Notes to Consolidated Financial Statements
January 31, 2021
1. 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 71 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 (see Note 3).
Principles of Consolidation and Reclassification
The consolidated financial statements include the accounts of Virco Mfg. Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The classification of certain prior year sales allowances of approximately $1.9 million, representing the replacement of damaged goods, previously presented in net sales, is presented in costs of goods sold in the accompanying prior year statement of operations, which conforms to current period presentation.
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; and the accounts receivable allowance for doubtful accounts.
As a result of the COVID-19 pandemic and its ongoing impact in the future may cause demand for our products to decline and competitive pricing pressures to increase, and other unforeseen effects, which makes these estimates more challenging and actual results could differ materially from these estimates.
COVID-19 Pandemic
The COVID-19 pandemic has materially adversely impacted the U.S. economy and the education system and is expected to continue to do so for at least the next fiscal year. The education system and education budgets are typically highly dependent on state and local tax revenues. The severity of this pandemic may materially adversely impact state and local tax revenues and result in changes in spending priorities for state and local governments, which may have a material adverse effect on future school budgets. The loss of state and local revenues may be substantially or partially offset by federal programs providing assistance to state governments, local governments and schools, although there can be no assurance that any federal funds could be used for capital expenditures or that the level of federal funding, if any, will be sufficient to maintain our historic order rates for school furniture. In addition, while we expect the majority of schools to be in session, there can be no assurance that school systems in the United States will reopen or resume normal operations for the 2021-2022 academic year.
Fiscal Year End
Fiscal years 2021 and 2020 refer to the fiscal years ended January 31, 2021 and 2020, 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. There was one customer who accounted for 12.3% of the Company’s accounts receivable at January 31, 2021. No customer accounted for more than 10% of the Company's accounts receivable at January 31, 2020. Because of the short time between shipment and collection, the net carrying value of receivables approximates the fair value for these assets. No customer exceeded 10% of the Company’s net sales for fiscal years ended January 31, 2021 and January 31, 2020. Foreign net sales were approximately 4.5% and 6.3% of the Company’s net sales for fiscal years 2021 and 2020, respectively.
Cash
Cash consists of cash on hand, and the Company has no cash equivalents. Outstanding checks, representing a book overdraft, are classified in accounts payable on the accompanying consolidated balance sheets and in operating activities in the accompanying consolidated statements of cash flows.
Fair Values of Financial Instruments
The fair values of the Company’s cash, accounts receivable, accounts payable and debt approximate their carrying amounts due to their short-term nature. For fair value of debt, see Note 3.
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 (see Note 4).
Inventories
Inventory is valued at the lower of cost or net realizable value (determined on a first-in, first-out basis) and includes material, labor and factory overhead. The Company records valuation adjustments for the excess cost of the inventory over its estimated net realizable value. Valuation adjustments for slow-moving and obsolete inventory are calculated using an estimated percentage applied to inventories based on a physical inspection of the product in connection with a physical inventory, a review of slow-moving products and component stage, inventory category, historical and forecasted consumption of sales, 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 valuation adjustments may be required. Due to reductions in sales volume in the past years, the Company's manufacturing facilities are operating at reduced levels of capacity. The Company records the cost of excess capacity as a period expense, not as a component of capitalized inventory valuation.
The following table presents an updated breakdown of the Company’s net inventory (in thousands) as of January 31:
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2021
|
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2020
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Finished goods
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$
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15,606
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|
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$
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15,401
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Work in Process
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11,907
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|
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15,957
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Raw materials
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10,757
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|
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11,971
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Inventories, net
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$
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38,270
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|
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$
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43,329
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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
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5 to 25 years
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Buildings and building improvements
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5 to 40 years
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Machinery and equipment
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3 to 10 years
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Leasehold improvements
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shorter of lease or useful life
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The Company capitalizes the cost of betterments 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 were $1,727,000 and $1,960,000 for fiscal years ended January 31, 2021 and 2020, respectively. Property, plant and equipment purchased during the year that remains unpaid as of January 31, 2021 and 2020 was $113,000 and $173,000, respectively.
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 $192,000 and $186,000 at January 31, 2021 and 2020, respectively.
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January 31,
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2021
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2020
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Balance at beginning of period
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$
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186,000
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$
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179,000
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Decrease in obligation
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—
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|
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—
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Accretion expense
|
6,000
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|
|
7,000
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Balance at end of period
|
$
|
192,000
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|
|
$
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186,000
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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 for fiscal years ended January 31, 2021 and 2020.
Net (Loss) Income per Share
Basic net (loss) income 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 (loss) income by the weighted-average number of common shares outstanding plus the dilutive effect of stock award grants. The following table sets forth the computation of basic and diluted loss per share:
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January 31,
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2021
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2020
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(In thousands, except per share)
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Numerator
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(Loss) income
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$
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(2,232)
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$
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2,382
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Denominator
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Weighted-average shares — basic
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15,759
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15,590
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Dilutive effect of common stock equivalents from equity incentive plans
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—
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104
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Weighted-average shares — diluted (a)
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$
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15,759
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|
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$
|
15,694
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Net (loss) income per common share
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Basic
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$
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(0.14)
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$
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0.15
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Diluted
|
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(0.14)
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0.15
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|
(a) For fiscal year 2021, approximately 52,000 shares of common stock equivalents were excluded in the computation of diluted net loss per share, as the effect would be anti-dilutive since the Company reported a net loss.
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, 2021 and 2020, the Company had not capitalized any remediation costs and had not recorded any amortization expense in fiscal years 2021 and 2020.
Advertising Costs
Advertising costs are expensed in the period during which the advertising space is run. Selling, general and administrative expenses include advertising costs for the years ended January 31, 2021 and 2020 of $468,000 and $1,030,000, respectively, and are expensed as incurred. Fiscal year 2021 reduction in advertising expenses was attributable to lack of participation in shows and exhibitions resulted from impacts of the COVID-19 pandemic. Prepaid advertising costs reported as a prepaid asset on the accompanying consolidated balance sheets at January 31, 2021 and 2020, were $341,000 and $300,000, respectively.
