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 pursuant to the rules and regulations of the Securities and Exchange Commission. 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 six months ended
July 31, 2017
, are not necessarily indicative of the results that may be expected for the fiscal year ending
January 31, 2018
. The balance sheet at
January 31, 2017
, 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 fiscal year ended
January 31, 2017
(“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 approximately
50%
of the Company’s total sales typically occurring from June to August each year, the Company’s 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 generally 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 Company’s 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 ongoing basis, management evaluates its estimates, including those related to market demand, labor costs, and stocking inventory.
Note 3. New Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The new standard requires lessees to recognize most leases, including operating leases, on-balance sheet via a right of use asset and lease liability. Changes to the lessee accounting model may change key balance sheet measures and ratios, potentially effecting analyst expectations and compliance with financial covenants. The new standard becomes effective for the Company effective for fiscal years beginning after December 15, 2018, but may be adopted at any time, and requires a modified retrospective transition. The Company is currently evaluating the effect the standard will have on consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.
The new standard provides classification guidance on eight cash flow issues including debt prepayment, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlements of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. The new standard becomes effective for the Company for fiscal years beginning after December 15, 2017. The Company anticipates the standard will have an immaterial effect on consolidated statements of cash flows.
In March 2017, the FASB issued authoritative guidance related to the presentation of net periodic pension cost in the income statement. This guidance requires that the service cost component of net periodic pension cost is presented in the same line as other compensation costs arising from services rendered by the respective employees during the period. The other components of net periodic pension cost are required to be presented in the income statement separately from the service cost component and outside of earnings from operations. This guidance also allows for the service cost component to be eligible for capitalization when applicable. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires retrospective adoption for the presentation of the service cost component and other components
of net periodic pension cost in the income statement and prospective adoption for capitalization of the service cost component. Early adoption is permitted at the beginning of a fiscal year. The Company adopted this standard in the first quarter of fiscal 2018 and it had no effect on the condensed consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting.
The new standard is intended to simplify accounting for share based employment awards to employees. Changes include: all excess tax benefits/deficiencies should be recognized as income tax expense/benefit; entities can make elections on how to account for forfeitures; and cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity on the cash flow statement. The Company implemented the new standard in the first quarter of fiscal 2018. The primary impact of implementation was the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital beginning with the first quarter of fiscal 2018. Upon adoption the balance of the unrecognized excess tax benefits of approximately
$172,000
was reversed with the impact recorded to retained earnings. Prior to the adoption of this standard, that amount would have been recognized as an adjustment to "Additional paid-in capital" in the Condensed Consolidated Balance Sheets. Excess tax benefits will be recorded in the operating section of the Condensed Consolidated Statements of Cash Flows on a prospective basis. Prior to fiscal 2018, the tax benefits or shortfalls were recorded in financing cash flows. The presentation requirements for cash flows related to employee taxes paid for withheld shares in the financing section had no impact to any of the periods presented in our Condensed Consolidated Statements of Cash Flows since such cash flows have historically been presented as a financing activity.
In July 2015, the FASB issued authoritative guidance to simplify the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. This guidance is effective for fiscal years beginning after December 15, 2016 and requires prospective adoption with early adoption permitted. The Company adopted this standard in the first quarter of fiscal 2018 and it had no effect on the condensed consolidated financial statements and related disclosures.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(Topic 606) (ASU 2014-09), and has modified the standard thereafter. The core principal of the standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The new revenue standard will be effective for the Company on February 1, 2018.
The standard permits the use of either a full retrospective method, where the standard is applied to each prior reporting period presented or a cumulative effect transition method, or modified retrospective method, where the cumulative effect of initially applying the standard is recognized at the date of initial application. We anticipate using the modified retrospective method and we are currently evaluating the effect the new revenue standard will have on our consolidated financial statements.
