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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 July 31, 2001 Commission File Number 1-8777
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VIRCO MFG. CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Delaware 95-1613718
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2027 Harpers Way, Torrance, CA 90501
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 533-0474
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No change
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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 [X] No [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 4, 2001.
Common Stock 12,322,947 Shares*
* Adjusted for 10% stock dividend declared August 21, 2001, date of record
September 6, 2001, payable September 28, 2001.
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VIRCO MFG. CORPORATION
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets - July 31, 2001 and January
31, 2001
Condensed consolidated statements of income - Three months ended
July 31, 2001 and 2000.
Condensed consolidated statements of income - Six months ended
July 31, 2001 and 2000.
Condensed consolidated statements of cash flows - Six months
ended July 31, 2001 and 2000.
Notes to condensed consolidated financial statements - July 31,
2001
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II. Other Information
Item 4. Submission of matters to a vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
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PART I
Item 1. Financial Statements
VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited (Note 1)
(Dollar amounts in thousands, except per share data)
ASSETS 7/31/2001 1/31/2001
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Current assets
Cash $ 2,696 $ 351
Accounts and notes receivable 48,568 25,345
Less allowance for doubtful accounts (551) (200)
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Net accounts and notes receivable 48,017 25,145
Inventories (Note 2)
Finished goods 25,415 27,009
Work in process 13,928 14,442
Raw materials and supplies 18,332 16,588
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Total inventories 57,675 58,039
Income taxes receivable 1,972 2,508
Prepaid expenses and deferred income tax 2,334 2,930
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Total current assets 112,694 88,973
Property, plant & equipment
Cost 153,819 153,504
Less accumulated depreciation (64,669) (58,859)
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Net property, plant & equipment 89,150 94,645
Other assets 15,938 15,931
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Total assets $ 217,782 $ 199,549
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See notes to condensed consolidated financial statements.
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VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited (Note 1)
(Dollar amounts in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 7/31/2001 1/31/2001
------------------------------------ --------- ---------
Current liabilities
Checks released but not yet cleared bank $ 1,241 $ 2,216
Accounts payable 15,476 13,930
Accrued compensation and employee benefits 9,542 10,775
Current maturities on long-term debt 12,101 12,101
Other current liabilities 5,815 6,778
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Total current liabilities 44,175 45,800
Non-current liabilities
Long term debt (less current portion) 62,061 43,741
Other non-current liabilities 14,252 11,334
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Total non-current liabilities 76,313 55,075
Deferred income taxes 4,533 4,533
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; 12,033,231 issued at
7/31/2001 and 12,032,233 shares issued at 1/31/2001
120 120
Additional paid-in capital 97,654 97,656
Retained earnings 10,920 10,645
Less treasury stock at cost, 830,551 shares at 7/31/2001 and 749,246
shares at 1/31/2001) (12,827) (12,009)
Less unearned ESOP shares (934) (696)
Less accumulated comprehensive loss (2,172) (1,575)
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Total stockholders' equity 92,761 94,141
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Total liabilities and stockholders' equity $ 217,782 $ 199,549
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See notes to condensed consolidated financial statements.
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VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (Note 1)
(Dollar amounts in thousands, except per share data)
Three Months Ended
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7/31/2001 7/31/2000
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Restated (Note 1)
Net sales $89,193 $96,578
Cost of goods sold 60,844 64,810
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Gross profit 28,349 31,768
Selling, general and administrative and other 19,640 23,155
Interest expense 1,349 1,614
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20,989 24,769
Income before income taxes 7,360 6,999
Income taxes 2,870 2,737
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Net income $ 4,490 $ 4,262
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Earnings per share $ .37 $ .34
Earnings per share - assuming dilution $ .36 $ .34
Weighted average share outstanding (a) 12,238 12,494
Weighted average share outstanding - assuming dilution (a) 12,367 12,651
Dividend per share
Cash (a) $ .02 $ .02
(a) Adjusted for 10% stock dividend declared August 21, 2001.
See notes to condensed consolidated financial statements.
