Summary of Business and Significant Accounting Policies | 12 Months Ended |
Jan. 31, 2015 |
Accounting Policies [Abstract] | |
Summary of Business and Significant Accounting Policies | Summary of Business and Significant Accounting Policies |
Business |
Virco Mfg. Corporation (the “Company”), which operates in one business segment, is engaged in the design, production and distribution of quality furniture for the commercial and education markets. Over 65 years of manufacturing operations have resulted in a wide product assortment. Major products include mobile tables, mobile storage equipment, desks, computer furniture, chairs, activity tables, folding chairs and folding tables. The Company manufactures its products in Torrance, California, and Conway, Arkansas, for sale primarily in the United States. |
The Company operates in a seasonal business, and requires significant amounts of working capital under its credit facility to fund acquisitions of inventory and finance receivables during the summer delivery season. Restrictions imposed by the terms of the Company’s credit facility may limit the Company’s operating and financial flexibility. However, management believes that its existing cash and available borrowings under its credit facility, and any cash generated from operations will be sufficient to fund its working capital requirements, capital expenditures and other obligations through the next 12 months. |
Principles of Consolidation |
The consolidated financial statements include the accounts of Virco Mfg. Corporation and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. |
Management Use of Estimates |
Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities - and disclosure of contingent assets and liabilities - at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, but are not limited to, valuation of inventory; deferred tax assets and liabilities; useful lives of property, plant, and equipment; liabilities under pension, warranty, self-insurance, and environmental claims, revenue recognition; and the accounts receivable allowance for doubtful accounts. Actual results could differ from these estimates. |
Fiscal Year End |
Fiscal years 2014, 2013 and 2012, refer to the fiscal years ended January 31, 2015, 2014 and 2013, respectively. |
Concentration of Credit Risk |
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. Sales to the Company’s recurring customers are generally made on open account with terms consistent with the industry. Credit is extended based on an evaluation of the customer’s financial condition and payment history. Past due accounts are determined based on how recently payments have been made in relation to the terms granted. Amounts are written off against the allowance in the period that the Company determines that the receivable is not collectable. The Company purchases insurance on receivables from certain commercial customers to minimize the Company’s credit risk. The Company does not typically obtain collateral to secure credit risk. Customers with inadequate credit are required to provide cash in advance or letters of credit. The Company does not assess interest on receivable balances. A substantial percentage of the Company’s receivables come from low-risk government entities. No customer exceeded 10% of the Company’s sales for each of the three years ended January 31, 2015. Foreign sales were approximately 7.7%, 7.5% and 10.0% of the Company’s sales for fiscal years 2014, 2013 and 2012, respectively. |
No single customer accounted for more than 10% of the Company’s accounts receivable at January 31, 2015 or 2014. Because of the short time between shipment and collection, the net carrying value of receivables approximates the fair value for these assets. |
Fair Values of Financial Instruments |
The fair values of the Company’s cash, accounts receivable, and accounts payable approximate their carrying amounts due to their short-term nature. |
Financial assets and liabilities measured at fair value on a recurring basis are classified in one of the three following categories, which are described below: |
Level 1 — Valuations based on unadjusted quoted prices for identical assets in an active market. |
Level 2 — Valuations based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. |
Level 3 — Valuations based on inputs that are unobservable and involve management judgment and our own assumptions about market participants and pricing. |
Financial assets measured at fair value on a recurring basis include assets associated with the Virco Employees Retirement Plan. |
Inventories |
Inventory is valued at the lower of cost or market (determined on a first-in, first-out basis) 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. |
Property, Plant and Equipment |
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization are computed on the straight-line method for financial reporting purposes based upon the following estimated useful lives: |
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Land improvements | 5 to 25 years | | | | | | | | | | |
Buildings and building improvements | 5 to 40 years | | | | | | | | | | |
Machinery and equipment | 3 to 10 years | | | | | | | | | | |
Leasehold improvements | shorter of lease or useful life | | | | | | | | | | |
The Company did not capitalize interest costs as part of the acquisition cost of property, plant and equipment for the years ended January 31, 2015, 2014 and 2013. The Company capitalizes the cost of significant repairs that extend the life of an asset. Repairs and maintenance that do not extend the life of an asset are expensed as incurred. Repair and maintenance expense was $1,616,000, $1,691,000 and $1,681,000 for fiscal years ended January 31, 2015, 2014 and 2013, respectively. Depreciation and amortization expense was $4,408,000, $4,209,000 and $4,368,000 for the fiscal years ended January 31, 2015, 2014 and 2013, respectively. |
