2011 ANNUAL RE POR T
VIRCO M FG. C OR PO R AT IO N
May 2, 2012
To Our Stockholders:
The long slump in public school funding continued to hurt us in 2011. As we noted in last year’s letter, the officially
proclaimed ‘end’ of the Great Recession has failed to reach the tax- and bond-funded segments of the public sector,
which are still struggling with shrinking budgets and painful re-organizations.
This delayed, drawn-out recovery has been hard on everybody, including the educators, administrators, students and
communities we have served since our founding in 1950. Quite simply, this is the worst recession we’ve ever dealt
with. Its depth and longevity have challenged us to find entirely new ways of cutting costs while preserving the key
assets we’ll need to support the recovery when it finally comes.
That, of course, is the question: Will there be a recovery, and if so, when? Every call of a bottom to this trough has
turned out to be early. Last year we saw encouraging upward trends in agricultural and resource-based communities,
as they invested strongly in their own futures with progressive new schools and education programs. Unfortunately
for us, these localized pockets of recovery weren’t large enough to offset the downturn in major metropolitan and
suburban communities where most American students are enrolled.
One bottom we do believe we can call is the trend toward outsourcing American classroom furniture. In previous
letters we’ve explained what we call the ‘price/cube threshold’—an economic barrier to entry where freight costs,
delivery delays, and the financing of extended supply chains offset savings from cheap labor. In anticipation of what
some pundits now call ‘on-shoring,’ we’ve been steadily investing in the most advanced CNC fabrication equipment to
keep our U.S. factories globally competitive. For the past decade, and thanks partly to the flexibility of this equipment,
we’ve led our industry in new designs, patent awards, breadth of color offerings and custom finishes.
Now we’re seeing a gratifying trend of being able to lead in total cost of delivery as well. Our vertical business model
operates on an integrated SAP technology platform that links front-end sales and project management with back-end
fabrication, warehousing, delivery and installation. In recent years we’ve invested just as heavily in selling and project
management technology as machinery. This has shortened our order-to-cash cycle and reduced our financial exposure
without limiting customer choice or service quality. Looking back two years, inventories have dropped by over 40%.
During this same period we more than doubled our make-to-order color palette and custom finish options, which have
proven popular on modern campuses. Through the early months of 2012 we’re seeing encouraging confirmation of
the customer appeal of our vertical model as orders track slightly ahead of last year.
Last year’s previously reported restructuring—now complete and fully accounted for in fiscal 2011 results—eliminated
between $9,000,000 -- $10,000,000 from our annual operating budget. With one-time restructuring charges of more
than $4,000,000 these two figures are roughly equal to last year’s operating loss. The restructuring charges won’t
be repeated this year. Combined with a modest price increase and stable raw material costs, we believe operations
are appropriately structured to generate a profit in fiscal 2012, even at currently reduced levels of revenue. Our
balance sheet remains strong. Despite the challenges of the past several years, we still have over $31,000,000 in net
tangible assets. Our debt-to-equity ratio is a conservative 2.05. We’ve retained our diversified production capabilities
and valuable contracts. We have a growing reference list of satisfied customers in every region of the country.
We’ve also made solid progress in international markets, some of which are trending more positively than domestic
markets. A number of developing countries have identified education as the best investment they can make for their
growing populations. Increasingly, they’re specifying forward-looking American designs for their most prestigious
schools, many of which are built on U.S. educational models.
We share this belief in education as the best insurance against an uncertain future. Creativity and intellectual flexibility
are a society’s most valuable currencies. Virco remains committed to fostering their growth both in America and the
rest of the world.
Sincerely,
Robert A. Virtue
President, Chairman of the Board and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:53)
Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the fiscal year ended January 31, 2012.
(cid:133)
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
(State or other jurisdiction of incorporation or organization)
95-1613718
(IRS Employer Identification No.)
2027 Harpers Way, Torrance, California
(Address of principal executive offices)
90501
(Zip Code)
Registrant’s telephone number, including area code (310) 533-0474
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 Par Value
Name of each exchange on which registered:
NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the issuer is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes (cid:31) No (cid:53)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes (cid:31) No (cid:59)
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 (cid:59) No (cid:31)
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 (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes (cid:59) No (cid:31)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. (cid:59)
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 (cid:133)
Accelerated filer (cid:133)
Non-accelerated filer (cid:133)
(Do not check if a smaller reporting company)
Smaller reporting company (cid:53)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes (cid:31) No (cid:59)
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on July 31, 2011, was
$36.5 million (based upon the closing price of the registrant’s common stock on such day, as reported by the NASDAQ).
As of April 1, 2012, there were 14,377,393 shares of the registrant’s common stock ($0.01 par value) outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2012 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission are incorporated by reference into Part III of this annual report on Form 10-K as set forth herein.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
POWER OF ATTORNEY
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
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20
20
21
21
22
23
24
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42
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69
70
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PART I
Cautionary Statement Regarding Forward-Looking Statements
This report on Form 10-K contains a number of “forward-looking statements” that reflect the Company’s current
views with respect to future events and financial performance, including, but not limited to, availability of funding
for educational institutions, statements regarding plans and objectives of management for future operations,
including plans and objectives relating to products, pricing, marketing, expansion, manufacturing processes, and
business strategies; the Company’s ability to continue to control costs and inventory levels; availability and cost of
raw materials, especially steel and petroleum-based products; the availability and cost of labor; the potential
impact of the Company’s “Assemble-To-Ship” program on earnings; market demand; the Company’s ability to
position itself in the market; references to current and future investments in and utilization of infrastructure;
statements relating to management’s beliefs that cash flow from current operations, existing cash reserves, and
available lines of credit will be sufficient to support the Company’s working capital requirements to fund existing
operations; references to expectations of future revenues; pricing; and seasonality.
Such statements involve known and unknown risks, uncertainties, assumptions and other factors, many of which are
out of the Company’s control and difficult to forecast, that may cause actual results to differ materially from those
which are anticipated. Such factors include, but are not limited to, changes in, or the Company’s ability to predict,
general economic conditions, the availability and cost of raw materials, the markets for school and office furniture
generally and specifically in areas and with customers with which the Company conducts its principal business
activities, the rate of approval of school bonds for the construction of new schools, the extent to which existing
schools order replacement furniture, customer confidence, competition and other factors included in the “Risk
Factors” section of this report.
In this report, words such as “anticipates,” “believes,” “expects,” “will continue,” “future,” “intends,” “plans,”
“estimates,” “projects,” “potential,” “budgets,” “may,” “could” and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as
of the date hereof.
Throughout this report, our fiscal years ended January 31, 2008, January 31, 2009, January 31, 2010, January 31,
2011 and January 31, 2012 are referred to as years 2007, 2008, 2009, 2010 and 2011, respectively.
Please note that this report includes trademarks of Virco, including, but not limited to, the following: ZUMA®,
ZUMAfrd™, Ph.D.®, I.Q.® Virtuoso®, Classic Series™, Martest 21®, Lunada ®, Plateau ®, Core-a-Gator ®,
Future Access ®, Sigma ®, Metaphor ®, Telos®, TEXT® and Parameter®. Solely for convenience, from time to time
we refer to our trademarks in this report without the ® and ™ symbols, but such references are not intended to
indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks. In addition,
other names and brands included in this report may be claimed by us as well or by third parties.
Item 1. Business
Introduction
Designing, producing and distributing high-value furniture for a diverse family of customers is a 62-year tradition at
Virco Mfg. Corporation (“Virco” or the “Company”, or in the first person, “we”, “us” and “our”). Virco was
incorporated in California in February 1950, and reincorporated in Delaware in April 1984. Though Virco started as
a local manufacturer of chairs and desks for Los Angeles-area schools, over the years, Virco has become the largest
manufacturer and supplier of moveable educational furniture and equipment for the preschool through 12th grade
market in the United States. The Company now manufactures a wide assortment of products, including mobile
tables, mobile storage equipment, desks, computer furniture, chairs, activity tables, folding chairs and folding tables.
Additionally, Virco has worked with accomplished designers — such as Peter Glass, Richard Holbrook, and Bob
Mills — to develop additional products for contemporary applications. These include the best-selling ZUMA® and
the recently introduced TEXT®, and Parameter® furniture collections, as well as Metaphor® and I.Q.® Series items
for educational settings; Ph.D.® and Ph.D. Executive seating lines; and the wide-ranging Plateau® Series.
In 2008, Virco introduced the TEXT table collection for learning environments. Designed by the award-winning
team of Peter Glass and Bob Mills, TEXT tables feature heavy-gauge tubular steel and proven Virco construction
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for extended product life, and elliptical legs, swooping yokes and arched feet for exceptional elegance. Selected
TEXT models can be equipped with a variety of technology-support and storage accessories. Lunada ® tables made
their debut at the end of 2008. Combining Virco’s popular Lunada bi-point bases with a selection of 20 top sizes,
Lunada tables make great choices for seminar, conference and related settings.
In 2009, Virco introduced Flip-Top Technology tables for computer classrooms and related environments. Flip-Top
Technology tables feature a 6” deep locking flip-top compartment that secures cables, surge protectors and wires
beneath the work surface. Also in 2009, utilizing our new flat metal forming capabilities, Virco introduced an array
of desks, returns and bookcases.
In 2010, Virco introduced Parameter®, an invigorating collection of desks, returns and credenzas for use by
teachers, principals and district administrators in their classrooms or offices. Parameter affordably combines all the
functionality — and more — of traditional mid-priced desks with high-end design elements. Virco’s flat metal
forming capabilities are used to manufacture Parameter items. Several new products were released in the second half
of 2010, including: Parameter and TEXT help desks for educators, which have a rounded work surface edge at one
end where students can comfortably pull up a chair for assistance with their work; Parameter mobile pedestals;
Parameter high-capacity wire management panels; Plateau adjustable-height tables; several 2000 Series “EL” (extra
large) classroom furniture models with an expanded seating surface; and a new collection of Virco vertical files.
In 2011, Virco introduced the Sage™ Contract and Civitas™ seating lines. Combining Virco’s super-comfortable
Sage shell with a sleek, new-look frame, Sage Contract chairs are great for offices and reception areas, colleges,
hospitality venues and other adult environments. Civitas chair and stool models – available in 18”, 25” and 30”
seat-heights with either a Sage, shell, an ergonomically contoured ZUMA® Series shell, or highly sustainable
ZUMAfrd™ seat and back components made of Fortified Recycled Wood™ hard plastic – provide exceptional
seating solutions for foodservice, libraries, media centers, circulation areas and related venues. Other 2011 product
releases included: 53 Series steel storage cabinets; an expanded range of 53 Series lateral files; special versions of
Virco’s 543 and 546 Series desks with wire management capabilities; HWT (hinged wire trough) technology tables
for computer labs and related applications; an array of 36” wide Plateau® Office Solutions and 2BC Series
bookcases; adjustable-height versions of Virco’s 120, 121 and 122 Series stools; and three ZUMA rocking chairs
with “bump” glides designed for environments where limited motion may be desired, such as areas for children with
severe sensory integration problems or Autism. Products targeted for release in 2012 include new 53 Series
wardrobe tower cabinets, a new collection of Sage rocking chairs, as well as additions to the Parameter line.
Virco’s impressive flat metal forming capabilities are further enhanced when combined with our Assemble-to-Ship
(“ATS”) strategy, which allows for the manufacture and storage of common components during the portion of the
year when demand for our product is low followed by assembly to customer-specific combinations prior to
shipment. The combination of flat metal forming and ATS enables Virco to offer an array of desks at three price
points that provide a variety of furniture solutions for customer applications in a wide range of environments.
As of January 31, 2012, the Company’s employment force was approximately 825 strong, manufacturing its
products in 1.1 million square feet of fabrication facilities and 1.2 million square feet of assembly and warehousing
facilities in Torrance, California and Conway, Arkansas. Additionally, the Company’s PlanSCAPE® project
management software allows its sales representatives to provide CAD layouts of classrooms, as well as classroom-
by-classroom planning documents for the budgeting, acquisition and installation of furniture, fixtures and equipment
(“FF&E”).
In recent years, due to budgetary pressures, many schools have reduced or eliminated central warehouses, janitorial
services, and professional purchasing functions. As a result, fewer school districts administer their own bids, and
are more likely to use regional, state, or national contracts. A shift to site-based management combined with
reductions in professional purchasing personnel has increased the reliance of schools on suppliers that provide for a
variety of needs from one source rather than administering different vendor relationships for each item. In response
to these changes, the Company has expanded both the products and the services it provides to its educational
customers. Now, in addition to buying furniture FOB Factory, customers can purchase furniture for delivery to
warehouses and school sites, and can also purchase full-service furniture delivery that includes the installation of the
furniture in classrooms. Because the Company has been aggressively developing new furniture lines to enhance the
range of products it manufactures — and by purchasing furniture and equipment from other companies for re-sale
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with Virco products — the Company is now able to provide “one-stop shopping” for all furniture, fixtures and
equipment needs in the K-12 market.
The expansion of the Company’s product line combined with the expansion of its services over the years has
provided Virco with the ability to serve various markets including the education market (the Company’s primary
market), which is made up of public and private schools (preschool through 12th grade), junior and community
colleges; four-year colleges and universities; trade, technical and vocational schools; convention centers and arenas;
the hospitality industry with respect to banquet and meeting facilities; government facilities at the federal, state,
county and municipal levels; and places of worship. In addition, the Company also sells to wholesalers, distributors,
traditional retailers and catalog retailers that serve these same markets.
Virco serves its customers through a well-trained, nationwide sales and support team. Virco’s educational product
line is marketed through an extensive direct sales force, as well as through a growing dealer network. In addition,
Virco has a Corporate Sales Group to pursue wholesalers, mail order accounts and national chains where
management believes that it would be more efficient to have a single sales representative or group service such
customers, as they tend to have needs that transcend the geographic boundaries established for Virco’s local
accounts. The Company also has an array of support services, including complete package solutions for the
furniture, fixtures and equipment line item on school budgets; computer-assisted layout planning; transportation
planning; and product delivery, installation, and repair.
Another important element of Virco’s business model is the Company’s emphasis on developing and maintaining
key manufacturing, assembly, distribution, and service capabilities. For example, Virco has developed
competencies in several manufacturing processes that are important to the markets the Company serves, such as
finishing systems, plastic molding, metal fabrication and woodworking. Virco’s physical facilities are designed to
support its ATS strategy. Warehouses have substantial staging areas combined with a large number of dock doors to
support the seasonal peak in shipments during summer months.
