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VIRCO MFG CORPORATION - Quarter Report: 2014 July (Form 10-Q)


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
  
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended July 31, 2014

OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from        to        
Commission File number 1-8777
  
VIRCO MFG. CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
95-1613718
(State or Other Jurisdiction of
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
No change
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report. 
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
 
Accelerated filer
 
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
 
ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding for each of the registrant’s classes of common stock, as of the latest practicable date:



Common Stock, $.01 par value — 14,852,640 shares as of September 5, 2014.

 
 




TABLE OF CONTENTS


 
 
EX-3.2
 
EX-10.1
 
EX-31.1
 
EX-31.2
 
EX-32.1
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 LABELS LINKBASE DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 

 


2


PART I. Financial Information
Item 1. Financial Statements


Virco Mfg. Corporation
Condensed Consolidated Balance Sheets
 
 
7/31/2014
 
1/31/2014
 
7/31/2013
(In thousands, except share data)
 
Unaudited (Note 1)
 
 
 
Unaudited (Note 1)
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash
$
1,130

 
$
1,051

 
$
2,443

Trade accounts receivables, net
29,414

 
8,468

 
32,088

Other receivables
47

 
52

 
107

Income tax receivable
317

 
290

 
304

Inventories
 
 
 
 
 
Finished goods, net
20,145

 
7,237

 
14,137

Work in process, net
15,161

 
11,116

 
12,243

Raw materials and supplies, net
9,977

 
9,427

 
10,460

 
45,283

 
27,780

 
36,840

Deferred tax assets, net
203

 
203

 

Prepaid expenses and other current assets
1,350

 
1,795

 
1,724

Total current assets
77,744

 
39,639

 
73,506

Property, plant and equipment
 
 
 
 
 
Land
1,671

 
1,671

 
1,671

Land improvements
1,189

 
1,185

 
1,213

Buildings and building improvements
47,047

 
47,271

 
47,263

Machinery and equipment
113,152

 
115,667

 
116,335

Leasehold improvements
1,957

 
2,328

 
2,417

 
165,016

 
168,122

 
168,899

Less accumulated depreciation and amortization
128,970

 
131,817

 
132,204

Net property, plant and equipment
36,046

 
36,305

 
36,695

Deferred tax assets, net
305

 
611

 
1,404

Other assets
6,990

 
6,789

 
6,722

Total assets
$
121,085

 
$
83,344

 
$
118,327

See accompanying notes.

3


Virco Mfg. Corporation
Condensed Consolidated Balance Sheets
 
 
7/31/2014
 
1/31/2014
 
7/31/2013
 
(In thousands, except share data)
 
Unaudited (Note 1)
 
 
 
Unaudited (Note 1)
Liabilities
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
20,382

 
$
12,355

 
$
17,282

Accrued compensation and employee benefits
3,860

 
3,594

 
4,143

Current portion of long-term debt
27,545

 
2,248

 
22,668

Deferred tax liabilities

 

 
572

Other accrued liabilities
7,293

 
4,459

 
8,110

Total current liabilities
59,080

 
22,656

 
52,775

Non-current liabilities
 
 
 
 
 
Accrued self-insurance retention
2,020

 
2,025

 
2,614

Accrued pension expenses
23,132

 
23,951

 
25,763

Income tax payable
37

 
69

 
98

Long-term debt, less current portion
6,000

 
6,000

 
6,000

Other accrued liabilities
1,092

 
1,038

 
1,372

Total non-current liabilities
32,281

 
33,083

 
35,847

Commitments and contingencies

 

 

Stockholders’ equity
 
 
 
 
 
Preferred stock:
 
 
 
 
 
Authorized 3,000,000 shares, $.01 par value; none issued or outstanding

 

 

Common stock:
 
 
 
 
 
Authorized 25,000,000 shares, $.01 par value; issued and outstanding 14,852,640 shares at 7/31/2014 ; and 14,718,414 at 1/31/2014 and 14,730,319 shares at 07/31/2013
148

 
147

 
147

Additional paid-in capital
116,105

 
115,978

 
115,817

Accumulated deficit
(73,191
)
 
(74,540
)
 
(71,077
)
Accumulated other comprehensive loss
(13,338
)
 
(13,980
)
 
(15,182
)
Total stockholders’ equity
29,724

 
27,605

 
29,705

Total liabilities and stockholders’ equity
$
121,085

 
$
83,344

 
$
118,327

See accompanying notes.