Product Warranty Expense
The Company provides a product warranty on most products. The standard warranty offered on products sold through January 31, 2013 is ten years. Effective February 1, 2014 through December 31, 2016, the Company modified its warranty to a limited lifetime warranty. Effective January 1, 2017, the Company modified the warranty offered to provide specific warranty periods by product component, with no warranty period longer than ten years. The Company generally provides that customers can return a defective product during the specified warranty period following purchase in exchange for a replacement product or the repair of the product by the Company 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 $700,000 and $800,000 as of January 31, 2021 and 2020, respectively, as other long-term liabilities in the accompanying consolidated balance sheets. The current portion of the warranty reserve was $300,000 and $325,000 as of January 31, 2021 and 2020, respectively; and included in other accrued liabilities in the accompanying consolidated balance sheets.
Self-Insurance
In fiscal 2021 and 2020, the Company was self-insured for product and general liability losses up to $250,000 per occurrence, workers’ compensation losses up to $250,000 per occurrence, and 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 4.00% in both fiscal 2021 and fiscal 2020.
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.
Virco issued a 10% stock dividend or 3/2 stock split every year beginning in 1983 through 2003. Although the stock dividend had no cash consequences to the Company, the accounting methodology required for 10% dividends affected the equity section of the balance sheet. When the Company recorded a 10% stock dividend, 10% of the market capitalization of the Company on the date of the declaration was reclassified from retained earnings to additional paid-in capital. During the period from 1983 through 2003, the cumulative effect of the stock dividends has been to reclassify over $122 million from retained earnings to additional paid-in capital. The equity section of the balance sheet on January 31, 2021 reflects additional paid-in capital of approximately $120 million and accumulated deficit of approximately $52 million. Other than the losses incurred during 2004-2006, 2011-2014, 2018-2019 and 2021, the accumulated deficit is a result of the accounting reclassification and is not the result of accumulated losses.
Accumulated Other Comprehensive Loss, Net of Tax
The following table summarizes the changes in accumulated balances of other comprehensive (loss) income for the years
ended January 31, 2021 and 2020:
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January 31,
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(in thousands)
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2021
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2020
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Balance as of beginning of year
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$
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(14,311)
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$
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(9,042)
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Other comprehensive loss before reclassifications
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(1,105)
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|
|
(6,045)
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Amounts reclassified from AOCI
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1,831
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|
776
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Net current period other comprehensive income (loss)
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|
726
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(5,269)
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Balance as of end of year
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$
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(13,585)
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$
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(14,311)
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The reclassifications out of accumulated other comprehensive (loss) income of $1,831,000 and $776,000 for the years ended January 31, 2021 and 2020, respectively, related to amortization of actuarial losses and settlements (See Note 4).
Revenue Recognition
The Company manufactures, markets and distributes a wide variety of school and office furniture to wholesalers, distributors, educational institutions and governmental entities. Revenue is recorded for promised goods or services when control is transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
The Company's sales generally involve a single performance obligation to deliver goods pursuant to customer purchase orders. Prices for our products are based on published price lists and customer agreements. The Company has determined that the performance obligations are satisfied at a point in time when the Company completes delivery per the customer contract. The majority of sales are free on board ("FOB") destination where the destination is specified per the customer contract and may include delivering the furniture into the classroom, school site or warehouse. Sales of furniture that are sold FOB factory are typically made to resellers of our product who in turn provide logistics to the ultimate customer. Once a product has been delivered per the shipping terms, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to have transferred upon shipment or delivery in accordance with shipping
terms because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. The Company offers sales incentives and discounts through various regional and national programs to our customers. These programs include product rebates, product returns allowances and trade promotions. Variable consideration for these programs is estimated in the transaction price at contract inception based on current sales levels and historical experience using the expected value method, subject to constraint.
The Company generates revenue primarily by manufacturing and distributing products through resellers and direct-to-customers. Control transfers to both resellers and direct customers at a point in time when the delivery process is complete as determined by the corresponding shipping terms. Therefore, we do not consider them to be meaningfully different revenue streams given similarities in the nature of the products, performance obligation and distribution processes. Sales are predominately in the United States and to a similar class of customer. We do not manage or evaluate the business based on product line or any other discernable category.
For product produced by and sourced from third parties, management has determined that it is the principal in all cases, since it (i) bears primary responsibility for fulfilling the promise to the customer; (ii) bears inventory risk before and/or after the good or service is transferred to the customer; and (iii) has discretion in establishing the price for the sale of good or service to the customer.
Delivery Costs
For the fiscal years ended January 31, 2021 and 2020, shipping and classroom delivery costs of approximately $15,090,000, and $20,552,000, respectively, were included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
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.
2. New Accounting Pronouncements
Recently Adopted Accounting Updates
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement benefits (Topic 715-20). This ASU amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The ASU also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. The Company adopted the new standard effective January 31, 2021 and the adoption did not have any impact on the Company’s results of operations, cash flows or financial position.
In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and the resultant expected cost and complexity of applying the lease modification requirements in ASC 842, the FASB issued Staff Q&A—Topic 842 and Topic 840: Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic, in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can elect to apply or not to apply the lease modification guidance in ASC 842 to those contracts. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.
In accordance with this interpretive guidance, the Company elected to account for lease concessions related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, the Company did not reassess each existing contract to determine whether enforceable rights and obligations for concessions existed and elected not to apply the lease modification guidance in ASC 842 to those contracts. During fiscal 2021, the Company accounted for COVID-19 lease abatements of $136,000 as reductions to variable lease expense as if no changes to the lease contract were made while continuing to recognize expense and reductions in the operating lease liability, as well as the operating lease right-of-use asset during the abatement period.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This update simplifies various aspects related to accounting for income taxes, removes certain exceptions to the general principles in ASC 740, and clarifies and amends existing guidance to improve consistent application. The Company adopted this ASU as of February 1, 2020 and the adoption of this standard did not have a material effect on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) which modifies the disclosure requirements of fair value measurements in Topic 820, Fair Value Measurement. For public companies the ASU removes disclosure requirements for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation process for Level 3 fair value measurements. The ASU modifies the disclosure requirements for investments in certain entities that calculate net asset value and clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds the disclosure requirement for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted this ASU as of February 1, 2020 and the adoption of this standard did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Updates
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss impairment methodology for measuring and recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption date, as modified by the recently issued ASU 2019-10 discussed below, will be for the fiscal year ending after December 15, 2022 and interim periods therein. The Company is currently evaluating the effect the standard will have on the consolidated financial statements and related disclosures.