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VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (Note 1)
(Dollar amounts in thousands, except per share data)
Six Months Ended
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7/31/2001 7/30/2000
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Restated (Note 1)
Net sales $ 131,650 $ 143,010
Cost of goods sold 91,818 96,761
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Gross profit 39,832 46,249
Selling, general and administrative and other 36,102 40,145
Interest expense 2,456 2,766
Loss (Gain) on sale of fixed assets 86 (7,945)
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38,644 34,966
Income before income taxes and cumulative effect of accounting change 1,188 11,283
Income taxes 463 4,404
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Net income before cumulative effect of accounting change 725 6,879
Cumulative effect of accounting change -- (297)
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Net income $ 725 $ 6,582
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Amounts per common share - basic (a)
Income before cumulative effect of accounting change $ .06 $ .55
Cumulative effect of accounting change -- (.02)
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Net income $ .06 $ .53
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Amounts per common share - assuming dilution (a)
Income before cumulative effect of accounting change $ .06 $ .54
Cumulative effect of accounting change -- (.02)
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Net income $ .06 $ .52
========= =========
Weighted average share outstanding (a) 12,329 12,498
Weighted average share outstanding - assuming dilution (a) 12,458 12,650
Dividend per share
Cash (a) $ .04 $ .04
(a) Adjusted for 10% stock dividend declared August 21, 2001.
See notes to condensed consolidated financial statements.
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VIRCO MFG. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (Note 1)
(Dollar amounts in thousands)
Six Months Ended
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7/31/2001 7/31/2000
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Cash flows from operating activities
Net income $ 725 $ 6,582
Adjustments to reconcile net income to net cash used in operating
activities:
Cumulative effect of accounting change -- 297
Depreciation 7,835 6,320
Provision for doubtful accounts 329 269
(Gain)Loss on sales of fixed asset 86 (7,945)
Change in assets and liabilities:
Accounts and notes receivable (23,201) (27,875)
Inventories 364 (14,710)
Prepaid expenses and deposits 994 408
Income taxes receivable/payable 536 1,439
Accounts payable and accrued expenses 298 6,891
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Net cash used in operating activities (12,034) (28,324)
Cash flows from investing activities
Capital expenditures (2,880) (12,466)
Proceeds from sale of assets 454 9,389
Net investment in life insurance (7) (21)
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Net cash used in investing activities (2,433) (3,098)
Cash flows from financing activities
Issuance of long-term debt 19,360 32,810
Repayment of long-term debt (1,040) (941)
Payment of cash dividend (450) (413)
Purchase of treasury stock (817) (283)
Issuance of common stock (3) 2
Loans to ESOP (238) (74)
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Net cash provided by financing activities 16,812 31,101
Net change in cash 2,345 (321)
Cash at beginning of period 351 1,072
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Cash at end of period $ 2,696 $ 751
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See notes to condensed consolidated financial statements
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VIRCO MFG. CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2001 and July 31, 2000
Note 1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles 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-month and six-month
periods ended July 31, 2001 are not necessarily indicative of the
results that may be expected for the year ended January 31, 2002. The
balance sheet at January 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles 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, 2001.
During the fourth quarter of fiscal year 2000, the Company changed its
method of accounting for revenue recognition in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in the Financial
Statements." Pursuant to Financial Accounting Standards Board
Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements," effective February 1, 2000, the Company recorded the
cumulative effect of the accounting change and accordingly, the
quarterly information for the first quarter of 2000, which had
previously been reported, has been restated. Additionally, net sales
and gross profit have been adjusted to reflect reclassifications to
conform to the presentation required by EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs," which the Company also adopted
during the fourth quarter of fiscal year 2000.
Note 2. Inventory
Year end financial statements reflect inventories verified by physical
counts with the material content valued by the LIFO method. At this
interim date, there has been no physical verification of inventory
quantities. Cost of sales is recorded at current cost. The effect of
penetrating LIFO layers is not recorded at interim dates unless the
reduction in inventory is expected to be permanent. No such adjustment
has been made for the period ended July 31, 2001. Management
continually monitors production costs, material costs and inventory
levels to determine that interim inventories are fairly stated.
