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VIRCO MFG CORPORATION - Quarter Report: 2005 October (Form 10-Q)

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UNITED STATES 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, 2005   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 o
     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     The number of shares outstanding of each of the issuer’s classes of common stock, as of December 5, 2005.
Common Stock    13,137,288 Shares
 
 

 


 

VIRCO MFG. CORPORATION
INDEX
 
 
 
 
 
 
 
 
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
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.

 


 

PART I
Item 1. Financial Statements
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
                         
    10/31/2005     1/31/2005     10/31/2004  
    (In thousands, except share data)  
    Unaudited (Note 1)             Unaudited (Note 1)  
Assets
                       
                         
Current assets
                       
Cash
  $ 1,441     $ 1,192     $ 1,633  
 
                       
Trade accounts receivable
    22,569       16,222       29,948  
Less allowance for doubtful accounts
    289       225       331  
     
Net trade accounts receivable
    22,280       15,997       29,617  
 
                       
Income taxes receivable
          1,279       1,136  
Other receivables
    74       165       149  
 
                       
Inventories
                       
Finished goods, net
    8,777       9,676       14,180  
Work in process, net
    10,335       10,373       5,403  
Raw materials and supplies, net
    6,471       5,998       6,218  
     
 
    25,583       26,047       25,801  
 
                       
Prepaid expenses and other current assets
    631       1,340       728  
     
Total current assets
    50,009       46,020       59,064  
 
                       
Property, plant and equipment:
                       
Land and land improvements
    3,253       3,287       3,287  
Buildings and building improvements
    49,581       49,542       49,548  
 
                       
Machinery and equipment
    105,114       104,762       105,205  
Leasehold improvements
    1,289       1,307       1,269  
     
 
                       
 
    159,237       158,898       159,309  
 
                       
Less accumulated depreciation and amortization
    107,433       102,009       101,060  
     
Net property, plant and equipment
    51,804       56,889       58,249  
 
                       
Goodwill and other intangible assets, net
    2,327       2,337       2,343  
Other assets
    8,816       8,795       9,174  
     
 
                       
Total assets
  $ 112,956     $ 114,041     $ 128,830  
     
See Notes to Condensed Consolidated Financial Statements.

 


 

VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
                         
    10/31/2005     1/31/2005     10/31/2004  
    (In thousands, except share data)  
    Unaudited (Note 1)             Unaudited (Note 1)  
Liabilities
                       
 
                       
Current liabilities
                       
Checks released but not yet cleared bank
  $ 2,280     $ 1,759     $ 4,860  
Accounts payable
    10,339       13,948       11,272  
Accrued compensation and employee benefits
    5,160       5,722       5,662  
Income tax payable
    858              
Current portion of long-term debt
    5,012       5,012       27,018  
Other accrued liabilities
    4,696       4,245       4,736  
     
Total current liabilities
    28,345       30,686       53,548  
 
                       
Non-current liabilities
                       
Accrued self-insurance retention and other
    2,591       3,221       2,023  
Accrued pension expenses
    13,749       12,751       13,449  
Long-term debt, less current portion
    20,537       18,118        
     
Total non-current liabilities
    36,877       34,090       15,472  
 
                       
Commitments and contingencies
                       
 
                       
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; issued 13,137,288 shares at 10/31/2005 and 13,098,364 at 1/31/2005; and 14,583,331 shares at 10/31/2004
    131       131       146  
Additional paid-in capital
    108,143       107,883       127,140  
Accumulated deficit
    (57,198 )     (55,407 )     (43,961 )
Less treasury stock at cost (0 shares at 10/31/2005 and 1/31/2005; 1,487,530 shares at 10/31/2004)
                (19,271 )
Accumulated comprehensive loss and other
    (3,342 )     (3,342 )     (4,244 )
     
Total stockholders’ equity
    47,734       49,265       59,810  
 
                       
     
Total liabilities and stockholders’ equity
  $ 112,956     $ 114,041     $ 128,830  
     
See Notes to Condensed Consolidated Financial Statements.