In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. ASU 2019-10 moves the effective date for certain previously issued amendments to later dates, depending on the filing status of the respective entity. Specifically, due to the amendment and the Company’s status as a smaller reporting company, the new effective dates for relevant previously issued amendments not yet adopted by the Company relate to ASU 2016-13 as described above.
Other recently issued accounting updates are not expected to have a material impact on the Company’s consolidated financial statements.
3. Debt
Outstanding balances (in thousands) for the Company’s long-term debt were as follows:
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January 31,
|
|
|
2021
|
|
2020
|
Revolving credit line
|
|
$
|
4,590
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|
|
$
|
9,969
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Other
|
|
5,850
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|
|
6,727
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|
Total debt
|
|
10,440
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|
|
16,696
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|
Less current portion
|
|
887
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|
|
878
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|
Non-current portion
|
|
$
|
9,553
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|
|
$
|
15,818
|
|
The Company ("the “Borrowers”) has a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”) structured to provide seasonal credit availability during the Company’s peak summer season. The Credit Agreement has been amended twenty-two times since it’s origination in 2011 through fiscal 2021, which, among other things, extended the maturity date of the Credit Agreement for three years until March 19, 2023.
The Credit Agreement is an asset-based loan consisting of (i) a revolving line of credit with a Maximum Revolving Advance Amount of $65,000,000 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 $15,000,000 from January through July of each year, minus undrawn amounts of letters of credit and reserves, and (ii) an equipment loan of $2,000,000. The Credit Agreement is secured by substantially all of the Company's, as defined, 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 March 19, 2023, and the Credit Agreement is subject to certain prepayment penalties upon earlier termination of the Credit Agreement. Prior to the maturity date, principal amounts outstanding under the Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions, including reduced borrowings under the revolving line to less than or equal $10,000,000 for a period of 30 consecutive days during the fourth quarter of each fiscal year. The Credit Agreement also contains certain financial covenants, including a fixed charge coverage ratio beginning on February 1st, 2020 of not less than 1.10 to 1.00, and capital expenditures not to exceed $8,000,000. The Company was in violation with its financial covenants as of July 31, 2020. On September 8, 2020, the Company entered into Amendment No. 21 to the Credit Agreement (“Amendment No. 21”) with its lender, PNC Bank, National Association. Amendment No. 21 provided a limited waiver of the Company’s violation of the covenant to maintain a Fixed Charge Coverage Ratio of at least 1.00 to 1.00 for the four fiscal quarter period ended July 31, 2020, and amended the Fixed Charge Coverage Ratio as follows: (i) 1.00 to 1.00 for the consecutive four fiscal quarter period ended October 31, 2020, and (ii) 1.10 to 1.00 for each consecutive four fiscal quarter period ending thereafter. In connection with Amendment No. 21, the Company also agreed to pay to PNC Bank a non-refundable fee of $75,000. However, the Company was not in compliance with this amended fixed-charge ratio of 1.00:1.00 as of October 31, 2020 due to the continuing decline in net sales and net income. The Company successfully negotiated and entered into Amendment No. 22 on December 11, 2020 to the Credit Agreement (“Amendment No. 22”) with its lender, PNC Bank, National Association. Amendment No. 22 provided a limited waiver of the Fixed-Charge Coverage Ratio for the four fiscal quarter period ended October 31, 2020 and amended the Fixed-Charge Coverage calculation to allow for the add back of certain COVID-19 related costs incurred from May 1, 2020 through April 30, 2021 not to exceed $2 million to adjusted EBITDA beginning with the four fiscal quarter period ended January 31, 2021, and retains the required minimum coverage ratio of 1.10:1.00. . In addition, the Credit Agreement also permits the Company to pay dividends or conduct stock repurchases subject to certain requirements. In connection with Amendment No. 22, the Company also agreed to pay PNC Bank a non-refundable fee of $40,000. The Company was in compliance with the covenants as of January 31, 2021.
The Credit Agreement bears interest, at the Borrowers’ option, at either the Alternate Base Rate (as defined in the Credit Agreement) or the Eurodollar Currency Rate (as defined in the Credit Agreement), in each case plus an applicable margin. The applicable margin for Alternate Base Rate loans is a percentage within a range of 1.25% to 1.75%, and the applicable margin for Eurodollar Currency Rate loans is a percentage within a range of 2.25% to 2.75%, in each case based on the EBITDA of the Borrower's 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. The interest rate as of January 31, 2021 was 5.0%. The Company also incurs a fee on the unused portion of the revolving line of credit at a rate of 0.375%.
To date the impact of COVID-19 on liquidity has been to moderate the seasonal increase in accounts receivable and production of inventory for summer delivery. Both the increase in accounts receivable and inventory are traditionally financed through the Company’s revolving line of credit with PNC Bank. Reductions in receivables and inventory were substantially offset by a reduction in borrowing under the revolving line of credit with PNC Bank.
Events of default (subject to certain cure periods and other limitations) under the Credit Agreement include, but are not limited to, (i) non-payment of principal, interest or other amounts due under the Credit Agreement, (ii) the violation of terms, covenants, representations or warranties in the Credit Agreement or related loan documents, (iii) any event of default under agreements governing certain indebtedness of the Borrowers and certain defaults by the Borrowers under other agreements that would materially adversely affect the Borrowers, (iv) certain events of bankruptcy, insolvency or liquidation involving the Borrowers, (v) judgments or judicial actions against the Borrowers in excess of $250,000, subject to certain conditions, (vi) the failure of the Company to comply with Pension Benefit Plans (as defined in the Credit Agreement), (vii) the invalidity of loan documents pertaining to the Credit Agreement, (viii) a change of control of the Borrowers and (ix) the interruption of operations of any of the Borrowers' manufacturing facilities for five consecutive days during the peak season or fifteen consecutive days during any other time, subject to certain conditions.
Pursuant to the Credit Agreement, substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Credit Agreement upon receipt by the Borrowers remittances. Due to this automatic liquidating nature of the Credit Agreement, if the Borrowers breach any covenant, violate any representation or warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing base calculation, the Borrowers may not have access to cash liquidity unless provided by PNC at its discretion. In addition, certain of the covenants and representations and warranties set forth in the Credit Agreement contain limited or no materiality thresholds, and many of the representations and warranties must be true and correct in all material respects upon each borrowing, which the Borrowers expect to occur on an ongoing basis. There can be no assurance that the Borrowers will be able to comply with all such covenants and be able to continue to make such representations and warranties on an ongoing basis.
