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, 2015

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 — 14,998,187 shares as of September 5, 2015.

 
 




TABLE OF CONTENTS


Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
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
 
 
7/31/2015
 
1/31/2015
 
7/31/2014
(In thousands, except share data)
 
Unaudited (Note 1)
 
 
 
Unaudited (Note 1)
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash
$
1,490

 
$
470

 
$
1,130

Trade accounts receivables, net
33,883

 
10,614

 
29,414

Other receivables
141

 
43

 
47

Income tax receivable
288

 
267

 
317

Inventories
 
 
 
 
 
Finished goods
16,998

 
5,602

 
20,145

Work in process
13,961

 
11,487

 
15,161

Raw materials and supplies
10,827

 
9,589

 
9,977

 
41,786

 
26,678

 
45,283

Deferred tax assets, net
156

 
156

 
203

Prepaid expenses and other current assets
1,334

 
743

 
1,350

Total current assets
79,078

 
38,971

 
77,744

Property, plant and equipment
 
 
 
 
 
Land
1,671

 
1,671

 
1,671

Land improvements
851

 
851

 
1,189

Buildings and building improvements
46,443

 
47,047

 
47,047

Machinery and equipment
107,275

 
110,060

 
113,152

Leasehold improvements
1,895

 
1,909

 
1,957

 
158,135

 
161,538

 
165,016

Less accumulated depreciation and amortization
122,849

 
126,317

 
128,970

Net property, plant and equipment
35,286

 
35,221

 
36,046

Deferred tax assets, net
569

 
624

 
305

Other assets
6,953

 
6,995

 
6,990

Total assets
$
121,886

 
$
81,811

 
$
121,085

See accompanying notes.

3


Virco Mfg. Corporation
Condensed Consolidated Balance Sheets
 
 
7/31/2015
 
1/31/2015
 
7/31/2014
 
(In thousands, except share data)
 
Unaudited (Note 1)
 
 
 
Unaudited (Note 1)
Liabilities
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
19,240

 
$
9,901

 
$
20,382

Accrued compensation and employee benefits
4,793

 
4,199

 
3,860

Current portion of long-term debt
24,708

 
3,366

 
27,545

Deferred tax liabilities

 

 

Other accrued liabilities
7,818

 
3,939

 
7,293

Total current liabilities
56,559

 
21,405

 
59,080

Non-current liabilities
 
 
 
 
 
Accrued self-insurance retention
2,379

 
1,730

 
2,020

Accrued pension expenses
27,907

 
28,986

 
23,132

Income tax payable
37

 
42

 
37

Long-term debt, less current portion
6,153

 
6,153

 
6,000

Other accrued liabilities
976

 
922

 
1,092

Total non-current liabilities
37,452

 
37,833

 
32,281

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 14,998,187 shares at 7/31/2015 and 14,852,640 at 1/31/2015 and 7/31/2014
150

 
149

 
148

Additional paid-in capital
116,385

 
116,348

 
116,105

Accumulated deficit
(69,416
)
 
(73,690
)
 
(73,191
)
Accumulated other comprehensive loss
(19,244
)
 
(20,234
)
 
(13,338
)
Total stockholders’ equity
27,875

 
22,573

 
29,724

Total liabilities and stockholders’ equity
$
121,886

 
$
81,811

 
$
121,085

See accompanying notes.


4


Virco Mfg. Corporation
Condensed Consolidated Statements of Income
Unaudited (Note 1)
 
 
Three months ended
 
7/31/2015
 
7/31/2014
 
(In thousands, except per share data)
Net sales
$
61,072

 
$
53,042

Costs of goods sold
37,076

 
32,346

Gross profit
23,996

 
20,696

Selling, general and administrative expenses
16,055

 
14,620

Gain on sale of property, plant & equipment

 

Restructuring expense

 
62

Operating income (loss)
7,941

 
6,014

Interest expense, net
453

 
505

Income (loss) before income taxes
7,488

 
5,509

Income tax expense (benefit)
38

 
306

Net income (loss)
$
7,450

 
$
5,203

 
 
 
 
Net income (loss) per common share:
 
 
 
Basic
$
0.50

 
$
0.35

Diluted
$
0.49

 
$
0.35

Weighted average shares outstanding:
 
 
 
Basic
14,887

 
14,725

Diluted
15,176

 
14,874


See accompanying notes.