During the last decade, many furniture manufacturers closed their domestic manufacturing facilities and began
importing increasing quantities of furniture from international sources. During this same period, Virco elected to
significantly reduce its work force, but retain its domestic factory locations. In recent years, the Company believes
that its domestic manufacturing capabilities have evolved into a significant strength. The Company has effectively
used product selection, color selection, and dependable execution of delivery and installation to customers to
enhance its market position. With increasing costs from international sources and increasing freight costs, our
factories are cost-competitive for bulky educational furniture and equipment items. The Company’s ATS strategy
allows for low-cube component parts to be sourced globally, with fabrication of bulky welded steel frames, wood
tops, and larger molded-plastic components to be performed locally. Domestic production of laminated wood tops
and molded plastic enables the Company to market a color palette that cannot be matched in a short delivery
window by imported finished goods. Domestic assembly allows the Company to use standard ATS components to
assemble customer-specific product and color combinations shortly prior to delivery and installation.
Finally, management continues to hone Virco’s ability to finance, manufacture and warehouse furniture within the
relatively narrow delivery window associated with the highly seasonal demand for education sales. In 2010 and
2011, approximately 50% of the Company’s total sales were delivered in June, July, and August with an even higher
portion of educational sales delivered in that period. Shipments of furniture in July and August can be six times
greater than in the seasonally slow winter months. Virco’s substantial warehouse space allows the Company to
build adequate inventories to service this narrow delivery window for the education market.
Principal Products
Virco produces the broadest line of furniture for the K-12 market of any manufacturer in the United States. By
supplementing products manufactured by Virco with products from other manufacturers, Virco provides a
comprehensive product assortment that covers substantially all products and price points that are traditionally
included on the furniture, fixtures and equipment line item on a new school project or school budget. Virco also
provides a variety of products for preschool markets and has recently developed products that are targeted for
college, university, and corporate learning center environments. The Company has an ambitious and on-going
product development program featuring products developed in-house as well as products developed with
accomplished designers. The Company’s primary furniture lines are constructed of tubular metal legs and frames,
5
combined with wood and plastic tops, plastic seats and backs, upholstered seats and backs, and upholstered rigid
polyethylene and polypropylene shells. Virco also has flat metal forming capabilities to enable the production of
desks, returns, bookcases, filing cabinets, mobile pedestals and related items.
Virco’s principal manufactured products include:
SEATING — Launched in 2004, the ergonomically supportive ZUMA® line designed by Peter Glass and Bob Mills
posted the highest initial-year new product sales total in the Company’s history. Recent additions to the ZUMA line
include two cantilever chairs with 13” and 15” seat heights; a tablet arm chair with a compact footprint; two rockers
with 13” and 15” seat heights; and a chair with an articulating tablet arm which was introduced in Virco’s 2009
Equipment for Educators™ catalog. The ZUMAfrd™ collection, introduced in 2005, features Fortified Recycled
Wood™ hard plastic seats, backrests and work surfaces. ZUMAfrd products have up to 70% recycled content and
are 98% recyclable. The Sage™ line, designed to serve students in college, university and other adult education
settings, and on high school campuses, was introduced in late 2006. Along with its original adult-height models,
Sage now offers a 13” and a 15” 4-leg chair, and a corresponding pair of cantilever chairs. In addition to these chairs
for younger, smaller students, Virco has introduced an articulating Sage tablet arm model for high school and adult
learning venues. Selected adult-height Sage models can also now be ordered with a padded, upholstered seat. In
2007, the Company introduced the Metaphor® Series — an updated sequel to Virco’s best-selling Classic Series™
furniture with improvements in comfort, ergonomics, stackability, and manufacturing efficiencies — and the Telos®
Series, a wide-ranging product line with ergonomically contoured Fortified Recycled Wood components. In 2011
Virco launched the Sage Contract line for offices and reception areas, colleges, hospitality venues and other adult
environments; Civitas™ chairs and stools for foodservice, libraries, media centers, circulation areas and related
venues; and adjustable-height versions of 120, 121 and 122 Series stools. Other Virco seating alternatives include
easily-adjustable Ph.D.® task chairs; I.Q.® Series classroom chairs; and comfortable, attractive Virtuoso® chairs by
Charles Perry. Classic Series™ stack chairs and Martest 21® hard plastic seating models are popular choices in
schools across America. Along with this range of seating, Virco offers folding chairs and upholstered stack chairs,
as well as additional plastic stack chairs and upholstered ergonomic chairs.
TABLES — In April 2008, Virco introduced the TEXT® table collection for learning environments. Designed by
the award-winning team of Peter Glass and Bob Mills, TEXT tables feature heavy-gauge tubular steel and proven
Virco construction for extended product life, and elliptical legs, swooping yokes and arched feet for exceptional
elegance. Selected TEXT models can be equipped with a variety of technology-support and storage accessories.
Lunada® tables made their debut at the end of 2008. Combining Virco’s popular Lunada bi-point bases with a
selection of 20 top sizes, Lunada tables make great choices for seminar, conference and related settings. Designed
for Virco by Peter Glass, Plateau® tables bring exceptional versatility, sturdy construction and great styling to
working and learning environments. For durable, easy-to-use lightweight folding tables, Virco’s Core-a-Gator®
models are unsurpassed. When paired with attractive, durable Virco café tops, Lunada bases by Peter Glass provide
eye-catching table solutions for hospitality settings. Virco also carries traditional folding and banquet tables, activity
tables and office tables, as well as the computer tables and mobile tables described below.
COMPUTER FURNITURE — The TEXT table collection described in the preceding paragraph provides educators
an array of computer furniture choices for learning environments; Virco’s Flip-Top Technology table line and the
recently released HWT Technology table collection also deliver popular computer furniture solutions. Future
Access® computer tables come with an integral wire management panel and all rectangular models have a smooth
post-formed front and rear edge. Like our Future Access models, 8700 Series computer tables can be equipped with
Virco’s functional computing accessories, such as keyboard mouse trays, CPU holders and support columns for
optional elevated shelves. The Plateau® Office Solutions collection offers desks and workstations with technology-
support capabilities, while the Plateau Library/Technology Solutions line has specialty tables and other products for
computing applications.
DESKS/CHAIR DESKS — From the ergonomic and collaborative-learning strengths of our best-selling ZUMA®
student desks to the continuing popularity of our traditional Classic Series™ chair desks and combo units, Virco’s
wide-ranging furniture models can be found in thousands of America’s schools. Related products include teacher
desks and tablet arm units. Selected models are available with durable, colorfast Martest 21® or Fortified Recycled
Wood™ hard plastic components. For teachers, principals and district administrators, Virco has introduced the
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distinctive, stylish and modern Parameter® collection of desks, returns and credenzas; designed in collaboration with
Peter Glass and Bob Mills, Parameter is also great for business environments.
ADMINISTRATIVE OFFICE FURNITURE— In addition to the Plateau Office Solutions and Parameter desks and
related products described above, Virco now manufactures a selection of desks, returns, bookcases and other items
that employ the Company’s flat metal forming capabilities; these products include 53 Series steel storage cabinets,
an expanded range of 53 Series lateral files, and special versions of 543 and 546 Series desks with wire management
capabilities released in 2011. Moreover, Plateau Office Solutions bookcases in popular sizes – an array of 36” wide
models were launched in 2011 – are available for administrative offices.
LABORATORY FURNITURE— For biology and chemistry classes, and other school- and college-based lab
settings, Virco offers a variety of steel-based science tables. Virco manufactures the table bases of these items and
equips them with specialty tops purchased from vendor partners. Virco’s ZUMA, Sage™, Telos® , Metaphor ®,
I.Q.®, Classic Series, and 3000 Series collections also include pneumatically adjustable lab stools with high-range
seat-height adjustment and a steel foot-ring.
MOBILE FURNITURE — School cafeterias are perfect venues for Virco mobile tables, while classrooms benefit
from the spacious storage capacity of Virco mobile cabinets. An array of Virco product lines includes mobile chairs
for school settings and offices.
STORAGE EQUIPMENT — For moving selected Virco chairs and folding tables, the Company carries a wide
range of handling and storage equipment. As a service to our convention center, arena, and auditorium customers,
Virco also manufactures stackable storage trucks that work with Virco upholstered stack chairs, folding chairs and
folding tables.
Virco’s wide-ranging product selection includes hundreds of furniture models that are certified according to the
Greenguard® Children & Schools Program for indoor air quality. In 2005 Virco’s ZUMA and ZUMAfrd™ products
earned the distinction of being the first classroom furniture models to be certified through the Greenguard Children
& Schools Program. All of the models in the Company’s most recently introduced product lines — including Flip-
Top Technology tables and Parameter desks, returns and credenzas — are Greenguard-certified. Along with Virco’s
leadership relative to Greenguard-certified furniture, the Company also introduced the classroom furniture industry’s
first Take-Back program in 2006, enabling qualifying schools, colleges, universities, and other organizations and
customers to return selected out-of-service furniture components for recycling rather than sending these items to a
landfill.
In order to provide a comprehensive product offering for the education market, the Company supplements Virco-
manufactured products with items purchased for re-sale, including wood and steel office furniture, early learning
products for pre-school and kindergarten classrooms, science laboratory furniture, and library tables, chairs and
equipment. In 2009, Virco began carrying a complete line of specialty furniture and equipment from Wenger®
Corporation for music rooms, performance areas and related spaces; Virco also now offers customized, space-
efficient workstations by Interior Concepts™ for technology and language labs, media centers, computer
classrooms, reception areas and offices. Wenger and Interior Concepts are two of the many vendors with which the
Company partners in order to effectively position Virco as the preferred one-stop furniture and equipment source for
K-12 schools. None of the products from vendor partners accounted for more than 10% of consolidated revenues in
2011.
To complement Virco’s extensive selection of furniture and equipment, we offer customers a variety of valuable
services in connection with the purchase of Virco products; revenues from these service levels are included in the
purchase price of the furniture items. In addition to giving customers the option of purchasing Virco products and
making their own delivery arrangements, Virco provides three levels of delivery service. When customers choose
Standard Delivery — also known as tailgate delivery — the delivery driver is responsible for moving the customer’s
goods to the tailgate of the truck only; therefore, the customer must have personnel on hand to unload the truck. For
additional charges Virco also offers Inside Delivery (no installation), or Full-Service Delivery (delivered and
installed). To assist customers involved with furniture, fixtures and equipment (FF&E) purchases for new school
construction projects or school renovations, Virco’s PlanSCAPE® service provides room-by-room computerized
layout planning and full FF&E project management.
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Customers
Virco’s major customers include educational institutions, convention centers and arenas, hospitality providers,
government facilities, and places of worship. No customer accounted for more than 10% of Virco’s consolidated
revenues during 2011.
Raw Materials
Virco purchases steel, aluminum, plastic, polyurethane, polyethylene, polypropylene, plywood, particleboard,
cartons and other raw materials from many different sources for the manufacture of its principal products.
Management believes the Company is not more vulnerable with respect to the sources and availability of these raw
materials than other manufacturers of similar products. The Company’s largest raw material cost is for steel,
followed by plastics and wood.
The price of these commodities, particularly steel and plastic, has been volatile in recent years. Steel and plastic
prices increased significantly in 2004 and 2005, in part due to worldwide demand of these materials, especially in
China. By comparison, in 2006 and 2007 the price of these commodities was relatively stable. In 2008, steel prices
increased by more than 80% during a four month period from April to July, followed by a period of modest decline
in the latter part of 2008 and relative stability in 2009 and 2010. During 2011, the Company incurred significant
increases in the cost of steel during the second quarter and plastic during the second and third quarters which
adversely impacted the profitability of orders received at the beginning of the year (such orders were shipped during
the summer).
In addition to the raw materials described above, the Company purchases components used in the fabrication and
assembly of furniture from a variety of overseas locations, but primarily from China. These components are
classified as raw materials in the financial statements until such time that the components are consumed in a
fabrication or assembly processes. These components are sourced from a variety of factories, none of which are
owned or operated by the Company. Costs for these imported components increased moderately during the last
three years, and are expected to increase further in 2012.
With respect to the Company’s annual contracts (or those contracts that have longer terms), the Company may have
limited ability to increase prices during the term of the contract. The Company has, however, negotiated increased
flexibility under many of these contracts, allowing the Company to increase prices on future orders. Nevertheless,
even with respect to these more flexible contracts, the Company does not have the ability to increase prices on
orders received prior to any announced price increases. Due to the intensely seasonal nature of our business, the
Company may receive significant orders during the first and second quarters for delivery in the second and third
quarters. With respect to any of the contracts described above, if the costs of raw materials increase suddenly or
unexpectedly, the Company cannot be certain that it will be able to implement corresponding increases in its sales
prices in order to offset such increased costs. Significant cost increases in providing products during a given
contract period can adversely impact operating results and have done so during prior years, especially 2004, 2005,
2008, and 2011. The Company typically benefits from any decreases in raw material costs under the contracts
described above.
Marketing and Distribution
Virco serves its customers through a well-trained, nationwide sales and support team, as well as a growing dealer
network. In addition, Virco has a Corporate Sales Group to pursue wholesalers, mail order accounts and national
chains where management believes it would be more efficient to have a single sales representative or group
approach such persons, as they tend to have needs that transcend the geographic boundaries established for Virco’s
local accounts.
Virco’s educational product line is marketed through what management believes to be the largest direct sales force
of any education furniture manufacturer. The Company’s approach to servicing its customer base is very flexible,
and is tailored to best meet the needs of individual customers and regions. When considered to be most efficient, the
sales force will call directly upon school business officials, who may include purchasing agents or individual school
principals where site-based management is practiced. Where it is considered advantageous, the Company will use
large exclusive distributors and full-service dealer partners. The Company’s direct sales force is considered to be an
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important competitive advantage over competitors who rely primarily upon dealer networks for distribution of their
products.
Virco’s sales force is assisted by the Company’s proprietary PlanSCAPE® software and experienced PlanSCAPE
managers when preparing complete package solutions for the FF&E segment of bond-funded public school
construction projects. PlanSCAPE software also enables the entire Virco sales force to prepare quotations for less
complicated projects.
A significant portion of Virco’s business is awarded through annual bids with school districts or other buying groups
used by school districts. These bids are typically valid for one year. Many contracts contain penalty, performance,
and debarment provisions that can result in debarment for a number of years, a financial penalty, or calling of
performance bonds.
Sales of commercial and contract furniture are made throughout the United States by distributorships and by
Company sales representatives who service the distributorship network. Virco representatives call directly upon
state and local governments, convention centers, individual hospitality venues, and mass merchants. Sales to this
market include colleges and universities, preschools, private schools, and office training facilities, which typically
purchase furniture through commercial channels.
The Company sells to thousands of customers, and, as such no single customer represented more than 10 percent of
the Company’s consolidated revenues in 2011. Significant purchases of furniture using public funds often require
annual bids or some form of “authorization” to purchase goods or services from a vendor. This authorization can
include state contracts, local and national buying groups, or local school districts that “piggyback” on the bid of a
larger district. In virtually all cases, purchase orders and payments are processed by the individual school districts,
even though the contract pricing may be determined by a state contract, national or local buying group, or
consortium of school districts. Schools usually can purchase from more than one contract or purchasing vehicle, if
they are participants in buying groups as well as being eligible for a state or national contract.