4


Virco Mfg. Corporation
Condensed Consolidated Statements of Income
Unaudited (Note 1)
 
 
Three months ended
 
7/31/2014
 
7/31/2013
 
(In thousands, except per share data)
Net sales
$
53,192

 
$
56,933

Costs of goods sold
32,346

 
35,347

Gross profit
20,846

 
21,586

Selling, general and administrative expenses
14,770

 
14,417

Restructuring expense
62

 
412

Interest expense, net
505

 
472

Income (loss) before income taxes
5,509

 
6,285

Income tax expense (benefit)
306

 
75

Net income (loss)
$
5,203

 
$
6,210

 
 
 
 
Net income (loss) per common share:
 
 
 
Basic
$
0.35

 
$
0.43

Diluted
$
0.35

 
$
0.42

Weighted average shares outstanding:
 
 
 
Basic
14,725

 
14,570

Diluted
14,874

 
14,647

 _______________
See accompanying notes.


5


Virco Mfg. Corporation
Condensed Consolidated Statements of Income
Unaudited (Note 1)
 
 
Six Months Ended
 
7/31/2014
 
7/31/2013
 
(In thousands, except per share data)
Net sales
$
76,722

 
$
76,823

Costs of goods sold
47,699

 
48,828

Gross profit
29,023

 
27,995

Selling, general and administrative expenses
26,492

 
24,919

Restructuring expense
62

 
475

Interest expense, net
834

 
800

Income (loss) before income taxes
1,635

 
1,801

Income tax expense (benefit)
287

 
38

Net income (loss)
$
1,348

 
$
1,763

 
 
 
 
Net income (loss) per common share:
 
 
 
Basic
$
0.09

 
$
0.12

Diluted
$
0.09

 
$
0.12

Weighted average shares outstanding:
 
 
 
Basic
14,687

 
14,506

Diluted
14,839

 
14,591

 _______________
See accompanying notes.


6


Virco Mfg. Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
Unaudited (Note 1)

 
Three months ended
 
7/31/2014
 
7/31/2013
 
(In thousands)
Net income (loss)
$
5,203

 
$
6,210

Other comprehensive income (loss) :
 
 
 
Pension adjustments, net of tax
321

 
402

Comprehensive income (loss)
$
5,524

 
$
6,612


See accompanying notes.

7


Virco Mfg. Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
Unaudited (Note 1)

 
Six months ended
 
7/31/2014
 
7/31/2013
 
(In thousands)
Net income (loss)
$
1,348

 
$
1,763

Other comprehensive income (loss) :
 
 
 
Pension adjustments, net of tax
642

 
804

Comprehensive income (loss)
$
1,990

 
$
2,567


See accompanying notes.

8


Virco Mfg. Corporation
Condensed Consolidated Statements of Cash Flows
Unaudited (Note 1)
 
Six months ended
7/31/2014
 
7/31/2013
 
(In thousands)
Operating activities
 
 
 
Net income (loss)
$
1,348

 
$
1,763

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
2,168

 
2,046

Provision for doubtful accounts
60

 
50

(Gain) loss on sale of property, plant and equipment

 
(13
)
Deferred income taxes
275

 

Stock-based compensation
259

 
275

Pension settlement

 

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(20,978
)
 
(23,304
)
Other receivables
5

 
1

Inventories
(17,504
)
 
(11,523
)
Income taxes
(27
)
 
(8
)
Prepaid expenses and other assets
244

 
53

Accounts payable and accrued liabilities
10,966

 
9,593

Net cash provided by (used in) operating activities
(23,184
)
 
(21,067
)
Investing activities
 
 
 
Capital expenditures
(1,904
)
 
(1,861
)
Proceeds from sale of property, plant and equipment

 
19

Net investment in life insurance

 

Net cash provided by (used in) investing activities
(1,904
)
 
(1,842
)
Financing activities
 
 
 
Proceeds from long-term debt
33,545

 
28,851

Repayment of long-term debt
(8,248
)
 
(4,236
)
Common stock repurchased
(130
)
 
(116
)
Cash dividend paid

 

Net cash provided by (used in) financing activities
25,167

 
24,499

 
 
 
 
Net increase (decrease) in cash
79

 
1,590

Cash at beginning of year
1,051

 
853

Cash at end of year
$
1,130

 
$
2,443

See accompanying notes.