5


Virco Mfg. Corporation
Condensed Consolidated Statements of Income
Unaudited (Note 1)
 
Six months ended
 
7/31/2015
 
7/31/2014
 
(In thousands, except per share data)
Net sales
$
84,120

 
$
76,425

Costs of goods sold
51,930

 
47,699

Gross profit
32,190

 
28,726

Selling, general and administrative expenses
27,097

 
26,195

Gain on sale of property, plant & equipment
(8
)
 

Restructing expense

 
62

Operating income ( loss)
5,101

 
2,469

Interest expense, net
750

 
834

Income (loss) before income taxes
4,351

 
1,635

Income tax expense (benefit)
77

 
287

Net income (loss)
$
4,274

 
$
1,348

 
 
 
 
Net income (loss) per common share:
 
 
 
Basic
$
0.29

 
$
0.09

Diluted
$
0.28

 
$
0.09

Weighted average shares outstanding:
 
 
 
Basic
14,856

 
14,687

Diluted
15,139

 
14,839

 
See accompanying notes.


6


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

 
Three months ended
 
7/31/2015
 
7/31/2014
 
(In thousands)
Net income (loss)
$
7,450

 
$
5,203

Other comprehensive income (loss) :
 
 
 
Pension adjustments
495

 
321

Comprehensive income (loss)
$
7,945

 
$
5,524


See accompanying notes.

7


Virco Mfg. Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
Unaudited (Note 1)
 
Six months ended
 
7/31/2015
 
7/31/2014
 
(In thousands)
Net income (loss)
$
4,274

 
$
1,348

Other comprehensive income (loss) :
 
 
 
Pension adjustments
990

 
642

Comprehensive income (loss)
$
5,264

 
$
1,990


See accompanying notes.



8


Virco Mfg. Corporation
Condensed Consolidated Statements of Cash Flows
Unaudited (Note 1)
 
Six months ended
7/31/2015
 
7/31/2014
 
(In thousands)
Operating activities
 
 
 
Net income (loss)
$
4,274

 
$
1,348

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
2,312

 
2,168

Provision for doubtful accounts
43

 
60

(Gain) loss on sale of property, plant and equipment
(8
)
 

Deferred income taxes
55

 
275

Stock-based compensation
244

 
259

Amortization of net actuarial (gain) loss for pension plans, net of tax
990

 
642

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(23,312
)
 
(20,978
)
Other receivables
(98
)
 
5

Inventories
(15,108
)
 
(17,504
)
Income taxes
(27
)
 
(27
)
Prepaid expenses and other current assets
(550
)
 
244

Accounts payable and accrued liabilities
13,436

 
10,324

Net cash provided by (used in) operating activities
(17,749
)
 
(23,184
)
Investing activities
 
 
 
Capital expenditures
(2,375
)
 
(1,904
)
Proceeds from sale of property, plant and equipment
8

 

Net cash provided by (used in) investing activities
(2,367
)
 
(1,904
)
Financing activities
 
 
 
Proceeds from long-term debt
31,960

 
33,545

Repayment of long-term debt
(10,618
)
 
(8,248
)
Common stock repurchased
(206
)
 
(130
)
Net cash provided by (used in) financing activities
21,136

 
25,167

 
 
 
 
Net increase (decrease) in cash
1,020

 
79

Cash at beginning of year
470

 
1,051

Cash at end of year
$
1,490

 
$
1,130

See accompanying notes.