Virco is the exclusive supplier of movable classroom furniture for one nationwide purchasing organization under
which many of our customers price their furniture. See “Risk Factors — Approximately 50% of our sales are priced
through one contract, under which we are the exclusive supplier of classroom furniture.” Sales priced under this
contract represented approximately 50% of Virco’s sales in 2011, 43% of Virco’s sales in 2010, and 40% of sales in
2009. In the third quarter of 2008, the Company was awarded a three-year contract with this purchasing
organization extending through 2011. In 2008 the Company was awarded three one-year extensions extending
through 2014. If Virco were unable to sell under this contract, we would be able to sell to the vast majority of our
customers under alternative contracts.
Seasonality
The educational sales market is extremely seasonal. Approximately 50% of the Company’s total sales in 2011 were
delivered in June, July, and August with an even higher portion of educational sales delivered in that period.
Shipments during peak weeks in July and August can be as great as six times the level of shipments in the winter
months.
Working Capital Requirements During the “Peak” Summer Season
As discussed above, the market for educational furniture and equipment is marked by extreme seasonality, with the
majority of shipments occurring from June to August each year, which is the Company’s peak season. As a result of
this seasonality, Virco builds and carries significant amounts of inventory during the 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, Virco
has historically relied on bank financing to meet cash flow requirements during the build-up period immediately
preceding the high season. Currently, the Company has a line of credit with PNC Bank to assist in meeting cash
flow requirements as inventory is built for, and business is transacted during, the peak summer season.
In addition, Virco typically is faced with a large balance of accounts receivable during the peak season. This occurs
for three primary reasons. First, accounts receivable balances naturally increase during the peak season as product
9
shipments increase. Second, many customers during this period are government institutions, which tend to pay
accounts receivable more slowly than commercial customers. Third, many summer deliveries may be “projects”
where the Company provides furniture for a new school or significant refurbishment of an existing school. Projects
may require architect sign off, school board approval prior to payment, or punch list completion, all of which can
delay payment. Virco has historically enjoyed high levels of collectability on these accounts receivable due to the
low-credit risk associated with such customers. Nevertheless, due to the time differential between inventory build-
up in anticipation of the peak season and the collection on accounts receivable throughout the peak season, the
Company must rely on external sources of financing.
Virco’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. For example, management expends a significant amount of time in the first quarter of each year
developing a stocking plan and estimating the number of temporary summer employees, the amount of raw
materials, and the types of components and products that will be required during the peak season. If management
underestimates any of these requirements, Virco’s ability to meet customer orders in a timely manner or to provide
adequate customer service may be diminished. If management overestimates any of these requirements, the
Company may have to absorb higher storage, labor and related costs, each of which may negatively affect the
Company’s results of operations. On an on-going basis, management evaluates its estimates, including those related
to market demand, labor costs, and stocking inventory. Moreover, management continually strives to improve its
ability to correctly forecast the requirements of the Company’s business during the peak season each year based in
part on annual contracts which are in place and management’s experience with respect to the market.
As part of Virco’s efforts to balance seasonality, financial performance and quality without sacrificing service or
market share, management has been refining the Company’s ATS operating model. ATS is Virco’s version of mass-
customization, which assembles standard, stocked components into customized configurations before shipment. The
ATS program reduces the total amount of inventory and working capital needed to support a given level of sales. It
does this by increasing the inventory’s versatility, delaying assembly until the last moment, and reducing the amount
of warehouse space needed to store finished goods. As part of the ATS stocking program, Virco has endeavored to
create a more flexible work force. The Company has developed compensation programs to reward employees who
are willing to move from fabrication to assembly to the warehouse as seasonal demands evolve.
Other Matters
Competition
Virco has numerous competitors in each of its markets. In the educational furniture market, Virco manufactures
furniture and sells direct to educational customers. Competitors typically fall into two categories (1) furniture
manufacturers that sell to dealers which re-sell furniture to the end user, and (2) dealers that purchase product from
these manufacturers and re-sell to educational customers. The manufacturers that Virco competes with include
HON (HNI) which recently acquired Sagus International LLC (which markets product under Artco-Bell, American
Desk, and Midwest Folding Products), KI Inc., Royal, Bretford, Smith System, Columbia, Scholarcraft and VS
America. The largest competitor that purchases and re-sells furniture is School Specialty (SCHS). In addition to
School Specialty, there are numerous smaller local education furniture dealers that sell into local markets.
Competitors in contract furniture vary depending upon the specific product line or sales market and include Falcon
Products, Inc., KI Inc., MTS and Mity Enterprises, Inc.
The educational furniture market is characterized by price competition, as many sales occur on a bid basis.
Management compensates for this market characteristic through a combination of methods that include emphasizing
the value of Virco’s products and product assortment, the convenience of one-stop shopping for “Equipment for
Educators™”, the value of Virco’s project management capabilities, the value of Virco’s distribution and delivery
capabilities, and the value of Virco’s customer support capabilities and other intangibles. In addition, management
believes that the streamlining of costs assists the Company in compensating for this market characteristic by
allowing Virco to offer a higher value product at a lower price. For example, as discussed above, Virco has
decreased distribution costs by avoiding re-sellers, and management believes that the Company’s large direct sales
force and the Company’s sizeable manufacturing and warehousing capabilities facilitate these efforts. Although
10
management prefers to compete on the value of Virco products and services, when market conditions warrant, the
Company will compete based on direct prices and may reduce its prices to build or maintain its market share.
Backlog
Sales order backlog at January 31, 2012, totaled $14.4 million and approximated eight weeks of sales, compared to
$17.6 million at January 31, 2011, and $13.0 million at January 31, 2010. Substantially all of the backlog will ship
during 2012.
Patents and Trademarks
In the last 10 years, the United States Patent and Trademark Office (the “USPTO”) has issued to Virco more than 50
patents on its various new product lines. These patents cover various design and utility features in Ph.D.® chairs,
I.Q.® Series furniture, the ZUMAfrd™ family of products, and the ZUMA® family of products, among others.
Virco has a number of other design and utility patents in the United States and other countries that provide
protection for Virco’s intellectual property as well. These patents expire over the next one to 17 years. Virco
maintains an active program to protect its investment in technology and patents by monitoring and enforcing its
intellectual property rights. While Virco’s patents are an important element of its success, Virco’s business as a
whole is not believed to be materially dependent on any one patent. See “Risk Factors — An inability to protect our
intellectual property could have a significant impact on our business.”
In order to distinguish genuine Virco products from competitors’ products, Virco has obtained the rights to certain
trademarks and tradenames for its products and engages in advertising and sales campaigns to promote its brands
and to identify genuine Virco products. While Virco’s trademarks and tradenames play an important role in its
success, Virco’s business as a whole is not believed to be materially dependent on any one trademark or tradename,
except perhaps “Virco,” which the Company has protected and enhanced as an emblem of quality educational
furniture for over 60 years.
Virco has no franchises or concessions that are considered to be of material importance to the conduct of its business
and has not appraised or established a value for its patents or trademarks.
Employees
As of January 31, 2012, Virco and its subsidiaries employed approximately 825 full-time employees at various
locations. Of this number, approximately 650 are involved in manufacturing and distribution, approximately 110 in
sales and marketing and approximately 65 in administration.
Environmental Compliance
Virco is subject to numerous federal, state, and local 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. In this context, Virco works diligently to remain in
compliance with all such environmental laws and regulations as these affect the Company’s operations. Moreover,
Virco has enacted policies for recycling and resource recovery that have earned repeated commendations, including:
recognition by the California Department of Resources Recycling and Recovery (CalRecycle) in 2011 and 2010 as a
Waste Reduction Awards Program (WRAP) honoree; recognition by the United States Environmental Protection
Agency in 2003 as a WasteWise Hall of Fame Charter Member, in 2002 as a WasteWise Partner of the Year and in
2001 as a WasteWise Program Champion for Large Businesses; and recognition by the Sanitation Districts of Los
Angeles County for compliance with industrial waste water discharge guidelines in 2007 through 2010. This is only
a partial list of Virco’s environmental awards and commendations; for a more complete list, go to www.virco.com
and click on the Corporate Stewardship header. In addition to these awards and commendations, Virco’s ZUMA®
and ZUMAfrd™ product lines were the first classroom furniture collections to earn indoor air quality certification
through the stringent GREENGUARD® Children & Schools Program. As a follow-up to the certification of ZUMA
and ZUMAfrd models in 2005, hundreds of other Virco furniture items – including all models in the Company’s
11
recently introduced TEXT® table line, as well as HWT Technology tables, Sage™ Contract chairs, and Civitas™
seating products – have earned GREENGUARD certification. Moreover, all Virco products covered by the
Consumer Product Safety Improvement Act of 2008 are in compliance with this legislation. All affected Virco
models are also in compliance with the California Air Resources Board rule implemented on January 1, 2009,
concerning formaldehyde emissions from composite wood products. Environmental laws have changed rapidly in
recent years, and Virco may be subject to more stringent environmental laws in the future. The Company has
expended, and may be expected to continue to expend, significant amounts in the future for compliance with
environmental rules and regulations, for the investigation of environmental conditions, for the installation of
environmental control equipment, or remediation of environmental contamination. Normal recurring expenses
relating to operating our factories in a manner that meets or exceeds environmental laws are matched to the cost of
producing inventory. It is possible that the Company’s operations may result in noncompliance with, or liability for
remediation pursuant to, environmental laws. Should such eventualities occur, the Company records liabilities for
remediation costs when remediation costs are probable and can be reasonably estimated. See “Risk Factors — We
could be required to incur substantial costs to comply with environmental requirements.” Violations of, and
liabilities under, environmental laws and regulations may increase our costs or require us to change our business
practices.
Financial Information About Industry Segment and Geographic Areas
Virco operates in a single industry segment. For information regarding the Company’s revenues, gross profit and
total assets for each of the last three fiscal years, see the Company’s consolidated financial statements.
During 2011, Virco derived approximately 7% of its revenues from customers located outside of the United States
(primarily in Canada and Panama). During the 2010 and 2009, Virco derived approximately 5-6% and 6-7% of its
revenues, respectively, from customers located outside of the United States (primarily in Canada). The Company
determines sales to these markets based upon the customers’ principal place of business. During 2011, 2010 and
2009, the Company did not have any long-lived assets outside of the United States.
Executive Officers of the Registrant
As of April 1, 2012, the executive officers of the Company, who are elected by and serve at the discretion of the
Company’s Board of Directors, were as follows:
Name
R. A. Virtue (1)
D. A. Virtue (2)
S. Bell (3)
R. E. Dose (4)
P. Quinones (5)
Office
President, Chairman of the Board and Chief Executive Officer
Executive Vice President
Vice President — General Manager, Conway Division
Vice President — Finance, Secretary and Treasurer
Vice President — Logistics, Marketing Services and Information
Technology
D. R. Smith (6)
N. Wilson (7)
B. Yau (8)
Vice President — Marking and Corporate Stewardship
Vice President — General Manager, Torrance Division
Vice President — Corporate Controller, Assistant Secretary and
____________
Assistant Treasurer.
Age at
January 31,
2012
79
53
55
55
48
63
64
53
Has Held
Office
Since
1990
1992
2004
1995
2004
1995
2004
2004
(1) Appointed Chairman in 1990; has been employed by the Company for 55 years and has served as the President
since 1982 and Chief Executive Officer since 1988.
(2) Appointed in 1992; has been employed by the Company for 26 years and has served in Production Control, as
Contract Administrator, as Manager of Marketing Services, as General Manager of the Torrance Division, and
currently as Corporate Executive Vice President.
12
(3) Appointed in 2004; has been employed by the Company for 23 years and has served in a variety of
manufacturing, safety, and environmental positions, and currently Vice President — General Manager, Conway
Division.
(4) Appointed in 1995; has been employed by the Company for 21 years and has served as the Corporate Controller,
and currently as Vice President of Finance, Secretary and Treasurer.
(5) Appointed in 2004; has been employed by the Company for 20 years in a variety customer and marketing
service positions, and currently as Vice President of Logistics, Marketing Services and Information Technology.
(6) Appointed in 1995; has been employed by the Company for 27 years in a variety of sales and marketing
positions, and currently as Vice President of Marketing and Corporate Stewardship.
(7) Appointed in 2004; has been employed by the Company for 45 years in a variety of manufacturing,
warehousing, and transportation positions, and currently as Vice President — General Manager, Torrance
Division.
(8) Appointed in 2004; has been employed by the Company for 15 years and has served as Corporate Controller,
and currently as Vice President Accounting, Corporate Controller, Assistant Secretary and Assistant Treasurer.
None of the Company’s officers have employment contracts.
Available Information
Virco files annual, quarterly and current reports, proxy statements and other information with the Securities and
Exchange Commission (“SEC”). Stockholders may read and copy this information at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330. Stockholders may also obtain copies of this information by
mail from the Public Reference Room at the address set forth above, at prescribed rates.
The SEC also maintains an Internet website that contains reports, proxy statements and other information about
issuers like Virco who file electronically with the SEC. The address of that site is www.sec.gov.
In addition, Virco makes available to its stockholders, free of charge through its Internet website, its annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed,
or furnished pursuant to, Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), as
soon as reasonably practicable after Virco electronically files such material with, or furnishes it to, the SEC. The
address of that site is www.virco.com.
Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully
considered. The risks and uncertainties described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we presently deem less significant may also adversely affect our
business, operating results, cash flows, and financial condition. If any of the following risks actually occur, our
business, operating results, cash flows and financial condition could be materially adversely affected.
Our product sales are significantly affected by education funding, which is a function of general economic
conditions. If the economy continues to remain weak or further weakens, funding for education may fail to
improve or decrease further, which would adversely affect our business and results of operations.
Our sales are significantly impacted by the level of education funding primarily in North America, which, in turn, is
a function of the general economic environment. In a weak economy, like the one currently being experienced in the
United States, state and local revenues decline, restricting funding for K-12 education spending which typically
leads to a decrease in demand for school furniture. Sustained depressions in the per-student funding levels provided
for in-state and local budgets could have a materially adverse impact on our business, financial condition and results
of operations.
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As part of the American Recovery and Reinvestment Act (ARRA), the Federal Government provided $44 billion to
be distributed through the Department of Education by April 30, 2009. Significant portions of this money were used
to avoid reductions-in-force at educational institutions. It is anticipated that the amount of Federal assistance will
decrease in 2012. This decrease and any continued depressions in state and local revenues and gaps in state budgets
may require substantial additional reductions in school budgets, which in turn could lead to further declines in
demand for school furniture, fixtures and equipment, which would materially adversely affect our revenue and
results of operations.
In addition, geopolitical uncertainties, terrorist attacks, acts of war, natural disasters, increases in energy and other
costs or combinations of such factors and other factors that are outside of our control could at any time have a
significant effect on the economy, which in turn would affect government revenues and allocations of government
spending. The occurrence of any of these or similar events in the future could cause demand for our products to
decline or competitive pricing pressures to increase, either or both of which would adversely affect our business,
operating results, cash flows and financial condition.
Gaps in state budgets may adversely affect our revenue and results of operations.