 


 

VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (Note 1)
                 
    Three months ended  
    10/31/2005     10/31/2004  
    (In thousands, except per share data)  
Net sales
  $ 70,484     $ 69,502  
Costs of goods sold
    50,400       49,111  
     
Gross profit
    20,084       20,391  
 
               
Selling, general and administrative expenses
    20,781       19,825  
Separation charges
    742        
Interest expense
    895       545  
     
 
               
(Loss) income before income taxes
    (2,334 )     21  
 
               
Provision for income taxes
    140        
     
Net (loss) income
  $ (2,194 )   $ 21  
     
 
               
Net (loss) income per common share
               
Basic
  $ (0.17 )   $ 0.00  
Diluted
    (0.17 )     0.00  
 
               
Weighted average shares outstanding
               
Basic
    13,146       13,105  
Diluted
    13,357       13,384  
(a) Net loss per share was calculated based on basic shares outstanding at October 31, 2005 due to the anti-dilutive effect of 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)
                 
    Nine months ended  
    10/31/2005     10/31/2004  
    (In thousands, except per share data)  
Net sales
  $ 179,644     $ 168,636  
Costs of goods sold
    123,649       116,131  
     
Gross profit
    55,995       52,505  
 
               
Selling, general and administrative expenses
    54,830       53,571  
Separation charges
    742        
Interest expense
    2,324       1,483  
     
 
               
Loss before income taxes
    (1,901 )     (2,549 )
 
               
Provision for income taxes
    109        
     
Net loss
  $ (1,792 )   $ (2,549 )
     
 
               
Net loss per common share
               
Basic
  $ (0.14 )   $ (0.19 )
Diluted
    (0.14 )     (0.19 )
 
               
Weighted average shares outstanding
               
Basic
    13,111       13,113  
Diluted
    13,350       13,319  
(a) Net loss per share was calculated based on basic shares outstanding at October 31, 2005 and 2004 due to the anti-dilutive effect of 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)
                 
    Nine months ended  
    10/31/2005     10/31/2004  
    (In thousands)  
Operating activities
               
 
               
Net loss
  $ (1,792 )   $ (2,549 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
               
Depreciation and amortization
    6,767       7,376  
Provision for doubtful accounts
    60       96  
Loss on sale of property, plant and equipment
    77       9  
 
               
Changes in assets and liabilities
               
Trade accounts receivable
    (6,343 )     (12,380 )
Other receivables
    91       (11 )
Inventories
    464       2,670  
Income taxes
    2,137       287  
Prepaid expenses and other current assets
    731       1,234  
Accounts payable and accrued liabilities
    (2,611 )     3,426  
     
Net cash (used in) provided by operating activities
    (419 )     158  
 
               
Investing activities
               
Capital expenditures
    (1,774 )     (2,276 )
Proceeds from sale of property, plant and equipment
    15        
     
Net cash used in investing activities
    (1,759 )     (2,276 )
 
               
Financing activities
               
Issuance of long-term debt
    2,419       2,727  
Repayment of long-term debt
          (1,042 )
Proceeds from issuance of common stock
    8       7  
     
Net cash provided by financing activities
    2,427       1,692  
 
               
Net increase (decrease) in cash
    249       (426 )
Cash at beginning of year
    1,192       2,059  
     
Cash at end of year
  $ 1,441     $ 1,633  
     
 
               
Supplemental disclosures of cash flow information
               
Cash paid (received) during the year for:
               
Interest, net of amounts capitalized
  $ 2,324     $ 1,483  
Income tax, net
    (2,249 )     (281 )
 
               
Non cash activities
               
Accrued asset retirement obligations
  $ 31     $  
See Notes to Condensed Consolidated Financial Statements.

 


 

VIRCO MFG. CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2005
Note 1.   Basis of Presentation
 
    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 months ended October 31, 2005, are not necessarily indicative of the results that may be expected for the year ending January 31, 2006. The balance sheet at January 31, 2005, 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, 2005.
 
Note 2.   Inventories
 
    Year end financial statements at January 31, 2005 reflect inventories verified by physical counts with the material content valued by the LIFO method. At October 31, 2005 and 2004, there was 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, 2005 and 2004. LIFO reserves at October 31, 2005 and January 31, 2005 were $6,201,000. LIFO reserves at October 31, 2004 were $4,042,000. Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated.
 