9


VIRCO MFG. CORPORATION
Notes to unaudited Condensed Consolidated Financial Statements
July 31, 2015
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, 2015, are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2016. The balance sheet at January 31, 2015, 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, 2015 (“Form 10-K”). Certain reclassifications have been made to the prior year statement of operations to conform to the current year presentation. Reclassifications did not have a material impact to the statement of operations. All references to the “Company” refer to Virco Mfg. Corporation and its subsidiaries.
Note 2. Correction of Immaterial Errors
In connection with the preparation of the January 31, 2015 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 Condensed Consolidated Statement of Operations properly reflects payments directly made to customers as decreases to net sales. While the amounts included in prior year were considered to be immaterial, the Company elected to revise the presentation of previously reported amounts to be consistent with the presentation for the quarter ended July 31, 2015. The change resulted in decreases to net sales, gross margin and selling, general, and administrative expenses of $150,000 and $297,000 for the three and six months ended July 31, 2014, respectively.
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, 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 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 May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") an updated standard on revenue recognitionThis ASU will supersede the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance.  ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using US GAAP and International Financial Reporting Standards.  The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. In doing so the Company may be required to use more judgment and make more estimates than under current authoritative guidance. ASU 2014-09 will be effective for the Company in the first quarter of fiscal

10



2017 and may be applied on a full retrospective or modified retrospective approach. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual and interim reporting periods ending after December 15, 2016.  We are currently evaluating this new standard and expect it to have no impact on our financial position and results of operations.

In April 2015, the FASB issued an Accounting Standards Update that requires reporting entities to present debt issuance costs as a direct deduction from the face amount of that note payable presented in the balance sheet. The Accounting Standards Update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. A reporting entity is required to apply the amendments in the Accounting Standards Update retrospectively to all prior periods. We are currently assessing the potential impact that the adoption of the Accounting Standards Update will have on our 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:
 
7/31/2015
 
1/31/2015
 
7/31/2014
 
(in thousands)
Revolving credit line
$
30,708

 
$
9,366

 
$
33,545

Other
153

 
153

 

Total debt
30,861

 
9,519

 
33,545

Less current portion
24,708

 
3,366

 
27,545

Non-current portion
$
6,153

 
$
6,153

 
$
6,000


On December 22, 2011, the Company entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). The credit agreement currently matures on December 22, 2017 and has a maximum availability of $50,000,000, including sub-lines for letters of credit and equipment financing. Borrowings under the Credit Agreement bear interest at either the Alternate Base Rate (as defined in the Credit Agreement) plus 0.75% to 1.75% or the Eurodollar Currency Rate (as defined in the Credit Agreement) plus 1.75% to 2.75%. The interest rate at July 31, 2015 was 4%. Approximately $25,595,000 was available for borrowing as of July 31, 2015.
The Credit Agreement prohibits the Company from issuing dividends or making payments with respect to the Company's capital stock, and contains numerous other covenants, including these financial covenants: (1) minimum tangible net worth, (2) fixed charge coverage ratio, and (3) minimum EBITDA amount, in each case as of the end of the relevant monthly, quarterly or annual measurement period. The Company was in compliance with its covenants during the first two quarters of 2015. Pursuant to the Credit Agreement, substantially all of the Company's accounts receivable are automatically and promptly swept to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Company. 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. On June 18, 2015, the Company entered into Amendment No.

11


10 to the Credit Agreement which, among other things, increased the borrowing availability for the period from June 18, 2015 through August 15, 2015.
The Company believes that the Revolving Credit Facility will provide sufficient liquidity to meet its capital requirements for at least in the next 12 months. Management believes that the carrying value of debt approximated fair value at July 31, 2015 and 2014, 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, 2015. The effective tax rate for the quarter ended July 31, 2015 was impacted by the valuation allowance recognized against state deferred tax assets and discrete items associated with non-taxable permanent differences.
The years ended January 31, 2012, January 31, 2014 and subsequent years remain open for examination by the IRS. The fiscal years ended January 31, 2011 and subsequent years remain open for examination by state tax authorities. The Company is not currently under IRS or state examination.
As of July 31, 2015, the Company has $37,000 of uncertain tax positions accrued. The specific timing of when the resolution of each tax position will be reached is uncertain. As of July 31, 2015, 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.
Note 8. Net Income (Loss) per Share
 