9


VIRCO MFG. CORPORATION
Notes to unaudited Condensed Consolidated Financial Statements
July 31, 2014
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, 2014, are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2015. The balance sheet at January 31, 2014, 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, 2014 (“Form 10-K”). All references to the “Company” refer to Virco Mfg. Corporation and its subsidiaries.
Note 2. Correction of Immaterial Errors
Subsequent to the year ended January 31, 2014, the Company identified certain errors in the condensed consolidated balance sheets and consolidated statements of comprehensive income (loss) for the quarters ended April 30, July 31 and October 31, 2013. The Company previously recorded its quarterly net periodic pension cost as an increase to accrued pension expenses, when a portion of the net periodic pension cost attributed to the recognized net actuarial loss or (gain) should have been recorded as a decrease in the Company’s accumulated other comprehensive loss. These errors have no impact on the amounts previously reported in the Company’s statements of operations or statements of cash flows. Further, these errors have no impact on its consolidated financial statements as of and for the year ended January 31, 2014.
Management has evaluated the materiality of these errors quantitatively and qualitatively and has concluded that the corrections of these errors are immaterial to the condensed consolidated balance sheets, consolidated statements of comprehensive income (loss), and the financial statements as a whole. Accordingly, the Company has corrected the accompanying condensed consolidated balance sheet and consolidated statement of comprehensive income (loss) for the three and six months ended July 31, 2013, and it intends to revise its condensed consolidated balance sheets and consolidated statements of comprehensive income (loss) for the quarters ended October 31, 2013 through subsequent periodic filings. The effect of recording immaterial corrections in the condensed consolidated balance sheets and consolidated statements of comprehensive income (loss) for the quarters ended July 31 and October 31, 2013 are as follows:
 
 
For the Quarter Ended July 31, 2013
 
For the Quarter Ended October 31, 2013
(in thousands)
 
As Previously Reported
 
As Corrected
 
As Previously Reported
 
As Corrected
Accrued pension expenses
 
$
26,567

 
$
25,763

 
$
26,398

 
$
25,192

Total stockholder’s equity
 
28,901

 
29,705

 
33,181

 
34,387

Net income (loss)
 
6,210

 
6,210

 
3,408

 
3,408

Comprehensive income (loss)
 
6,210

 
6,612

 
4,208

 
4,610

Impact for period-to-date comprehensive income (loss)
 
1,763

 
2,567

 
5,971

 
7,177

Note 3. 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, which is 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 historically relied on third-party bank

10


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 4. New Accounting Standards

In July 2013, the FASB issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, or similar tax loss, or a tax carryforward exists. The Company adopted the guidance effective February 1, 2014, the beginning of the Company's 2014 fiscal year. The guidance did not have a material impact on the Company's financial statements.

In April 2014, the FASB issued accounting guidance which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance will be effective for fiscal years beginning on or after January 31, 2015 and interim periods within those annual periods with early adoption allowed. The Company does not expect the adoption to have a material impact on its financial statements.

In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

Note 5. Inventories
Inventories primarily consist of raw materials, work in progress, and finished goods of manufactured products. In addition, the Company maintains an inventory of finished goods purchased for resale. Inventories are stated at lower of cost or market and consist of materials, labor, and overhead. The Company determines the cost of inventory by the first-in, first-out method. The value of inventory includes any related production overhead costs incurred in bringing the inventory to its present location and condition. The Company records the cost of excess capacity as a period expense, not as a component of capitalized inventory valuation.
Management continually monitors production costs, material costs and inventory levels to determine that interim inventories are fairly stated.
Note 6. Debt
Outstanding balances (in thousands) for the Company’s long-term debt were as follows:
 
 
 
7/31/2014
 
1/31/2014
 
7/31/2013
 
(in thousands)
Revolving credit line
$
33,545

 
$
8,248

 
$
28,668

Other

 

 