Note 3.   Debt
 
    At October 31, 2005, the Company was in violation of certain of its loan covenants. In December 2005, the Company restructured its debt with Wells Fargo Bank, which waived the October 31, 2005 covenant violation, and the Company and Wells Fargo amended the terms of the loan and several of the financial covenants. The Company’s revolving credit facility with Wells Fargo Bank, amended and restated as of December 6, 2005 provides a Term Loan of $20,000,000 and a secured revolving line of credit that varies as a percentage of inventory and receivables, up to a maximum of $50,000,000 during the four months from June 2006 through September 2006 and a maximum of $40,000,000 for the balance of the agreement. The term note is a two-year loan amortizing at $5,000,000 per year with interest payable monthly at a fluctuating rate equal to the Wells Fargo’s prime rate (6.75% at October 31, 2005) plus a fluctuating margin of 2.00%. The fluctuating margin decreases by 1/4% for each quarter that the Company meets or exceeds certain earnings before income taxes, depreciation and amortization (EBITDA) targets. Accordingly, a 100 basis point upward fluctuation in the lender’s base rate would cause the Company to incur additional interest charges of approximately $95,000 and $272,000 for the three month and nine month periods ended October 31, 2005, respectively. The Company would benefit from a similar interest savings if the base rate were to fluctuate downward by a like amount. This restructured line of credit is designed to provide adequate liquidity for Virco’s 2006 operating plan.
 
    The revolving line has a 26-month maturity with interest payable monthly at a fluctuating rate equal to Wells Fargo’s prime rate plus a fluctuating margin similar to the term note. The revolving line typically provides for advances of 80% on eligible accounts receivable and 20% to 60% on eligible inventory. The advance rates fluctuate depending on the time of the year and the types of assets. The agreement has an unused commitment fee of 0.375%. Approximately $12,642,000 was available for borrowing as of October 31, 2005.
 
    The revolving credit facility with Wells Fargo Bank is subject to minimum (EBITDA) requirements. The

 


 

    agreement also places certain restrictions on capital expenditures, new operating leases, dividends and the repurchase of the Company’s common stock. The revolving credit facility is secured by the Company’s accounts receivable, inventories, equipment and Property.

At October 31, 2004, the Company was in violation of one of its covenants under the line of credit with Wells Fargo Bank, and the Bank provided a waiver of that covenant. However, based upon management’s forecast at that time of operating results for the remainder of the year, it was considered to be more likely than not that the Company would also violate the loan covenants at the fourth quarter ending January 31, 2005. Accordingly, the debt was classified as a current liability on the October 31, 2004 balance sheet.
 
Note 4.   Income Taxes
 
    The Company recognizes 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, 2005, January 31, 2005 and October 31, 2004.
 
Note 5.   Net (Loss) Income per Share
 
    For the three and nine months ended October 31, 2005, 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 (loss) income per share:
                                 
    Three Months Ended     Nine Months ended  
    10/31/2005     10/31/2004     10/31/2005     10/31/2004  
            (In thousands, except per share data)          
Net (loss) income
  $ (2,194 )   $ 21     $ (1,792 )   $ (2,549 )
     
 
                               
Average shares outstanding
    13,146       13,105       13,111       13,113  
Net effect of dilutive stock options based on the treasury stock method using average market price
    211       279       239       206  
     
Totals
    13,357       13,384       13,350       13,319  
     
Net (loss) income per share
                               
Basic
  $ (0.17 )   $ 0.00     $ (0.14 )   $ (0.19 )
Diluted
    (0.17 )     0.00       (0.14 )     (0.19 )
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 the options included in the table below 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, 2005 and 2004 are as follows:

 


 

                                 
    Three Months Ended     Nine Months ended  
    10/31/2005     10/31/2004     10/31/2005     10/31/2004  
  (In thousands, except per share data)  
Net (loss) income, as reported
  $ (2,194 )   $ 21     $ (1,792 )   $ (2,549 )
Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects
    11       13       38       40  
     
Pro forma net (loss) income
  $ (2,205 )   $ 8     $ (1,830 )   $ (2,589 )
     
 
                               
Net (loss) income per share, as reported
                               
Basic
  $ (0.17 )   $ 0.00     $ (0.14 )   $ (0.20 )
Diluted
    (0.17 )     0.00       (0.14 )     (0.20 )
 
                               
Weighted average shares outstanding
                               
Basic
    13,146       13,105       13,111       13,113  
Diluted
    13,357       13,384       13,350       13,319  
Note 6.   Comprehensive Income (Loss)
 
    Comprehensive income (loss) for the three and nine months ended October 31, 2005 and 2004 was the same as net income (loss) reported on the statements of income and operations. Accumulated comprehensive loss at October 31, 2005 and 2004 and January 31, 2005 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 10-K for the period ending January 31, 2005, 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 (the “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 10-K for the period ending January 31, 2005, 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 10-K for the period ending January 31, 2005, 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, 2005 and 2004 were as follows (in thousands):