Note 3. Income Taxes
Income taxes for the three months and six months ended July 31, 2001
were computed using the effective tax rate estimated to be applicable
for the full fiscal year, which is subject to ongoing review and
evaluation by management.
Note 4. Significant Accounting Policies
The weighted average number of shares used in the computation of
diluted net income per share were 12,367,000 and 12,651,000 for the
quarter ended July 31, 2001 and July 31, 2000, respectively. The
weighted average number of shares used in the computation of diluted
net income per share were 12,458,000 and 12,650,000 for the six months
ended July 31, 2001 and July 31, 2000, respectively. Per share and
weighted-average share amounts for the second quarter and six months
ended July 31,
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2000 have been restated to reflect a 10% stock dividend payable on
September 28, 2001 to stockholders of record as of September 6, 2001.
Comprehensive income includes net income and minimum pension liability
adjustments. Comprehensive income was $4,465,000 and $4,262,000 for
the quarter ended July 31, 2001 and July 31, 2000, respectively.
Comprehensive income was $128,000 and $6,582,000 for the six months
ended July 31, 2001 and July 31, 2000, respectively.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities," (SFAS 133, as amended by SFAS 138), which is required to
be adopted in years beginning after June 15, 2000. The Company has
adopted the new Statement effective February 1, 2001. The Statement
requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to
fair value and reflected as income or expense. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value
of derivatives are either offset against commitments through earnings
or recognized in other comprehensive income until the hedge item is
recognized in earnings. The ineffective portion of a derivative's
change in fair value is immediately recognized in earnings.
The Company enters into interest rate swap contracts to reduce its
exposure to fluctuations in interest rates. At July 30, 2001, the
Company had one interest rate swap contract which was accounted for as
a cash flow hedge. The transition adjustment to implement SFAS 133
resulted in recording a liability and an offset to Other Comprehensive
Loss which was $552,000, net of an applicable income tax benefit of
$368,000 at February 1, 2001. There is no impact to current earnings
due to hedge ineffectiveness.
Note 5. Gain on Sale of Real Estate
On April 25, 2000, the Company finalized the sale of its Torrance,
California, warehouse. The Company received $9,385,000 in cash and
recorded $7,945,000 pre-tax gain on disposition during the quarter
ended April 30, 2000.
Note 6. Interest Rate Swap Contract
It is the Company's policy to enter into interest rate swap contracts
only to the extent necessary to reduce exposure to fluctuations in
interest rates. The Company does not enter into interest rate swap
contracts for speculative purposes. Interest rate swaps are
contractual agreements between the Company and third parties to
exchange fixed and floating interest payments periodically without the
exchange of the underlying principal amounts (notional amounts). In
the unlikely event that a counterparty fails to meet the terms of an
interest rate swap contract, the Company's exposure is limited to the
interest rate differential on the notional amount. The Company does
not anticipate non-performance by the counterparty. The Company only
entered into one interest rate swap contract, which matures on March
3, 2003. At July 31, 2001, the notional amount of the swap was
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$20,000,000 with an affixed payment rate of 7.23% and a fluctuating
receiving rate based upon LIBOR.
At July 31, 2001 the carrying value approximated the fair value of
$995,000. During the quarter ended July 31, 2001, the Company recorded
an additional loss amount of $25,000 (net of an applicable income tax
benefit of $17,000) in other comprehensive loss in order to account
for the change in fair value. The fair value of the swap is estimated
on pricing models using current assumptions.
Note 7. New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets," which supersedes Accounting Principles Board
Opinion No. 17, SFAS No. 141 is effective for any business combination
completed subsequent to June 30, 2001, and SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001. Under SFAS No.
142, goodwill deemed to have an indefinite life will no longer be
amortized and will be subjected to annual impairment tests. Other
intangible assets will continue to be amortized over their useful
lives. Accordingly, the Company will apply the provisions of SFAS No.
141 should it enter into any business combinations after June 30,
2001. The Company believes SFAS No. 142 will not have any effect on
the Company's financial position, results of operations or cash flows.