 
Three Months Ended
 
Six Months Ended
 
 
7/31/2015
 
7/31/2014
 
7/31/2015
 
7/31/2014
 
 
(In thousands, except per share data)
Net income (loss)
 
$
7,450

 
$
5,203

 
$
4,274

 
$
1,348

Weighted average shares outstanding
 
14,887

 
14,725

 
14,856

 
14,687

Net effect of dilutive share-based on the treasury stock method using average market price
 
289

 
149

 
283

 
152

Totals
 
15,176

 
14,874

 
15,139

 
14,839

 
 
 
 
 
 
 
 
 
Net income (loss) per share - basic
 
$
0.50

 
$
0.35

 
$
0.29

 
$
0.09

Net income (loss) per share - diluted
 
$
0.49

 
$
0.35

 
$
0.28

 
$
0.09



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 75,174 awards under the 2011 Plan during the three and six month periods ended July 31, 2015. As of July 31, 2015, there were approximately 803,520 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 2014 and 0 awards under the 2007 Plan during the quarter ended July 31, 2015. As of July 31, 2015, there were approximately 13,075 shares available for future issuance under the 2007 Plan.
Accounting for the Plans
Restricted Stock Unit Awards
The following table presents a summary of restricted stock and stock unit awards at July 31, 2015 and 2014:
 
 
 
 
 
Expense for 3 months ended
 
Expense for 6 months ended
 
Unrecognized
Compensation
Cost at
Date of Grants
 
Units Granted
 
Terms of Vesting
7/31/2015
 
7/31/2014
 
7/31/2015
 
7/31/2014
 
7/31/2015
2011 Stock Incentive Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
6/22/2015
 
48,000
 
4 years
$
5,000

 
$

 
5,000

 
$

 
$
127,000

6/22/2015
 
27,174
 
1 year
13,000

 

 
13,000

 

 
62,000

6/24/2014
 
28,626
 
1 year
6,000

 
13,000

 
25,000

 
13,000

 

6/24/2014
 
490,000
 
5 years
61,000

 
43,000

 
125,000

 
43,000

 
920,000

12/3/2013
 
10,000
 
1 year

 
6,000

 

 
12,000

 

6/25/2013
 
71,430
 
1 year

 
13,000

 

 
50,000

 

6/19/2012
 
520,000
 
5 years
38,000

 
39,000

 
77,000

 
79,000

 
270,000

2007 Stock Incentive Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
6/16/2009
 
382,500
 
5 years

 
15,000

 

 
62,000

 

Totals for the period
 
 
 
 
$
123,000

 
$
129,000

 
$
245,000

 
$
259,000

 
$
1,379,000


Note 10. Stockholders’ Equity
At April 30, 2015, $1.1 million remained available for repurchases of the Company’s common stock pursuant to the Company’s repurchase program. During the second quarter the Board of Directors terminated the repurchase plan. Prior to the termination of the repurchase plan, the Company did not repurchase any shares of its common stock during the three or six months ended July 31, 2015. 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 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.

13


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 certain former non-employee directors of the Company (the “Non-Employee Directors Retirement Plan”). The Non-Employee Directors Retirement Plan provides a lifetime annual retirement benefit equal to the director’s annual retainer fee for the fiscal year in which the director terminated his or her position with the Board, subject to the director having provided 10 years of service to the Company. As more fully described in the Form 10-K, benefit accruals under this plan were frozen effective December 31, 2003.
The net periodic pension cost (income) for the Pension Plan, the VIP Plan, and the Non-Employee Directors Retirement Plan for the three months and six months ended July 31, 2015 and 2014 were as follows (in thousands):

 
Three Months Ended
 
Pension Plan
 
VIP Plan
 
Non-Employee Directors Retirement Plan
7/31/2015
 
7/31/2014
 
7/31/2015
 
7/31/2014
 
7/31/2015
 
7/31/2014
Service cost
$

 
$

 
$

 
$

 
$

 
$

Interest cost
324

 
315

 
105

 
88

 
3

 
4

Expected return on plan assets
(324
)
 