 


 

                                                 
                                    Non-Employee  
                    VIP Retirement Plan     Directors Retirement  
    Pension Plan     Three Months Ended     Plan  
    2005     2004     2005     2004     2005     2004  
Service cost
  $ 55     $ 57     $ 58     $ 65     $ 6     $ 5  
Interest cost
    337       321       89       83       6       6  
Expected return on plan assets
    (248 )     (250 )                 0       0  
Amortization of transition amount
    (9 )     (9 )                 0       0  
Amortization of prior service cost
    107       95       (125 )     (115 )     22       22  
Recognized net actuarial loss or (gain)
    33       52       27       22       (7 )     (6 )
Settlement and curtailment
                                   
             
Net periodic pension cost
  $ 275     $ 266     $ 49     $ 55     $ 27     $ 27  
             
                                                 
                                    Non-Employee  
                    VIP Retirement Plan     Directors Retirement  
    Pension Plan     Three Months Ended     Plan  
    2005     2004     2005     2004     2005     2004  
Service cost
  $ 165     $ 172     $ 174     $ 195     $ 18     $ 16  
Interest cost
    1,011       963       267       249       18       18  
Expected return on plan assets
    (744 )     (750 )     0       0       0       0  
Amortization of transition amount
    (27 )     (27 )     0       0       0       0  
Amortization of prior service cost
    321       284       (375 )     (344 )     66       65  
Recognized net actuarial loss or (gain)
    99       156       81       65       (21 )     (19 )
Settlement and curtailment
                                   
             
Net periodic pension cost
  $ 825     $ 800     $ 147     $ 165     $ 81     $ 80  
             
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 three and nine months ended October 31, 2005 and 2004:
                                 
    Three Months Ended     Nine Months Ended  
    10/31/2005     10/31/2004     10/31/2005     10/31/2004  
    (In thousands)     (In thousands)  
Beginning accrued warranty balance
  $ 1,500     $ 1,351     $ 1,500     $ 1,751  
Provision
    261       390       693       825  
Costs incurred
    (261 )     (390 )     (693 )     (1,225 )
     
Ending accrued warranty balance
  $ 1,500     $ 1,351     $ 1,500     $ 1,351  
     

 


 

VIRCO MFG. CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Three Months Ended October 31, 2005 and 2004
For the third quarter of 2005, the Company incurred an after tax loss of $2,194,000 on sales of $70,484,000 compared to net income of $21,000 on sales of $69,502,000 in the same period last year.
The $982,000, or 1% increase in sales for the third quarter is attributable to increases in selling prices, substantially offset by a decrease in unit volume. The reduction in unit volume in the third quarter is partially attributable to the timing of shipments. A larger percentage of our summer shipments were delivered in the second quarter of 2005 than in the second quarter of 2004. Incoming orders for the third quarter of 2005 increased by approximately 0.5% compared to the third quarter of 2004. Backlog at October 31, 2005 was approximately 6% higher than at the same date last year.
Gross profit for the third quarter, as a percentage of sales, decreased by nearly 1% compared to the same period last year. As more fully disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2005, the Company, in its 2004 fiscal year experienced a substantial increase in the cost of fuel and certain raw materials. Exacerbating these price increases was the fact that the Company had committed to annual sales contracts with school districts and was unable to raise selling prices to cover the increased material costs. Consequently, margins declined and continued to decline throughout the balance of 2004. In response to the increased raw material costs in 2004, the Company increased selling prices when it entered into new annual contracts in 2005. As a result, during the third quarter of 2005, the Company benefited from these increased selling prices, but continued to experience volatile and increasing plastic, steel, and petroleum based fuel costs, caused in large part by the hurricanes in the Gulf Coast region of the United States. The cost of fuel adversely impacted inbound freight on materials, utilities costs in our factories, and more importantly, freight rates on shipments to customers. Due to reduced unit volume of manufactured product, the Company reduced production levels by more that 15% during the third quarter compared to the prior year. This action caused a loss of manufacturing operating efficiencies resulting in higher that expected manufacturing costs.
Selling, general and administrative expense for the quarter ended October 31, 2005 increased by 4.8% compared to the same period last year, and increased as a percentage of sales by nearly 1%. Increases in marketing and installation expenses were driven by a larger percentage of project business. Increased liability insurance caused the balance of the increase. Freight expense, as a percentage of sales, decreased slightly due to the impact of increased selling prices, tiered selling prices that encouraged larger average order sizes, and operating efficiencies, offset by higher freight rate and fuel charges.
In October 2005, as a result of decreased unit volume of manufactured products, the Company announced and completed a reduction in its work force of approximately 100 persons. The Company incurred one-time severance costs of approximately $742,000 in the third quarter in connection with this reduction in work force. No similar charge was incurred during the quarter ended October 31, 2004.
Interest expense for the quarter ended October 31, 2005 increased by approximately $350,000 compared to the same period last year. The increase was primarily due to higher interest rates.
Nine Months Ended October 31, 2005 and 2004
For the nine months ended October 31, 2005, the Company incurred net loss of $1,792,000 on sales of $179,644,000 compared to a net loss of $2,549,000 on sales of $168,636,000 in the same period last year.
The $11,008,000, or 6.5% increase in sales for the first nine months is attributable to increases in selling prices, partially offset by a decrease in unit volume. Operating results for the same period improved by approximately $750,000.