Virtually all states are required to balance their operating budgets either on an annual or bi-annual basis. Unlike the
federal government, states cannot maintain services during an economic downturn by running a deficit. Without
federal economic assistance, states that have not recovered from the recent recession will need to address remaining
shortfalls with a combination of spending cuts and/or tax increases. If states cut spending for education to address
such budgetary shortfalls, our revenue and results of operations will be adversely affected.
Reduced levels of spending on education may significantly impact spending on furniture and increase price
competition in the furniture market. If price competition increases, we may need to reduce our prices to
build or maintain our market share, which in turn could lower our profit margins.
The educational furniture market is characterized by price competition, as many sales occur on a bid basis. When
state and local funding for education declines, schools typically reduce spending on all budget line items prior to
reducing teacher and administrator salaries and benefits. This in turn can result in reduced demand for school
furniture, which in turn can intensify price competition in our industry. This price competition could impact our
ability to implement price increases or, in some cases, such as during an industry downturn, maintain prices. In
addition, when market conditions warrant, we may need to reduce prices to build or maintain our market share. If
we are unable to increase or maintain prices for our products, our profit margins could decline. Such decline will be
compounded to the extent we are unable to maintain or reduce the cost of our products, which may be especially
difficult in the current environment given the volatility of the commodities markets.
Our efforts to introduce new products that meet customer requirements may not be successful, which could
limit our sales growth or cause our sales to decline.
To keep pace with industry trends, such as changes in education curriculum and increases in the use of technology,
and with evolving regulatory and industry requirements, including environmental, health, safety and similar
standards for the education environment and for product performance, we must periodically introduce new products.
The introduction of new products requires the coordination of the design, manufacturing and marketing of such
products, which may be affected by factors beyond our control. The design and engineering of certain of our new
products can take up to a year or more, and further time may be required to achieve customer acceptance.
Accordingly, the launch of any particular product may be later or less successful than we originally anticipated.
Additionally, our competitors may develop new product designs that achieve a high level of customer acceptance,
which could give them a competitive advantage over us in making future sales. Difficulties or delays in introducing
new products or lack of customer acceptance of new products could limit our sales growth or cause our sales to
decline.
14
The majority of our sales are generated under annual contracts, which combined with the seasonal nature of
our business, may limit our ability to raise prices on a timely basis during a given year in response to
increases in costs.
We commit to annual contracts that determine selling prices for goods and services for periods of one year, and
occasionally longer. Though the Company has negotiated increased flexibility under many of these contracts that
may allow the Company to increase prices on future orders, the Company does not have the ability to raise prices on
orders received prior to any announced price increase. Due to the intensely seasonal nature of our business, the
Company may receive significant orders during the first and second quarters for delivery in the second and third
quarters. With respect to any of the contracts described above, if the costs of providing our products or services
increase between the date the orders are received and the shipping date, we may not be able to implement
corresponding increases in our sales prices for such products or services in order to offset the related increased costs.
Significant cost increases in providing either the services or products during a given contract period could therefore
lower our profit margins. By way of example, in 2008, we incurred a severe increase in the price of steel. Steel
prices increased by more than 80% during a four month period from April to July. During the period from April
through the third quarter of 2008, the price of petroleum increased substantially, affecting the cost of plastic,
inbound freight, freight to customers, and other energy costs. During the third quarter of 2008, we successfully
raised the sales prices under a significant number of our annual contracts in an effort to recover margin lost to
increased costs. Due to the seasonal nature of our business, however, approximately 2/3 of orders received and
approximately 75% of shipments for the year were priced prior to the third quarter increase. During 2011 the
Company incurred an increase of approximately 30% in the cost of steel during the second quarter, and nearly a
30% increase in the cost of certain plastics over the second and third quarters. The Company has increased prices
for the 2012 year in effort to recover these commodity cost increases. These cost increases adversely impacted gross
margins for products shipped during the summer season.
We depend on outside suppliers who may be unable to meet our volume and quality requirements, and we
may be unable to obtain alternative sources.
We require substantial amounts of raw materials and components to manufacture our products, which we purchase
from outside sources. Raw materials comprised our single largest total cost for 2011, 2010, and 2009. Contracts
with most of our suppliers are short-term. These suppliers may not continue to provide raw materials and
components to us at attractive prices, or at all, and we may not be able to obtain the raw materials we need in the
future from these or other providers on the scale and within the time frames we require. In the current economic
environment, many of the Company’s suppliers may experience difficulty obtaining financing and may go out of
business. The Company may have difficulty replacing these suppliers, especially if the supplier fails as the
Company is entering the seasonal summer shipping season. Moreover, we do not carry significant inventories of
raw materials, components or finished goods that could mitigate an interruption or delay in the availability of raw
materials and components. In addition, because we purchase components from international sources, primarily
China, we are subject to fluctuations in currency exchange rates as well as the impact of natural disasters, war and
other factors that may disrupt the transportation systems or shipping lines used by our suppliers, and other
uncontrollable factors such as changes in foreign regulation or economic conditions. Any failure to obtain raw
materials and components on a timely basis, or any significant delays or interruptions in the supply of raw materials,
could prevent us from being able to manufacture products ordered by our customers in a timely fashion, which could
have a negative impact on our reputation and could cause our sales to decline.
Increases in basic commodity, raw material and component costs could adversely affect our profitability.
Fluctuations in the price, availability and quality of the commodities, raw materials and components used in
manufacturing our products could have an adverse effect on our costs of sales, profitability and our ability to meet
customers’ demand. The price of commodities, raw materials and components, including steel and plastics, our
largest raw material categories, have been volatile in recent years, and the cost, quality and availability of such
commodities have been significantly affected in recent years by, among other things, changes in global supply and
demand, changes in laws and regulations (including tariffs and duties), changes in exchange rates and worldwide
price levels, natural disasters, labor disputes, terrorism and political unrest or instability. These factors could lead to
further price increases or supply interruptions in the future. As discussed above, in the short term, rapid changes in
15
raw material costs can be very difficult for us to offset with price increases because, in the case of many of our
contracts, we have committed to selling prices for goods and services for periods of one year, and occasionally
longer. Our profit margins could be adversely affected if commodity, raw material and component costs remain
high or escalate further, and, we are unable to pass along a portion of the higher costs to our customers.
We are affected by the cost of energy, and increases in energy prices could reduce our margins and profits.
The profitability of our operations is sensitive to the cost of energy relative to our transportation costs, the costs of
petroleum-based materials (like plastics), and the costs of operating our manufacturing facilities. Petroleum prices
have fluctuated significantly in recent years. Prices and availability of petroleum products are subject to political,
economic and market factors that are generally outside our control. Political events in petroleum-producing regions
as well as hurricanes and other weather-related events may cause petroleum prices to increase. If such prices
increase, our transportation costs may be adversely affected in the form of increased operation costs for our fleet and
surcharges on freight paid to third-party carriers. If our transportation costs continue to increase, and/or the price of
petroleum-based products and cost of operating our manufacturing facilities increase, these increases could have a
negative impact on our gross margins and profitability.
Approximately 50% of our sales are priced through one contract, under which we are the exclusive supplier
of classroom furniture.
A nationwide contract/price list, which allows schools and school districts to purchase furniture without bidding,
accounts for the pricing of a significant portion of our sales. This contract/price list is sponsored by a nationwide
purchasing organization that does not purchase products from the Company. By providing a public bid specification
and authorization service to publicly-funded agencies, the organization’s contract/price list enables such agencies to
make authorized expenditures of taxpayer funds. For all sales under this contract/price list, Virco has a direct selling
relationship with the purchaser, whether it is a school, a district, or another publicly-funded agency. In addition,
Virco can ship directly to the purchaser; perform installation services at the purchaser’s location; and finally bill
directly to, and collect from, the purchaser. Although Virco sells direct to hundreds of individual schools and school
districts, and these schools and school districts can purchase our products and services under several bids and
contracts available to them, approximately 50% of Virco’s sales in 2011 and 43% of Virco’s sales in 2010 were
priced under this nationwide contract/price list. In the 3rd quarter of 2008, the Company was awarded a three-year
contract with this purchasing organization extending through 2011. In addition, in 2008 the Company was awarded
three one-year extensions extending through 2014. If Virco were to lose its exclusive supplier status under this
contract/price list, and other manufacturers were allowed to sell under this contract/price list, it could cause Virco’s
sales, or growth in sales, to decline.
We operate in a seasonal business, and require significant amounts of working capital through our existing
credit facility to fund acquisitions of inventory, fund expenses for freight and installation, and finance
receivables during the summer delivery season. Restrictions imposed by the terms of our existing credit
facility may limit our operating and financial flexibility.
Our credit facility, among other things, largely prevents us from incurring any additional indebtedness, limits capital
expenditures, restricts dividends and stock repurchases, and provides for seasonal variations in the maximum
borrowing amount, including a reduced maximum level of borrowing during the fourth fiscal quarter. Our credit
facility also provides for monthly financial covenants, which currently include a minimum EBITDA, a minimum
tangible net worth and a minimum fixed charge coverage ratio requirement. As a result of the foregoing, our
operation and financial flexibility may be limited, which may prevent us from engaging in transactions that might
further our growth strategy or otherwise be considered beneficial to us.
Under our credit facility, substantially all of our accounts receivable are automatically and promptly swept to repay
amounts outstanding under the credit facility upon our receipt. Due to this automatic liquidating nature, if we breach
any covenant, violate any representation or warranty or suffer a deterioration in our ability to borrow pursuant to the
borrowing base calculation contained in the credit facility, we may not have access to cash liquidity unless provided
by the lender in its discretion. If the indebtedness under our credit facility were to be accelerated, we cannot be
certain that we will have sufficient funds available to pay such indebtedness or that we will have the ability to
refinance the accelerated indebtedness on terms favorable to us or at all. Any such acceleration could also result in a
16
foreclosure on all or substantially all of our assets, which would have a negative impact on the value of our common
stock and jeopardize our ability to continue as a going concern. In addition, certain of the covenants and
representations and warranties set forth in our credit facility 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
we expect to occur on an ongoing basis. There can be no assurance that we will be able to comply with all such
covenants and be able to continue to make such representations and warranties on an ongoing basis.
We may not be able to renew our credit facility on favorable terms, or at all, which would adversely affect
our results of operations.
We have historically relied on third-party bank financing to meet our seasonal cash flow requirements. On an annual
basis, we prepare a forecast of seasonal working capital requirements and use borrowings under our credit facility
with PNC Bank to help meet these seasonal cash flow and working capital requirements. Disruptions in the U.S.
credit markets have caused the interest rate on prospective debt financing to widen considerably and have made
financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of certain types
of debt financing. Continued uncertainty in the credit markets may negatively impact our ability to renew our credit
facility upon its maturity in 2014 on favorable terms or at all. If we are unable to renew our credit facility on
favorable terms (including available borrowing line and the rate of interest charged thereunder), or at all, our ability
to fund our operations would be impaired, which would have a material adverse effect on our results of operations.
If management does not accurately forecast the Company’s requirements for the peak summer season, the
Company’s results of operations could be adversely affected.
The Company’s business is highly seasonal and requires significant working capital in anticipation of and during the
peak summer season. This requires management to make estimates and judgments with respect to the Company’s
working capital requirements during, and in anticipation of, the peak summer season. Management expends a
significant amount of time in the first quarter of each year developing a stocking plan and estimating the number of
temporary summer employees, the amount of raw materials, and the types of components and products that will be
required during the peak season. If management does not accurately forecast the Company’s requirements, the
Company’s results of operations could be adversely affected. For example, if management underestimates any of
these requirements, Virco’s ability to meet customer orders in a timely manner or to provide adequate customer
service may be diminished. If management overestimates any of these requirements, the Company may be required
to absorb higher storage, labor and related costs, each of which may negatively affect the Company’s results of
operations.
We may require additional capital in the future, which may not be available or may be available only on
unfavorable terms.
Our capital requirements depend on many factors, including capital improvements, tooling and new product
development. To the extent that our existing capital is insufficient to meet these requirements and cover any losses,
we may need to raise additional funds through financings or curtail our growth and reduce our assets. Any equity or
debt financing, if available at all, may be on terms that are not favorable to us. Equity financings could result in
dilution to our stockholders, and the securities may have rights, preferences and privileges that are senior to those of
our common stock. If our need for capital arises because of significant losses, the occurrence of these losses may
make it more difficult for us to raise the necessary capital.
An inability to protect our intellectual property could have a significant impact on our business.
We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and
trade secret laws. Our ability to compete effectively with our competitors depends, to a significant extent, on our
ability to maintain the proprietary nature of our intellectual property. The degree of protection offered by the claims
of the various patents, trademarks and service marks may not be broad enough to provide significant proprietary
protection or competitive advantages to us, and patents, trademarks or service marks may not be issued on our
pending or contemplated applications. In addition, not all of our products are covered by patents. It is also possible
that our patents, trademarks and service marks may be challenged, invalidated, cancelled, narrowed or
circumvented. If we are unable to maintain the proprietary nature of our intellectual property with respect to our
17
significant current or proposed products, our competitors may be able to sell copies of our products, which could
adversely affect our ability to sell our original products and could also result in competitive pricing pressures.
If third parties claim that we infringe upon their intellectual property rights, we may incur liability and costs
and may have to redesign or discontinue an infringing product.
We face the risk of claims that we have infringed third parties’ intellectual property rights. Companies operating in
the furniture industry routinely seek protection of the intellectual property for their product designs, and our
principal competitors may have large intellectual property portfolios. Our efforts to identify and avoid infringing
third parties’ intellectual property rights may not be successful. Any claims of intellectual property infringement,
even those without merit, could (i) be expensive and time-consuming to defend; (ii) cause us to cease making,
licensing or using products that incorporate the challenged intellectual property; (iii) require us to redesign,
reengineer, or rebrand our products or packaging, if feasible; or (iv) require us to enter into royalty or licensing
agreements in order to obtain the right to use a third party’s intellectual property. Such claims could have a negative
impact on our sales and results of operations.
We could be required to incur substantial costs to comply with environmental requirements. Violations of,
and liabilities under, environmental laws and regulations may increase our costs or require us to change our
business practices.
Our past and present ownership and operation of manufacturing plants are subject to extensive and changing federal,
state, and local environmental laws and regulations, including those relating to discharges to air, water and land, the
handling and disposal of solid and hazardous waste and the cleanup of properties affected by hazardous substances.
As a result, we are involved from time to time in administrative and judicial proceedings and inquiries relating to
environmental matters and could become subject to fines or penalties related thereto. We cannot predict what
environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will
be administered or interpreted or what environmental conditions may be found to exist. 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. If new environmental laws and regulations are introduced and enforced
domestically, but not implemented or enforced internationally, we will operate at a competitive disadvantage
compared to competitors who source product primarily from international sources. In addition, in the past we have
been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response
Compensation and Liability Act (“CERCLA”) for remediation costs associated with waste disposal sites previously
used by us. In general, CERCLA can impose liability for costs to investigate and remediate contamination without
regard to fault or the legality of disposal and, under certain circumstances, liability may be joint and several,
resulting in one party being held responsible for the entire obligation. Liability may also include damages for harm
to natural resources. We may also be subject to claims for personal injury or contribution relating to CERCLA sites.