Note 4. Inventories
Inventory is valued at the lower of cost (determined on a first-in, first-out basis) or Net Realizable Value and includes material, labor, and factory overhead. The Company maintains allowances for estimated slow moving and obsolete inventory to reflect the difference between the cost of inventory and the estimated market value. Allowances for slow moving and obsolete inventory are determined through a physical inspection of the product in connection with a physical inventory, a review of slow-moving product, and consideration of active marketing programs. The market for education furniture is traditionally driven by value, not style, and the Company has not typically incurred significant obsolescence expenses. If market conditions are less favorable than those anticipated by management, additional allowances may be required. Due to reductions in sales volume in the past years, the Company’s manufacturing facilities are operating at reduced levels of capacity. The Company records the cost of excess capacity as a period expense, not as a component of capitalized inventory valuation.
The following table presents an updated breakdown of the Company’s net inventory (in thousands) as of July 31, 2017, January 31, 2017 and July 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/31/2017
|
|
1/31/2017
|
|
7/31/2016
|
Finished goods
|
|
$
|
21,912
|
|
|
$
|
11,174
|
|
|
$
|
22,461
|
|
WIP
|
|
16,923
|
|
|
13,486
|
|
|
17,250
|
|
Raw materials
|
|
12,026
|
|
|
11,029
|
|
|
12,160
|
|
Inventories, net
|
|
$
|
50,861
|
|
|
$
|
35,689
|
|
|
$
|
51,871
|
|
Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated.
Note 5. Debt
Outstanding balances (in thousands) for the Company’s long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/31/2017
|
|
1/31/2017
|
|
7/31/2016
|
|
(in thousands)
|
Revolving credit line
|
$
|
35,924
|
|
|
$
|
4,914
|
|
|
$
|
36,979
|
|
Other
|
63
|
|
|
97
|
|
|
25
|
|
Total debt
|
35,987
|
|
|
5,011
|
|
|
37,004
|
|
Less current portion
|
29,987
|
|
|
68
|
|
|
31,068
|
|
Non-current portion
|
$
|
6,000
|
|
|
$
|
4,943
|
|
|
$
|
5,936
|
|
On December 22, 2011, the Company entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). The credit agreement currently matures on December 22, 2019 and has a maximum availability of
$49,500,000
, plus sub-lines for letters of credit and a
$2,500,000
line for equipment financing. Borrowings under the Credit Agreement bear interest at either the Alternate Base Rate (as defined in the Credit Agreement) plus
0.50%
to
1.50%
or the Eurodollar Currency Rate (as defined in the Credit Agreement) plus
1.50%
to
2.50%
. The interest rate at July 31, 2017 was
4.75%
. Approximately
$31,938,000
was available for borrowing as of
July 31, 2017
.
The Credit Agreement restricts the Company from issuing dividends or making payments with respect to the Company's capital stock to an annual limit of
$1.3 million
, and contains numerous other covenants, including these financial covenants: (1) fixed charge coverage ratio, and (2) minimum EBITDA amount, in each case as of the end of the relevant monthly, quarterly or annual measurement period. The Company was in compliance with its covenants during the second quarter of fiscal year ending January 31, 2018. Pursuant to the Credit Agreement, substantially all of the Company's accounts receivable are automatically and promptly swept to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Company. On April 4, 2016, the Company entered into Amendment No. 12 to the Credit Agreement which, among other things, increased the borrowing availability for the period from June 1, 2016 through August 15, 2016 and modified the clean down provision to reduce borrowings under the line to less than
$6,000,000
from a period of
60
consecutive days to
30
consecutive days. On October 26, 2016, the Company entered into Amendment No. 13 to the Credit Agreement which, among other things, reduced the maximum availability of
$49,750,000
to
$49,500,000
to allow for a sub-line for the company's credit card program. On March 13, 2017, the Company entered into Amendment No. 14 to the Credit Agreement which established a
$2,500,000
equipment line to facilitate the capital expenditure plan for 2018 and to establish covenants for 2018. On June 8, 2017, the Company entered into Amendment No. 15 to the Credit Agreement which, among other things, will allow the restatement of the amount of revolving advances to
$14,000,000
for June 2017 and
$11,000,000
for July 2017 and extend the time to borrow under the
$2,500,000
Equipment Line until March 12, 2018. On August 7, 2017, the Company entered into Amendment No. 16 to the Credit Agreement with PNC Bank which, among other things, will (a) consent to the acquisition of the building, (b) allow the Company to incur the additional indebtedness and (c) amend the Credit Agreement in certain respects, which Lenders and Agent are willing to do on the terms and subject to the conditions contained in this Amendment.