Total debt
33,545

 
8,248

 
28,668

Less current portion
27,545

 
2,248

 
22,668

Non-current portion
$
6,000

 
$
6,000

 
$
6,000



11


On December 22, 2011 (the Closing Date), the Company entered into a Revolving Credit and Security Agreement (the Credit Agreement) with PNC Bank, National Association, as administrative agent and lender (PNC). On June 15, 2012, the Company entered into Amendment No. 1 (Amendment No. 1) to the Credit Agreement which, among other things, increased the borrowing availability thereunder by $3,000,000 from $6,000,000 to $9,000,000 for the period from May 1 through July 14 of each year. On July 27, 2012, the Company entered into Amendment No. 2 (Amendment No. 2) to the Credit Agreement which, among other things, reduced the minimum EBITDA financial covenant contained therein for the five consecutive months ending June 2012 from $1,600,000 to $300,000. On September 12, 2012, the Company entered into Amendment No. 3 (Amendment No. 3) to the Credit Agreement which, among other things, modified the minimum EBITDA covenant for the balance of the fiscal year. On December 6, 2012, the Company entered into Amendment No. 4 (Amendment No. 4) to the Credit Agreement which, among other things, waived the violation of the minimum EBITDA and minimum tangible net worth covenants at October 31, 2012 and eliminated the minimum EBITDA covenant at November 30, 2012. On March 1, 2013, the Company entered into Amendment No. 5 (Amendment No. 5) to the Credit Agreement, which among other things modified the minimum tangible net worth covenant for the periods from January 31, 2013 to January 31, 2014, modified the minimum EBIDTA covenant for certain periods to January 31, 2014 and waived the violation of the minimum EBITDA covenant for the eleven consecutive fiscal month period ending December 31, 2012. On January 9, 2014, the Company entered into Amendment No. 6 (Amendment No. 6) to the Credit Agreement, which, among other things, amended the definition of “Peak Season” and increased the peak season borrowing capacity. On April 15, 2014, the Company entered into Amendment No. 7 (Amendment No. 7) to the Credit Agreement, which, among other things, extended the maturity date of the Credit Agreement for three years until December 22, 2017, reduced the maximum availability under the Credit Agreement by 10,000,000 from $60,000,000 to $50,000,000, waived the violation of the minimum EBITDA covenant at January 31, 2014, waived the violation of the fixed charge coverage ratio covenant at January 31, 2014, included levels for the minimum tangible net worth financial covenant and a minimum EBITDA financial covenant for fiscal year 2014 and the minimum fixed charge coverage ratio until the maturity date of the Credit Agreement. On August 18, 2014, the Company entered into Amendment No. 8 (Amendment No. 8) to the Credit Agreement which, among other things, extended the draw period under the temporary equipment line.
The Credit Agreement, as amended, provides the Company with a secured revolving line of credit (the Revolving Credit Facility) of up to $50,000,000, 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. 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 January 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 Company's personal property and certain of the Company's real property. The principal amount outstanding under the Credit Agreement and any accrued and unpaid interest is due no later than December 22, 2017, 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 Company without premium or penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions.
The Revolving Credit Facility bears interest, at the Company's 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 0.75% to 1.75%, and the applicable margin for Eurodollar Currency Rate loans is a percentage within a range of 1.75% to 2.75%, in each case based on the EBITDA of the Company 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 Credit Agreement contains a covenant that forbids the Company from issuing dividends or making payments with respect to the Company's capital stock, and contains numerous other covenants that limit under certain circumstances the ability of the Company and their subsidiaries to, among other things, merge with or acquire other entities, incur new liens, incur additional indebtedness, repurchase stock, sell assets outside of the ordinary course of business, enter into transactions with affiliates, or substantially change the general nature of the business of the Company, taken as a whole. The Credit Agreement also requires the Company to maintain the following financial maintenance covenants: (1) a minimum tangible net worth amount, (2) a minimum fixed charge coverage ratio, and (3) a minimum EBITDA amount, in each case as of the end of the relevant monthly, quarterly or annual measurement period. As of July 31, 2014 the Credit Agreement required the Company to maintain: (1) a minimum tangible net worth of at least $26,350,000 for the fiscal quarter ending July 31, 2014, (2) a minimum fixed charge coverage ratio of at least 1.00 to 1.00 for the four consecutive fiscal quarters ending January 31, 2015, and (3) a minimum EBITDA amount of $4,420,000 for the six months ended July 31, 2014 and $5,512,000 for the twelve consecutive fiscal months ending January 31, 2015.