 


 

Gross profit for the first nine months, as a percentage of sales, was flat compared to the same period last year. As discussed above, and more fully disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2005, in the prior year the Company experienced a substantial increase in the cost of fuel and certain raw materials, especially steel. During the first six months of 2005, the cost of raw materials remained relatively stable, but at the higher prices experienced during the fourth quarter of 2004. In response to the increased raw material costs in 2004, the Company increased selling prices when it entered into new annual contracts in 2005. During the first quarter of 2005, however, gross margin declined, as the impact of price increases had not yet offset the impact of the increased material costs. During the second quarter, a larger percentage of sales reflected pricing under the new annual contracts, and gross margin increased. During the third quarter, the Company continued to benefit from higher sales prices, but experienced volatility and increasing plastic, steel and petroleum based fuel costs caused in large part by the hurricanes in the Gulf Coast region of the United States. These price fluctuations caused margins to decline in the third quarter. The net effect was that gross margins for the first nine months, as a percentage of sales, were unchanged as compared to the same period in 2004.
Selling, general and administrative expense for the nine months ended October 31, 2005 increased by approximately $1,260,000 compared to the same period last year, but decreased as a percentage of sales by more than 1%. The decrease as a percentage of sales was primarily attributable to the price increases under the Company’s annual contracts. Increases in marketing and installation expenses were partially offset by reductions in other selling and administrative expenses. Freight expense, as a percentage of sales, decreased slightly due to the impact of increased selling prices, tiered selling prices that encouraged larger average order sizes, and operating efficiencies, offset by higher freight rate and fuel charges.
As discussed above, the Company incurred one-time severance costs of approximately $742,000 in the third quarter in connection with the reduction in its work force. No similar charge was incurred during the nine month period ended October 31, 2004.
Interest expense for the nine months ended October 31, 2005 increased by approximately $841,000 compared to the same period last year. The increase is primarily due to higher interest rates.
Financial Condition
As a result of seasonally higher deliveries in the third quarter than the fourth quarter, accounts and notes receivable increased compared to January 31, 2005. Receivables declined compared to the third quarter of 2004. This decline was attributable to a higher concentration of third quarter sales occurring in the early part of the quarter, combined with increased collection efforts. The Company traditionally builds large quantities of inventory during the first six months of the fiscal year in anticipation of seasonally high summer shipments. For the first six months, the Company increased inventory by nearly $18,006,000 compared to January 31, 2005. Seasonal deliveries in the second and third quarter caused inventory to decline to levels comparable to both January 31, 2005 and October 31, 2004.
The Company has established a goal of limiting capital spending to approximately $5,000,000 for 2005, which is approximately one-half of anticipated depreciation expense. Capital spending for the nine months ended October 31, 2005, was $1,774,000 compared to $2,276,000 for the same period last year. Capital expenditures are being financed through the Company’s credit facility with Wells Fargo Bank and operating cash flow.
Net cash used in operating activities for the nine months ended October 31, 2005 was $419,000 compared to net cash provided of $158,000 for the same period last year.
The Company believes that cash flows from operations, together with the Company’s unused borrowing capacity under the Company’s credit facility will be sufficient to fund the Company’s debt service requirements, capital expenditures and working capital needs. Approximately $12,642,000 was available for borrowing as of October 31, 2005.
At October 31, 2005, the Company was in violation of certain of its loan covenants. In December 2005, the Company restructured its debt with Wells Fargo Bank, waiving the October 31, 2005 covenant violation, and amending the terms of the loan and several of the financial covenants. The Company’s revolving credit facility with Wells Fargo Bank, amended and restated as of December 6, 2005, provides a Term Loan of $20,000,000 and a secured revolving line of credit that varies as a percentage of inventory and receivables, up to a maximum of $50,000,000 during the four months from June