The Company believes that the Revolving Credit Facility will provide sufficient liquidity to meet its capital requirements for at least in the next
12 months
. Management believes that the carrying value of debt approximated fair value at
July 31, 2017
and 2016, as all of the long-term debt bears interest at variable rates based on prevailing market conditions.
Note 6. Income Taxes
The Company recognizes deferred income taxes under the asset and liability method of accounting for income taxes in accordance with the provisions of ASC No. 740, Accounting for Income Taxes. Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, the Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. 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. The Company maintains a partial valuation allowance against certain state deferred tax assets that the Company does not believe it is more-likely-than-not to realize.
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. The Company's income tax expense for the three months ended July 31, 2017 was
$2.8 million
on pre-tax income of
$7.9 million
or an effective tax rate of
36.2
percent. The Company's income tax expense for the six months ended July 31, 2017 was
$1.5 million
on pre-tax income of
$4.3 million
or an effective tax rate of
34.7 percent
. For the three months ended July 31, 2016, the Company's income tax expense was
$140,000
on pre-tax income of
$7.0 million
. The Company's income tax expense for the six months ended July 31, 2016 was
$170,000
on pre-tax income of
$3.9 million
. The effective tax rate was substantially lower in the three and six months ended July 31, 2016 principally due to a valuation allowance recorded against the majority of the net deferred tax assets at July 31, 2016.
The Company adopted ASU 2016-09 related to stock compensation in the first quarter of fiscal 2018. Upon adoption the balance of the unrecognized excess tax benefits of approximately
$172,000
was recognized with the impact recorded to retained earnings.
See "Note 3. Recently Adopted Accounting Standards" in the Notes to Condensed Consolidated Financial Statements" for more information regarding the implementation of ASU No. 2016-09.
In 2016, the Company closed its IRS examination for its tax return for the year ended January 31, 2013 with no changes. The January 31, 2014 and subsequent years remain open for examination by the IRS and state tax authorities. The Company is not currently under any state examination. Subsequent to the quarter ended July 31, 2017, the Company received a notice from the IRS indicating that the agency will conduct an examination for its fiscal year ended January 31, 2016 Federal tax return.
The specific timing of when the resolution of each tax position will be reached is uncertain. As of July 31, 2017, it is reasonably possible that unrecognized tax benefits will decrease by
$9,000
within the next
12 months
due to the expiration of the statute of limitations.
Note 7. Net Income per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
7/31/2017
|
|
7/31/2016
|
|
7/31/2017
|
|
7/31/2016
|
|
|
(In thousands, except per share data)
|
Net income
|
|
$
|
5,028
|
|
|
$
|
6,886
|
|
|
$
|
2,817
|
|
|
$
|
3,747
|
|
Weighted average shares outstanding
|
|
15,211
|
|
|
15,036
|
|
|
15,170
|
|
|
15,004
|
|
Net effect of dilutive shares - based on the treasury stock method using average market price
|
|
74
|
|
|
111
|
|
|
63
|
|
|
96
|
|
Totals
|
|
15,285
|
|
|
15,147
|
|
|
15,233
|
|
|
15,100
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
|
$
|
0.33
|
|
|
$
|
0.46
|
|
|
$
|
0.19
|
|
|
$
|
0.25
|
|
Net income per share - diluted
|
|
$
|
0.33
|
|
|
$
|
0.45
|
|
|
$
|
0.18
|
|
|
$
|
0.25
|
|
Note 8. Stock-Based Compensation
Stock Incentive Plans
Under the 2011 Plan, the Company may grant an aggregate of
2,000,000
shares to its employees and non-employee directors in the form of stock options or awards. Restricted stock or stock units awarded under the 2011 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its restricted stock unit awards and related compensation expense as the difference between the market value of the awards on the date of grant less the exercise price of the awards granted. During the quarter ended
July 31, 2017
, the Company granted awards for
504,404
shares of restricted stock awards and
188,673
shares of restricted stock awards vested according to their terms. There were approximately
259,832
shares available for future issuance under the 2011 Plan as of
July 31, 2017
.