Approximately $21,891,000 was available for borrowing as of January 31, 2021.
As of January 31, 2021, long-term debt repayments are approximately as follows (in thousands):
|
|
|
|
|
|
Year ending January 31,
|
|
2022
|
$
|
887
|
|
2023
|
4,930
|
|
2024
|
238
|
|
2025
|
248
|
|
2026
|
258
|
|
Thereafter
|
3,879
|
|
Management believes that the carrying value of debt approximated fair value at January 31, 2021 and 2020, as all of the long-term debt bears interest at variable rates based on prevailing market conditions.
4. Retirement Plans
Pension Plans
The Company maintains two defined benefit pension plans, the Virco Employees Retirement Plan (“Employee Plan”), and the Virco Important Performers Retirement Plan (“VIP Plan”). The annual measurement date for both plans is January 31. The Company and its subsidiaries cover all employees hired prior to December 31, 2003 under the Employee Plan, which is a qualified noncontributory defined benefit retirement plan. Benefits under the Employee Plan are based on years of service and career average earnings. Benefit accruals under the Employee Plan were frozen effective December 31, 2003. All benefits were fully vested as of January 31, 2021 and 2020.
The Company also provides a supplementary retirement plan for certain key employees, the VIP Plan. The VIP Plan provides a benefit up to 50% of average compensation for the last five years in the VIP Plan offset by benefits earned under the Employee Plan. Benefit accruals under the VIP Plan were frozen effective December 31, 2003. Substantially all assets, consisting of life insurance contracts and cash equivalents, securing the VIP Plan are held in a rabbi trust. The cash surrender values of the life insurance policies are included in other assets and money market funds in the accompanying consolidated balance sheets. The cash surrender values of the life insurance policies securing the VIP Plan were $3,430,000 and $3,384,000 at January 31, 2021 and 2020, respectively. Death benefits payable under life insurance policies held by the Plan were approximately $8,845,000 and $8,919,000 at January 31, 2021 and 2020, respectively.
Accounting policy regarding pensions requires management to make complex and subjective estimates and assumptions relating to amounts which are inherently uncertain. Three primary economic assumptions influence the reported values of plan liabilities and pension costs. The Company takes the following factors into consideration: discount rate, assumed rate of return and rate of increase in compensation.
The discount rate represents an estimate of the rate of return on a portfolio of high-quality, fixed-income securities that would provide cash flows that match the expected benefit payment stream from the plans. When setting the discount rate, the Company utilizes a spot-rate yield curve developed from high-quality bonds currently available which reflects changes in rates that have occurred over the past year. This assumption is sensitive to movements in market rates that have occurred since the preceding valuation date, and therefore, may change from year to year. Discount rate ranges for the Employee Plan and the VIP Plan 2.75% - 2.80% and 3.00% - 3.05% at January 31, 2021 and 2020, respectively.
Because the Company’s future benefit accruals for both benefit plans were frozen in 2003, the compensation increase assumption had no impact on pension expense, accumulated benefit obligation or projected benefit obligation for the period ended January 31, 2021 or 2020.
The assumed rate of return on plan assets represents an estimate of long-term returns available to investors who hold a mixture of stocks, bonds and cash equivalent securities. When setting its expected return on plan asset assumptions, the Company considers long-term rates of return on various asset classes (both historical and forecasted, using data collected from various sources generally regarded as authoritative) in the context of expected long-term average asset allocations for its defined benefit pension plan.
The Company maintains a trust for and funds the pension obligations for the Employee Plan. The Board of Directors appoints a Retirement Plan Committee that establishes a policy for investment and funding strategies. Approximately 49% of the trust assets are managed by investment advisors and held in common trust funds with the balance managed by the Retirement Plan Committee. The Retirement Plan Committee has established target asset allocations for its investment advisors, who invest the trust assets in a variety of institutional collective trust funds. The Company’s investment advisors have developed a funding strategy that moves fund asset allocation from equity and other investments to fixed income instruments designed to mirror the changes in discount rates as the Plan becomes more fully funded. At January 31, 2021, approximately 12% of the trust assets were held in these investments. The Retirement Plan Committee receives quarterly reports addressing investment returns, funded status of the plan and progress on the glidepath to fully funded status from the investment advisors and meets periodically with them to discuss investment performance. At January 31, 2021 and 2020, the amount of the plan assets invested in bond or short-term investment funds was 15% and 16%, respectively, and the balance of the trust was held in equity funds or other investments. The trust does not hold any Company stock.
It is the Company's policy to contribute adequate funds to the trust accounts to cover benefit payments under the VIP Plan and to maintain the funded status of the Employee Plan at a level which is adequate to avoid significant restrictions to the Employee Plan under the Pension Protection Act of 2006. Contributions to the Qualified Plan Trust and benefit payments under the VIP Plan totaled $604,000 in fiscal 2021 and $954,000 in fiscal 2020. Contributions during fiscal 2022 will depend upon actual investment results and benefit payments but are anticipated to be approximately $428,000. At January 31, 2021, accumulated other comprehensive loss of approximately $13.6 million, net of tax, is attributable to the pension plans.
The Company does not anticipate making any significant changes to the pension assumptions in the near future. If the Company were to have used different assumptions in the fiscal year ended January 31, 2021, a 1% reduction in investment return would have increased expense by approximately $210,000, a 1% change in the rate of compensation increase would have no impact, and a 1% reduction in discount rates would cause obligations under the Plans to increase by approximately $6.7 million and increase pension expense by approximately $800,000.
