VIRCO MFG CORPORATION - Quarter Report: 2009 April (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended April 30, 2009
OR
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
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 | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
2027 Harpers Way, Torrance, CA | 90501 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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 for each of the registrants classes of common stock, as
of the latest practicable date:
Common Stock, $.01 par value 14,142,422 shares as of June 1, 2009.
VIRCO MFG. CORPORATION
INDEX
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Exhibit 10.1 - Amendment No. 2 to Second Amended and Restated Credit Agreement, dated as of March 27,
2009, by Virco Mfg. Corporation and Wells Fargo Bank, National Association (incorporate by reference to
Exhibit 10.25 to the Companys Annual Report on Form 10-K filed with the Commission on April 16, 2009). |
||||||||
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. |
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Exhibit 32.1 - Certifications of Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
4/30/2009 | 1/31/2009 | 4/30/2008 | ||||||||||
(In thousands, except share data) | ||||||||||||
Unaudited (Note 1) | Unaudited (Note 1) | |||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash |
$ | 1,121 | $ | 4,387 | $ | 1,487 | ||||||
Trade accounts receivable |
11,579 | 14,393 | 13,115 | |||||||||
Less allowance for doubtful accounts |
206 | 200 | 224 | |||||||||
Net trade accounts receivable |
11,373 | 14,193 | 12,891 | |||||||||
Other receivables |
638 | 768 | 86 | |||||||||
Inventories |
||||||||||||
Finished goods, net |
23,209 | 10,720 | 25,026 | |||||||||
Work in process, net |
17,785 | 14,848 | 27,631 | |||||||||
Raw materials and supplies, net |
7,964 | 7,417 | 10,412 | |||||||||
Total inventories |
48,958 | 32,985 | 63,069 | |||||||||
Deferred tax assets, net |
5,751 | 3,808 | 5,880 | |||||||||
Prepaid expenses and other current assets |
2,192 | 1,658 | 1,755 | |||||||||
Total current assets |
70,033 | 57,799 | 85,168 | |||||||||
Property, plant and equipment: |
||||||||||||
Land and land improvements |
3,387 | 3,379 | 3,626 | |||||||||
Buildings and building improvements |
47,888 | 47,888 | 49,558 | |||||||||
Machinery and equipment |
115,780 | 116,559 | 115,074 | |||||||||
Leasehold improvements |
1,911 | 1,911 | 1,477 | |||||||||
168,966 | 169,737 | 169,735 | ||||||||||
Less accumulated depreciation and amortization |
124,614 | 125,122 | 123,986 | |||||||||
Net property, plant and equipment |
44,352 | 44,615 | 45,749 | |||||||||
Goodwill and other intangible assets |
| | 2,350 | |||||||||
Less accumulated amortization |
| | 56 | |||||||||
Net goodwill and other intangible assets |
| | 2,294 | |||||||||
Deferred tax assets, net |
9,390 | 9,372 | 5,652 | |||||||||
Other assets |
6,289 | 6,289 | 6,238 | |||||||||
Total assets |
$ | 130,064 | $ | 118,075 | $ | 145,101 | ||||||
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VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
4/30/2009 | 1/31/2009 | 4/30/2008 | ||||||||||
(In thousands, except share data) | ||||||||||||
Unaudited (Note 1) | Unaudited (Note 1) | |||||||||||
Liabilities |
||||||||||||
Current liabilities: |
||||||||||||
Checks released but not yet cleared bank |
$ | 3,455 | $ | 4,996 | $ | 1,943 | ||||||
Accounts payable |
11,511 | 10,728 | 13,424 | |||||||||
Accrued compensation and employee benefits |
4,246 | 5,136 | 5,524 | |||||||||
Current portion of long-term debt |
6,148 | 69 | 9,152 | |||||||||
Other accrued liabilities |
7,215 | 6,735 | 8,949 | |||||||||
Total current liabilities |
32,575 | 27,664 | 38,992 | |||||||||
Non-current liabilities: |
||||||||||||
Accrued self-insurance retention and other |
5,068 | 4,424 | 4,745 | |||||||||
Accrued pension expenses |
20,063 | 19,777 | 13,956 | |||||||||
Long-term debt, less current portion |
10,000 | 47 | 20,097 | |||||||||
Total non-current liabilities |
35,131 | 24,248 | 38,798 | |||||||||
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 14,142,422 shares at 4/30/2009 and 14,238,994 at