The Company subleased space at one of its facilities on a month-to-month basis during 2014, 2013 and 2012. Rental income was $40,000 for fiscal 2014, 2013, and 2012. |
The Company has established asset retirement obligations related to leased manufacturing facilities in accordance with Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 410, “Asset Retirement and Environmental Obligations.” Accrued asset retirement obligations are recorded at net present value and discounted over the life of the lease. Asset retirement obligations, included in other non-current liabilities were $572,000 and $563,000 at January 31, 2015 and 2014, respectively. |
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| January 31, | | | | |
| 2015 | | 2014 | | | | |
Balance at beginning of period | $ | 563,000 | | | $ | 554,000 | | | | | |
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Decrease in obligation | — | | | — | | | | | |
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Accretion expense | 9,000 | | | 9,000 | | | | | |
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Balance at end of period | $ | 572,000 | | | $ | 563,000 | | | | | |
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Impairment of Long-Lived Assets |
An impairment loss is recognized in the event facts and circumstances indicate the carrying amount of a long-lived asset may not be recoverable, and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Impairment is recorded based on the excess of the carrying amount of the impaired asset over the fair value. Generally, fair value represents the Company’s expected future cash flows from the use of an asset or group of assets, discounted at a rate commensurate with the risks involved. There were no impairments in fiscal years 2014, 2013 and 2012. |
Net Income (Loss) per Share |
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding plus the dilution effect of stock grants. The following table sets forth the computation of basic and diluted income (loss) per share: |
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In thousands, except per share data | 2014 | | 2013 | | 2012 |
Numerator | | | | | |
Net income (loss) | $ | 849 | | | $ | (1,730 | ) | | $ | (3,830 | ) |
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Denominator | | | | | |
Weighted-average shares — basic | 14,756 | | | 14,620 | | | 14,387 | |
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Dilutive effect of equity incentive plans | 231 | | | — | | | — | |
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Weighted-average shares — diluted (1) | 14,987 | | | 14,620 | | | 14,387 | |
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Net income (loss) per common share | | | | | |
Basic | $ | 0.06 | | | $ | (0.12 | ) | | $ | (0.27 | ) |
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Diluted | 0.06 | | | (0.12 | ) | | (0.27 | ) |
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-1 | For fiscal years 2013 and 2012, approximately 180,000 and 119,000 shares of common stock equivalents, respectively, were excluded in the computation of diluted net income per share, as the effect would be anti-dilutive. | | | | | | | | | | |
Environmental Costs |
The Company is subject to numerous environmental laws and regulations in the various jurisdictions in which it operates that (a) govern operations that may have adverse environmental effects, such as the discharge of materials into the environment, as well as handling, storage, transportation and disposal practices for solid and hazardous wastes, and (b) impose liability for response costs and certain damages resulting from past and current spills, disposals or other releases of hazardous materials. Normal, recurring expenses related to operating the Company's factories in a manner that meets or exceeds environmental laws and regulations are matched to the cost of producing inventory. |
Despite our efforts to comply with existing laws and regulations, compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures by us, some of which may be material. We reserve amounts for such matters when expenditures are probable and reasonably estimable. |
Costs incurred to investigate and remediate environmental waste are expensed, unless the remediation extends the useful life of the assets employed at the site. At January 31, 2015 and 2014, the Company had not capitalized any remediation costs and had not recorded any amortization expense in fiscal years 2014, 2013 and 2012. |
Advertising Costs |
Advertising costs are expensed in the period during which the advertising space is run. Selling, general and administrative expenses include advertising costs of $1,277,000 in 2014, $1,246,000 in 2013, and $1,103,000 in 2012. Prepaid advertising costs reported as an asset on the balance sheet at January 31, 2015 and 2014, were $244,000 and $242,000, respectively. |
Product Warranty Expense |