 


 

2006 through September 2006 and a maximum of $40,000,000 for the balance of the agreement. The term note is a two-year loan amortizing at $5,000,000 per year with interest payable monthly at a fluctuating rate equal to the Wells Fargo’s prime rate (6.75% at October 31, 2005) plus a fluctuating margin of 2.00%. The fluctuating margin decreases by 1/4% for each quarter that the Company meets of exceeds certain EBITDA targets. This restructured line of credit is designed to provide adequate liquidity for Virco’s 2006 operating plan.
At October 31, 2004, the Company was in violation of one of its covenants under the line of credit with Wells Fargo Bank, and the bank provided a waiver of that covenant. However, based upon management’s forecast at that time for operating results for the remainder of the fiscal year, it was considered to be more likely than not that the Company would also violate the loan covenants at the fourth quarter ending January 31, 2005. Accordingly, the debt was classified as a current liability on the October 31, 2004 balance sheet.
Critical Accounting Policies and Estimates
The Company’s critical accounting policies are outlined in its Annual Report on Form 10-K for fiscal year ended January 31, 2005.
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 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, 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, 2005.
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
At October 31, 2005, the Company was in violation of certain of its loan covenants. In December 2005, the Company restructured its debt with Wells Fargo Bank, which waived the October 31, 2005 covenant violation, and the Company and Wells Fargo Bank amended the terms of the loan and several of the financial covenants. The Company’s revolving credit facility with Wells Fargo Bank, amended and restated as of December 6, 2005, provides a Term Loan of $20,000,000 and a secured revolving line of credit that varies as a percentage of inventory and receivables, up to a maximum of $50,000,000 during the four months from June 2006 through September 2006 and a maximum of $40,000,000 for the balance of the agreement. The term note is a two-year loan amortizing at $5,000,000 per year with interest payable monthly at a fluctuating rate equal to Wells Fargo’s prime rate (6.75% at October 31, 2005) plus a fluctuating margin of 2.00%. The fluctuating margin decreases by 1/4% for each quarter that the Company meets or exceeds certain EBITDA targets. Accordingly, a 100 basis point upward fluctuation in the lender’s base rate would cause the Company to incur additional interest charges of approximately $95,000 and $272,000 for the three month and nine month periods ended October 31, 2005. The Company would benefit from a similar interest savings if the base rate were to fluctuate downward by a like amount.
The revolving line has a 24-month maturity with interest payable monthly at a fluctuating rate equal to the Wells Fargo’s prime rate plus a fluctuating margin similar to the term note. The revolving line typically provides for advances of 80% on eligible accounts receivable and 20% to 60% on eligible inventory. The advance rates fluctuate depending on the time of the year and the types of assets. The agreement has an unused commitment fee of 0.375%. Approximately $12,642,000 was available for borrowing as of October 31, 2005.

 


 

The revolving credit facility with Wells Fargo Bank is subject to minimum earnings before income taxes depreciation and amortization (EBITDA) requirements. The agreement also places certain restrictions on capital expenditures, new operating leases, dividends and the repurchase of the Company’s common stock. The revolving credit facility is secured by the Company’s accounts receivable, inventories, equipment and property.
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 was classified as current on the October 31, 2004 balance sheet.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The 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, as amended (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 the 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.
We carried out an evaluation, under the supervision and with the participation of the 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 as of the end of the period covered by this Quarterly Report pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Company’s President and Chief Executive Officer, along with the Company’s Chief Financial Officer and other members of management, concluded that the Company’s disclosure controls and procedures are effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer as well as its Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
(b) Changes In Internal Control Over Financial Reporting
No changes in the Company’s internal control over financial reporting have come to management’s attention during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 


 

PART II
VIRCO MFG. CORPORATION
OTHER INFORMATION
Item 6. 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.
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.

 


 

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 8, 2005   By:   /s/ Robert E. Dose
 
          Robert E. Dose
 
          Vice President – Finance