The following tables set forth (in thousands) the combined funded status of the Company’s pension plans at January 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Employee Retirement Plans
|
|
1/31/2021
|
|
1/31/2020
|
|
Change in Benefit Obligation
|
Benefit obligation at beginning of year
|
$
|
43,292
|
|
|
$
|
36,299
|
|
|
Service cost
|
—
|
|
|
—
|
|
|
Interest cost
|
1,211
|
|
|
1,382
|
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
Amendments
|
—
|
|
|
—
|
|
|
Actuarial losses (gains)
|
1,588
|
|
|
8,280
|
|
|
Plan settlement
|
—
|
|
|
—
|
|
|
Benefits paid
|
(1,913)
|
|
|
(2,669)
|
|
|
Benefit obligation at end of year
|
$
|
44,178
|
|
|
$
|
43,292
|
|
|
Change in Plan Assets
|
|
|
|
|
Fair value at beginning of year
|
$
|
23,654
|
|
|
$
|
23,527
|
|
|
Actual return on plan assets
|
1,591
|
|
|
1,806
|
|
|
Company contributions
|
640
|
|
|
990
|
|
|
Settlements
|
—
|
|
|
—
|
|
|
Benefits paid
|
(1,913)
|
|
|
(2,669)
|
|
|
Fair value at end of year
|
$
|
23,972
|
|
|
$
|
23,654
|
|
|
Funded Status
|
|
|
|
|
Unfunded status of the plans
|
$
|
(20,206)
|
|
|
$
|
(19,638)
|
|
|
Amounts Recognized in Statement of Financial Position
|
|
|
|
|
Current liabilities
|
$
|
(364)
|
|
|
$
|
(314)
|
|
|
Non-current liabilities
|
(19,842)
|
|
|
(19,324)
|
|
|
Accrued benefit cost
|
$
|
(20,206)
|
|
|
$
|
(19,638)
|
|
|
Amounts Recognized in Statement of Financial Position and Operations
|
|
|
|
|
Accrued benefit liability
|
(20,206)
|
|
|
(19,638)
|
|
|
Accumulated other compensation loss
|
14,444
|
|
|
15,427
|
|
|
Net amount recognized
|
$
|
(5,762)
|
|
|
$
|
(4,211)
|
|
|
Items not yet Recognized as a Component of Net Periodic Pension Expense, Included in AOCI
|
|
|
|
|
Unrecognized net actuarial loss
|
$
|
14,444
|
|
|
$
|
15,427
|
|
|
Unamortized prior service costs
|
—
|
|
|
—
|
|
|
Net initial asset recognition
|
—
|
|
|
—
|
|
|
|
$
|
14,444
|
|
|
$
|
15,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Employee Retirement Plans
|
|
1/31/2021
|
|
1/31/2020
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
|
Net loss
|
$
|
849
|
|
|
$
|
7,885
|
|
|
Prior service cost
|
—
|
|
|
—
|
|
|
Amortization of loss
|
(1,831)
|
|
|
(776)
|
|
|
Amortization of prior service cost (credit)
|
—
|
|
|
—
|
|
|
Amortization of initial asset
|
—
|
|
|
—
|
|
|
Total recognized in other comprehensive (loss) income
|
$
|
(982)
|
|
|
$
|
7,109
|
|
|
Items to be Recognized as a Component of Periodic Pension Cost for next fiscal year
|
|
|
|
|
Prior service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
Net actuarial loss
|
1,771
|
|
|
1,872
|
|
|
|
$
|
1,771
|
|
|
$
|
1,872
|
|
|
Supplemental Data
|
|
|
|
|
Projected benefit obligation
|
$
|
44,178
|
|
|
$
|
43,292
|
|
|
Accumulated benefit obligation
|
44,178
|
|
|
43,292
|
|
|
Fair value of plan assets
|
23,972
|
|
|
23,654
|
|
|
Components of Net Cost
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
1,211
|
|
|
1,382
|
|
|
Expected return on plan assets
|
(869)
|
|
|
(1,432)
|
|
|
Amortization of transition amount
|
—
|
|
|
—
|
|
|
Recognized (gain) loss due to settlement
|
—
|
|
|
—
|
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
Recognized net actuarial loss
|
1,831
|
|
|
776
|
|
|
Benefit cost
|
$
|
2,173
|
|
|
$
|
726
|
|
|
Estimated Future Benefit Payments
|
|
|
|
|
FYE 01-31-2022
|
$
|
6,724
|
|
|
|
|
FYE 01-31-2023
|
3,122
|
|
|
|
|
FYE 01-31-2024
|
2,791
|
|
|
|
|
FYE 01-31-2025
|
3,169
|
|
|
|
|
FYE 01-31-2026
|
2,647
|
|
|
|
|
FYE 01-31-2027 to 2031
|
11,917
|
|
|
|
|
Total
|
$
|
30,370
|
|
|
|
|
Weighted Average Assumptions to Determine Benefit Obligations at
Year-End
|
|
|
|
|
Discount rate
|
2.75% -2.80%
|
|
3.00% - 3.05%
|
|
Rate of compensation increase
|
N/A
|
|
N/A
|
|
Weighted Average Assumptions to Determine Net Periodic Pension Cost
|
|
|
|
|
Discount rate
|
3.00% - 3.05%
|
|
4.10%
|
|
Expected return on plan assets
|
6.00%
|
|
6.50%
|
|
Rate of compensation increase
|
N/A
|
|
N/A
|
|
The Employee Plan held no Level 2 or 3 investments at January 31, 2021 and 2020. The following table sets for the fair value of the Level 1 investments for the Employee Plan as of January 31, 2021 and 2020 (in thousands):
Fair Value Measurements of Plan Assets
Employee Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
1/31/2021
|
|
1/31/2020
|
Level 1 Measurement
|
|
|
|
Common Stock
|
10,323
|
|
|
10,080
|
|
Principal Money Market
|
458
|
|
|
799
|
|
PNC Govt Money Fund
|
271
|
|
|
175
|
|
Vanguard INTM Term Investment
|
410
|
|
|
250
|
|
Vanguard LT Investment
|
1,044
|
|
|
1,161
|
|
Ishares Russell 2000
|
1,724
|
|
|
1,560
|
|
Ishares Russell MID-CAP
|
1,890
|
|
|
1,850
|
|
Ishares Emerging Markets
|
1,191
|
|
|
1,103
|
|
Ishares MCSI RAFE
|
1,636
|
|
|
1,577
|
|
Ishares S&P Index
|
2,091
|
|
|
2,252
|
|
Vanguard INTM Term Treasury
|
410
|
|
|
250
|
|
Vanguard LT Treasury
|
1,047
|
|
|
1,183
|
|
Total Level 1 Investments
|
$
|
22,495
|
|
|
$
|
22,240
|
|
In addition to the holdings above, the Employee Plan has a holding in a mutual fund investment, Managed Investment Fund. The mutual fund investment is valued using the net asset value (“NAV”) as a practical expedient and is not required to be categorized in the fair value hierarchy table. The total fair value of this investment was $1,454,000 and $1,414,000 as of January 31, 2021 and 2020, respectively, and is not included in the table above. In relation to this investment, there is no unfunded commitments and the shares can be redeemed on a daily basis with minimal restrictions. Events that may lead to a restriction to transact with the fund is not considered probable.
