##### Table of Contents



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, 2005
    
    Commission File Number
1-8777
 VIRCO MFG. CORPORATION
  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
   þ o
 þ o
 o þ




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Part I. Financial InformationItem 1.
    
    Financial Statements (unaudited)Condensed consolidated balance sheets  July 31, 2005, January 31, 2005 and July 31, 2004Condensed consolidated income statements  Three months ended July 31, 2005 and 2004Condensed consolidated statements of income and operations  Six months ended July 31, 2005 and 2004Condensed consolidated statements of cash flows  Six months ended July 31, 2005 and 2004Notes to condensed consolidated financial statements  July 31, 2005Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures about Market RiskItem 4.
    
    Controls and ProceduresPart II. Other InformationItem 1.
    
    Legal ProceedingsItem 2.
    
    Changes in Securities and Use of ProceedsItem 3.
    
    Defaults Upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other InformationItem 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 2002Exhibit 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 2002Exhibit 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.EX-31.1EX-31.2EX-32.1




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PART I
 
 Item 1. Financial Statements
  
  7/31/2005
    
    
    1/31/2005
    
    
    7/31/2004(In thousands, except share data)Unaudited (Note 1)
    
    
    
    
    
    
    Unaudited (Note 1)AssetsCurrent assetsCash
    
    $
    964
    
    
    $
    1,192
    
    
    $
    1,012Trade accounts receivable
    
    
    44,912
    
    
    
    16,222
    
    
    
    38,902Less allowance for doubtful accounts
    
    
    286
    
    
    
    225
    
    
    
    312Net trade accounts receivable
    
    
    44,626
    
    
    
    15,997
    
    
    
    38,590Income taxes receivable
    
    
    
    
    
    
    1,279
    
    
    
    1,130Other receivables
    
    
    114
    
    
    
    165
    
    
    
    235InventoriesFinished goods, net
    
    
    19,544
    
    
    
    9,676
    
    
    
    21,091Work in process, net
    
    
    16,762
    
    
    
    10,373
    
    
    
    13,761Raw materials and supplies, net
    
    
    7,747
    
    
    
    5,998
    
    
    
    8,03044,053
    
    
    
    26,047
    
    
    
    42,882Prepaid expenses and other current assets
    
    
    772
    
    
    
    1,340
    
    
    
    775Total current assets
    
    
    90,529
    
    
    
    46,020
    
    
    
    84,624Property, plant and equipment:Land and land improvements
    
    
    3,255
    
    
    
    3,287
    
    
    
    3,287Buildings and building improvements
    
    
    49,581
    
    
    
    49,542
    
    
    
    49,548Machinery and equipment
    
    
    104,397
    
    
    
    104,762
    
    
    
    104,664Leasehold improvements
    
    
    1,289
    
    
    
    1,307
    
    
    
    1,269158,522
    
    
    
    158,898
    
    
    
    158,768Less accumulated depreciation and amortization
    
    
    105,331
    
    
    
    102,009
    
    
    
    98,630Net property, plant and equipment
    
    
    53,191
    
    
    
    56,889
    
    
    
    60,138Goodwill and other intangible assets, net
    
    
    2,331
    
    
    
    2,337
    
    
    
    2,346Other assets
    
    
    8,816
    
    
    
    8,795
    
    
    
    9,174Total assets
    
    $
    154,867
    
    
    $
    114,041
    
    
    $
    156,282




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##### Table of Contents



7/31/2005
    
    
    1/31/2005
    
    
    7/31/2004(In thousands, except share data)Unaudited (Note 1)
    
    
    
    
    
    
    Unaudited (Note 1)LiabilitiesCurrent liabilitiesChecks released but not yet cleared bank
    
    $
    2,587
    
    
    $
    1,759
    
    
    $
    3,596Accounts payable
    
    
    25,042
    
    
    
    13,948
    
    
    
    18,401Accrued compensation and employee benefits
    
    
    5,227
    
    
    
    5,722
    
    
    
    5,841Income taxes payable
    
    
    999
    
    
    
    
    
    
    
    Current portion of long-term debt
    
    
    13,844
    
    
    
    5,012
    
    
    
    21,261Other accrued liabilities
    
    
    5,788
    
    
    
    4,245
    
    
    
    5,016Total current liabilities
    
    
    53,487
    
    
    
    30,686
    
    
    
    54,115Non-current liabilitiesAccrued self-insurance retention and other
    
    
    3,113
    
    
    
    3,221
    
    
    
    3,958Accrued pension expenses
    
    
    13,340
    
    
    