12


In addition, the Credit Agreement contains a clean down provision that requires the Company to reduce borrowings under the line to less than $6,000,000 for a period of 60 consecutive days each fiscal year. 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. The Company was in compliance with its covenants at July 31, 2014.
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 Company and certain defaults by the Company under other agreements that would materially adversely affect the Company, (iv) certain events of bankruptcy, insolvency or liquidation involving the Company, (v) judgments or judicial actions against the Company 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 Company and (ix) the interruption of operations of any of the Company' 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 Company' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Company. Due to this automatic liquidating nature of the Revolving Credit Facility, if the Company breach any covenant, violate any representation or warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing base calculation, the Company 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 Company expect to occur on an ongoing basis. There can be no assurance that the Company 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 $18,360,000 was available for borrowing as of July 31, 2014.
The descriptions set forth herein of the Credit Agreement, Amendment No. 1, Amendment No. 2, Amendment No. 3, Amendment No. 4, Amendment No. 5, Amendment No. 6, Amendment No. 7 and Amendment No. 8 are qualified in their entirety by the terms of such agreements, each of which has been filed with the Securities and Exchange Commission.
Management believes that the carrying value of debt approximated fair value at July 31, 2014 and 2013, as all of the long-term debt bears interest at variable rates based on prevailing market conditions.

Note 7. 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. Based on this consideration, the Company determined the realization of a majority of the net deferred tax assets do not meet the more likely than not criteria and a valuation allowance was recorded against the majority of the net deferred tax assets at July 31, 2014. The effective tax rate for the quarter ended July 31, 2014 was impacted by the valuation allowance and a discrete item associated with uncertain tax positions.
The Company is currently under IRS examination for the year ended January 31, 2013. The years ended January 31, 2012 and January 31, 2014 remain open for examination by the IRS. The years ended January 31, 2010 through January 31, 2014 remain open for examination by state tax authorities. The Company is not currently under any state examinations.
The specific timing of when the resolution of each tax position will be reached is uncertain. As of July 31, 2014, we do not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.


13

Table of Contents


Note 8. Net Income (Loss) per Share

 
 
Three Months Ended
 
Six Months Ended
 
 
7/31/2014
 
7/31/2013
 
7/31/2014
 
7/31/2013
 
 
(In thousands, except per share data)
Net income (loss)
 
$
5,203

 
$
6,210

 
$
1,348

 
$
1,763

Average shares outstanding
 
14,725

 
14,570

 
14,687

 
14,506

Net effect of dilutive stock options based on the treasury stock method using average market price
 
149

 
77

 
152

 
85

Totals
 
14,874

 
14,647

 
14,839

 
14,591

 
 
 
 
 
 
 
 
 
Net income (loss) per share - basic
 
$
0.35

 
$
0.43

 
$
0.09

 
$
0.12

Net income (loss) per share - diluted
 
$
0.35

 
$
0.42

 
$
0.09

 
$
0.12


Note 9. Stock-Based Compensation and Stockholders’ Rights
Stock Incentive Plans
The Company's two stock plans are the 2011 Employee Stock Incentive Plan (the “2011 Plan”) and the 2007 Employee Incentive Stock Plan (the “2007 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. The Company granted 518,626 awards under the 2011 Plan during the quarter ended July 31, 2014. As of July 31, 2014, there were approximately 830,694 shares available for future issuance under the 2011 Plan.
Under the 2007 Plan, the Company may grant an aggregate of 1,000,000 shares to its employees and non-employee directors in the form of stock options or awards. Restricted stock or stock units awarded under the 2007 Plan are expensed ratably over the vesting period of the awards. 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 0 awards under the 2007 Plan during 2013 and 0 awards under the 2007 Plan during the quarter ended July 31, 2014. As of July 31, 2014, there were approximately 13,075 shares available for future issuance under the 2007 Plan.


14


Accounting for the Plans
Restricted Stock Unit Awards
The following table presents a summary of restricted stock and stock unit awards at July 31, 2014 and 2013:
 
 
 
 
 
Expense for 3 months ended
 
Expense for 6 months ended
 
Unrecognized
Compensation
Cost at
Date of Grants
 
Units Granted
 
Terms of Vesting
7/31/2014
 
7/31/2013
 
7/31/2014
 
7/31/2013
 
7/31/2014
2011 Stock Incentive Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
6/24/2014
 
28,626
 
1 year
$
13,000

 
$

 
$
13,000

 
$

 
$
62,000

6/24/2014
 
490,000
 
5 year
43,000

 

 
43,000

 

 
1,237,000

12/3/2013
 
10,000
 
1 year
6,000

 