401(k) Retirement Plan
The Company’s retirement plan, which covers all U.S. employees, allows participants to defer from 1% to 75% of their eligible compensation through a 401(k)-retirement program. Through December 31, 2001, the plan included an employee stock ownership component. The plan continues to include Virco stock as one of the investment options. At January 31, 2021 and 2020, the plan held 915,542 shares and 706,654 shares of the Company’s common stock, respectively. Effective January 1, 2019, the Company initiated an employer match. For the fiscal years ended January 31, 2021 and 2020, the compensation costs incurred for employer match was $774,000 and $765,000, respectively.
Life Insurance
The Company provided post-retirement life insurance to certain retired employees under the Dual Option Life Insurance Plan (the "Plan"). Effective January 2004, the Company terminated this plan for active employees. The Company has purchased split-dollar life insurance on the lives of the remaining covered participants. Death benefits due to participants are approximately $2,250,000. Cash surrender values of these policies, which are included in other assets in the accompanying consolidated balance sheets, were $1,895,000 and $1,906,000 at January 31, 2021 and 2020, respectively. Death benefits payable under the policies were approximately $3,917,000 and $3,902,000 at January 31, 2021 and 2020, respectively. Death benefits received under the Plan in excess of the benefit obligation will be retained in the trust and used to secure and fund benefits payable under the VIP Pension Plan. The Company maintains a rabbi trust to hold assets related to the Dual Option Life Insurance Plan. All assets securing this plan are held in the rabbi trust.
The following sets forth the Company's change in death benefits payable during the years ended January 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
1/31/2021
|
|
1/31/2020
|
Liability beginning of year
|
$
|
1,986,000
|
|
|
$
|
2,037,000
|
|
Accretion expense
|
48,000
|
|
|
49,000
|
|
Death benefits paid
|
—
|
|
|
(100,000)
|
|
Liability end of year
|
$
|
2,034,000
|
|
|
$
|
1,986,000
|
|
5. Stock-Based Compensation
Stock Incentive Plans
The Company's two stock plans are the 2019 Employee Stock Incentive Plan (the “2019 Plan”) and the 2011 Employee Incentive Stock Plan (the “2011 Plan”).
Under the 2019 Plan, the Company may grant an aggregate of 1,000,000 shares to its employees in the form of restricted stock units and non-employee directors in the form of restricted stock awards. Restricted stock units and awards granted under the 2019 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its restricted stock units or awards and related compensation expense as the difference between the market value of the units or awards on the date of grant less the exercise price of the units or awards granted. During fiscal year 2021, the Company granted 94,695 awards to non-employee directors, vested 45,600 shares according to their terms and forfeited 0 shares under the 2019 Plan. As of January 31, 2021, there were approximately 677,305 shares available for future issuance under the 2019 Plan.
Under the 2011 Plan, the Company may grant an aggregate of 2,000,000 shares to its employees in the form of restricted stock units and non-employee directors in the form of restricted stock awards. Restricted stock units and awards granted under the 2011 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its restricted stock units or awards and related compensation expense as the difference between the market value of the units or awards on the date of grant less the exercise price of the units or awards granted. During fiscal year 2021, the Company granted 0 restricted awards to non-employee directors and 0 units to its employees; vested 59,385 stock awards and 119,200 units according to their terms and forfeited 0 stock units under the 2011 Plan. As of January 31, 2021, there were approximately 32,892 shares available for future issuance under the 2011 Plan.
During fiscal year 2021, stock-based compensation expense related to restricted stock units and awards recognized in cost of goods sold and selling, general and administrative expenses was $257,000 and $755,000, respectively. During fiscal year 2020, stock-based compensation expense related to restricted stock units and/or awards recognized in cost of goods sold and selling, general and administrative expenses was $239,000 and $685,000, respectively.
Accounting for the Plans
A summary of the Company’s restricted stock unit awards activity, and related information for the following years ended January 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Restricted stock units
|
|
Weighted- Average Exercise Price
|
|
Restricted stock units
|
|
Weighted- Average Exercise Price
|
Outstanding at beginning of year
|
|
740,985
|
|
|
$
|
4.54
|
|
|
501,155
|
|
|
$
|
4.44
|
|
Granted
|
|
94,695
|
|
|
2.64
|
|
|
547,385
|
|
|
4.38
|
|
Exercised
|
|
(224,185)
|
|
|
2.60
|
|
|
(223,555)
|
|
|
4.45
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
(84,000)
|
|
|
4.51
|
|
Outstanding at end of year
|
|
611,495
|
|
|
4.26
|
|
|
740,985
|
|
|
4.54
|
|
Weighted-average fair value of restricted stock units granted during the year
|
|
|
|
2.64
|
|
|
|
|
4.38
|
|
The aggregate fair value of restricted stock awards vested during fiscal years 2021 and 2020 was $582,881 and $994,820, respectively. The Company recognized compensation expense, net of forfeitures, for the restricted stock awards of $1,012,000 and $924,000 for fiscal 2021 and 2020, respectively. The Company records forfeitures as incurred.
The weighted-average grant-date fair value of restricted stock awards is the quoted market price of the Company’s common stock on the date of grant, as shown in the table above. The weighted-average grant-date fair value of restricted stock awards granted in fiscal 2021 and 2020 was $2.64 per share and $4.38 per share, respectively.
As of January 31, 2021, there was $1.9 million of total unrecognized compensation expense related to restricted stock awards. That expense is expected to be recognized over a weighted-average period of 2.95 years.
To satisfy employee minimum statutory tax withholding requirements for restricted stock awards that vest, the Company withholds and retires a portion of the vesting common shares, unless an employee elects to pay cash. In fiscal 2021 and 2020, the Company withheld 54,402 and 55,792 common shares, respectively, with a total value of approximately $156,000 and $246,000, respectively. These amounts are presented as a cash outflow from financing activities in the accompanying consolidated statement of cash flows.