    12,751
    
    
    
    12,860Long-term debt, less current portion
    
    
    35,000
    
    
    
    18,118
    
    
    
    25,560Total non-current liabilities
    
    
    51,453
    
    
    
    34,090
    
    
    
    42,378Commitments and contingenciesStockholders equityPreferred stockAuthorized 3,000,000 shares, $.01 par
value; none issued or outstanding
    
    
    
    
    
    
    
    
    
    
    Common stockAuthorized 25,000,000 shares, $.01 par
value; issued 13,155,286 shares at
7/31/2005; 13,098,364 at 1/31/2005; and
14,585,894 shares at 7/31/2004
    
    
    131
    
    
    
    131
    
    
    
    146Additional paid-in capital
    
    
    108,143
    
    
    
    107,883
    
    
    
    127,140Accumulated deficit
    
    
    (55,005
    )
    
    
    (55,407
    )
    
    
    (43,982
    )Less treasury stock at cost (0 shares at
7/31/2005 and 1/31/2005; 1,487,530 shares
at 7/31/2004)
    
    
    
    
    
    
    
    
    
    
    (19,271
    )Accumulated comprehensive loss and other
    
    
    (3,342
    )
    
    
    (3,342
    )
    
    
    (4,244
    )Total stockholders equity
    
    
    49,927
    
    
    
    49,265
    
    
    
    59,789Total liabilities and stockholders equity
    
    $
    154,867
    
    
    $
    114,041
    
    
    $
    156,282




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Three months ended7/31/2005
    
    
    7/31/2004(In thousands, except per share data)Net sales
    
    $
    75,906
    
    
    $
    68,813Costs of goods sold
    
    
    49,402
    
    
    
    47,016Gross profit
    
    
    26,504
    
    
    
    21,797Selling, general and administrative expenses
    
    
    19,492
    
    
    
    19,204Interest expense
    
    
    896
    
    
    
    562Income before income taxes
    
    
    6,116
    
    
    
    2,031Provision for income taxes
    
    
    31
    
    
    
    Net income
    
    $
    6,085
    
    
    $
    2,031Net income per common shareBasic
    
    $
    0.46
    
    
    $
    0.16Diluted
    
    
    0.46
    
    
    
    0.15Weighted average shares outstandingBasic
    
    
    13,119
    
    
    
    13,098Diluted
    
    
    13,343
    
    
    
    13,406




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##### Table of Contents



Six months ended7/31/2005
    
    
    7/31/2004(In thousands, except per share data)Net sales
    
    $
    109,160
    
    
    $
    99,134Costs of goods sold
    
    
    73,249
    
    
    
    67,020Gross profit
    
    
    35,911
    
    
    
    32,114Selling, general and administrative expenses
    
    
    34,049
    
    
    
    33,745Interest expense
    
    
    1,429
    
    
    
    939Income/(loss) before income taxes
    
    
    433
    
    
    
    (2,570
    )Provision for income taxes
    
    
    31
    
    
    
    Net income/(loss)
    
    $
    402
    
    
    $
    (2,570
    )Net income/(loss) per common share (a)Basic
    
    $
    0.03
    
    
    $
    (0.20
    )Diluted
    
    
    0.03
    
    
    
    (0.20
    )Weighted average shares outstandingBasic
    
    
    13,104
    
    
    
    13,111Diluted
    
    
    13,358
    
    
    
    13,280
 
 (a)
    
    Net loss per share was calculated based on basic shares outstanding at July 31, 2004
due to the anti-dilutive effect on the inclusion of common stock equivalent shares.




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Six months ended7/31/2005
    
    
    7/31/2004(In thousands)Operating activitiesNet income/(loss)
    
    $
    402
    
    
    $
    (2,570
    )Adjustments to reconcile net income/(loss) to net cash
used in operating activitiesDepreciation and amortization
    
    
    4,672
    
    
    
    4,934Provision for doubtful accounts
    
    
    60
    
    
    
    87Loss on sale of property, plant and equipment
    
    
    77
    
    
    
    2Changes in assets and liabilitiesTrade accounts receivable
    
    
    (28,689
    )
    
    
    (21,441
    )Other receivables
    
    
    51
    
    
    
    Inventories
    
    
    (18,006
    )
    
    
    (14,411
    )Income taxes
    
    
    2,278
    
    
    
    293Prepaid expenses and other current assets
    
    
    568
    
    
    
    1,187Accounts payable and accrued liabilities
    
    
    13,681
    
    
    
    11,089Net cash used in operating activities
    
    
    (24,906
    )
    