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. The Company determines the fair value of its restricted stock unit awards and related compensation expense as the difference between the market value of the awards on the date of grant less the exercise price of the awards granted. The Company granted
no
awards during the second quarter ended July 31, 2017. On June 19, 2017, the 2007 Plan expired and no further awards may be made under the 2007 Plan.
Accounting for the Plans
Restricted Stock Unit Awards
The following table presents a summary of restricted stock and stock unit awards at
July 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense for 3 months ended
|
|
Expense for 6 months ended
|
|
Unrecognized
Compensation
Cost at
|
Date of Grants
|
Units Granted
|
Terms of Vesting
|
|
7/31/2017
|
|
7/31/2016
|
|
7/31/2017
|
|
7/31/2016
|
|
7/31/2017
|
2011 Stock Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
06/20/2017
|
40,404
|
1 year
|
|
$
|
33,000
|
|
|
$
|
—
|
|
|
$
|
33,000
|
|
|
$
|
—
|
|
|
$
|
166,000
|
|
06/20/2017
|
464,000
|
5 years
|
|
77,000
|
|
|
—
|
|
|
77,000
|
|
|
—
|
|
|
2,216,000
|
|
06/21/2016
|
51,284
|
1 year
|
|
16,000
|
|
|
33,000
|
|
|
66,000
|
|
|
33,000
|
|
|
—
|
|
06/21/2016
|
36,000
|
3 years
|
|
12,000
|
|
|
8,000
|
|
|
24,000
|
|
|
8,000
|
|
|
86,000
|
|
06/22/2015
|
48,000
|
4 years
|
|
8,000
|
|
|
8,000
|
|
|
16,000
|
|
|
16,000
|
|
|
60,000
|
|
06/22/2015
|
27,174
|
1 year
|
|
—
|
|
|
6,000
|
|
|
—
|
|
|
25,000
|
|
|
—
|
|
06/24/2014
|
490,000
|
5 years
|
|
60,000
|
|
|
60,000
|
|
|
120,000
|
|
|
120,000
|
|
|
440,000
|
|
06/19/2012
|
520,000
|
5 years
|
|
12,000
|
|
|
37,000
|
|
|
49,000
|
|
|
74,000
|
|
|
—
|
|
Totals for the period
|
|
|
|
$
|
218,000
|
|
|
$
|
152,000
|
|
|
$
|
385,000
|
|
|
$
|
276,000
|
|
|
$
|
2,968,000
|
|
Note 9. Stockholders’ Equity
The Company’s Credit Agreement with PNC restricts the Company from issuing dividends or making payments with respect to the Company's capital stock to an annual limit of
$1.3 million
. Such dividends payments are also subject to compliance with financial and other covenants provided in the Credit Agreement.
The Company adopted ASU 2016-09 related to stock compensation in the first quarter of fiscal 2018. Upon adoption the balance of the unrecognized excess tax benefits of approximately
$172,000
was reversed with the impact recorded to retained earnings.
See "Note 3. Recently Adopted Accounting Standards" in the Notes to Condensed Consolidated Financial Statements" for more information regarding the implementation of ASU No. 2016-09.
Note 10. Retirement Plans
The Company and its subsidiaries cover certain employees under a noncontributory defined benefit retirement plan, entitled the Virco Employees’ Retirement Plan (the “Pension Plan”). Benefits under the Employees Retirement Plan are based on years of
service and career average earnings. As more fully described in the Form 10-K, benefit accruals under the Employees Retirement 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
5
years in the VIP Plan, offset by benefits earned under the Pension Plan. As more fully described in the Form 10-K, benefit accruals under this plan were frozen since December 31, 2003. There is no service cost incurred under this plan.
The Company also provides a non-qualified plan for certain former 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 terminated his or her position with the Board, subject to the director having provided
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.
