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