(275
)
 

 

 

 

Amortization of transition amount

 

 

 

 

 

Recognized (gain) loss due to curtailments

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

Recognized net actuarial (gain) loss
375

 
284

 
120

 
45

 

 
(8
)
Benefit cost
$
375

 
$
324

 
$
225

 
$
133

 
$
3

 
$
(4
)
 
Six Months Ended
 
Pension Plan
 
VIP Plan
 
Non-Employee Directors Retirement Plan
7/31/2015
 
7/31/2014
 
7/31/2015
 
7/31/2014
 
7/31/2015
 
7/31/2014
Service cost
$

 
$

 
$

 
$

 
$

 
$

Interest cost
648

 
630

 
210

 
176

 
6

 
8

Expected return on plan assets
(648
)
 
(550
)
 

 

 

 

Amortization of transition amount

 

 

 

 

 

Recognized (gain) loss due to curtailments

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

Recognized net actuarial (gain) loss
750

 
568

 
240

 
90

 

 
(16
)
Benefit cost
$
750

 
$
648

 
$
450

 
$
266

 
$
6

 
$
(8
)

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, 2015 and 2014.

14



 
Three Months Ended
 
Six Months Ended
 
7/31/2015
 
7/31/2014
 
7/31/2015
 
7/31/2014
 
(In thousands)
Beginning balance
$
950

 
$
1,000

 
$
950

 
$
1,000

Provision
112

 
83

 
193

 
218

Costs incurred
(62
)
 
(83
)
 
(143
)
 
(218
)
Ending balance
$
1,000

 
$
1,000

 
$
1,000

 
$
1,000


Note 13. Subsequent Events
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.

15



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
For the three months ended July 31, 2015, the Company earned a pre-tax profit of $7,488,000 on sales of $61,072,000 compared to a pre-tax profit of $5,509,000 on sales of $53,042,000 in the prior year.
Net sales for the three months ended July 31, 2015 increased by $8,030,000 or 15.1%. This increase was attributable to increased volume of approximately $6.5 million and the balance attributable to increased selling prices. The Company began the quarter with a backlog of orders that was approximately $420,000 greater than the prior year. Order rates for the quarter increased by approximately 8.5% compared to the prior year. Ending backlog at July 31, 2015 was $39.1 million compared to $40.1 million at the same date last year.
The second quarter results reflected continued increase in seasonality of the Company’s business. Many school districts were affected by severe winter storms at the beginning of 2015. These storms affected deliveries in the first quarter, which pushed orders and deliveries into the second quarter. Many of these same districts were required to extend school further into the summer to meet the minimum number of required instruction days, effectively delaying the beginning of the summer delivery window. Other school districts have accelerated the beginning of back to school, also impacting the summer delivery window. Second quarter sales were also impacted by the composition of orders. The Company experienced a $1 million reduction in sales of bond funded project business. The reduction in bond funded project business was offset by growth in business that is traditionally funded by the operating budgets of the schools.
As discussed more fully in the Form 10-K for the fiscal year ended January 31, 2015 (“Form 10-K”), the Company implemented a variety of cost saving initiatives in prior years that have reduced the number of full time employees, among other cost savings. This reduced cost structure has helped the Company reduce operating losses in the seasonally slower first quarter. The reduction in headcount in prior years was concentrated in manufacturing, and included both direct and indirect positions. The Company aggressively shifted to temporary workers to meet the seasonal demand for production and distribution.
Gross margin as a percentage of sales increased to 39.3% for the three months ended July 31, 2015 compared to 39.0% in the same period last year. Gross margin was favorably affected by an increase in selling prices as discussed above, slightly increased overhead absorption as a result of a 4% increase in production hours, and stable costs for raw materials. The improvements in margin were partially offset by increased factory costs to service the shrinking summer delivery window while utilizing more temporary labor. Compared to the second quarter of 2014, the Company started the second quarter of 2015 with $658,000 more inventory, ended the quarter with $3.5 million less inventory, yet supported a 15% increase in shipments, and improved upon the level of customer service.
Selling, general and administrative expenses for the three months ended July 31, 2015 increased by $1,435,000 compared to the same period last year , but decreased as a percentage of sales by 1.3%. The increase in selling, general and administrative expenses was attributable to increased variable freight and service expenses, and increased variable compensation expenses, primarily composed of a $700,000 provision for performance bonuses. These increases were partially offset by a reduction in legal expenses. The prior year included what the Company believes were non- recurring legal costs related to protecting the Company against infringement of certain patents. Interest expense decreased due to decreased levels of borrowing.
For the six months ended July 31, 2015, the Company earned a pre-tax profit of $4,351,000 on net sales of $84,120,000 compared to a pre-tax profit of $1,635,000 on net sales of $76,425,000 in the same period last year. Net sales for the six months ended July 31, 2014 increased by $7,695,000 compared to the same period last year. This increase was the result of a $5 million increase in unit volume and the balance attributable to increased selling prices. The Company began the year with a backlog of orders that was approximately $1.6 million less than the prior year. Order rates for the first six months increased by approximately 7.4% compared to the prior year. Ending backlog at July 31, 2015 was $39.1 million compared to $40.1 million at the same date last year.
Gross margin as a percentage of sales improved to 38.3% for the six months ended July 31, 2015 compared to 37.6% in the same period last year. Gross margin was favorably affected by an increase in selling prices as discussed above, a 1% increase in production rates, and stable raw material costs.
Selling, general and administrative expenses for the six months ended July 31, 2015 increased by approximately $900,000 compared to the same period last year but decreased as a percentage of sales by 2.1%. The increase in selling, general and administrative expenses was attributable to increased variable freight and service expenses, and increased variable compensation expenses, primarily composed of a $700,000 provision for anticipated performance bonuses. These increases were partially offset by a reduction in legal expenses. The prior year included what the Company believes were non- recurring legal costs. Interest expense decreased due to decreased levels of borrowing.