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VIRCO MFG. CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations:
For the second quarter of 2001, the Company had a net income of $4,490,000 on
sales of $89,193,000 compared to a net income of $4,262,000 on sales of
$96,578,000 in the same period last year. Earnings were $.36 per share compared
to $.34 per share in the same period last year, after giving effect to the 10%
stock dividend declared August 21, 2001. For the six months ended July 31, 2001,
the Company earned net income of $725,000 on sales of $131,650,000 compared to
net income of $6,582,000 on sales of $143,010,000 in the same period last year.
Earnings were $.06 per share compared to $.52 per share in the same period last
year, after giving effect to the 10% stock dividend declared August 21, 2001.
The second quarter and year to date results are consistent with Virco's seasonal
business cycle, which produces diminished first quarter sales followed by strong
second and third quarter deliveries of educational furniture. The seasonal
nature of Virco's sales has intensified due to strategic marketing decisions and
changes in the buying pattern of educational customers. Sales for the second
quarter decreased $7,385,000 compared to the same period last year. Backlog at
July 31, 2001 was approximately $3,000,000 higher compared to the same time last
year.
Gross profit for the second quarter decreased slightly compared to the same
period last year. The decline in margin is attributable to a significant
reduction in manufacturing hours during the second quarter compared to the same
period last year and substantially offset by an increase in prices and
reductions in spending. In the prior year, the Company built a large quantity of
finished goods inventory to stock during the first and second quarters in
anticipation of large deliveries of furniture in the second and third quarters
of 2000. The prior year sales were less than expected resulting in disappointing
third and fourth quarter results as the Company cut production and incurred
severance costs to reduce its workforce.
For the current year, the Company has maintained a reduced cost structure,
employing approximately 525 (19%) fewer employees during the second quarter of
2001 compared to the prior year. At August 1, 2001, the Company employed
approximately 625 (21%) fewer employees than at the same date last year,
reflecting a reduction in summer hiring. The reduction in production hours
resulted in unfavorable production variances compared to the prior year, but has
allowed the Company to reduce inventories compared to the prior year despite
reduced levels of sales.
During the second quarter, the Company has more fully implemented a
manufacturing strategy it refers to as "Assemble to Ship". Under this strategy,
the Company builds components to stock instead of building finished goods to
stock. The Company then assembles the finished product as customer orders
determine production quantities and color combinations. This ATS stategy has
been complimented with policy of seasonal workforce assignments. The Company has
traditionally relied upon seasonal hiring to help meet peak summer shipping
demands. In the current quarter, the Company paid seasonal incentives to
fabrication employees who transferred to assembly and warehouse positions during
the summer. This strategy played a significant role in achieving the workforce
reductions referenced above.
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The Company believes that it can support a greater volume and variety of
customer orders with a smaller investment in inventory and a smaller but more
experienced permanent workforce utilizing these strategies.
Selling, general and administrative expense and other for the quarter ended July
31, 2001 decreased by approximately $3,515,000 compared to the same period last
year. The reduction was primarily attributable to reduced freight expense
resulting from lower unit sales volume and overall reduction in spending.
Interest expense decreased by $265,000 due to a lower average borrowing balance
and lower interest rates for the quarter ended July 31, 2001 compared to the
same period last year. The decrease in borrowings was attributable to reduced
capital spending and decreased levels of inventory.
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Financial Condition:
As a result of seasonally high shipments in the second quarter, accounts
receivable increased by approximately $23,201,000 compared to year-end. This
increase in accounts receivable was financed through the credit facility with
Wells Fargo Bank.
Capital spending for the six months ended July 31, 2001 was $2,880,000 compared
to $12,466,000 for the same period last year. In the prior year, the Company
completed a significant investment cycle at the Conway, Arkansas manufacturing
and distribution facility. With the completion of this investment, the Company
intends to significantly curtail capital spending. The Company has established a
goal of limiting capital spending to approximately $7,000,000 for 2001, which is
approximately one-half of anticipated depreciation expense. Capital expenditures
are being financed through credit facilities established with Wells Fargo Bank
and operating cash flow. Beginning May 1, 2001, the credit facility with Wells
Fargo Bank is expanded to $80,000,000 from $70,000,000. The maximum principal
amount available under this note shall be reduced automatically on September 1,
2001, and on each January 1, commencing January 1, 2001, by the amount of
$10,000,000. If cash flow permits, the Company intends to prepay a portion of
the line used to finance the Conway, Arkansas expansion in the fourth quarter.