6. Income Taxes
The income tax (benefit) expense for the last two years is reconciled to the statutory federal income tax rates of 21% for the tax years ended January 31, respectively, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Statutory
|
$
|
(625)
|
|
|
$
|
585
|
|
State taxes (net of federal tax)
|
9
|
|
|
400
|
|
Change in valuation allowance
|
(119)
|
|
|
(573)
|
|
State rate adjustment
|
(104)
|
|
|
(291)
|
|
Change in unrecognized tax benefits
|
(4)
|
|
|
20
|
|
Stock Compensation
|
85
|
|
|
(28)
|
|
Expirations of attributes
|
16
|
|
|
345
|
|
Permanent differences
|
11
|
|
|
(17)
|
|
Return to provision
|
(13)
|
|
|
(96)
|
|
Income tax (benefit) expense
|
$
|
(744)
|
|
|
$
|
345
|
|
Significant components of the (benefit) expense for income taxes attributed to continuing operations are as follows for the years ended January 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Current
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
State
|
(2)
|
|
|
136
|
|
|
(2)
|
|
|
136
|
|
Deferred
|
|
|
|
Federal
|
(555)
|
|
|
442
|
|
State
|
(68)
|
|
|
340
|
|
|
(623)
|
|
|
782
|
|
Change in valuation allowance
|
(119)
|
|
|
(573)
|
|
|
(742)
|
|
|
209
|
|
Income tax (benefit) expense
|
$
|
(744)
|
|
|
$
|
345
|
|
Deferred tax assets and liabilities are comprised of the following as of January 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Deferred tax assets
|
|
|
|
Accrued vacation and sick leave
|
$
|
835
|
|
|
$
|
1,264
|
|
Retirement plans
|
5,657
|
|
|
5,448
|
|
Insurance reserves
|
293
|
|
|
443
|
|
Warranty
|
181
|
|
|
207
|
|
Net operating loss carryforwards
|
4,501
|
|
|
3,658
|
|
Right of use liabilities
|
5,237
|
|
|
6,067
|
|
Inventory
|
1,287
|
|
|
1,175
|
|
Business interest expense limitation
|
—
|
|
|
224
|
|
Other
|
324
|
|
|
301
|
|
|
$
|
18,315
|
|
|
$
|
18,787
|
|
Deferred tax liabilities
|
|
|
|
Tax in excess of book depreciation
|
$
|
(924)
|
|
|
$
|
(802)
|
|
Right of use assets
|
(4,541)
|
|
|
(5,519)
|
|
Other
|
(70)
|
|
|
(53)
|
|
|
$
|
(5,535)
|
|
|
$
|
(6,374)
|
|
Valuation allowance
|
(1,064)
|
|
|
(1,183)
|
|
Net long term deferred tax asset
|
$
|
11,716
|
|
|
$
|
11,230
|
|
In assessing the realizability of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of its deferred tax assets will not be realized. 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. As a part of this evaluation, the Company assesses all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, the availability of tax carrybacks, tax-planning strategies, and results of recent operations (including cumulative losses in recent years), to determine whether sufficient future taxable income will be generated to realize existing deferred tax assets. On the basis of this evaluation, and after considering future reversals of existing taxable temporary differences and the effects of seasonality on the Company’s business, the Company determined that its U.S. federal deferred tax assets are more likely than not to be realizable, but that valuation allowances of $1,064,000 are needed for certain state NOL’s to reduce the carrying amount of deferred tax assets to an amount that is more likely than not to be realized. At January 31, 2021, the Company has net operating loss carryforwards of approximately $12,897,000 for U.S. federal, with no expirations, and $29,891,000 for state income tax purposes, expiring at various dates through January 31, 2039.
The following table summarizes the activity related to our gross unrecognized tax benefits for the years ended January 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Balances as of February 1,
|
$
|
60
|
|
|
$
|
38
|
|
Increases related to prior year tax positions
|
—
|
|
|
8
|
|
Decreases related to prior year tax positions
|
(4)
|
|
|
—
|
|
Increases related to current year tax positions
|
8
|
|
|
18
|
|
Decreases related to lapsing of statute of limitations
|
(10)
|
|
|
(4)
|
|
Balance as of January 31,
|
$
|
54
|
|
|
$
|
60
|
|
At January 31, 2021, the Company’s unrecognized tax benefits associated with uncertain tax positions were $54,000, of which $43,000 if recognized, would favorably affect the effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense which is consistent with the recognition of the items in prior reporting. The Company had recorded a liability for interest and penalties related to unrecognized tax benefits of $11,000 at January 31, 2021, and $10,000 at January 31, 2020. The year ended January 31, 2017 and subsequent years remain open for examination by the IRS and state tax authorities. The Company is
currently under IRS examination for fiscal year ended January 31, 2016. The Company is not currently under state examinations.
The specific timing of when the resolution of each tax position will be reached is uncertain. As of January 31, 2021, it is reasonably possible that unrecognized tax benefits will decrease by $6,000 within the next 12 months due to the expiration of the statute of limitations.
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The Company has performed an analysis of the impact of the CARES Act and have determined that the impact would not be significant. There were several provisions of the CARES Act that impact Company's fiscal 2020 tax filings, but were not included in the determination of the tax provision due to the date of enactment after January 31, 2020.
The CARES Act provides single-employer pension companies additional time to meet the funding obligations. The Company has deferred the timing of funding contributions to a new due date of January 1, 2021. Consequently, the tax deduction related to such contributions will be deferred until the funding payment is made. The CARES Act also modifies the limitation for business interest expense deduction. The new limitation has increased from 30 to 50 percent of adjusted taxable income. As of the issuance of this report, the Company continues to evaluate the impact of the CARES Act.
7. Leases and Commitments
The Company has operating leases on real property, equipment, and automobiles that expire at various dates. The Company determines if an arrangement is a lease at inception and assesses classification of the lease at commencement. All of the Company’s leases are classified as operating leases, as a lessee. Beginning on the first day of fiscal 2020, the Company adopted ASC 842 to account for its leases. Pursuant to ASC 842, the Company uses the implicit rate when readily determinable, or the incremental borrowing rate. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments using company specific credit spreads. The Company’s lease terms include options to extend or terminate the lease only when it is reasonably certain that we will exercise that option. Lease expense for our operating leases is recognized on a straight-line basis over the lease term.