 
12,000

 

 

6/25/2013
 
71,430
 
1 year
13,000

 
30,000

 
50,000

 
30,000

 

6/19/2012
 
31,250
 
1 year

 
4,000

 

 
17,000

 

6/19/2012
 
520,000
 
5 year
39,000

 
40,000

 
79,000

 
82,000

 
444,000

2007 Stock Incentive Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
6/19/2012
 
78,125
 
1 year

 
11,000

 

 
41,000

 

6/16/2009
 
382,500
 
5 year
15,000

 
49,000

 
62,000

 
105,000

 

Totals for the period
 
 
 
 
$
129,000

 
$
134,000

 
$
259,000

 
$
275,000

 
$
1,743,000

Stockholders’ Rights

On October 15, 1996, the Board of Directors declared a dividend of one preferred stock purchase right (the "Rights") for each outstanding share of the Company's common Stock. The Rights were terminated on July 28, 2014 prior to becoming exercisable.

Note 10. Stockholders’ Equity
During the three months ended July 31, 2014, the Company did not repurchase any shares of its common stock. As of July 31, 2014, $1.1 million remained available for repurchases of the Company’s common stock pursuant to the Company’s repurchase program approved by the Board of Directors, subject to restriction under the Company's Credit Agreement with PNC. Pursuant to the Company’s Credit Agreement with PNC, the Company is prohibited from repurchasing any shares of its stock except in cases where a repurchase is financed by a substantially concurrent issuance of new shares of the Company’s common stock.


Note 11. Retirement Plans

The Company and its subsidiaries cover 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 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, 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 months and six months ended July 31, 2014 and 2013 were as follows (in thousands):

 
Three Months Ended
 
Pension Plan
 
VIP Plan
 
Non-Employee Directors Retirement Plan
7/31/2014
 
7/31/2013
 
7/31/2014
 
7/31/2013
 
7/31/2014
 
7/31/2013
Service cost
$

 
$

 
$

 
$

 
$

 
$

Interest cost
315

 
322

 
88

 
83

 
4

 
4

Expected return on plan assets
(275
)
 
(276
)
 

 

 

 

Amortization of transition amount

 

 

 

 

 

Recognized (gain) loss due to curtailments

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

Recognized net actuarial (gain) loss
284

 
350

 
45

 
55

 
(8
)
 
(3
)
Benefit cost
$
324

 
$
396

 
$
133

 
$
138

 
$
(4
)
 
$
1


 
Six months Ended
 
Pension Plan
 
VIP Plan
 
Non-Employee Directors Retirement Plan
7/31/2014
 
7/31/2013
 
7/31/2014
 
7/31/2013
 
7/31/2014
 
7/31/2013
Service cost
$

 
$

 
$

 
$

 
$

 
$

Interest cost
630

 
644

 
176

 
166

 
8

 
8

Expected return on plan assets
(550
)
 
(552
)
 

 

 

 

Amortization of transition amount

 

 

 

 

 

Recognized (gain) loss due to curtailments

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

Recognized net actuarial (gain) loss
568

 
700

 
90

 
110

 
(16
)
 
(6
)
Benefit cost
$
648

 
$
792

 
$
266

 
$
276

 
$
(8
)
 
$
2



Note 12. Warranty Accrual
The Company provides a warranty against all substantial defects in material and workmanship. In 2005 the Company extended its standard warranty from five years to 10 years. Effective February 1, 2014 the Company modified its warranty to a limited lifetime warranty. The new warranty effective February 1, 2014 is not anticipated to have a significant effect on warranty expense. 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 and six months ended July 31, 2014 and 2013.
 
Three Months Ended
 
Six Months Ended
 
7/31/2014
 
7/31/2013
 
7/31/2014
 
7/31/2013
 
(In thousands)
Beginning balance
$
1,000

 
$
1,000

 
$
1,000

 
$
1,000

Provision
83

 
75

 
218

 
216

Costs incurred
(83
)
 
(75
)
 
(218
)
 
(216
)
Ending balance
$
1,000

 
$
1,000

 
$
1,000

 
$
1,000


Note 13. Subsequent Events

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We have evaluated subsequent events to assess the need for potential recognition or disclosure in this Quarterly Report on Form 10-Q. Such events were evaluated through the date these financial statements were issued. Based upon this evaluation, it was determined that, no subsequent events occurred that required recognition or disclosure in the financial statements.



