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 notes required by generally accepted accounting principles for complete financial statements and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 31, 2018
(“Form 10-K”). 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, 2018
, are not necessarily indicative of the results that may be expected for the fiscal year ending
January 31, 2019
. The balance sheet at
January 31, 2018
, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. 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
Recently Adopted Accounting Updates
In May 2014, FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(Topic 606) (ASU 2014-09), and has modified the standard thereafter. The Company adopted ASU 2014-09 effective February 1, 2018 using the modified retrospective method to apply this guidance to all open contracts at the date of initial application. The results of applying Topic 606 were insignificant and did not have a material impact on our consolidated financial condition, results of operations, cash flows, business process, controls or systems.
The Company manufactures, markets and distributes a wide variety of school and office furniture to wholesalers, distributors, educational institutions and governmental entities. Revenue is recorded for promised goods or services when control is transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
Contractual Arrangements with Customers
The Company's sales generally involve a single performance obligation to deliver goods pursuant to customer purchase orders. Prices for our products are based on published price lists, customer agreements and individual customer orders. The Company has determined that the performance obligations are satisfied at a point in time when the Company completes delivery per the
customer contract. The majority of our sales are free on board (FOB) destination where the destination is specified per the customer contract and may include delivering the furniture into the classroom, school site or warehouse. Sales of furniture that are sold FOB factory are typically made to resellers of our product who in turn provide logistics to the ultimate customer. Once a product has shipped or delivered, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to have transferred upon shipment or delivery because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. The Company offers sales incentives and discounts through various regional and national programs to our customers. These programs include product rebates, product returns allowances and trade promotions. Variable consideration for these programs is estimated in the transaction price at contract inception based on current sales levels and historical experience using the expected value method, subject to constraint.
The Company generates revenue primarily by manufacturing and distributing products through resellers and direct-to-customers. Control transfers to both resellers and direct customers at a point in time when the delivery process is complete as determined by the corresponding shipping terms. Therefore, we do not consider them to be meaningfully different revenue streams given similarities in the nature of the products, performance obligation and distribution processes. Sales are predominately in the United States and to a similar class of customer. We do not manage or evaluate the business based on product line or any other discernable category.
For product produced by and sourced from third parties, management has determined that it is the principal in all cases, since it establishes its own pricing for such product, and assumes the credit risk for amounts billed to its customers.
Contract Assets and Liabilities
Payment terms are established on the Company’s pre-established credit requirements based upon an evaluation of customers’ credit quality. Most customers obtain payment terms between 1-30 days and an asset is recognized for the related accounts receivable.
Contract liabilities are recognized for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing of when an order is placed and when shipment or delivery occurs. As of February 1, 2018, the effective date, and April 30, 2018, other than accounts receivable, the Company had no material contract assets, contract liabilities or deferred contract costs recorded on its condensed consolidated balance sheet.
Costs of fulfilling customers’ purchase orders, such as shipping, handling and delivery, which occur prior to the transfer of control, are recognized in selling, general and administrative expense when incurred.
Practical Expedients
Significant Financing Component - as we expect the period between when we transfer control of the promised good or service to a customer and when the customer pays for that good or service will be one year or less, the Company elected to apply the practical expedient for significant financing components
Remaining Performance Obligations - due to the short-term duration of the Company’s contracts with customers and fulfillment of performance obligations, the Company has elected not to disclose the information regarding the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue.
Cost to Obtain a Customer - we pay certain costs to obtain a customer contract such as commissions. As our customer contracts have a contractual term of one year or less, we have elected to apply the practice expedient and expense these costs in selling, general and administrative expense as incurred, which is consistent with our historical practice.
Recently Issued Accounting Updates
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’s fiscal year beginning after December 15, 2018, but may be adopted at any time, and requires a modified retrospective transition. While still evaluating the effect the standard will have on consolidated financial statements and related disclosures, the Company has determined that the primary impact will be to recognize on the
balance sheet all leases with lease terms greater than 12 months. It is expected that this standard will have a material impact on the Company’s consolidated financial statements in recognizing the right of use asset and related lease liability.