1/31/2009, and 14,428,662 shares at 4/30/2008 |
141 | 142 | 144 | |||||||||
Additional paid-in capital |
113,962 | 114,067 | 114,517 | |||||||||
Accumulated deficit |
(42,363 | ) | (38,664 | ) | (42,260 | ) | ||||||
Accumulated comprehensive loss |
(9,382 | ) | (9,382 | ) | (5,090 | ) | ||||||
Total stockholders equity |
62,358 | 66,163 | 67,311 | |||||||||
Total liabilities and stockholders equity |
$ | 130,064 | $ | 118,075 | $ | 145,101 | ||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
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VIRCO
MFG. CORPORATION
UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (Note 1)
Unaudited (Note 1)
Three months ended | ||||||||
4/30/2009 | 4/30/2008 | |||||||
(In thousands, except share data) | ||||||||
Net sales |
$ | 27,049 | $ | 29,194 | ||||
Costs of goods sold |
18,749 | 19,641 | ||||||
Gross profit |
8,300 | 9,553 | ||||||
Selling, general, administrative & other expenses |
13,012 | 13,791 | ||||||
Interest expense |
175 | 309 | ||||||
Loss before income taxes |
(4,887 | ) | (4,547 | ) | ||||
Income tax benefits |
(1,900 | ) | (1,691 | ) | ||||
Net loss |
$ | (2,987 | ) | $ | (2,856 | ) | ||
Net loss per common share |
||||||||
Basic and diluted |
$ | (0.21 | ) | $ | (0.20 | ) | ||
Weighted average shares outstanding |
||||||||
Basic and diluted |
14,231 | 14,429 | ||||||
Dividend declared per common share
|
||||||||
Cash |
$ | 0.05 | $ | 0.05 | ||||
Net loss per share was calculated based on basic shares outstanding due to the anti-dilutive effect
on the inclusion of common stock equivalent shares.
See Notes to Unaudited Condensed Consolidated Financial Statements.
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VIRCO MFG. VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (Note 1)
Three months ended | ||||||||
4/30/2009 | 4/30/2008 | |||||||
(In thousands) | ||||||||
Operating activities |
||||||||
Net loss |
$ | (2,987 | ) | $ | (2,856 | ) | ||
Adjustments to reconcile net loss to net cash used in
operating activities |
||||||||
Depreciation and amortization |
1,332 | 1,458 | ||||||
Provision for doubtful accounts |
40 | 20 | ||||||
Deferred income taxes |
(1,942 | ) | (1,691 | ) | ||||
Stock based compensation |
221 | 200 | ||||||
Changes in operating assets and liabilities |
||||||||
Trade accounts receivable |
2,780 | 2,563 | ||||||
Other receivables |
37 | 198 | ||||||
Inventories |
(15,973 | ) | (20,061 | ) | ||||
Income taxes |
76 | 42 | ||||||
Prepaid expenses and other current assets |
(534 | ) | (262 | ) | ||||
Accounts payable and accrued liabilities |
(636 | ) | (4,374 | ) | ||||
Net cash used in operating activities |
(17,586 | ) | (24,763 | ) | ||||
Investing activities |
||||||||
Capital expenditures |
(1,070 | ) | (860 | ) | ||||
Net cash used in investing activities |
(1,070 | ) | (860 | ) | ||||
Financing activities |
||||||||
Issuance of debt |
16,090 | 25,422 | ||||||
Repayment of debt |
(18 | ) | (18 | ) | ||||
Cash dividends paid |
(356 | ) | (360 | ) | ||||
Repurchase of common stock |
(326 | ) | | |||||
Net cash provided by financing activities |
15,390 | 25,044 | ||||||
Net decrease in cash |
(3,266 | ) | (579 | ) | ||||
Cash at beginning of year |
4,387 | 2,066 | ||||||
Cash at end of year |
$ | 1,121 | $ | 1,487 | ||||
Non cash disclosures: |
||||||||
Increase to long term liabilities as a result of the
adoption of EITF 06-4 |
$ | | $ | 1,820 | ||||
Cash dividends declared but not paid |
356 | |
See Notes to Unaudited Condensed Consolidated Financial Statements.
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VIRCO MFG. CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2009
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 months ended April 30, 2009, are
not necessarily indicative of the results that may be expected for the fiscal year ending
January 31, 2010. The balance sheet at January 31, 2009 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 Companys Annual Report on Form 10-K for the fiscal year ended
January 31, 2009 (Form 10-K). All references to the Company refer to Virco Mfg. Corporation
and its subsidiaries.