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Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The Company's order rates and results of operations for the first six months of 2014 continue to be affected by economic conditions and the related impact on tax receipts and budgeted expenditures for public schools. Orders from bond funded projects continue to decline, but business from other sources of funding increased. After many years of decline, tax proceeds and related operating budgets for schools are beginning to stabilize, even increase in some cases, and new funding from programs such as STEM (Science, Technology, Engineering, and Math) are contributing to order rates. For the first six months project orders, which are typically new school construction or major renovations usually financed by bonds declined by nearly 20%. This decline was offset by orders from operating budgets and other grant programs. Order rates for the six months ended July 31, 2014 are 5.5% higher than the corresponding period last year, and show volatility on a month-to-month basis. Order rates for the three month period ended July 31, 2014 were 5.6% greater than the corresponding period last year.

As discussed more fully in the Form 10-K for the fiscal year ended January 31, 2014 (“Form 10-K”), the Company implemented a variety of cost saving initiatives over the prior 2.5 years that have reduced the number of full time employees by approximately 33% going into the beginning of the first quarter of 2014. This reduced cost structure has enabled the Company to reduce operating losses during the seasonally slow first and fourth quarters. The reduction in headcount was concentrated in manufacturing, and included both direct labor and indirect positions. It is the intent of the Company to meet the seasonal demand for production and distribution through more aggressive use of temporary seasonal workers. As a result of operating losses incurred during 2010 and 2011, the Company has established a substantial valuation allowance for deferred tax assets. For this reason, the discussion below will focus on pre-tax operating results.

For the three months ended July 31, 2014, the Company earned a pre-tax profit of $5,509,000 on net sales of $53,192,000 compared to a pre-tax profit of $6,285,000 on net sales of $56,933,000 in the same period last year. Net sales for the three months ended July 31, 2014 decreased by $3,741,000, a 6.6% decrease, compared to the same period last year. This decrease was the result of a reduction in unit volume partially offset by a slight increase in selling prices.

Unit volume during the second quarter declined largely as a result increased seasonality in our business. Order rates increased in the second quarter, and although shipments declined, backlog at July 31, 2014 increased compared to the prior year. Substantially all of the increased backlog at July 31, 2014 was shipped in August.

Gross margin as a percentage of sales increased to 39.2% for the three months ended July 31, 2014 compared to 37.9% in the same period last year. Gross margin was favorably affected primarily by an increase in overhead absorption as a result of a 13% increase in production hours and a slight increase in selling prices. Commodity costs were stable compared to the prior year.

Selling, general and administrative expenses for the three months ended July 31, 2014, increased by $353,000 compared to the same period last year , and increased as a percentage of sales by nearly 2.5%. The increase in selling, general and administrative expenses as a percentage of sales was attributable to increased freight and service expenses, increased selling and marketing initiatives, and what the Company believes will be non- recurring legal costs.

For the six months ended July 31, 2014, the Company earned a pre-tax profit of $1,635,000 on net sales of $76,722,000 compared to a pre-tax profit of $1,801,000 on net sales of $76,823,000 in the same period last year. Net sales for the six months ended July 31, 2014 decreased by $101,000 compared to the same period last year. This decrease was the result of a slight increase in unit volume offset by a slight decrease in selling prices.

Gross margin as a percentage of sales improved to 37.8% for the six months ended July 31, 2014 compared to 36.4% in the same period last year. The improvement in gross margin was attributable to improved overhead absorption related to a 12% increase in production hours, factory spending that did not increase at the same rate as production hours, and stable commodity costs.

Selling, general and administrative expenses for the six months ended July 31, 2014, increased by approximately $1,573,000 compared to the same period last year , and increased as a percentage of sales by 2.1%. The increase in selling, general and administrative expenses was attributable to increased freight and service expenses, increased selling and marketing initiatives, and what the Company believes will be non- recurring legal costs.

In the first six months of 2014 the Company did not record significant income tax expense / (benefit). During the fourth quarter of 2010 the Company established a valuation allowance on the majority of deferred tax assets. The effective income tax rate for

17


the quarter ended July 31, 2014 was impacted by the valuation allowance, alternative minimum taxes, franchise taxes required by various states and a discrete item associated with uncertain tax positions.