    
    (20,830
    )Investing activitiesCapital expenditures
    
    
    (1,059
    )
    
    
    (1,718
    )Proceeds from sale of property, plant and equipment
    
    
    15
    
    
    
    6Net cash used in investing activities
    
    
    (1,044
    )
    
    
    (1,712
    )Financing activitiesIssuance of long-term debt
    
    
    25,714
    
    
    
    22,530Repayment of long-term debt
    
    
    
    
    
    
    (1,042
    )Proceeds from issuance of common stock
    
    
    8
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    7Net cash provided by financing activities
    
    
    25,722
    
    
    
    21,495Net decrease in cash
    
    
    (228
    )
    
    
    (1,047
    )Cash at beginning of year
    
    
    1,192
    
    
    
    2,059Cash at end of year
    
    $
    964
    
    
    $
    1,012Supplemental disclosures of cash flow informationCash paid (received) during the year for:Interest, net of amounts capitalized
    
    $
    1,429
    
    
    $
    939Income tax, net
    
    
    (2,254
    )
    
    
    (302
    )Non cash activitiesAccrued asset retirement obligations
    
    $
    22
    
    
    $
    22




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##### Table of Contents



Note 1.
    
    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 six months
ended July 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.
    
    InventoriesYear end financial statements at January 31, 2005 reflect
inventories verified by physical counts with the material content
valued by the LIFO method. At July 31, 2005 and 2004, 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 adjustments have
been made for the periods ended July 31, 2005 and 2004. LIFO
reserves at July 31, 2005 and January 31, 2005 were $6,201,000.
LIFO reserves at July 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.
    
    DebtThe Companys revolving credit facility with Wells Fargo Bank, amended and restated as of
January 21, 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 $40,000,000.
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 (6.25% at July 31,
2005) plus a fluctuating margin of (i) 1.50% if the aggregate principal amount of the Term
Loan outstanding is greater than $15,000,000; (ii) 1.25% if the aggregate principal amount
of the Term Loan outstanding is greater than $10,000,000 but less than $15,000,000; (iii)
1.00% if the aggregate principal amount of the Term Loan outstanding is greater than
$5,000,000 but less than $10,000,000; (iv) 0.75% if the aggregate principal amount of the
Term Loan outstanding is less than $5,000,000. Accordingly, a 100 basis point upward
fluctuation in the lenders base rate would cause the Company to incur additional interest
charges of approximately $76,000 for the fiscal quarter ended July 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 $10,159,000 was available for borrowing as of July 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. The Company is in
compliance with its covenants at July 31, 2005.Note 4.
    
    Income TaxesThe 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




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##### Table of Contents



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 July 31, 2005, January 31, 2005 and July 31, 2004.Note 5.
    
    Net Income/(Loss) per ShareFor the six month period ended July 31, 2004, 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 income/(loss) per
share:
 Three Months Ended
    
    
    Six months ended7/31/2005
    
    
    7/31/2004
    
    
    7/31/2005
    
    
    7/31/2004(In thousands, except per share data)Net income/(loss)
    
    $
    6,085
    
    
    $
    2,031
    
    
    $
    402
    
    
    $
    (2,570
    )Average shares outstanding
    
    
    13,119
    
    
    
    13,098
    
    
    
    13,104
    
    
    
    13,111Net effect of dilutive
stock options based on the
treasury stock method
using average market price
    
    
    224
    
    
    
    308
    
    
    
    254
    
    
    
    169Totals
    
    
    13,343
    
    
    
    13,406
    
    
    
    13,358
    
    
    
    13,280Net income/(loss) per shareBasic
    
    $
    0.46
    
    
    $
    0.16
    
    
    $
    0.03
    
    
    $
    (0.20
    )Diluted
    
    
    0.46
    
    
    
    0.15
    
    
    
    0.03
    
    
    
    (0.20
    )
  Three Months Ended
    
    
    Six months ended7/31/2005
    
    
    7/31/2004
    
    
    7/31/2005
    
    
    7/31/2004(In thousands, except per share data)Net income/(loss), as reported
    
    $
    6,085
    
    
    $
    2,031
    
    
    $
    402
    
    
    $
    (2,570
    )Total stock-based employee compensation
expense determined under the fair value
based method for all awards, net of related
tax effects
    
    
    14
    
    
    
    13
    
    
    
    27
    
    
    
    26Pro forma net income/(loss)
    
    $
    6,071
    
    
    $
    2,018
    
    
    $
    375
    
    
    $
    (2,596
    )Net Net income/(loss) per share, as reportedBasic
    
    $
    0.46
    
    
    $
    0.15
    
    
    $
    0.03
    
    
    $
    (0.20
    )Diluted
    
    
    0.45
    
    
    
    0.15
    
    
    
    0.03
    
    
    
    (0.20
    )Weighted average shares outstandingBasic
    
    
    13,119
    
    
    
    13,098
    
    
    
    13,104
    
    
    
    13,111Diluted
    
    
    13,343
    
    
    
    13,406
    
    
    
    13,358
    
    
    
    13,280




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##### Table of Contents



Note 6.
    