Other recently issued accounting updates are not expected to have a material impact on the Company’s 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 net realizable 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 inventories as of April 30, 2018, January 31, 2018 and April 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/30/2018
|
|
1/31/2018
|
|
4/30/2017
|
Finished goods
|
|
$
|
26,655
|
|
|
$
|
13,054
|
|
|
$
|
21,829
|
|
WIP
|
|
22,796
|
|
|
16,627
|
|
|
20,977
|
|
Raw materials
|
|
13,047
|
|
|
12,376
|
|
|
11,982
|
|
Inventories
|
|
$
|
62,498
|
|
|
$
|
42,057
|
|
|
$
|
54,788
|
|
Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated.
Note 5. Debt
Outstanding balances for the Company’s long-term debt were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/30/2018
|
|
1/31/2018
|
|
4/30/2017
|
|
|
Revolving credit line
|
$
|
31,432
|
|
|
$
|
10,059
|
|
|
$
|
24,267
|
|
Other
|
6,824
|
|
|
6,622
|
|
|
80
|
|
Total debt
|
38,256
|
|
|
16,681
|
|
|
24,347
|
|
Less current portion
|
24,266
|
|
|
4,681
|
|
|
18,336
|
|
Non-current portion
|
$
|
13,990
|
|
|
$
|
12,000
|
|
|
$
|
6,011
|
|
On December 22, 2011, the Company entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”). The credit agreement has been amended seventeen times subsequent to that date. On March 19, 2018, the Company entered into amendment No. 17, which amended the Credit Agreement by (i) extending the maturity date of the Credit Agreement for three years until March 19, 2023, (ii) allowing dividends and stock buyback up to
$2,000,000
in aggregate for any fiscal year, (iii) setting forth the minimum EBITDA financial covenant for fiscal quarter ended April 30, 2018 at (
$3,767,000
) and two consecutive fiscal quarters ending July 31, 2018 at
$6,402,000
, (iv) increasing the Maximum Revolving Advance Amount from
$50,000,000
to
$60,000,000
, and (v) setting forth the minimum fixed charge coverage ratio of not less than
1.10
to 1.00 commencing with the consecutive four fiscal quarter period ending October 31, 2018 and measured as of the end of each fiscal quarter until the maturity date of the Credit Agreement. In connection with the Seventeenth Amendment, the Borrowers also agreed to pay to PNC Bank a non-refundable extension fee of
$250,000
.
The Credit Agreement provides the Company ("Borrowers") with a secured revolving line of credit (the “Revolving Credit Facility”) of up to
$60,000,000
, with seasonal adjustments to the credit limit and subject to borrowing base limitations, and includes a sub-limit of up to
$3,000,000
for issuances of letters of credit. In addition, the Credit Agreement provides an
Equipment Line for purchases of equipment up to
$2,500,000
. The Revolving Credit Facility is an asset-based line of credit that is subject to a borrowing base limitation and generally provides for advances of up to
85%
of eligible accounts receivable, plus a percentage equal to the lesser of
60%
of the value of eligible inventory or
85%
of the liquidation value of eligible inventory, plus an amount ranging from
$8,000,000
to
$14,000,000
from December 1 through July 31 of each year, minus undrawn amounts of letters of credit and reserves. The Revolving Credit Facility is secured by substantially all of the Borrowers' personal property and certain of the Borrowers' real property. The principal amount outstanding under the Credit Agreement and any accrued and unpaid interest is due no later than March 19, 2023, and the Revolving Credit Facility is subject to certain prepayment penalties upon earlier termination of the Revolving Credit Facility. Prior to the maturity date, principal amounts outstanding under the Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions.