16


In the first six months of 2015 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 the quarter ended July 31, 2015 was impacted by the valuation allowance and state income and franchise taxes.
Liquidity and Capital Resources
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. In addition, the Company finances a large balance of accounts receivable during the peak season. Accounts receivable increased by $23,312,000 from January 31, 2015 to July 31, 2015. This compares to prior year when accounts receivable grew by $20,978,000 during the same period. The accounts receivable balance was $4,469,000 higher at July 31, 2015 than at July 31, 2014 due to increased sales in the second quarter.

For the first six months, the Company increased inventory by approximately $15,108,000 at July 31, 2015 compared to January 31, 2015. This compares to an increase of $17,504,000 during the same period last year. Inventory at July 31, 2015 was $3,497,000 less than the prior year. The increase in accounts receivable and inventory at July 31, 2015 compared to the January 31, 2015, was financed in part by vendor credit, which naturally increases with increased second quarter business activity, and the balance through the Company's credit facility with PNC Bank.

Interest expense decreased by approximately $84,000 for the six months ended July 31, 2015, compared to the same period last year. The decrease was primarily due to decreased borrowing levels under the Company's line of credit with PNC Bank National Association (“PNC Bank”).

Borrowings under the Company's revolving line of credit with PNC Bank at July 31, 2015 decreased by approximately $2,837,000 compared to the borrowings at July 31, 2014. The Company established a goal of limiting capital spending to less than $3,000,000 for fiscal year 2015, which is less than the Company's anticipated depreciation expense. Capital spending for the six months ended July 31, 2014 was $2,375,000 compared to $1,904,000 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, 2015, was $17,749,000 compared to $23,184,000 for the same period last year. The decrease in cash used was primarily attributable to an increase net income 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, 2015.
Forward-Looking Statements
From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2015, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
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 2015 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

17


PART II — Other Information

Virco Mfg. Corporation

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, Use of Proceeds and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit 10.1 - Tenth 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, Chief Executive Officer, 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.


18




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, 2015
By:
/s/ Robert E. Dose
 
 
Robert E. Dose
 
 
Vice President — Finance


19