Note 2. Seasonality
The market for educational furniture is marked by extreme seasonality, with over 50% of the
Companys total sales typically occurring from June to September each year, which is the
Companys peak season. Hence, the Company typically builds and carries significant amounts of
inventory during and in anticipation of this peak summer season to facilitate the rapid delivery
requirements of customers in the educational market. This requires a large up-front investment in
inventory, labor, storage and related costs as inventory is built in anticipation of peak sales
during the summer months. As the capital required for this build-up generally exceeds cash
available from operations, the Company has historically relied on third-party bank financing to
meet cash flow requirements during the build-up period immediately preceding the peak season.
In addition, the Company typically is faced with a large balance of accounts receivable during
the peak season. This occurs for two primary reasons. First, accounts receivable balances
typically increase during the peak season as shipments of products increase. Second, many
customers during this period are government institutions, which tend to pay accounts receivable
more slowly than commercial customers.
The Companys working capital requirements during and in anticipation of the peak summer season
require management to make estimates and judgments that affect assets, liabilities, revenues and
expenses, and related contingent assets and liabilities. On an on-going basis, management
evaluates its estimates, including those related to market demand, labor costs, and stocking
inventory.
Note 3. New Accounting Standards
In June 2008, the FASB issued EITF 03-6-1, Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (EITF 03-6-1). Under EITF 03-6-1, unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend
equivalents, whether they are paid or unpaid, are considered participating securities and should
be included in the computation of earnings per share pursuant to the two-class method. EITF 03-6-1
is effective for financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. In addition, all prior period earnings per share data
presented should be adjusted retrospectively and early application is not permitted. The Company
adopted EITF 03-6-1 on February 1, 2009 and the adoption did not have an impact on its financial
statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). This
Standard defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after November 15, 2007,
which is the fiscal year beginning February 1, 2008, for the Company. The Company adopted SFAS
No. 157 effective February 1, 2008. The adoption of SFAS No. 157 for financial assets and
liabilities held by the Company did not have a material effect on the Companys financial
statements or notes thereto. As of April 30, 2009, the Company has financial assets in cash, which
is measured at fair value using quoted prices for identical assets in an active market (Level 1
fair value hierarchy) in accordance to SFAS No. 157.
In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 (FSP
FAS 157-2), which permits a one year deferral of the application of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least annually). The Company
adopted SFAS No. 157 for non-financial assets and non-financial liabilities on February 1, 2009
and the provisions did not have a material effect on its results of operations, financial position
or cash flows.
In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations (SFAS No.
141(R)), replacing SFAS No. 141, Business Combinations (SFAS No. 141), and SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements An Amendment of ARB No. 51
(SFAS No. 160). SFAS No. 141(R) retains the fundamental requirements of SFAS
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No. 141, broadens its scope by applying the acquisition method to all transactions and other
events in which one entity obtains control over one or more other businesses, and requires, among
other things, that assets acquired and liabilities assumed be measured at fair value as of the
acquisition date, that liabilities related to contingent considerations be recognized at the
acquisition date and remeasured at fair value in each subsequent reporting period, that
acquisition-related costs be expensed as incurred, and that income be recognized if the fair value
of the net assets acquired exceeds the fair value of the consideration transferred. SFAS No. 160
establishes accounting and reporting standards for non-controlling interests (i.e., minority
interests) in a subsidiary, including changes in a parents ownership interest in a subsidiary and
requires, among other things, that non-controlling interests in subsidiaries be classified as a
separate component of equity. Except for the presentation and disclosure requirements of SFAS
No. 160, which are to be applied retrospectively for all periods presented, SFAS No. 141 (R) and
SFAS No. 160 are to be applied prospectively in financial statements issued for fiscal years
beginning after December 15, 2008. The adoption of SFAS No. 141 (R) and SFAS No. 160 on February
1, 2009 did not have any material impact to the Companys financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS No. 161). SFAS No. 161 requires companies with derivative instruments to
disclose information that should enable readers of financial statements to understand how and why
a company uses derivative instruments, how derivative instruments and related hedged items are
accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
and how derivative instruments and related hedged items affect a companys financial position,
financial performance and cash flows. SFAS No. 161 was effective for the Company on February 1,
2009. The adoption of SFAS No. 161 did not have an effect on the Companys financial position,
results of operations or cash flows.