The Revolving Credit Facility bears interest, at the Borrowers' option, at either the Alternate Base Rate (as defined in the Credit Agreement) or the Eurodollar Currency Rate (as defined in the Credit Agreement), in each case plus an applicable margin. The applicable margin for Alternate Base Rate loans is a percentage within a range of
0.50%
to
1.50%
, and the applicable margin for Eurodollar Currency Rate loans is a percentage within a range of
1.50%
to
2.50%
in each case based on the EBITDA of the Borrowers at the end of each fiscal quarter, and may be increased at PNC's option by
2.0%
during the continuance of an event of default. Accrued interest with respect to principal amounts outstanding under the Credit Agreement is payable in arrears on a monthly basis for Alternative Base Rate loans, and at the end of the applicable interest period but at most every three months for Eurodollar Currency Rate loans. The interest rate at April 30, 2018 was
6.25%
.
The Credit Agreement also requires the Company to maintain the following financial maintenance covenants: (i) a minimum fixed charge coverage ratio, and (ii) a minimum EBITDA amount, in each case as of the end of the relevant monthly, quarterly or annual measurement period. As of April 30, 2018, the Credit Agreement required the Company to maintain a minimum EBITDA amount of (
$3,767,000
) for the three months ended April 30, 2018. The Company achieved EBITDA of (
$2,960,000
) for the quarter ended April 30, 2018. For the quarter ended April 30, 2018, the Company was in compliance with its financial covenants.
In addition, the Credit Agreement contains a clean down provision that requires the Company to reduce borrowings under the line to less than
$8,000,000
for a period of
30
consecutive days during the fourth quarter of 2019. The Company believes that normal operating cash flow will allow it to meet the clean down requirement with no adverse impact on the Company's liquidity.
Events of default (subject to certain cure periods and other limitations) under the Credit Agreement include, but are not limited to, (i) non-payment of principal, interest or other amounts due under the Credit Agreement, (ii) the violation of terms, covenants, representations or warranties in the Credit Agreement or related loan documents, (iii) any event of default under agreements governing certain indebtedness of the Borrowers and certain defaults by the Borrowers under other agreements that would materially adversely affect the Borrowers, (iv) certain events of bankruptcy, insolvency or liquidation involving the Borrowers, (v) judgments or judicial actions against the Borrowers in excess of
$250,000
,subject to certain conditions, (vi) the failure of the Company to comply with Pension Benefit Plans (as defined in the Credit Agreement), (vii) the invalidity of loan documents pertaining to the Credit Agreement, (viii) a change of control of the Borrowers and (ix) the interruption of operations of any of the Borrowers' manufacturing facilities for five consecutive days during the peak season or fifteen consecutive days during any other time, subject to certain conditions.
Pursuant to the Credit Agreement, substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Borrowers. Due to this automatic liquidating nature of the Revolving Credit Facility, if the Borrowers breach any covenant, violate any representation or warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing base calculation, the Borrowers may not have access to cash liquidity unless provided by PNC at its discretion. In addition, certain of the covenants and representations and warranties set forth in the Credit Agreement contain limited or no materiality thresholds, and many of the representations and warranties must be true and correct in all material respects upon each borrowing, which the Borrowers expect to occur on an ongoing basis. There can be no assurance that the Borrowers will be able to comply with all such covenants and be able to continue to make such representations and warranties on an ongoing basis.
The Company's line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season. The Company believes that the Revolving Credit Facility will provide sufficient liquidity to meet its capital requirements in the next
12 months
. Approximately
$5,790,000
was available for borrowing as of
April 30, 2018
.
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.
On December 22, 2017, Staff Accounting Bulletin No. 118 was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. In accordance with SAB 118, we have determined that
$4,438,000
of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities was provisional amount and reasonable estimate at January 31, 2018. Additional work is necessary to do a more detailed analysis. Any subsequent adjustment to these amounts will be recorded to current tax expense in fiscal year 2019 when the analysis is complete.
The January 31, 2015 and subsequent years remain open for examination by the IRS and state tax authorities. The Company is not currently under any state examination. The Company is currently under IRS examination for its fiscal year ended January 31, 2016 Federal tax return.