At July 31, 2001, the Company has approximately $13,122,000 available under its
credit facility with Wells Fargo Bank.
Net cash used in operating activities for the six months ended July 31, 2001 was
$12,034,000 compared to $28,324,000 for the same period last year. The decrease
in cash used in operating activities was primarily due to the reduced inventory
level. Long term debt was $62,061,000 as of July 31, 2001 compared to
$43,741,000 as of January 31, 2001.
In April 1998, the Board of Directors approved a stock buyback program giving
authorization to buy back up to $5,000,000 of common stock. The amount
authorized was subsequently increased to $14,000,000. As of July 31, 2001, the
Company has repurchased approximately 800,000 shares at a cost of approximately
$12,300,000 since the inception of this program in April 1998. The Company
intends to continue buying back shares of common stock as long as the Company
believes the shares are undervalued and operating cash flows and borrowing
capacity under the Wells Fargo line allow.
On August 21, 2001, the Company's Board of Directors authorized a 10% stock
dividend payable on September 28, 2001 to stockholders on record as of September
6, 2001. In the same meeting, the Board also authorized a $0.02 per share cash
dividend payable on October 31, 2001 to stockholders on record as of October 12,
2001. For the three months and six months ended July 31, 2001, the Company paid
$224,000 and $450,000 in cash dividends, respectively.
The Company believes that cash flows from operations, together with the
Company's unused borrowing capacity with Wells Fargo Bank will be sufficient to
fund the Company's debt service requirements, capital expenditures and working
capital needs.
Forward-Looking Statements
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From time to time, the Company or its representatives have made or 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," "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 costs, availability
and cost of labor, demand for the Company's products, and competitive conditions
affecting selling prices and margins, capital costs and general economic
conditions. Such risks and uncertainties are discussed in more detail in the
Company's Annual Report on Form 10-K for the year ended January 31, 2001.
The Company's forward-looking statements represent its judgment only on the
dates such statements were made. By making any forward-looking statements, the
Company assumes no duty to update them to reflect new, changed or unanticipated
events or circumstances.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
On February 22, 2000, the Company entered into an interest rate swap agreement
with Wells Fargo Bank. The initial notional swap amount is $30,000,000 for the
period February 22, 2000 through February 29, 2001. The notional swap amount
then decreases to $20,000,000 until the end of the swap agreement, March 3,
2003. The swap agreement is in consideration for a fixed rate at 7.23% plus a
fluctuating margin of 1.25% to 1.50%.
As of July 31, 2001, the Company has borrowed $68,000,000 under its Wells Fargo
credit facility, of which $20,000,000 is subject to the interest rate swap
agreement as described above and the remaining contain variable interest rates.
Accordingly, a 100 basis point upward fluctuation in the lender's base rate
would cause the Company to incur additional interest charges of approximately
$156,000 per fiscal quarter and $283,000 for the six months ended July 31, 2001.
The Company would benefit from a similar interest savings if the base rate were
to fluctuate downward by a like amount.
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PART II
VIRCO MFG. CORPORATION
Other Information
Item 4. Submission of matters to a vote of Security Holders
The following is a description of matters submitted to a vote of
registrant's stockholders at the Annual Meeting of Stockholders held
June 12, 2001.
Election of three directors whose term expire in 2004.
Votes For
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Douglas A. Virtue 9,467,311
George W. Ott 9,513,169
John H. Stafford 9,508,553
Item 6. Exhibits and Reports on Form 8-K
Exhibit (3.2) - Bylaws of the Company dated September 10, 2001
Exhibit (11) - Statement re: Computation of Earnings Per Share
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VIRCO MFG. CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIRCO MFG. CORPORATION
Date: September 14, 2001 By: /s/ Robert E. Dose
----------------------------- --------------------------------------
Robert E. Dose
Vice President - Finance
Date: September 14, 2001 By: /s/ Bassey Yau
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Bassey Yau
Corporate Controller
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