    Comprehensive Income/(Loss)Comprehensive income/(loss) for the three and six months ended July 31, 2005 and 2004 was
the same as net income/(loss) reported on the statements of income and operations.
Accumulated comprehensive loss at July 31, 2005 and 2004 and January 31, 2005 is composed
of minimum pension liability adjustments.Note 7.
    
    Retirement PlansThe 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 10K 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 (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 10K 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 six
months ended July 31, 2005 and 2004 were as follows (in
thousands):
 Non-EmployeeVIP Retirement Plan
    
    
    Directors RetirementPension Plan
    
    
    Three months ended July 31,
    
    
    Plan2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    55
    
    
    $
    57
    
    
    $
    58
    
    
    $
    65
    
    
    $
    6
    
    
    $
    5Interest cost
    
    
    337
    
    
    
    321
    
    
    
    89
    
    
    
    83
    
    
    
    6
    
    
    
    6Expected return on plan assets
    
    
    (248
    )
    
    
    (250
    )
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0Amortization of transition amount
    
    
    (9
    )
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0Amortization of prior service cost
    
    
    107
    
    
    
    95
    
    
    
    (125
    )
    
    
    (115
    )
    
    
    22
    
    
    
    22Recognized net actuarial (gain) or loss
    
    
    33
    
    
    
    52
    
    
    
    27
    
    
    
    22
    
    
    
    (7
    )
    
    
    (6
    )Settlement and curtailment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    275
    
    
    $
    266
    
    
    $
    49
    
    
    $
    55
    
    
    $
    27
    
    
    $
    27
 Non-EmployeeVIP Retirement Plan
    
    
    Directors RetirementPension Plan
    
    
    Six months ended July 31,
    
    
    PlanService cost
    
    $
    110
    
    
    $
    114
    
    
    $
    116
    
    
    $
    130
    
    
    $
    12
    
    
    $
    10Interest cost
    
    
    674
    
    
    
    642
    
    
    
    178
    
    
    
    166
    
    
    
    12
    
    
    
    12Expected return on plan assets
    
    
    (496
    )
    
    
    (500
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Amortization of transition amount
    
    
    (18
    )
    
    
    (18
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Amortization of prior service cost
    
    
    214
    
    
    
    190
    
    
    
    (250
    )
    
    
    (230
    )
    
    
    44
    
    
    
    44Recognized net actuarial (gain) or loss
    
    
    66
    
    
    
    104
    
    
    
    54
    
    
    
    44
    
    
    
    (14
    )
    
    
    (12
    )Settlement and curtailment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    550
    
    
    $
    532
    
    
    $
    98
    
    
    $
    110
    
    
    $
    54
    
    
    $
    54




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Note 8.
    
    WarrantyThe 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 six months ended July 31, 2005 and 2004:
 Three Months Ended
    
    
    Six months ended4/30/2005
    
    
    4/30/2004
    
    
    7/31/2005
    
    
    7/31/2004(In thousands)
    
    
    (In thousands)Beginning Accrued Warranty Balance
    
    $
    1,500
    
    
    $
    1,751
    
    
    $
    1,500
    
    
    $
    1,751Provision
    
    
    219
    
    
    
    275
    
    
    
    432
    
    
    
    435Costs Incurred
    
    
    (219
    )
    
    
    (475
    )
    
    
    (432
    )
    
    
    (835
    )Ending Accrued Warranty Balance
    
    $
    1,500
    
    
    $
    1,551
    
    
    $
    1,500
    
    
    $
    1,351




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PART II
   
    Votes For
    
    Authority WithheldDonald S. Friesz
    
    
    10,522,647
    
    
    
    406,333Glen D. Parish
    
    
    10,565,900
    
    
    
    363,080James R. Wilburn
    
    
    10,616,719
    
    
    
    312,261




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VIRCO MFG. CORPORATIONDate: September 8, 2005
    
    By:
    
    /s/ Robert E. DoseRobert E. DoseVice President  Finance