We reserve amounts for such matters when expenditures are probable and reasonably estimable.
In addition to environmental laws and regulations affecting our manufacturing activities, the Company is subject to
laws and regulations related to consumer product regulation. The Company sells products that are subject to the
Consumer Product Safety Improvement Act of 2008 and the California Air Resources Board rule implemented on
January 1, 2009, concerning formaldehyde emissions from composite wood products. The Company has controls in
place to insure that its products meet all consumer product regulations, and a significant number of Virco products
have been certified according to the GREENGUARD® Environmental Institute’s stringent Children & Schools
Program.
The Patient Protection and Affordable Care Act may increase the cost of providing medical benefits to
employees, which could have a significant adverse impact on our results of operations.
We currently provide medical, dental, and life insurance benefits to substantially all full-time employees. Recent
legislation regarding health care reform may cause the cost of providing medical insurance to our employees to
increase. We may not be able to pass the cost of increased medical costs to our customers, which could cause our
costs of sales to increase and our gross profit to decline.
18
We may not be able to manage our business effectively if we are unable to retain our experienced
management team or recruit other key personnel.
The success of our operations is highly dependent upon our ability to attract and retain qualified employees and
upon the ability of our senior management and other key employees to implement our business strategy. We believe
there are only a limited number of qualified executives in the industry in which we compete. The loss of the services
of key members of our management team could seriously harm our efforts to successfully implement our business
strategy.
We are subject to potential labor disruptions, which could have a significant impact on our business.
None of our work force is represented by unions, and while we believe that we have good relations with our work
force, we may experience work stoppages or other labor problems in the future. Any prolonged work stoppage
could have an adverse effect on our reputation, our vendor relations and our customers.
Our insurance coverage may not adequately insulate us from expenses for product defects.
We maintain product liability and other insurance coverage that we believe to be generally in accordance with
industry practices. Our insurance coverage may not be adequate to protect us fully against substantial claims and
costs that may arise from product defects, particularly if we have a large number of defective products that we must
repair, retrofit, replace or recall.
Volatility in the equity markets or interest rates could substantially increase our pension costs and have a
negative impact on our operating results.
We sponsor one qualified defined benefit pension plan, the Virco Employee Retirement Plan (the “Employee Plan”),
and two nonqualified pension plans. The difference between plan obligations and assets, or the funded status of the
Employee Plan, significantly affects net periodic benefit costs of our Employee Plan and our ongoing funding
requirements with respect to the Employee Plan. The Employee Plan is funded with trust assets invested in a
diversified portfolio of debt and equity securities and other investments. Among other factors, changes in interest
rates, investment returns and the market value of plan assets can (i) affect the level of plan funding; (ii) cause
volatility in the net periodic pension cost; and (iii) increase our future contribution requirements. Because the
current economic environment is characterized by declining investment returns and interest rates, we may be
required to make additional cash contributions to the Employee Plan and recognize further increases in our net
pension cost to satisfy our funding requirements. A significant decrease in investment returns or the market value of
plan assets or a significant decrease in interest rates could increase our net periodic pension costs and adversely
affect our results of operations.
Holders of approximately 40% of the shares of our stock have entered into an agreement restricting the sale
of the stock.
Certain shares of the Company’s common stock received by the holders thereof as gifts from Julian A. Virtue,
including shares received in subsequent stock dividends, are subject to an agreement that restricts the sale or transfer
of those shares. As a result of the share ownership and representation on the board and in management, the parties
to the agreement have significant influence on affairs and actions of the Company, including matters requiring
stockholder approval such as the election of directors and approval of significant corporate transactions. In addition,
these transfer restrictions and concentration of ownership could have the effect of impeding an acquisition of the
Company.
Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent a
change in control of our company.
Provisions in our certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent
a merger or acquisition involving us that our stockholders may consider favorable. In addition, our certificate of
incorporation provides for a staggered board of directors, whereby directors serve for three-year terms, with
approximately one-third of the directors coming up for reelection each year. Having a staggered board will make it
more difficult for a third party to obtain control of our board of directors through a proxy contest, which may be a
19
necessary step in an acquisition of us that is not favored by our board of directors. We are also subject to the anti-
takeover provisions of Section 203 of the Delaware General Corporation Law. Under these provisions, if anyone
becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three
years without special approval, which could discourage a third party from making a takeover offer and could delay
or prevent a change of control. For purposes of Section 203, “interested stockholder” means, generally, someone
owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our
outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203.
Additionally, the Board of Directors entered into a Rights Agreements pursuant to which certain preferred stock
purchase rights would become exercisable when a person acquires or commences to acquire a beneficial interest of
at least 20% of our outstanding common stock.
Our stock price has historically been volatile, and investors in our common stock could suffer a decline in
value.
There has been significant volatility in the market price and trading volume of equity securities, which may be
unrelated to the financial performance of the companies issuing the securities. The limited “float” of shares
available for purchase or sale of Virco stock can magnify this volatility. These broad market fluctuations may
negatively affect the market price of our common stock. Some specific factors that may have a significant effect on
our common stock market price include:
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our operating results or future prospects;
our announcements or our competitors’ announcements of new products;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
strategic actions by us or our competitors, such as acquisitions or restructurings;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidance, interpretations or principles;
changes in our growth rates or our competitors’ growth rates;
our inability to raise additional capital;
conditions of the school furniture industry as a result of changes in funding or general economic conditions,
including those resulting from war, incidents of terrorism and responses to such events; and
changes in stock market analyst recommendations or earnings estimates regarding our common stock, other
comparable companies or the education furniture industry generally.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Torrance, California
Virco leases a 560,000 sq. ft. office, manufacturing and warehousing facility located on 23.5 acres of land in
Torrance, California. During the third quarter of 2008, the Company extended the lease for an additional five-year
period expiring on February 28, 2015. As part of the extension, the Company received a $600,000 tenant
improvement allowance that was utilized and accounted for as capital expenditure prior to December 31, 2009. This
20
facility also includes the corporate headquarters, the West Coast showroom, and all West Coast distribution
operations.
Conway, Arkansas
The Company owns 100 acres of land in Conway, Arkansas, containing 1,200,000 sq. ft. of manufacturing,
warehousing, and office space. This facility — which is equipped with high-density storage systems, features 70
dock doors dedicated to outbound freight, and has substantial yard capacity to store and stage trailers — has enabled
the Company to consolidate the warehousing function and implement the Assemble-to-Ship inventory stocking
program. Management believes that this facility supports Virco’s ability to handle increased sales during the peak
delivery season and enhances the efficiency with which orders are filled.
In addition to the complex described above, the Company operates two other facilities in Conway, Arkansas. The
first is a 375,000 sq. ft. fabrication facility that was acquired in 1954, and expanded and modernized over
subsequent years. The Company manufactures fabricated steel components, chrome plates, and fabricates injection-
molded plastic components at this facility. These components are transferred to other facilities for assembly into
finished goods. The second is a 175,000 sq. ft. manufacturing facility that is used to fabricate and store
compression-molded components. This building is leased under a 10-year lease expiring in March 2018.
Item 3. Legal Proceedings
Virco 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 4. Mine Safety Disclosures
Not applicable.
21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
The NASDAQ exchange is the principal market on which Virco Mfg. Corporation (VIRC) stock is traded. As of
April 4, 2012, there were approximately 264 registered stockholders according to transfer agent records. There were
approximately 1,106 beneficial stockholders.
Dividend Policy
Historically it has been the Board of Directors’ policy to periodically review the payment of cash and stock
dividends in light of the Company’s earnings and liquidity. During the fourth quarter of 2007 the Company initiated
a quarterly dividend of $0.025 per share. Due to the timing of regularly scheduled Board of Directors meetings,
declaration dates often times fell in the quarter prior to the payment date, as was the case in the 2nd and 4th quarters
of 2009 and 2010. Effective as of the third quarter of 2011, the Board of Directors suspended the quarterly cash
dividend program. In addition, pursuant to the terms of the Company’s current line of credit with PNC Bank, which
was entered into on December 22, 2011, the Company is prohibited from paying dividends. Consequently, for at
least as long as this covenant is included in its credit agreement with PNC Bank, no dividends will be paid by the
Company to its stockholders.
Quarterly Dividend and Stock Market Information
Cash Dividends Declared
2011
2010
Common Stock Range
2011
2010
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$ 0.05
-
-
-
$ 0.05
-
0.05
-
Stock Repurchases
High
$ 3.51
3.43
2.73
1.87
Low
$ 2.83
2.35
1.35
1.31
High
$ 4.10
3.85
3.20
3.07
Low
$ 3.07
2.34
2.60
2.41
The Company did not repurchase any shares of its stock during the fourth quarter of 2011. Pursuant to the
Company’s credit agreement with PNC Bank, 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.
Stock Performance Graph
The graph set forth below compares the five-year cumulative total stockholder return of the Company’s common
stock with the cumulative total stockholder return of (i) an industry peer group index, and (ii) the NASDAQ Market
Index. The graph assumes $100 was invested on February 1, 2007, in the Company’s common stock, the NASDAQ
Market Index and the companies in the peer group and assumes the reinvestment of dividends, if any.
22
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG VIRCO MFG. CORPORATION, NASDAQ MARKET INDEX
AND MORNINGSTAR INDEX
$140
$120
$100
$80
$60
$40
$20
$0
2007
2008
2009
2010
2011
2012
Virco Mfg. Corporation
NASDAQ Market Index
Morningstar Business Equipment Index
Company/Market/Peer Group
Virco Mfg. Corporation
NASDAQ Market Index
Morningstar Business Equipment
1/31/2007
$ 100.00
$ 100.00
$ 100.00
1/31/2008
71.42
$
97.75
$
80.52
$
1/31/2009
24.29
$
60.96
$
47.25
$
1/31/2010
$ 41.97
$ 89.56
$ 66.93
1/31/2011
$ 37.44
$ 113.81
$ 86.72
1/31/2012
22.20
$
$ 119.84
76.22
$
Period Ending
The current composition of Morningstar Business Equipment is as follows: ACCO Brands Corp, Acme United
Corporation, Canon Inc., Champion Industries, Diebold Incorporated, Ennis, Inc., HNI Corporation, Herman Miller,
Inc., Knoll, Inc., Pitney Bowes Inc., Standard Register Company, Steelcase, Inc., VeriFone Systems, Inc., Virco
Mfg. Corporation, Xerox Corporation.
Item 6. Selected Financial Data
The following tables set forth selected historical consolidated financial data for the periods indicated. The following
data should be read in conjunction with Item 8, Financial Statements and Supplementary Data, and with Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
23
Five Year Summary of Selected Financial Data
In thousands, except per share data
Summary of Operations
Net sales
Net (loss) income (1)
Net (loss) income per share data (a) (1)
Basic
Assuming dilution
Cash dividends declared per share
____________
2011
2010
As Adjusted
2009
As Adjusted
2008
As Adjusted
2007
$ 166,441 $ 180,995
$ (13,803) $ (17,594)
$
$
(0.97) $
(0.97)
(1.25)
(1.25)
0.05
$
0.10
$
$
$
$
190,513 $ 212,003 $ 229,565
22,219
2,479 $
(725) $
(0.05) $
(0.05)
0.17 $
0.17
1.54
1.53
0.10 $
0.10 $
0.03
(a) Net loss per share was calculated based on basic shares outstanding due to the anti-dilutive effect on the
inclusion of common stock equivalent shares.
Other Financial Data
In thousands, except per share data
Total assets (1)
Working capital (1)
Current ratio (1)
Total long-term obligations
Stockholders’ equity (1)
Shares outstanding at year-end
Stockholders’ equity per share (1)
____________
$
$
$
$
$
2010
2011
94,225 $ 100,588
29,498
18,968 $
2.5/1
1.7/1
30,169
36,489 $
50,402
30,896 $
14,205
14,354
3.55
2.15 $
$
$
As Adjusted
2008
As Adjusted
2009
122,432 $ 123,432 $
36,525 $
2.4/1
25,104 $
71,520 $
14,239
38,386 $
2.7/1
30,236 $
69,270 $
14,163
$
$
$
4.89 $
5.02 $
As Adjusted
2007
131,273
36,902
2.1/1
21,129
76,236
14,429
5.28
(1) The historical financial data has been modified for the opening balance sheet for 2007 and for the results of
operations and ending balance sheets for 2008, 2009, and 2010 to reflect our fourth quarter 2010 change in
accounting principle for our method of accounting for certain of our inventory.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of
forward-looking statements that reflect the Company’s current views with respect to future events and financial
performance, including, but not limited to, availability of funding for educational institutions, economic conditions,
statements regarding plans and objectives of management for future operations, including plans and objectives
relating to products, pricing, marketing, expansion, and manufacturing processes; new business strategies; the
Company’s ability to continue to control costs and inventory levels; availability and cost of raw materials, especially
steel and petroleum-based products; the availability and cost of labor; the potential impact of the Company’s
“Assemble-To-Ship” program on earnings; market demand; the Company’s ability to position itself in the market;
references to current and future investments in and utilization of infrastructure; statements relating to management’s
beliefs that cash flow from current operations, existing cash reserves, and available lines of credit will be sufficient
to support the Company’s working capital requirements to fund existing operations; references to expectations of
future revenues; pricing; and seasonality.
24
Such statements involve known and unknown risks, uncertainties, assumptions and other factors, many of which are
outside of the Company’s control and difficult to forecast, that may cause actual results to differ materially from
those which are anticipated. Such factors include, but are not limited to, changes in, or the Company’s ability to
predict, general economic conditions, the markets for school and office furniture generally and specifically in areas
and with customers with which the Company conducts its principal business activities, the rate of approval of school
bonds for the construction of new schools, the extent to which existing schools order replacement furniture,
customer confidence, competition and other factors included in the “Risk Factors” section of this report.
In this report, words such as “anticipates,” “believes,” “expects,” “will continue,” “future,” “intends,” “plans,”
“estimates,” “projects,” “potential,” “budgets,” “may,” “could” and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of
the date hereof.
Executive Overview
Management’s strategy is to position Virco as the overall value supplier of educational furniture and equipment.
The markets that Virco serves include the education market (the Company’s primary market), which is made up of
public and private schools (preschool through 12th grade), junior and community colleges, four-year colleges and
universities; trade, technical and vocational schools; convention centers and arenas; the hospitality industry, with
respect to their banquet and meeting facilities; government facilities at the federal, state, county and municipal
levels; and places of worship. In addition, the Company sells to wholesalers, distributors, retailers and catalog
retailers that serve these same markets. These institutions are frequently characterized by extreme seasonality
and/or a bid-based purchasing function. The Company’s business model, which is designed to support this strategy,
includes the development of several competencies to enable superior service to the markets in which Virco
competes. An important element of Virco’s business model is the Company’s emphasis on developing and
maintaining key manufacturing, warehousing, distribution, installation, project management, and service
capabilities. The Company has developed a comprehensive product offering for the furniture, fixtures and
equipment needs of the K-12 education market, enabling a school to procure all of its FF&E requirements from one
source.