The Company provides a product warranty on most products. The standard warranty offered on products sold through January 31, 2005 is five years. Effective February 1, 2005, the standard warranty was increased to 10 years on products sold after February 1, 2005. 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 generally provides that customers can return a defective product during the specified warranty period following purchase in exchange for a replacement product or that the Company can repair the product at no charge to the customer. The Company determines whether replacement or repair is appropriate in each circumstance. The Company uses historic data to estimate appropriate levels of warranty reserves. Because product mix, production methods, and raw material sources change over time, historic data may not always provide precise estimates for future warranty expense. The Company recorded warranty reserves of $950,000 and $1,000,000 as of January 31, 2015 and 2014, respectively. |
Self-Insurance |
In 2014 and 2013, the Company was self-insured for product and general liability losses up to $250,000 per occurrence, for workers’ compensation losses up to $250,000 per occurrence, and for auto liability up to $50,000 per occurrence. Actuaries assist the Company in determining its liability for the self-insured component of claims, which have been discounted to their net present value utilizing a discount rate of 0.50% in 2014 and 0.50% in 2013. |
Stock-Based Compensation Plans |
The Company recognizes stock-based compensation cost for shares that are expected to vest, on a straight-line basis, over the requisite service period of the award. |
Accumulated Other Comprehensive Income (Loss), Net of Tax |
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The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the year ended January 31, 2015 and 2014: |
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| January 31, | | | | |
(in thousands) | 2015 | | 2014 | | | | |
Balance as of beginning of year | $ | (13,980 | ) | | $ | (15,986 | ) | | | | |
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Other comprehensive (loss) income before reclassifications | (7,537 | ) | | 458 | | | | | |
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Amounts reclassified from AOCI | 1,283 | | | 1,548 | | | | | |
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Net current period other comprehensive (loss) income | (6,254 | ) | | 2,006 | | | | | |
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Balance as of end of year | $ | (20,234 | ) | | $ | (13,980 | ) | | | | |
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The reclassifications out of accumulated other comprehensive income (loss) of $1,283,000 and $1,548,000 for the years ended January 31, 2015 and 2014, respectively, related to amortization of actuarial losses. |
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Revenue Recognition |
The Company recognizes revenue in accordance with FASB ASC Topic 605, “Revenue Recognition.” Revenue is recognized when title passes under its various shipping terms, when installation services are complete, and when collectability is reasonably assured. The Company reports sales net of sales returns and allowances, sales taxes imposed by various government authorities, cash discounts and rebate to customers. In most instances, the Company sells furniture on bids and contracts, which may include multiple elements. For sales that include freight to the customer, many sales are delivered on the same day shipped, with an average delivery being in route for 1 to 3 days. Installation, which involves carrying the furniture to the classroom and setting the desks and chairs in place, typically occurs the day the furniture is delivered. |
In accordance with ASC 605, 25, “Revenue Recognition - Multiple-Element Arrangements,” revenue arrangements with multiple deliverables are generally accounted for by the Company on a combined unit of accounting as our customers control our ability to deliver and install the furniture, and as a result the furniture delivery and installation are generally provided at the same time. We recognize the consideration for the combined unit of accounting once the final item has been delivered and installed. |
Delivery Costs |
For the fiscal years ended January 31, 2015, 2014 and 2013, shipping and classroom delivery costs of approximately $15,411,000, $14,576,000 and $15,040,000, respectively, were included in selling, general and administrative expenses. |
Accounting for 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 FASB ASC Topic 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. A valuation allowance against deferred tax assets is recorded when it is determined to be more likely than not that the asset will not be realized. |
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Correction of Immaterial Errors |
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In connection with the preparation of the consolidated financial statements, the Company determined that certain payments directly made to customers, which were previously included in selling, general, and administrative expenses, should instead be reflected as decreases to net sales. The current year Consolidated Statement of Operations properly reflects payments directly made to customers as decreases to net sales. The Company evaluated the impact of this error on prior years’ financial statements and concluded that it was immaterial for the years ended January 31, 2014 and 2013, and for all interim periods within those years. While the amounts included in prior years were considered to be immaterial, the Company elected to revise the presentation of previously reported amounts to be consistent with the presentation for the year ended January 31, 2015. The changes resulted in decreases to net sales, gross margin and selling, general, and administrative expenses of $878,000 and $944,000, for the years ended January 31, 2014 and 2013, respectively. The unaudited quarterly results included in Note 11 have also been updated to reflect this change for all periods presented. |