a reduction in receivables.

In April 1998, the Board of Directors approved a stock buyback program. In December 2001, the Board of Directors increased the authorized amount to $20,000,000. As of April 30, 2003, the Company has repurchased approximately 1,435,000 shares at a cost of approximately $18,656,000 since the inception of this program in April 1998. The Company intends to continue buying back shares of common stock as long as the Company believes the shares are undervalued and operating cashflows and borrowing capacity under the Wells Fargo line allow. As of April 30, 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 has required the Company to limit stock buyback activity to $250,000 for the period between June 4, 2003 and December 1, 2003.

On February 11, 2003, the Company’s Board of Directors authorized a $0.02 per share cash dividend, payable on April 30, 2003, to stockholders on record as of March 31, 2002. For the quarter ended April 30, 2003, the Company paid $262,000 in cash dividends.

In April 2002, the Company entered into an agreement with Dew-El Corporation to purchase certain assets of Furniture Focus^TM, Inc., an Ohio reseller that offers complete package solutions for the furniture, fixtures and equipment segments of bond-funded public school construction projects, primarily in the upper Midwest. In May 2002, the Company paid $2,400,000 in cash for certain assets of the corporation and recorded goodwill of $2,200,000. The goodwill is not expected to be deductible for income tax. In addition, the Company purchased approximately $2,150,000 of accounts receivable. The financial statements for the fiscal 2002 included nine months of Furniture Focus operations. The additional revenue and operating results as a result of this acquisition did not have a significant effect on the Company’s financial position, operations or cash flows.

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.

Critical Accounting Policies and Estimates:

The Company’s critical accounting policies are outlined in its Form 10-K for fiscal year ended January 31, 2003.

Forward-Looking Statements:

From time to time, the Company or its representatives have made and 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,” “believes,” “estimates,” “projects,” or similar

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expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company’s forward-looking statements are subject to certain risks and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, material availability and cost of materials, especially steel; availability and cost of labor, demand for the Company’s products, and competitive conditions affecting selling prices and margins, capital costs and general economic conditions. Such risks and uncertainties are discussed in more detail in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2003.

The Company’s forward-looking statements represent its judgment only on the dates such statements were made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

On February 22, 2000, the Company entered into an interest rate swap agreement with Wells Fargo Bank. The initial notional swap amount is $30,000,000 for the period February 22, 2000 through February 28, 2001. The notional swap amount then decreases to $20,000,000 until the end of the swap agreement, March 3, 2003. The swap agreement is in consideration for a fixed rate at 7.23% plus a fluctuating margin of 1.50% to 2.50%. The swap agreement was not renewed at expiration.

As of April 30, 2003, the Company has borrowed $40,808,000 under its Wells Fargo credit facility. The revolving credit facility with Wells Fargo Bank is a two-year non-amortizing line with interest payable monthly at a fluctuating rate equal to the Bank’s prime rate, plus a fluctuating margin of 0.25% — 0.50. The line also allows the Company the option to borrow under 30- 60- and 90-day fixed term rates at LIBOR plus a fluctuating margin of 1.50% to 2.50%. Accordingly, a 100 basis point upward fluctuation in the lender’s base rate would cause the Company to incur additional interest charges of approximately $79,000 for the fiscal quarter ended April 30, 2003. The Company would benefit from a similar interest savings if the base rate were to fluctuate downward by a like amount.

Item 4. Controls and Procedures

Our company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission (the “SEC”) pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our company’s management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Assessing the costs and benefits of such controls and procedures necessarily involves the exercise of judgment by management, and such controls and procedures, by their nature, can provide only reasonable assurance that management’s objectives in establishing them will be achieved.

Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our company’s management, including the company’s President and Chief Executive Officer along with the company’s Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, the company’s President and Chief Executive Officer along with the company’s Chief Financial Officer concluded that our company’s disclosure controls and procedures are effective in alerting them in a

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timely fashion to material information relating to the company (including its consolidated subsidiaries) required to be included in the company’s Exchange Act reports. There have been no significant changes in our company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date that our company carried out its evaluation.

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PART II

VIRCO MFG. CORPORATION

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

Signatures

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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.

Each of the undersigned, in their capacity as the Chief Executive Officer and Chief Financial Officer of Virco Mfg. Corporation, as the case may be, provides the following certifications required by 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and 17 C.F.R. §240.13a-14.

Certification of Chief Executive Officer

I, Robert A. Virtue, certify that:

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Certification of Chief Financial Officer

I, Robert E. Dose, certify that:

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