The net periodic pension cost (income) for the Pension Plan, the VIP Plan, and the Non-Employee Directors Retirement Plan for the three and six months ended
July 31, 2017
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Pension Plan
|
|
VIP Plan
|
|
Non-Employee Directors Retirement Plan
|
7/31/2017
|
|
7/31/2016
|
|
7/31/2017
|
|
7/31/2016
|
|
7/31/2017
|
|
7/31/2016
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
304
|
|
|
296
|
|
|
89
|
|
|
90
|
|
|
9
|
|
|
3
|
|
Expected return on plan assets
|
(342
|
)
|
|
(284
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of transition amount
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized (gain) loss due to Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized net actuarial (gain) loss
|
179
|
|
|
282
|
|
|
60
|
|
|
77
|
|
|
—
|
|
|
(29
|
)
|
Benefit cost
|
$
|
141
|
|
|
$
|
294
|
|
|
$
|
149
|
|
|
$
|
167
|
|
|
$
|
9
|
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Pension Plan
|
|
VIP Plan
|
|
Non-Employee Directors Retirement Plan
|
7/31/2017
|
|
7/31/2016
|
|
7/31/2017
|
|
7/31/2016
|
|
7/31/2017
|
|
7/31/2016
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
608
|
|
|
592
|
|
|
178
|
|
|
180
|
|
|
18
|
|
|
6
|
|
Expected return on plan assets
|
(684
|
)
|
|
(568
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of transition amount
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized (gain) loss due to Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized net actuarial (gain) loss
|
358
|
|
|
564
|
|
|
120
|
|
|
154
|
|
|
—
|
|
|
(58
|
)
|
Benefit cost
|
$
|
282
|
|
|
$
|
588
|
|
|
$
|
298
|
|
|
$
|
334
|
|
|
$
|
18
|
|
|
$
|
(52
|
)
|
Note 11. Warranty Accrual
The Company provides a warranty against all substantial defects in material and workmanship. The standard warranty offered on products sold through January 31, 2013 is
10
years. Effective February 1, 2014 the Company modified its warranty to a limited lifetime warranty. The warranty effective February 1, 2014 is not anticipated to have a significant effect on warranty expense. Effective January 1, 2017, the Company modified the warranty offered to provide specific warranty periods by product component, with no warranty period longer than ten years. The Company’s warranty is not a guarantee of service life, which depends upon events outside the Company’s control and may be different from the warranty period. The Company accrues an estimate of its exposure to warranty claims based upon both product sales data and an analysis of actual warranty claims incurred.
The following is a summary of the Company’s warranty-claim activity for the three and six months ended
July 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
7/31/2017
|
|
7/31/2016
|
|
7/31/2017
|
|
7/31/2016
|
|
(In thousands)
|
Beginning balance
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Provision
|
112
|
|
|
47
|
|
|
182
|
|
|
176
|
|
Costs incurred
|
(112
|
)
|
|
(47
|
)
|
|
(182
|
)
|
|
(176
|
)
|
Ending balance
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Note 12. Contingencies
The Company has a self-insured retention for product and general liability losses up to
$250,000
per occurrence, workers’ compensation liability losses up to
$250,000
per occurrence, and for automobile liability losses up to
$50,000
per occurrence. The Company has purchased insurance to cover losses in excess of the retention up to a limit of
$30,000,000
. The Company has obtained an actuarial estimate of its total expected future losses for liability claims and recorded a liability equal to the net present value.
The Company and its subsidiaries are defendants in various legal proceedings resulting from operations in the normal course of business. It is the opinion of management, in consultation with legal counsel, that the ultimate outcome of all such matters will not materially affect the Company’s financial position, results of operations or cash flows.
Note 13. Subsequent Events
Subsequent to July 31, 2017, the Company purchased a manufacturing building in Conway Arkansas for
$7,200,000
with Virco making a
20%
down payment and the current owner providing financing for
20
years at
4%
per year. The Company has been operating a component fabrication operation in this building since the 1998 under a series of 10 year leases. The current lease would have expired in March 2018. Upon purchase of the building, annual depreciation expense for the building is anticipated to be approximately
$300,000
per year less than current rent expense. Annual debt service payments are anticipated to be approximately
$300,000
per year less than current rent expense.
On August 8, 2017, the Company entered into Amendment No. 16 to the Credit Agreement with PNC Bank which, among other things, will (a) consent to the acquisition of the building, (b) permit the Company to incur the additional indebtedness and (c) amend the Credit Agreement in certain respects, which Lenders and Agent are willing to do on the terms and subject to the conditions contained in this Amendment.