Virco’s product offering consists primarily of items manufactured by Virco, complemented with product sourced
from other furniture manufacturers. The product offering is continually enhanced with an ongoing new product
development program that incorporates internally developed product as well as product lines developed with
accomplished designers. Finally, management continues to hone Virco’s ability to forecast, finance, manufacture,
warehouse, deliver, and install furniture within the relatively narrow delivery window associated with the highly
seasonal demand for education sales. In 2011 and 2010, approximately 50% of the Company’s total sales were
delivered in June, July, and August with an even higher portion of educational sales delivered in that period.
Shipments during July and August can be as great as six times the level of shipments in the winter months. Virco’s
substantial warehouse space allows the Company to build adequate inventories to service this narrow delivery
window for the education market.
The market and operating environment for school furniture, fixtures, and equipment has been challenging during the
last decade and is likely to continue to be for at least the near future. Schools suffered significant budgetary
pressures from 2001 to 2005 following the “dot com” bust, and more recently in 2008 through 2011 as a result of the
recession and severe budget deficits incurred by state and local governments.
In addition, the furniture industry in general, including the market for school furniture, has been significantly
impacted by low cost competition from China. In 2004, 2005, and 2008 commodity prices for some of the
Company’s primary raw materials, particularly steel and plastic, were extremely volatile. During 2011, the
Company incurred a cost increase of approximately 30% in the cost of steel during the second quarter, and nearly a
30% increase in the cost of certain plastics over the second and third quarters. Due to recent volatility in the
commodities’ markets, similar volatility for the Company’s raw materials is likely to continue for the near term.
Because a majority of the Company’s sales are generated under annual contracts in which the Company has limited
ability to raise the price of its products during the term of the contract, if the costs of the Company’s raw materials
increase suddenly or unexpectedly, the Company cannot be certain that it will be able to implement corresponding
increases in its sales prices in order to offset such increased costs. Significant cost increases in providing products
25
during a given contract period can adversely impact operating results and have done so during prior years and the
most recently completed fiscal year. The Company typically benefits from any decreases in raw material costs
under the contracts described above.
The years 2008 through 2011 were particularly challenging for the Company and the educational furniture industry
in general and conditions are likely to remain challenging for the near term. The budgetary pressures placed on
school budgets in these years as a result of the recession were more severe than any period in recent history. These
budgetary pressures directly impacted the demand for the Company’s products, as the demand for educational
furniture largely depends upon: (1) available funding in a school’s general operating fund and (2) the completion of
bond-funded projects, which is directly impacted by the amount of bond financing issued to fund new school
construction, to renovate older schools, and to fully equip new and renovated schools. In response to the 2008
recession, passage of new bond issuances declined, and bond funded project completions have trended down each
year. Despite an increase in the numbers of students attending school, completions of projects from bond financing
declined in 2008, 2009, 2010, and 2011, and school operating budgets experienced significant strain during the same
period. In response to these budgetary pressures, as is traditionally the case, schools opted to retain teachers and
spend less on repairs, maintenance and replacement furniture, which in turn reduced the demand for, and sales of,
the Company’s products.
During a period of robust education spending during the 1990’s, the Company expanded and modernized its
manufacturing and distribution facilities at the Torrance, CA and Conway, AR locations. During the last decade,
the Company has worked continuously to significantly reduce its cost structure while concurrently expanding its
product offering, expanding manufacturing process capabilities and more fully automating its facilities. For
example, headcount of permanent employees as of January 31, 2012, was approximately 825 compared to a peak of
nearly 2,950 in August 2000. Factory overhead in 2011 declined by more than 43% compared to 2000. The
Company accomplished this without closing a factory and while continuing to add new production processes,
including flat metal forming, and other capabilities to support an ambitious product development program.
In 2009, 2010 and 2011, Virco continued to invest in new products, which positively impacted sales. For example,
in 2009 the Company introduced Flip-Top Technology tables for computer classrooms. The Company also utilized
its new flat metal forming capabilities to introduce an array of desks, returns and bookcases. In 2010, the Company
introduced, Parameter®, an invigorating collection of desks, returns and credenzas, and initiated a program to further
expand the use of our flat metal forming capabilities to produce lateral files, vertical files and mobile pedestals. In
2011, Virco launched the Sage Contract line for offices and reception areas, colleges, hospitality venues and other
adult environments; Civitas™ chairs and stools for foodservice, libraries, media centers, circulation areas and
related venues; and adjustable-height versions of 120, 121 and 122 Series stools.
Virco also benefits from its proprietary PlanSCAPE® software, and experienced PlanSCAPE managers, which allow
Virco to prepare complete package solutions for the FF&E segment of bond-funded public school construction
projects. PlanSCAPE software also enables the entire Virco sales force to prepare quotations for less complicated
projects. PlanSCAPE project management software allows Virco’s sales representatives to provide classroom-by-
classroom planning documents for the budgeting, acquisition and installation of FF&E.
The Company anticipates that demand for furniture in the education markets may be flat or continue to decline in
2012. Although general economic conditions have improved, significant state and local budget deficits may
adversely affect funding for education. The Company expects that completion of bond-funded school and college
construction projects will be lower in 2012 than in each of 2008, 2009, 2010, and 2011. Completions of K-12
projects are anticipated to decline by approximately 15% and completions of college projects may be comparable to
the prior year. As a much larger portion of the Company’s annual sales are to the K-12 schools, the market for
bond-funded construction projects in which the Company competes may be smaller in 2012. Management also
anticipates a continued lower level of demand for replacement furniture due to the significant financial pressures
being placed on school operating budgets. During 2011, in an effort to bring the Company’s cost structure in line
with decreased revenues, the Company offered early retirement and voluntary separation packages to its employees
in Arkansas and California. Combined with normal attrition, the Company reduced its workforce by approximately
205 persons (20%). The annual cost savings from this reduction in force when including overtime, taxes, and
benefits is expected to range between $9 – 10 million per year. These savings will be offset somewhat by the cost of
temporary direct labor employees hired to meet production requirements during 2012. The Company plans to
26
maintain its core work force at current levels for the near future, supplemented with temporary labor as necessary in
order to produce, warehouse, deliver, and install furniture during the coming summer. Because the Company has
not closed any manufacturing or distribution facilities that are utilized in operations, any increase in demand for our
products can be met without any required investment in physical infrastructure.
While the Company anticipates challenging economic conditions to continue to impact its core customer base in the
near term, there are certain underlying demographics, customer responses, and changes in the competitive landscape
that provide opportunities. First, the underlying demographics of the student population are stable compared to the
volatility of school budgets, and the related level of furniture and equipment purchases. This volatility is attributable
to the financial health of the school systems. Virco management believes that there is a pent-up demand for quality
school furniture (though it is unclear when and to what extent that pent-up demand will be converted into a
meaningful increase in purchases). Second, management believes that parents and voters will demand that we
educate our children and make this an ongoing priority for future government spending. Third, many schools have
responded to the budget strains by reducing their support infrastructure. School districts historically have operated
central warehouses and professional purchasing departments in a central business office. In order to retain teaching
staff, many school districts have shut down the warehouses and reduced their purchasing departments and janitorial
staffs. This change provides opportunities to sell services to schools, such as project management for new or
renovated schools, delivery to individual school sites rather than truckload deliveries to central warehouses, and
installation of furniture in classrooms. Moreover, this change offers opportunities for Virco to promote its complete
product assortment which allows one-stop shopping as opposed to sourcing furniture needs from a variety of
suppliers. Finally, many suppliers have shut down or dramatically curtailed their domestic manufacturing
capabilities, making it difficult for competitors to provide custom colors or finishes during a tight seasonal summer
delivery window when they are reliant upon a supply chain extending to China. Unlike its primary competitors,
Virco has maintained and expanded its domestic manufacturing capabilities, recently adding flat metal forming
processes to its manufacturing capabilities and bringing production into its factories of items formerly sourced from
other suppliers. Virco’s domestic factories are a strategic resource for providing its customers with timely delivery
of a broad selection of colors, finishes, laminates, and product styles.
During 2012 the Company also anticipates continued uncertainty and volatility in commodity costs, particularly in
the areas of certain raw materials, transportation, and energy. The Company does not anticipate that this volatility
will be as dramatic as experienced in 2011, but it has no assurances that commodity prices will remain stable.
Critical Accounting Policies and Estimates
This discussion and analysis of Virco’s financial condition and results of operations is based upon the Company’s
financial statements which have been prepared in accordance with U.S. generally accepted accounting principles.
The preparation of these financial statements requires Virco management to make estimates and judgments that
affect the Company’s reported assets, liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, management evaluates such estimates, including those related to revenue
recognition, allowance for doubtful accounts, valuation of inventory and related obsolescence reserves, self-insured
retention for products and general liability insurance, self-insured retention for workers’ compensation insurance,
provision for warranty, liabilities under defined benefit and other compensation programs, and estimates related to
deferred tax assets and liabilities. Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. This forms the basis of judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. Factors that could cause or contribute to these
differences include the factors discussed above under Item 1, Business, and elsewhere in this annual report on Form
10-K. Virco’s critical accounting policies are as follows:
Revenue Recognition: The Company recognizes revenue in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue Recognition”. Sales are recorded when
title passes and collectability is reasonably assured under its various shipping terms. The Company reports sales as
net of sales returns and allowances and sales taxes imposed by various government authorities.
Allowances for Doubtful Accounts: Considerable judgment is required when assessing the ultimate realization of
receivables, including assessing the probability of collection, current economic trends, historical bad debts and the
27
current creditworthiness of each customer. The Company maintains allowances for doubtful accounts that may
result from the inability of our customers to make required payments. Over the past five years, the Company’s
allowance for doubtful accounts has ranged from approximately 0.7% to 2.7% of accounts receivable at year-end.
The allowance is evaluated using historic experience combined with a detailed review of past-due accounts. The
Company does not typically obtain collateral to secure credit risk. The primary reason that Virco’s allowance for
doubtful accounts represents such a small percentage of accounts receivable is that a large portion of the accounts
receivable is attributable to low-credit-risk governmental entities, giving Virco’s receivables a historically high
degree of collectability. Although many states are experiencing budgetary difficulties, it is not anticipated that
Virco’s credit risk will be significantly impacted by these events. Over the next year, no significant change is
expected in the Company’s sales to government entities as a percentage of total revenues.
Inventory Valuation: Inventory is valued at the lower of cost or market (determined on a first-in, first-out basis) and
includes material, labor, and factory overhead. The Company maintains allowances for estimated slow moving and
obsolete inventory to reflect the difference between the cost of inventory and the estimated market value.
Allowances for slow moving and obsolete inventory are determined through a physical inspection of the product in
connection with a physical inventory, a review of slow-moving product, and consideration of active marketing
programs. The market for education furniture is traditionally driven by value, not style, and the Company has not
typically incurred significant obsolescence expenses. If market conditions are less favorable than those anticipated
by management, additional allowances may be required. Due to reductions in sales volume in the past years, the
Company’s manufacturing facilities are operating at reduced levels of capacity. The Company records the cost of
excess capacity as a period expense, not as a component of capitalized inventory valuation.
On January 31, 2011, the Company elected to change its costing method for the material component of raw
materials, work in process, and finished goods inventory to the lower of cost or market using the first-in first-out
(“FIFO”) method, from the lower of cost or market using the last-in first out (“LIFO”) method. The labor and
overhead components of inventory have historically been valued on a FIFO basis. The Company believes that the
FIFO method for the material component of inventory is preferable as it conforms the inventory costing methods for
all components of inventory into a single costing method and better reflects current acquisition costs of those
inventories on our consolidated balance sheets. Additionally, presentation of inventory at FIFO aligns the financial
reporting with the Company’s borrowing base under its line of credit (see Note 3 for further discussion of the line of
credit). Further, this change will promote greater comparability with companies that have adopted International
Financial Reporting Standards, which does not recognize LIFO as an acceptable accounting method. In accordance
with FASB ASC Topic 250, “Accounting Changes and Error Corrections,” all prior periods presented have been
adjusted to apply the new accounting method retrospectively. In addition, as an indirect effect of the change in our
inventory costing method from LIFO to FIFO, the Company recorded additional inventory lower of cost or market
expenses and changes in deferred tax assets and income tax expense. The retroactive effect of the change in our
inventory costing method, including the indirect effect of such change, increased the February 1, 2008, opening
retained earnings balance by $4.1 million, and increased our inventory and retained earnings balances by
$8.5 million and $5.4 million as of January 31, 2009, by $6.9 million and $4.3 million as of January 31, 2010, and
by $7.6 million and $4.7 million as of January 31, 2011, respectively. In addition, the change in our inventory
costing method, including the indirect effect of such change, increased (decreased) net income by $(1.0) and
$0.4 million for the years ending January 31, 2010 and 2011, respectively.
Self-Insured Retention: For 2009, 2010, and 2011 the Company was self-insured for product liability losses ranging
up to $250,000 per occurrence, for workers’ compensation losses up to $250,000 per occurrence, and for auto
liability up to $50,000 per occurrence. The Company obtains annual actuarial valuations for the self-insured
retentions. Product liability, workers’ compensation, and auto reserves for known and unknown incurred but not
reported (“IBNR”) losses are recorded at the net present value of the estimated losses using a discount rate ranging
from 4.5% - 6.0% for 2011, 2010, and 2009. Given the relatively short term over which the IBNR losses are
discounted, the sensitivity to the discount rate is not significant. Estimated workers’ compensation losses are funded
during the insurance year and subject to retroactive loss adjustments. The Company’s exposure to self-insured
retentions varies depending upon the market conditions in the insurance industry and the availability of cost-
effective insurance coverage. Self-insured retentions for 2012 will be comparable to the retention levels for 2011.
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Warranty Reserve: The Company provides a warranty against all substantial defects in material and workmanship.
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 standard warranty offered on products sold through
January 31, 2005, is five years. Effective February 1, 2005, the standard warranty was increased to 10 years on
products sold after February 1, 2005. The Company warranties generally provide that customers can return a
defective product during the specified warranty period following purchase in exchange for a replacement product or
that the Company can repair the product at no charge to the customer. The Company determines whether
replacement or repair is appropriate in each circumstance. The Company uses historic data to estimate appropriate
levels of warranty reserves. Because product mix, production methods, and raw material sources change over time,
historic data may not always provide precise estimates for future warranty expense.