Note 7. Net Loss per Share
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
4/30/2018
|
|
4/30/2017
|
|
|
(In thousands, except per share data)
|
Net loss
|
|
$
|
(3,572
|
)
|
|
$
|
(2,211
|
)
|
Weighted average shares outstanding
|
|
15,317
|
|
|
15,128
|
|
Net effect of dilutive shares - based on the treasury stock method using average market price
|
|
—
|
|
|
—
|
|
Totals
|
|
15,317
|
|
|
15,128
|
|
|
|
|
|
|
Net loss per share - basic
|
|
$
|
(0.23
|
)
|
|
$
|
(0.15
|
)
|
Net loss per share - diluted (a)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.15
|
)
|
(a) All exercisable and non-exercisable stock options were not included in the computation of diluted net loss per share at April 30, 2018 and 2017, 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, 2018 and 2017, was
201,000
and
252,000
, respectively.
Note 8. Stock-Based Compensation
Stock Incentive Plan
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 first quarter ended April 30, 2018, the Company granted
0
shares of restricted stock awards and
0
shares of restricted stock awards vested according to their terms. There were approximately
289,832
shares available for future issuance under the 2011 Plan as of
April 30, 2018
. As of April 30, 2018, there was $
2,104,000
of unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of approximately
3
years. At April 30, 2018, stock-based compensation expense related to restricted stock awards recognized in cost of goods sold and selling, general and administrative
expenses was
$60,000
and
$168,000
, respectively. At April 30, 2017, stock-based compensation expense related to restricted stock awards recognized in cost of goods sold and selling, general and administrative expenses was
$28,000
and
$139,000
, respectively.
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
$2 million
. Such dividends payments are also subject to compliance with financial and other covenants provided in the Credit Agreement. In March 2018, the Company declared a quarterly cash dividend of
$0.015
per share, payable April 10, 2018 to shareholders of record as of March 23, 2018.
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. There is no service cost incurred under this plan.
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 net periodic pension cost (income) for the Pension Plan and the VIP Plan for the three months ended
April 30, 2018
and
2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Pension Plan
|
|
VIP Plan
|
4/30/2018
|
|
4/30/2017
|
|
4/30/2018
|
|
4/30/2017
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
266
|
|
|
304
|
|
|
89
|
|
|
89
|
|
Expected return on plan assets
|
(407
|
)
|
|
(342
|
)
|
|
—
|
|
|
—
|
|
Amortization of transition amount
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized (gain) loss due to Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized net actuarial (gain) loss
|
90
|
|
|
179
|
|
|
82
|
|
|
60
|
|
Benefit cost
|
$
|
(51
|
)
|
|
$
|
141
|
|
|
$
|
171
|
|
|
$
|
149
|
|
401(k) Retirement Plan
The Company’s retirement plan, which covers all U.S. employees, allows participants to defer from
1%
to
75%
of their eligible compensation through a 401(k) retirement program. Through December 31, 2001, the plan included an employee stock ownership component. The plan continues to include Virco stock as one of the investment options. At April 30, 2018 and 2017, the plan held
595,425
shares and
578,988
shares of Virco stock, respectively. For the quarter ended April 30, 2018, the Company made a contribution to employees enrolled in the Plan in connection with an auto enrollment program and initiated a Company match effective January 1, 2018. For the quarter year ended April 30, 2018, the compensation costs incurred for employer match was
$184,000
. There was no employer match for same period ended April 30, 2017.
Note 11. Warranty Accrual
The Company provides an assurance type 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 months ended
April 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
4/30/2018
|
|
4/30/2017
|
|
(In thousands)
|
Beginning balance
|
$
|
925
|
|
|
$
|
1,000
|
|
Provision
|
55
|
|
|
70
|
|
Costs incurred
|
(55
|
)
|
|
(70
|
)
|
Ending balance
|
$
|
925
|
|
|
$
|
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
None.