Note 4. Inventories
Fiscal year end financial statements at January 31, 2009 reflect inventories verified by physical
counts with the material content valued by the LIFO method. At April 30, 2009 and 2008, there
were no physical verifications 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 three months
ended April 30, 2009 and 2008. LIFO reserves at April 30, 2009, January 31, 2009 and April 30,
2008 were $9,531,000, $9,531,000 and $7,193,000, respectively. Management continually monitors
production costs, material costs and inventory levels to determine that interim inventories are
fairly stated.
Note 5. Debt
As of January 31, 2009, the Company had outstanding borrowings under a revolving credit facility
that the Company maintains with Wells Fargo pursuant to the Second Amended and Restated Credit
Agreement dated as of March 12, 2008 between the Company and Wells Fargo (the Credit Agreement),
as amended by Amendment No. 1 thereto dated as of July 31, 2008 (Amendment No. 1 to Credit
Agreement).
Effective as of March 27, 2009, the Company entered into Amendment No. 2 to the Credit Agreement
(Amendment No. 2), dated as of March 12, 2008, with Wells Fargo and a related Revolving Line of
Credit Note. The Credit Agreement, as amended by Amendment No. 1 and Amendment No. 2, provides
the Company with a secured revolving line of credit (the Revolving Credit) of up to $65,000,000,
with seasonal adjustments to the credit limit and additional asset-based borrowing-base
limitations thereto, and includes a sub-limit of up to $10,000,000 (subject to asset-based
borrowing-base limitations) for the issuance of letters of credit. The Revolving Credit is secured
by the maintenance by Wells Fargo of a first priority perfected security interest in certain of
the personal and real property of the Company and its subsidiaries.
The Revolving Credit will mature on March 1, 2011. Interest under the Revolving Credit is payable
monthly at a fluctuating rate equal to Wells Fargos prime rate or LIBOR, plus a fluctuating
margin. The margin above prime or LIBOR varies with trailing 12 months EBITDA, with maximum
fluctuating margins of prime + 1% or LIBOR + 3.5%. The Revolving Credit is also subject to an
unused commitment fee of 0.375%.
The Revolving Credit with Wells Fargo is subject to various financial covenants including a fixed
charge coverage calculation and a funded debt to adjusted EBITDA ratio. The Revolving Credit also
includes additional restrictions, including, without limitation, restrictions on capital
expenditures, additional indebtedness, dividends and the repurchase of the Companys common stock.
The Revolving Credit facility is secured by certain of the Companys and its subsidiaries
accounts receivable, inventories, equipment and real property. Availability under the Revolving
Credit line was $16,204,000 as of April 30, 2009 and the Company was in compliance with its
covenants as of such date.
The descriptions set forth herein of the Credit Agreement, Amendment No. 1 and Amendment No. 2 are
qualified in their entirety by the terms of such agreements, each of which has been filed with the
Commission.
Note 6. Income Taxes
There were no significant increases or decreases in the unrecognized tax benefits during the
three months ended April 30, 2009. As of April 30, 2009, the Company does not believe there are
any positions for which it is reasonably possible that the total amount of unrecognized tax
benefits will significantly increase or decrease within the next 12 months.
The Internal Revenue Service (the IRS) has completed the examination of all of the Companys
federal income tax returns through 2004 with no issues pending or unresolved. The years 2005
through 2008 remain open for examination by the IRS. During the quarter
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ended October 31, 2008, the Company was notified by the IRS that it will be auditing the
Companys tax filings for fiscal year ended January 31, 2007.
At January 31, 2009, the Company has net operating loss carryforwards for federal and state
income tax purposes, expiring at various dates through 2028. Federal net operating losses that
can potentially be carried forward totaled approximately $3,438,000 at January 31, 2009. State
net operating losses that can potentially be carried forward totaled approximately $26,648,000 at
January 31, 2009. The Company has determined that it is more likely than not that some portion of
the state net operating loss and credit carryfowards will not be realized and has provided a
valuation allowance of $927,000 on the deferred tax assets at January 31, 2009 and April 30,