Liquidity and Capital Resources

Interest expense increased by approximately $34,000 for the six months ended July 31, 2014, compared to the same period last year. The increase was primarily due to increased borrowing costs related to the Company's line of credit with PNC Bank National Association (“PNC Bank”).

Net accounts receivable was $2,674,000 lower at July 31, 2014 than at July 31, 2013 due to decreased sales. Accounts receivable was $20,946,000 greater at July 31, 2014 than at January 31, 2014 due to the seasonal business cycle. As discussed in the Company's Form 10-K, approximately 50% of the Company's annual sales volume is shipped in June through August. The Company traditionally builds large quantities of inventory during the first quarter of each fiscal year in anticipation of seasonally high summer shipments. For the first six months, the Company increased inventory by approximately $17,503,000 compared to January 31, 2014. This increase was $5,980,000 more than the $11,523,000 increase in the comparable period in 2013. At the end of the second quarter inventory was approximately $8,443,000 more compared to July 31, 2013. Inventory increased more than prior year to accommodate the earlier opening of schools in August and increased backlog at July 31, 2014 compared to the prior year. The increase in accounts receivable and inventory at July 31, 2014 compared to the January 31, 2014, was financed through the Company's credit facility with PNC Bank.

Borrowings under the Company's revolving line of credit with PNC Bank at July 31, 2014 increased by approximately $4,877,000 compared to the borrowings at July 31, 2013. The Company established a goal of limiting capital spending to less than $3,000,000 for fiscal year 2014, which is less than the Company's anticipated depreciation expense. Capital spending for the six months ended July 31, 2014 was $1,904,000 compared to $1,861,000 for the same period last year. Capital expenditures are being financed through the Company's credit facility with PNC Bank and operating cash flow.

Net cash used in operating activities for the six months ended July 31, 2014, was $23,184,000 compared to $21,067,000 for the same period last year. The increase in cash used was primarily attributable to an increase in cash used for inventory, a decrease in cash used for receivables, and an increase in accounts payable and accrued liabilities.

The Company believes that cash flows from operations, together with the Company's unused borrowing capacity with PNC Bank will be sufficient to fund the Company's debt service requirements, capital expenditures and working capital needs for the next twelve months.

Off Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
The Company's critical accounting policies are outlined in its Form 10-K. There have been no changes in the quarter ended July 31, 2014.

Forward-Looking Statements
From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2014, the Company or its representatives have made and may make forward-looking statements, orally or in writing, including those contained herein. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission. The words or phrases “anticipates,” “expects,” “will continue,” “believes,” “estimates,” “projects,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the 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, availability of funding for educational institutions, availability and cost of materials, especially steel, availability and cost of labor, demand for the Company's products, competitive conditions affecting selling prices and margins, capital costs and general economic conditions. Such risks and uncertainties are discussed in more detail in the Company's Form 10-K.
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.

18

Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.




19

Table of Contents

Item 4. Controls and Procedures

Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Principal Executive Officer along with its Principal Financial Officer, of the effectiveness of the design and operation of disclosure controls and procedures. Based upon the foregoing, the Company's Principal Executive Officer along with the Company's Principal Financial Officer concluded that the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial reporting during the second fiscal quarter of 2014 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

20

Table of Contents


PART II — Other Information

Item 1. Legal Proceedings

The Company has various legal actions pending against it arising in the ordinary course of business, which in the opinion of the Company, are not material in that management either expects that the Company will be successful on the merits of the pending cases or that any liabilities resulting from such cases will be substantially covered by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to these suits and claims, management believes that the aggregate amount of such liabilities will not be material to the results of operations, financial position, or cash flows of the Company.
Item 1A. Risk Factors

Not applicable.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.

Item 6. Exhibits
Exhibit 3.2 - Amended and Restated Bylaws of the Company dated May 7, 2014.
Exhibit 10.1 - Eighth Amendment to Revolving Credit and Security Agreement, dated as of December 6, 2012, by and among Virco Mfg. Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent.
Exhibit 31.1 — Certification of Robert A. Virtue, President, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 — Certification of Robert E. Dose, Vice President, Finance, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 — Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101.INS — XBRL Instance Document.
Exhibit 101.SCH — XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document.
Exhibit 101.LAB — XBRL Taxonomy Extension Label Linkbase Document.
Exhibit 101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document.


21

Table of Contents

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 11, 2014
By:
/s/ Robert E. Dose
 
 
Robert E. Dose
 
 
Vice President — Finance


22