Defined Benefit Obligations: The Company has three defined benefit plans, the Virco Employees Retirement Plan
(the “Employee Plan”), the Virco Important Performers Plan (the “VIP Plan”) and the Non-Employee Directors
Retirement Plan (the “Directors Plan”), which provide retirement benefits to employees and outside directors. Virco
discounted the pension obligations for the various plans using the following rates:
Employee Plan
VIP Plan
Directors Plan
2011
2010
2009
4.5%
5.5%
5.75%
4.5%
6.0%
6.00%
4.5%
5.5%
5.75%
Because the Company froze benefit accruals for all three plans in 2003, the assumed rate of increase in
compensation has no effect on the accounting for the plans. The Company estimated a 6.5% return on plan assets
for the Employee Plan for all three years. The VIP Plan and Directors Plan are unfunded and have no plan assets.
These rate assumptions can vary due to changes in interest rates, the employment market, and expected returns in
the stock market. In prior years, the discount rate and the anticipated rate of return on plan assets have decreased by
several percentage points, causing pension expense and pension obligations to increase. In 2008, the Company
incurred significant losses on investments held in trust to fund the Employee Plan. These investment losses will
cause future pension costs to increase, and will require future cash contributions to adequately fund the Employee
Plan.
In the third quarter of 2011 the Company offered an early retirement program to employees who voluntarily
terminated their employment with the Company. The incentive offered was a cash incentive and did not include
additional retirement benefits, but was heavily directed toward employees with significant years of service.
Approximately 150 employees accepted this offer. Due to the volume of lump sum payments processed during the
third and fourth quarters of 2011, the Company incurred a pension settlement cost for the Employee Plan.
Although the Company does not anticipate any change in these rates in the coming year, any moderate change
should not have a significant effect on the Company’s financial position, results of operations or cash flows.
Effective December 31, 2003, the Company froze new benefit accruals under all three plans. The Company obtains
annual actuarial valuations for all three plans.
Deferred Tax Assets and Liabilities: 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 “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 whether it is more likely than not
that some portion or all of the 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. The Company considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company
incurred a substantial operating loss for the years ended January 31, 2012 and 2011. During the fourth quarter of the
year ended January 31, 2011, based on this consideration, the Company determined the realization of a majority of
the net deferred tax assets no longer met the more likely than not criteria and a valuation allowance was recorded
29
against the majority of the net deferred tax assets. Valuation allowances totaled $22,859,000 and $14,548,000 at
January 31, 2012 and 2011, respectively. At January 31, 2012, the Company has net operating loss carryforwards
for federal and state income tax purposes, expiring at various dates through 2033. Federal net operating losses that
can potentially be carried forward totaled approximately $21,980,000 at January 31, 2012. State net operating losses
that can potentially be carried forward totaled approximately $45,786,000 at January 31, 2012.
Results of Operations (2011 vs. 2010)
Financial Results and Cash Flow
On January 31, 2011, the Company elected to change its costing method for the material component of raw
materials. The effect of this accounting change for the fiscal year ended January 31, 2011 was to decrease cost of
sales by, and increase gross margin by, $640,000. Net loss decreased by $354,000. There was no effect on net cash
flow from operations. In addition, during the fourth quarter ended January 31, 2011, the Company determined the
realization of a majority of the net deferred tax assets no longer met the more likely than not criteria, and an
additional valuation allowance of $14.0 million was recorded against the net deferred tax assets. After adjusting the
results for the change in accounting, for the fiscal year ended January 31, 2012, the Company incurred a pre-tax loss
of $13,748,000 on net sales of $166,441,000 compared to pre-tax loss of $8,587,000 on net sales of $180,995,000 in
the same period last year. Net loss per share was $0.97 for the fiscal year ended January 31, 2012, compared to net
loss per share of $1.25 in the prior year. Cash flow used in operations was $910,000 for the fiscal year ended
January 31, 2012, compared to cash flow provided by operations of $5,452,000 in the prior year.
Sales
Virco’s sales decreased by 8.0% in 2011 to $166,441,000 compared to $180,995,000 in 2010. The decrease in sales
was caused by continued unfavorable economic conditions that had an adverse impact on budgets for school
spending and by a reduction in completions of bond-funded projects. Volume declined by approximately $23
million, offset by increases in price. In 2010 the Company bid aggressively in certain markets in an effort to grow
volume in a difficult market. This adversely impacted the gross margin in 2010. In 2011 the Company increased
prices in an effort to restore margins to more profitable levels and to compensate for increases in raw material costs
experienced during 2011. Sales of Virco’s new products, including Parameter®, Sage™, and Text® increased in
2011 compared to 2010, but were offset by reductions in other product lines. Sales for project orders in fiscal 2011
were level with project orders in fiscal 2010. The reduction in shipments occurred in the second and third quarters
of the year, but the reduction in order rates was concentrated in two months. Approximately 65% of the annual
reduction in orders occurred in the months of April and May. Order rates for the balance of the year declined, but to
a lesser extent.
For 2012 the Company anticipates that the persistent budgetary challenges for state and local governments combined
with an anticipated reduction in completions of bond-funded projects may cause the amount of school furniture sold
to be comparable to or perhaps less than 2011. As we have throughout this recession, the Company continues to
focus on strategies to develop and strengthen its brand with an aggressive product development campaign. The
Company is accelerating efforts to increase sales to customers who purchase furniture and equipment through the
General Services Administration (GSA) and to pursue international projects. We will continue to use our domestic
factories to provide greater flexibility for custom specifications such as laminates, colors, and on-time delivery. As
discussed below, the Company significantly reduced its workforce through an early retirement program. This
significant reduction in force largely spared our direct sales force. The Company will continue to emphasize the
value, design and color selections of its products, the value of its distribution, delivery, installation, and project
management capabilities, and the value of timely deliveries during the peak seasonal delivery period. In order to
increase or maintain market share during 2012, when market conditions warrant, the Company will compete based
on direct prices and may reduce its prices to build or maintain its market share.
Cost of Sales
Cost of sales was 71.1% of sales in 2011 and 71.6% of sales in 2010. This decrease was due to an increase in selling
prices, offset by increases in material costs and a reduction in factory utilization.
30
As a percentage of sales, raw material costs were 0.2% lower than the prior year. The Company increased selling
prices at the beginning of the year in effort to improve gross margins. During the second quarter, steel prices
increased by approximately 30%. Costs for certain plastics used in production increased by approximately 30%
during the course of the second and third quarters. These cost increases offset the impact of the price increase for
the material component of cost of sales. Direct labor costs as a percentage of sales decreased by approximately
0.5%, primarily due to increased selling prices. Manufacturing overhead as a percentage of sales increased by 0.2%.
This increase was primarily attributable to a decrease in production hours and the related impact on factory
utilization. Production hours, which decreased by nearly 12% compared to the prior year, were reduced in response
to a reduction in sales combined with an effort to reduce inventory at year end.
The Company is beginning 2012 with approximately $7.6 million less inventory than in 2011 and $15.8 million less
than in 2010. Due to the reduced quantity of inventory at January 31, 2012, production levels and related factory
overhead absorption, which vary depending upon selling volumes, are anticipated to be higher in 2012 than in 2011.
As discussed below, the Company significantly reduced its workforce during 2011. The Company intends to hire
temporary workers as necessary during 2012 to meet any production requirements that cannot be filled by the
remaining full-time workforce.
During 2012 the Company anticipates continued uncertainty and volatility in commodity costs, particularly in the
areas of certain raw materials, transportation, and energy. The Company does not anticipate that this volatility will
be as dramatic in 2012 as experienced in 2011, but that it could be more volatile than in 2010 or 2009. For more
information, please see the section below entitled “Inflation and Future Change in Prices.”
Selling, General and Administrative and Other Expenses
Selling, general and administrative expenses for the fiscal year ended January 31, 2012, increased by approximately
$1.9 million compared to the prior year, and were 36.4% of sales as compared to 32.5% in the prior year. The
primary reason for this increase was the nearly $4.6 million of severance costs incurred in the third and fourth
quarters related to the early retirement program offered by the Company in the third quarter of 2011.
Approximately 150 employees, or 15% of the Company’s workforce, accepted the offer. Most severed their
employment in the third quarter. A few employees remained into the fourth quarter to assist an orderly transition of
responsibilities. When combined with normal attrition of employees that were not replaced, at January 31, 2012 the
Company reduced the number of full-time employees by approximately 205, or 20% of the workforce at January 31,
2011. The annual cost savings from this reduction in force when including overtime, taxes, and benefits is expected
to range between $9 – 10 million per year. These savings will be offset somewhat by the cost of temporary direct
labor employees hired to meet production requirements during 2012. The early retirement program was a cash
payment to employees that was based upon years of service. Virco disbursed nearly $2.6 million to severed
employees under this program. Because the majority of the employees accepting the offer were longer-term
employees with vested pension benefits, the Company incurred nearly $2.0 million of pension settlement costs
during the third and fourth quarters. The reduction in employees was evenly distributed between direct labor and
other overhead, sales support, and G&A positions.
Warehousing, freight and installation costs decreased in dollars and remained flat as a percentage of sales. Selling
costs declined due to a reduction in volume but increased as a percentage of sales. G&A spending increased
slightly, in part due to an increase in retirement plan expense, but was otherwise stable compared to the prior year.
Interest expense was $45,000 more in 2011 compared to 2010 as a result of increased levels of borrowing.
Provision 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 ASC Topic 740, “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 whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
31
taxable income or reversal of deferred tax liabilities during the periods in which those temporary differences become
deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment.
During 2011 and 2010 the Company incurred significant operating losses. When combined with operating results
from 2009 the Company has incurred a cumulative operating loss for the last three years. While the Company has
taken significant measures to return to profitability, the short-term outlook for the school furniture market is
challenging. Based on these considerations, at January 31, 2012 and January 31, 2011, the Company determined the
realization of a majority of the net deferred tax assets no longer met the more likely than not criteria, and a valuation
allowance was recorded against the majority of the net deferred tax assets. The Company has determined that it is
more likely than not that some portion of the state net operating loss and credit carry forwards will not be realized
and has provided a valuation allowance on a portion of the state net operating losses. At January 31, 2012, the
Company had net operating losses carried forward for federal and state income tax purposes, expiring at various
dates through 2033 if not utilized. Federal net operating losses that can potentially be carried forward totaled
approximately $21,980,000 at January 31, 2012. State net operating losses that can potentially be carried forward
totaled approximately $45,785,000 at January 31, 2012.
Because the Company has recorded a valuation allowance for the majority of deferred tax assets, the effective tax
rate for 2012 may be low, with income tax being primarily income and franchise taxes as required by various states.
Results of Operations (2010 vs. 2009)
Financial Results and Cash Flow
As described above, on January 31, 2011, the Company elected to change its costing method for the material
component of raw materials. The effect of this accounting change for the fiscal year ended January 31, 2011 was to
decrease cost of sales by, and increase gross margin by, $640,000. Net loss decreased by $354,000. There was no
effect on net cash flow from operations. The effect of this accounting change for the fiscal year ended January 31,
2010 was to increase cost of sales by, and decrease gross margin by, $1,615,000. Net income decreased by
$1,025,000. There was no effect on net cash flow from operations. In addition, during the fourth quarter ended
January 31, 2011, the Company determined the realization of a majority of the net deferred tax assets no longer met
the more likely than not criteria, and an additional valuation allowance of $14.0 million was recorded against the net
deferred tax assets. After adjusting the results for the change in accounting, for the fiscal year ended January 31,
2011 and 2010, the Company incurred a pre-tax loss of $8,587,000 on net sales of $180,995,000 compared to a pre-
tax loss of $1,451,000 on net sales of $190,513,000 in the same period last year. Net loss per share was $1.25 for the
fiscal year ended January 31, 2011, compared to net loss per share of $0.05 in the prior year. Cash flow provided by
operations was $5,452,000 for the fiscal year ended January 31, 2011, compared to cash flow used by operations of
$2,795,000 in the prior year.
Sales
Virco’s sales decreased by 5.0% in 2010 to $180,995,000 compared to $190,513,000 in 2009. The decrease in sales
was caused by unfavorable economic conditions that had an adverse impact on budgets for school spending. The
market for school furniture, fixtures, and equipment declined, which intensified price competition for available
business. Approximately 60% of the reduction was attributable to a reduction in volume with the balance
attributable to reductions in price. Sales of Virco’s new products, including Parameter® , Zuma® , Sage™,
Metaphor® , and Text® increased in 2010 compared to 2009, but were offset by reductions in other product lines.
Cost of Sales
Cost of sales was 71.6% of sales in 2010 and 67.9% of sales in 2009. This increase was due to a combination of a
reduction in price, as described above, and an increase in certain costs.
As a percentage of sales, raw material costs increased by 1.5% compared to the prior year. Steel prices increased
moderately during 2010, but other commodity costs were relatively stable. Manufacturing overhead increased by
approximately 1.6% of sales. The increase was attributable to a decrease in factory utilization. Production hours
32
decreased by nearly 15% for 2010 compared to the prior year. The reduction in production levels was attributable to
a reduction in unit volume, and a decision by the Company to reduce inventory levels.
In the fourth quarter of 2009, the Company manufactured more standard ATS components in order to reduce
summer overtime and temporary labor costs during the summer of 2010. When the Company experienced
reductions in order volumes in the second and third quarters, production levels were reduced to control inventory
levels. Production levels remained low throughout the fourth quarter, resulting is a substantial reduction in
inventory levels compared to the prior year.
Selling, General and Administrative and Other Expenses
Selling, general and administrative expenses for the fiscal year ended January 31, 2011, decreased by approximately
$2.5 million, or 4.1% from the prior year, and were 32.5% of sales as compared to 32.2% in the prior year. Freight
and installation costs increased in both dollars and as a percentage of sales due to an increase in the percentage of
business requiring delivery and installation. Variable selling costs declined due to a reduction in volume. G&A
spending decreased due to a reduction in retirement plan expense, but was otherwise flat compared to the prior year.
Interest expense was $50,000 less in 2010 compared to 2009 as a result of lower interest rates.
Provision for Income Taxes
For the fiscal year ended January 31, 2011, the Company incurred an $8.6 million operating loss. When combined
with operating results from the prior two years the Company incurred a cumulative operating loss for the last three
years. While the Company has taken measures to return to profitability, the short term outlook for the school
furniture market is challenging. Based on these considerations, at January 31, 2011, the Company determined the
realization of a majority of the net deferred tax assets no longer met the more likely than not criteria, and a valuation
allowance was recorded against the majority of the net deferred tax assets. The Company has determined that it is
more likely than not that some portion of the state net operating loss and credit carry forwards will not be realized
and has provided a valuation allowance on a portion of the state net operating losses. At January 31, 2011, the
Company had net operating losses carried forward for federal and state income tax purposes, expiring at various
dates through 2032 if not utilized. Federal net operating losses that can potentially be carried forward totaled
approximately $11,129,000 at January 31, 2011. State net operating losses that can potentially be carried forward
totaled approximately $32,104,000 at January 31, 2011.