2009. The Company evaluates the valuation allowance on a quarterly basis.
Note 7. Net Loss per Share
Three Months Ended | ||||||||
4/30/2009 | 4/30/2008 | |||||||
(In thousands, except per share data) | ||||||||
Numerators: |
||||||||
Numerator for both basic and diluted net loss per share |
$ | (2,987 | ) | $ | (2,856 | ) | ||
Denominators: |
||||||||
Denominator for basic net loss per share weighted-average
common shares outstanding |
14,231 | 14,429 | ||||||
Potentially dilutive shares from stock option plans |
| | ||||||
Denominator for diluted net loss per share |
14,231 | 14,429 | ||||||
Net loss per share basic and diluted |
$ | (0.21 | ) | $ | (0.20 | ) |
Certain exercisable and non-exercisable stock options were not included in the computation of
diluted net loss per share at April 30, 2009 and 2008, because their inclusion would have been
anti-dilutive. The number of stock options outstanding, which met this anti-dilutive criterion for
the three months ended April 30, 2009 and 2008, was 109,000 and 63,000, respectively.
Note 8. Stock Based Compensation
Stock Incentive Plans
The Companys two stock plans are the 2007 Stock Incentive Plan (the 2007 Plan) and the 1997
Stock Incentive Stock Plan (the 1997 Plan). Under the 2007 Plan, the Company may grant an
aggregate of 1,000,000 shares to its employees and non-employee directors in the form of stock
options or awards. Restricted stock or stock units awarded under the 2007 Plan are expensed
ratably over the vesting period of the awards. There were no grants during the period ended April
30, 2009. There were approximately 688,969 shares available for future issuance under the 2007
Plan as of April 30, 2009.
The 1997 Plan expired in 2007 and had 102,869 unexercised options outstanding at April 30, 2009.
Pursuant to the terms of the 1997 Plan, stock options were required to be awarded to employees at
exercise prices equal to the fair market value of the Companys common stock on the date of grant.
Stock options generally have a maximum term of 10 years and generally become exercisable ratably
over a five-year period.
The shares of common stock issued upon exercise of a previously granted stock option are
considered new issuances from shares reserved for issuance upon adoption of the various plans.
While the Company does not have a formal written policy detailing such issuance, it requires that
the option holders provide a written notice of exercise to the stock plan administrator and
payment for the shares prior to issuance of the shares.
Accounting for the Plans
Effective February 1, 2006, the Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment, using the modified prospective-transition method. The
modified prospective-transition method was applied to those unvested options issued prior to the
Companys adoption that have historically been accounted for under the Intrinsic Value Method. All
outstanding options were 100% vested prior to the adoption and no options were granted or modified
since the adoption of FASB Statement No. 123(R). As the compensation cost for restricted stock
units was measured using the estimated fair value on the date of grant and recognized over the
vesting period, there was no effect on the Companys statements of operations, due to the adoption
of FASB Statement No. 123(R). Accordingly, no compensation expense was recorded on the Companys
options during the three months ended April 30, 2009 or April 30, 2008.
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Restricted Stock and Stock Unit Awards
Accounting for the Plans
The following table presents a summary of restricted stock and stock unit awards at April 30,
2009 and 2008:
Unrecognized | ||||||||||||
Compensation | ||||||||||||
Expense for 3 months ended | Cost at | |||||||||||
4/30/2009 | 04/30/2008 | 4/30/2009 | ||||||||||
2007 Stock Incentive Plan |
||||||||||||
262,500 Restricted Stock Units issued 6/19/2007, vesting over 5 years |
$ | 89,000 | $ | 89,000 | $ | 1,096,000 | ||||||
35,644 Grants of Restricted Stock issued 6/17/2008, vesting over 1 year |
44,000 | | 15,000 | |||||||||
12,887 Grants of Restricted Stock issued 6/19/2007, vesting over 1 year |
| 22,000 | | |||||||||
1997 Employee Incentive Stock Plan |
||||||||||||
270,000 Restricted Stock Units issued 6/30/2004, vesting over 5 years |
88,000 | 89,000 | 59,000 | |||||||||
Totals for the period |
$ | 221,000 | $ | 200,000 | $ | 1,170,000 | ||||||
Stockholders Rights
On October 15, 1996, the Board of Directors declared a dividend of one preferred stock purchase
right (the Rights) for each outstanding share of the Companys common stock. Each of the Rights
entitles a stockholder to purchase for an exercise price of $50.00 ($20.70, as adjusted for stock
splits and stock dividends), subject to adjustment, one one-hundredth of a share of Series A
Junior Participating Cumulative Preferred Stock of the Company, or under certain circumstances,
shares of common stock of the Company or a successor company with a market value equal to two
times the exercise price. The Rights are not exercisable, and would only become exercisable for
all other persons when any person has acquired or commences to acquire a beneficial interest of at
least 20% of the Companys outstanding common stock. The Rights have no voting privileges, and may
be redeemed by the Board of Directors at a price of $.001 per Right at any time prior to the
acquisition by any person of a beneficial ownership of 20% of the outstanding common stock. There
are 200,000 shares (483,153 shares as adjusted by stock splits and stock dividends) of Series A
Junior Participating Cumulative Preferred Stock reserved for issuance upon exercise of the Rights.