The Company has an operating lease for its corporate office, manufacturing and distribution facility located in Torrance, CA, currently with a remaining lease term through April 30, 2025. The Company leases equipment under a 5-year operating lease arrangement. The Company has the option of buying the assets at the end of the lease period at a price that does not result in the Company being reasonably certain of exercising the option. In addition, the Company leases trucks, automobiles, and forklifts under operating leases that include certain fleet management and maintenance services. Certain of the leases contain renewal or purchase options and require payment for property taxes and insurance. The Company records lease expense on a straight-line basis based on the contractual lease payments. In accordance with ASC 842, the Company recognizes the present value of the future lease commitments as an operating lease liability, and a corresponding right-of-use asset ("ROU asset"), net of tenant allowances. Tenant improvements and related tenant allowances are recorded as a reduction to the ROU asset. The Company elected to account for leases with an original term of 12 months or less that do not contain a purchase option as short-term leases. Additionally, certain of the leases provide for variable payment for property taxes, insurance, and common area maintenance payments among others. The Company recognizes variable lease expenses for these leases in the period incurred. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
In accordance with ASC 842, quantitative information regarding our leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve-Months Ended
|
|
Twelve-months ended
|
|
1/31/2021
|
|
1/31/2020
|
|
(in thousands)
|
|
|
|
|
Operating lease cost
|
$
|
5,742
|
|
|
$
|
5,435
|
|
Short-term lease cost
|
263
|
|
|
149
|
|
Short-term sublease income
|
(40)
|
|
|
(40)
|
|
Variable lease cost
|
766
|
|
|
892
|
|
Total lease cost
|
$
|
6,731
|
|
|
$
|
6,436
|
|
|
|
|
|
|
|
|
|
Other operating leases information:
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
5,163,000
|
|
|
$
|
5,435,000
|
|
Right-of-use assets obtained in exchange for new lease liabilities
|
$
|
622,000
|
|
|
$
|
1,613,000
|
|
Weighted-average remaining lease term (years)
|
4.06
|
|
4.95
|
Weighted-average discount rate
|
6.41
|
%
|
|
6.38
|
%
|
Minimum future lease payments (in thousands) for operating leases in effect as of January 31, 2021, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Operating Lease
|
Year ending January 31,
|
|
|
2022
|
|
$
|
5,822
|
|
2023
|
|
5,398
|
|
2024
|
|
5,261
|
|
2025
|
|
5,370
|
|
2026
|
|
1,349
|
|
Thereafter
|
|
—
|
|
Remaining balance of lease payments
|
|
$
|
23,200
|
|
|
|
|
Short-term lease liabilities
|
|
$
|
4,672
|
|
Long-term lease liabilities
|
|
15,619
|
|
Total lease liabilities
|
|
$
|
20,291
|
|
|
|
|
Difference between undiscounted cash flows and discounted cash flows
|
|
$
|
2,909
|
|
8. Contingencies
The Company and other furniture manufacturers are subject to federal, state and local laws and regulations relating to the discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and hazardous materials. The Company has expended, and expects to continue to spend, significant amounts in the future to comply with environmental laws. Normal recurring expenses relating to operating the Company factories in a manner that meets or exceeds environmental laws are matched to the cost of producing inventory. Despite the Company’s significant dedication to operating in compliance with applicable laws, there is a risk that the Company could fail to comply with a regulation or that applicable laws and regulations change. On these occasions, the Company records liabilities for remediation costs when remediation costs are probable and can be reasonably estimated.
The Company is subject to contingencies pursuant to environmental laws and regulations that in the future may require the Company to take action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the Company or other parties.
The Company has a self-insured retention for product and general liability losses up to $250,000 per occurrence, workers’ compensation liability losses up to $250,000 per occurrence and automobile liability losses up to $50,000 per occurrence. The Company has purchased insurance to cover losses in excess of the retention up to a limit of $30,000,000. The Company has obtained an actuarial estimate of its total expected future losses for liability claims and recorded a liability equal to the net present value of $1,135,000 and $1,700,000 at January 31, 2021 and 2020, respectively, based upon the Company’s estimated payout period of five years using a 4.0% and 4.0% discount rate, respectively.
Workers’ compensation, automobile, general and product liability claims may be asserted in the future for events not currently known by management. Management does not anticipate that any related settlement, after consideration of the existing reserve for claims incurred and potential insurance recovery, would have a material adverse effect on the Company’s financial position, results of operations or cash flows. Estimated payments under the self-insurance programs are as follows (in thousands):
|
|
|
|
|
|
Year ending January 31,
|
|
2022
|
$
|
200
|
|
2023
|
225
|
|
2024
|
225
|
|
2025
|
225
|
|
2026
|
225
|
|
Thereafter
|
75
|
|
Total
|
$
|
1,175
|
|
Discount to net present value
|
(40)
|
|
|
$
|
1,135
|
|
The Company and its subsidiaries are defendants in various legal proceedings resulting from operations in the normal course of business. It is the opinion of management, in consultation with legal counsel, that the ultimate outcome of all such matters will not materially affect the Company’s financial position, results of operations or cash flows.
9. Warranty
The Company provides a warranty against all substantial defects in material and workmanship. The standard warranty offered on products sold through January 31, 2013 is ten years. Effective February 1, 2014 the Company modified its warranty to a limited lifetime warranty. The warranty effective February 1, 2014 is not anticipated to have a significant effect on warranty expense. Effective January 1, 2017, the Company modified the warranty offered to provide specific warranty periods by product component, with no warranty period longer than ten years. The Company’s warranty is not a guarantee of service life, which depends upon events outside the Company’s control and may be different from the warranty period. The Company accrues an estimate of its exposure to warranty claims based upon both product sales data and an analysis of actual warranty claims incurred. The following is a summary of the Company’s warranty-claim activity during for the years ended January 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Beginning balance
|
|
$
|
800
|
|
|
$
|
700
|
|
Provision for current year
|
|
380
|
|
|
570
|
|
Benefits from prior years
|
|
(325)
|
|
|
(145)
|
|
Costs incurred
|
|
(155)
|
|
|
(325)
|
|
Ending balance
|
|
$
|
700
|
|
|
$
|
800
|
|
10. Subsequent Events
None