On July 31, 2007, the Company and Mellon Investor Services LLC entered into an amendment to the
Rights Agreement governing the Rights. The amendment, among other things, extended the term of the
Rights issued under the Rights Agreement to October 25, 2016, removed the dead-hand provisions
from the Rights Agreement, and formally replaced the former Rights Agent, The Chase Manhattan
Bank, with its successor-in-interest, Mellon Investor Services LLC.
Note 9. Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended April 30, 2009 and 2008 was the same as
net income (loss) reported on the Statements of Operations. Accumulated comprehensive income
(loss) at April 30, 2009 and 2008 and January 31, 2009 is composed of minimum pension liability
adjustments.
Note 10. Retirement Plans
The Company and its subsidiaries cover all employees under a noncontributory defined benefit
retirement plan, entitled 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, benefit accruals under the 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 VIP
Plan. As more fully described in the Form 10-K, 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 directors 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, benefit
accruals under this plan were frozen effective December 31, 2003.
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The net periodic pension costs for the Plan, the VIP Plan, and the Non-Employee Directors
Retirement Plan for the three months each ended April 30, 2009 and 2008 were as follows (in
thousands):
Three Months Ended April 30, | ||||||||||||||||||||||||
Non-Employee Directors | ||||||||||||||||||||||||
Employees Retirement Plan | VIP Retirement Plan | Retirement Plan | ||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Service cost |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Interest cost |
367 | 357 | 85 | 83 | 7 | 7 | ||||||||||||||||||
Expected return on plan assets |
(179 | ) | (300 | ) | | | | | ||||||||||||||||
Amortization of prior service cost |
128 | 128 | (79 | ) | (79 | ) | | | ||||||||||||||||
Recognized net actuarial (gain) or loss |
231 | 47 | 24 | 36 | (46 | ) | (8 | ) | ||||||||||||||||
Net periodic pension cost |
$ | 547 | $ | 232 | $ | 30 | $ | 40 | $ | (39 | ) | $ | (1 | ) | ||||||||||
Note 11. Warranty
The Company accrues an estimate of its exposure to warranty claims based upon both current and
historical product sales data and warranty costs incurred. The majority of the Companys products
sold through January 31, 2005 carry a five-year warranty. Effective February 1, 2005, the Company
extended its standard warranty period to 10 years. The Company periodically assesses the adequacy
of its recorded warranty liabilities and adjusts the amounts as necessary. The warranty liability
is included in accrued liabilities in the accompanying consolidated balance sheets.
The following is a summary of the Companys warranty claim activity for the three month periods
each ended April 30, 2009 and 2008 (in thousands):
April 30, | ||||||||
2009 | 2008 | |||||||
Beginning balance |
$ | 1,950 | $ | 1,750 | ||||
Provision |
301 | 543 | ||||||
Costs incurred |
(301 | ) | (343 | ) | ||||
Ending balance |
$ | 1,950 | $ | 1,950 | ||||
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VIRCO MFG. CORPORATION
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
For the three months ended April 30, 2009, the Company incurred a pre-tax loss of $4,887,000 on net
sales of $27,049,000 compared to a pre-tax loss of $4,547,000 on net sales of $29,194,000 in the
same period last year.
Net sales for the three months ended April 30, 2009 decreased by $2,145,000, a 7.4% decrease,
compared to the same period last year. Incoming orders for the same period decreased by
approximately 3.4% compared to the prior year. Backlog at April 30, 2009 increased by
approximately 3% compared to the prior year. The combination of year-to-date net sales plus
backlog at April 30, 2009 has decreased by 1.4% compared to the prior year. Activity for the
quarter reflects an increase in selling prices, offset by a reduction in unit volume. Business
activity for the three months ended April 30, 2009 was impacted by general economic conditions,
particularly those that impact tax receipts and the funded status of public schools.
Gross margin as a percentage of sales decreased to 30.7% for the three months ended April 30, 2009
compared to 32.7% in the same period last year. The reduction in gross margin was attributable to
increased costs for certain raw materials compared to the first quarter of 2008 and because a
larger percentage of orders were sold FOB factory, which typically yields lower margins than orders
that include delivery and full service.
Selling, general and administrative expenses for the three months ended April 30, 2009 decreased by
approximately $800,000 compared to the same period last year , but increased as a percentage of
sales by 0.9%. The decrease in selling, general and administrative expenses was primarily
attributable to a reduction in variable freight and installation cost, due to the reduced volume of
shipments and reduced percentage of shipments that included delivery and full service. The
increase in selling, general and administrative expenses as a percentage of sales was primarily
attributable to the reduction in net sales for the three months ended April 30, 2009.
Liquidity and Capital Resources
Interest expense decreased by approximately $134,000 for the three months ended April 30, 2009
compared to the same period last year. The decrease was due to reduced interest rates in addition
to lower loan balances under the Companys revolving line of credit with Wells Fargo Bank.
As a result of seasonally lower shipments in the three months ended April 30, 2009 compared to the
three months ended January 31, 2009 and the three months ended April 30, 2008, accounts and notes
receivable were reduced at April 30, 2009 compared to January 31, 2009 and April 30, 2008. The
Company traditionally builds large quantities of inventory during the first quarter of each fiscal
year in anticipation of seasonally high summer shipments. For the current fiscal quarter, the
Company increased inventory by approximately $16,000,000 compared to January 31, 2009 and reduced
inventory by approximately $14,000,000 compared to April 30, 2008. The increase in inventory
during the first quarter of 2009 compared the January 31, 2009 was financed through the Companys
credit facility with Wells Fargo Bank. The decrease in inventory compared to April 30, 2008 is due
to a combination of several components. First, the Company has decreased its inventory of raw
materials and products purchased for resale. Second, the Company has produced fewer semi-finished
ATS components. Third, in response to the current economic conditions, the Company reduced the
variety of SKUs in its stocking program and is focusing on a quick ship program of core product
lines that can be shipped during the summer with very short lead times.
At April 30, 2009, accounts payable and accrued liabilities are comparable to April 30, 2008.
Borrowings under the Companys revolving line of credit with Wells Fargo Bank decreased by
approximately $13 million compared to the April 30, 2008, primarily due to reduced levels of
inventory and receivables. Other long term liabilities for the three months ended April 30, 2009
were comparable to January 31, 2009. The Company has established a goal of limiting capital
spending to less than $5,000,000 for fiscal year 2009, which is slightly less than the Companys
anticipated depreciation expense. Capital spending for the three months ended April 30, 2009, was
$1,071,000 compared to $860,000 for the same period last year. Capital expenditures are being
financed through the Companys credit facility established with Wells Fargo Bank and operating cash
flow.
Net cash used in operating activities for the three months ended April 30, 2009 was $17,586,000
compared to $24,763,000 for the same period last year. The decrease in cash used was primarily
attributable to a decrease in the amount of inventory added to stock in the first quarter. In
addition, during the current quarter, accounts payable and accrued liabilities remained stable. In
the first quarter of 2008 the Company used operating cash to reduce accounts payable.
The Company believes that cash flows from operations, together with the Companys unused borrowing
capacity with Wells Fargo will be sufficient to fund the Companys debt service requirements,
capital expenditures and working capital needs for the next twelve months. Approximately
$16,204,000 was available for borrowing as of April 30, 2009.
Off Balance Sheet Arrangements
During the three months ended April 30, 2009, there were no material changes in the Companys off
balance sheet arrangements or contractual obligations and commercial commitments from those
disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2009
(Form 10-K).
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Critical Accounting Policies and Estimates
The Companys critical accounting policies are outlined in its Form 10-K. No changes have occurred
other than the adoption of the new accounting standards as described in Note 3 to the Companys
Unaudited Condensed Consolidated Financial Statements.
Forward-Looking Statements
From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 2009, 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 Companys 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 Companys 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 Companys Form 10-K.
The Companys 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
As of January 31, 2009, the Company had outstanding borrowings under a revolving credit facility
that the Company maintains with Wells Fargo pursuant to the Second Amended and Restated Credit
Agreement dated as of March 12, 2008 between the Company and Wells Fargo (the Credit Agreement),
as amended by Amendment No. 1 thereto dated as of July 31, 2008 (Amendment No. 1 to Credit
Agreement).
Effective as of March 27, 2009, the Company entered into Amendment No. 2 to the Credit Agreement
(Amendment No. 2), dated as of March 12, 2008, with Wells Fargo and a related Revolving Line of
Credit Note. The Credit Agreement, as amended by Amendment No. 1 and Amendment No. 2, provides the
Company with a secured revolving line of credit (the Revolving Credit) of up to $65,000,000, with
seasonal adjustments to the credit limit and additional asset-based borrowing-base limitations
thereto, and includes a sub-limit of up to $10,000,000 (subject to asset-based borrowing-base
limitations) for the issuance of letters of credit. The Revolving Credit is secured by the
maintenance by Wells Fargo of a first priority perfected security interest in certain of the
personal and real property of the Company and its subsidiaries.
The Revolving Credit will mature on March 1, 2011. Interest under the Revolving Credit is payable
monthly at a fluctuating rate equal to Wells Fargos prime rate or LIBOR, plus a fluctuating
margin. The margin above prime or LIBOR varies with trailing 12 months EBITDA, with maximum
fluctuating margins of prime + 1% or LIBOR + 3.5%. The Revolving Credit is also subject to an
unused commitment fee of 0.375%.
The Revolving Credit with Wells Fargo is subject to various financial covenants including a fixed
charge coverage calculation and a funded debt to adjusted EBITDA ratio. The Revolving Credit also
includes additional restrictions, including, without limitation, restrictions on capital
expenditures, additional indebtedness, dividends and the repurchase of the Companys common stock.
The Revolving Credit facility is secured by certain of the Companys and its subsidiaries accounts
receivable, inventories, equipment and real property. Availability under the Revolving Credit line
was $16,204,000 as of April 30, 2009 and the Company was in compliance with its covenants as of
such date.
The descriptions set forth herein of the Credit Agreement, Amendment No. 1 and Amendment No. 2 are
qualified in their entirety by the terms of such agreements, each of which has been filed with the
Commission.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports filed with the Securities and Exchange Commission
(the Commission) pursuant to the Securities Exchange Act of 1934 (the Exchange Act) is
recorded, processed, summarized and reported within the time periods specified in the Commissions
rules and forms, and that such information is accumulated and communicated to the Companys
management, including its President and Chief Executive Officer and Principal 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 managements objectives in establishing them will be achieved.
The Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including its Principal Executive Officer along with its Principal Financial
Officer , of the effectiveness of the design and operation of disclosure controls and procedures as
of the end of the period covered by this Quarterly Report on Form 10-Q, pursuant to Exchange Act
Rule 13a-15. Based upon the foregoing, the Companys Principal Executive Officer along with the
Companys Principal Financial Officer concluded that, subject to the limitations noted in this Part
I, Item 4, the Companys 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 Commissions 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
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Companys management, including its Principal Executive and Principal Financial Officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting during the first
fiscal quarter of 2009 that has materially affected, or is reasonably likely to materially affect,
the Companys internal control over financial reporting.
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PART II OTHER INFORMATION
VIRCO MFG. CORPORATION
Item 1. Legal Proceedings
The Company has various legal actions pending against it arising in the ordinary course of
business, which in the opinion of the Company, are not material in that management either expects
that the Company will be successful on the merits of the pending cases or that any liabilities
resulting from such cases will be substantially covered by insurance. While it is impossible to
estimate with certainty the ultimate legal and financial liability with respect to these suits and
claims, management believes that the aggregate amount of such liabilities will not be material to
the results of operations, financial position, or cash flows of the Company.
Item 1A. Risk Factors
There have been no material changes from risk factors as disclosed in the Form 10-K for the period
ended January 31, 2009.
Item 6. Exhibits
Exhibit 10.1 Amendment No. 2 to Second Amended and Restated Credit Agreement, dated as of March
27, 2009, by Virco Mfg. Corporation and Wells Fargo Bank, National Association (incorporate by
reference to Exhibit 10.25 to the Companys Annual Report on Form 10-K filed with the Commission on
April 16, 2009).
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 Principal Executive Officer and Principal 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: June 8, 2009
|
By: | /s/ Robert E. Dose
|
||||
Vice President Finance |
15