Inflation and Future Change in Prices
We commit to annual contracts that determine selling prices for goods and services for periods of one year, and
occasionally longer. Though the Company has negotiated flexibility under many of these contracts that may allow
the Company to increase prices on future orders, the Company does not have the ability to raise prices on orders
received prior to any announced price increase. Due to the intensely seasonal nature of our business, the Company
may receive significant orders during the first and second quarters for delivery in the second and third quarters.
With respect to any of the contracts described above, if the costs of providing our products or services increase
between the date the orders are received and the shipping date, we may not be able to implement corresponding
increases in our sales prices for such products or services in order to offset the related increased costs. During 2011
the Company incurred an increase of approximately 30% in the cost of steel during the second quarter, and nearly a
30% increase in the cost of certain plastics over the second and third quarter. These cost increases adversely
impacted gross margins for products shipped during the summer season. During 2010 the Company incurred
increased costs for steel, but most other costs increased only modestly. In 2009, material costs were relatively stable.
For 2012, the Company anticipates continued volatility in costs, particularly with respect to certain raw materials,
transportation, and energy. Anticipated volatility for 2012 is not expected to be as severe as experienced in 2011.
There is continued uncertainty with respect to steel and to raw material costs that are affected by the price of oil,
especially plastics. Transportation costs may be adversely affected by increased oil prices, in the form of increased
operation costs for our fleet, and surcharges on freight paid to third-party carriers. Furthermore, as a result of
current adverse economic conditions, there has been a reduction in the number of freight carriers competing for
Virco’s business. Virco expects to incur continued pressure on employee benefit costs. The Company has renewed
health insurance contracts for its employees through December 2012, but costs subsequent to that date may be
33
adversely impacted by current legislation. Virco has aggressively addressed these costs by reducing headcount,
freezing pension benefits, passing on a portion of increased medical costs to employees, and hiring temporary
workers who are not eligible for benefit programs.
To recover the cumulative impact of increased costs, the Company raised the list prices for Virco’s products in 2012
and 2011. Due to current economic conditions, the Company anticipates continued significant price competition in
2012, and may not be able to raise prices without risk of losing market share. The Company anticipates that the
volatility of commodity costs will not be as significant in 2012 as experienced in 2011. As a significant portion of
Virco’s business is obtained through competitive bids, the Company is carefully considering material and
transportation costs as part of the bidding process. Total material costs for 2012, as a percentage of sales, could be
higher than in 2011. The Company is working to control and reduce costs by improving production and distribution
methodologies, investigating new packaging and shipping materials, and searching for new sources of purchased
components and raw materials.
Liquidity and Capital Resources
Working Capital Requirements
Virco addresses liquidity and working capital requirements in the context of short-term seasonal requirements and
long-term capital requirements of the business. The Company’s core business of selling furniture to publicly funded
educational institutions is extremely seasonal. The seasonal nature of this business permeates most of Virco’s
operational, capital, and financing decisions.
The Company’s working capital requirements during and in anticipation of the peak summer season oblige
management to make estimates and judgments that affect Virco’s assets, liabilities, revenues and expenses.
Management expends a significant amount of time during the year, and especially in the first quarter, developing a
stocking plan and estimating the number of employees, the amount of raw materials, and the types of components
and products that will be required during the peak season. If management underestimates any of these requirements,
Virco’s ability to fill customer orders on a timely basis or to provide adequate customer service may be diminished.
If management overestimates any of these requirements, the Company may be required to absorb higher storage,
labor and related costs, each of which may affect profitability. On an ongoing basis, management evaluates such
estimates, including those related to market demand, labor costs, and inventory levels, and continually strives to
improve Virco’s ability to correctly forecast business requirements during the peak season each year.
As part of Virco’s efforts to address seasonality, financial performance and quality without sacrificing service or
market share, management has been refining the Company’s ATS operating model. ATS is Virco’s version of mass-
customization, which assembles standard, stocked components into customized configurations before shipment. The
Company’s ATS program reduces the total amount of inventory and working capital needed to support a given level
of sales. It does this by increasing the inventory’s versatility, delaying assembly until the last moment, and reducing
the amount of warehouse space needed to store finished goods.
In addition, Virco finances its largest balance of accounts receivable during the peak season. This occurs for three
primary reasons. First, accounts receivable balances naturally 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. Third, many summer deliveries may be “projects”
where the Company provides furniture for a new school or significant refurbishment of an existing school. Projects
may require architect sign off, school board approval prior to payment, or punch list completion, all of which can
delay payment.
As the capital required for the summer season generally exceeds cash available from operations, Virco has
historically relied on third-party bank financing to meet seasonal cash flow requirements. On December 22, 2011
(the “Closing Date”), the Company and Virco Inc., a wholly owned subsidiary of the Company (“Virco” and,
together with the Company, the “Borrowers”) entered into a Revolving Credit and Security Agreement (the “Credit
Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”). The Credit
Agreement provides the Borrowers with a secured revolving line of credit (the “Revolving Credit Facility”) of up to
$60,000,000, with seasonal adjustments to the credit limit and subject to borrowing base limitations, and includes a
sub-limit of up to $3,000,000 for the issuance of letters of credit. The Revolving Credit Facility is an asset-based
34
line of credit that is subject to a borrowing base limitation and generally provides for advances of up to 85% of
eligible receivables, plus a percentage equal to the lesser of 60% of the value of eligible inventory or 85% of the
liquidation value of eligible inventory, plus an amount ranging from $6,000,000 to $12,000,000 from March 1
through July 15 of each year, minus undrawn amounts of letters of credit and reserves. The Revolving Credit
Facility is secured by substantially all of the Borrower’s personal property and certain of the Borrower’s real
property. The principal amount outstanding under the Credit Agreement and any accrued and unpaid interest is due
no later than December 22, 2014, and the Revolving Credit Facility is subject to certain prepayment penalties upon
earlier termination of the Revolving Credit Facility. Prior to the maturity date, principal amounts outstanding under
the Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or penalty,
subject to borrowing base limitations, seasonal adjustments and certain other conditions.
On the Closing Date, the Borrowers drew down approximately $9,800,000 under the Revolving Credit Facility to
repay in full all indebtedness outstanding under its prior revolving facility governed by the Second Amended and
Restated Credit Agreement dated as of March 12, 2008, as amended, by and between the Company and Wells Fargo
Bank, National Association, and to pay fees and expenses related to the Credit Agreement. The Company intends to
utilize the Revolving Credit Facility for liquidity and working capital purposes.
The Revolving Credit Facility bears interest, at the Borrowers’ option, at either the Alternate Base Rate (as defined
in the Credit Agreement) or the Eurodollar Currency Rate (as defined in the Credit Agreement), in each case plus an
applicable margin. The applicable margin for Alternate Base Rate loans is a percentage within a range of 0.75% to
1.75%, and the applicable margin for Eurodollar Currency Rate loans is a percentage within a range of 1.75% to
2.75%, in each case based on the EBITDA of the Borrowers at the end of each fiscal quarter, and may be increased
at PNC’s option by 2.0% during the continuance of an event of default. Accrued interest with respect to principal
amounts outstanding under the Credit Agreement is payable in arrears on a monthly basis for Alternative Base Rate
loans, and at the end of the applicable interest period but at most every three months for Eurodollar Currency Rate
loans.
The Credit Agreement contains a covenant that forbids the Company from issuing dividends or making payments
with respect to the Company’s capital stock, and contains numerous other covenants that limit under certain
circumstances the ability of the Borrowers and their subsidiaries to, among other things, merge with or acquire other
entities, incur new liens, incur additional indebtedness, repurchase stock, sell assets outside of the ordinary course of
business, enter into transactions with affiliates, or substantially change the general nature of the business of the
Borrowers, taken as a whole. The Credit Agreement also requires the Company to maintain certain financial
covenants, including a minimum tangible net worth, minimum EBITDA amounts and a minimum fixed charge
coverage ratio. In addition, there is 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 days each fiscal year. The Company believes that normal
operating cash flow will allow it to meet the “clean down” requirement with no adverse impact on the Company’s
liquidity. The Company was in compliance with its covenants at January 31, 2012.
Events of default (subject to certain cure periods and other limitations) under the Credit Agreement include, but are
not limited to, (i) non-payment of principal, interest or other amounts due under the Credit Agreement, (ii) the
violation of terms, covenants, representations or warranties in the Credit Agreement or related loan documents,
(iii) any event of default under agreements governing certain indebtedness of the Borrowers and certain defaults by
the Borrowers under other agreements that would materially adversely affect the Borrowers, (iv) certain events of
bankruptcy, insolvency or liquidation involving the Borrowers, (v) judgments or judicial actions against the
Borrowers in excess of $250,000, subject to certain conditions, (vi) the failure of the Company to comply with
Pension Benefit Plans (as defined in the Credit Agreement), (vii) the invalidity of loan documents pertaining to the
Credit Agreement, (viii) a change of control of the Borrowers and (ix) the interruption of operations of any of the
Borrowers’ manufacturing facilities for five consecutive days during the peak season or fifteen consecutive days
during any other time, subject to certain conditions.
Pursuant to the Credit Agreement, substantially all of the Borrowers’ accounts receivable are automatically and
promptly swept to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Borrowers.
Due to this automatic liquidating nature of the Revolving Credit Facility, if the Borrowers breach any covenant,
violate any representation or warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing
base calculation, the Borrowers may not have access to cash liquidity unless provided by PNC in its discretion. In
35
addition, certain of the covenants and representations and warranties set forth in the Credit Agreement contain
limited or no materiality thresholds, and many of the representations and warranties must be true and correct in all
material respects upon each borrowing, which the Borrowers expect to occur on an ongoing basis. There can be no
assurance that the Borrowers will be able to comply with all such covenants and be able to continue to make such
representations and warranties on an ongoing basis.
The Company’s new line of credit with PNC is structured to provide seasonal credit availability during the
Company’s peak summer season. The Company believes that this new facility will provide sufficient liquidity to
meet its capital requirements in the next 12 months. Approximately $2,849,000 was available for borrowing as of
January 31, 2012.
During 2011, 2010 and 2009 the Company maintained the strength of its balance sheet and available liquidity
through a variety of methods. Despite a substantial operating loss and valuation allowance against deferred tax
assets in 2011 and 2010, the Company recorded operating cash flow of ($910,000) in 2011 and $5,452,000 in 2010.
Our continued disciplines over capital expenditures resulted in depreciation expense in excess of capital
expenditures by approximately $2,860,000 in 2011 and $2,350,000 in 2010. The Company reduced inventory levels
by $7,600,000, $8,200,000 and ($2,100,000) in 2011, 2010, and 2009, respectively. Management believes cash
generated from operations and from the previously described sources will be adequate to meet its capital
requirements in the next 12 months.
Long-Term Capital Requirements
In addition to short-term liquidity considerations, the Company continually evaluates long-term capital
requirements. From 1997 through 2000, the Company completed two large capital projects, which have had
significant subsequent effects on cash flow. The first project was the implementation of the SAP enterprise
resources planning system. The second project was the expansion and re-configuration of the Conway, Arkansas,
manufacturing and distribution facility.
Upon completion of these projects, the Company dramatically reduced capital spending. During 2001-2005 capital
expenditures ranged from 25%-40% of depreciation expense, and has remained below depreciation since that time.
Management intends to limit future capital spending until growth in sales volume fully utilizes the new plant and
distribution capacity. Capital expenditures will continue to focus on new product development along with the
tooling and new processes required to produce new products. The Company has established a goal of limiting
capital spending to less than $3,000,000 for 2012, which is less than anticipated depreciation expense.
Asset Impairment
The Company made substantial investments in its infrastructure in 1998, 1999, and 2000. The investments included
a new factory, new warehouse, and new production and distribution equipment. Much of the tooling, machinery,
and equipment acquired at this time is now fully or substantially depreciated. The factory, warehouse, and
equipment acquired are used to produce, store, and ship a variety of product lines, and the use of any one piece of
equipment is not dependent on the success or volume of any individual product. New products are designed to use
as many common or existing components as practical. As a result, both our ATS inventory components and the
machines used to produce them become more versatile. The Company evaluates the potential for impaired assets on
a quarterly basis. As of January 31, 2012, there has been no impairment to the long-lived assets of the Company.
The Company has no intangible assets on its Consolidated Balance Sheet at January 31, 2012 or January 31, 2011.
Contractual Obligations
The Company leases manufacturing, transportation, and office equipment, as well as real estate under a variety of
operating leases. The Company leases substantially all vehicles, including trucks and passenger cars under
operating leases where the lessor provides fleet management services for the Company. The fleet management
services provide Virco with operating efficiencies relating to the acquisition, administration, and operation of leased
vehicles. Real estate leases have been used where the Company did not want to make a long-term commitment to a
location, or when economic conditions favored leasing. The Torrance manufacturing and distribution facility is
leased under an operating lease that expires on February 28, 2015. The Company does not have any lease
36
obligations or purchase commitments in excess of normal recurring obligations. Leasehold improvements and
tenant improvement allowances are depreciated over the lesser of the expected life of the asset or the lease term.
Contractual Obligations
Payments Due by Period
In thousands
Long-term debt obligations
Interest on long-term debt
Operating lease obligations
Purchase obligations
Total
$ 11,508 $
240
19,391
14,777
Less than 1
year
5,497 $
—
6,016
14,777
1-3 years 3-5 years
More than 5
years
240
11,191
—
6,011 $ — $ —
—
—
559
1,625
—
—
559
$ 45,916 $ 26,290 $ 17,442 $ 1,625 $
We may be required to make significant cash outlays related to our unrecognized tax benefits. However, due to the
uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make
reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities.
Accordingly, unrecognized tax benefits of $271,000 as of January 31, 2012, have been excluded from the
contractual obligations table above. For further information related to unrecognized tax benefits, see Note 7,
“Income Taxes,” to the consolidated financial statements included in this report.
Virco’s largest market is publicly funded school districts. A significant portion of this business is awarded on a bid
basis. Many school districts require that a bid bond be posted as part of the bid package. In addition to bid bonds,
many districts require a performance bond when the bid is awarded. At January 31, 2012, the Company had bonds
outstanding valued at approximately $1,490,000. To the best of management’s knowledge, in over 62 years of
selling to schools, Virco has never had a bid or performance bond called.
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. 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. Warranty expense increased during 2010 due to the Company’s
decision to replace a component on a certain style of chair. These replacements were completed during 2011 at a
cost less than originally anticipated as the Company was able to perform field repairs at a favorable cost rather than
incurring replacement costs. The repair / replacement of this component was not related to the safety of the product
and has no exposure relating to product liability reserves. At the current time, management cannot reasonably
determine whether warranty claims for the upcoming fiscal year will be less than, equal to, or greater than warranty
claims incurred in 2011. The following is a summary of the Company’s warranty-claim activity during 2011 and
2010.
(In thousands)
Beginning balance
Provision
Costs incurred
Ending balance
Retirement Obligations
January 31,
2012
2011
$ 2,300 $ 1,675
1,519
(894)
(64)
(836)
$ 1,400 $ 2,300
The Company provides retirement benefits to employees and non-employee directors under three defined benefit
retirement plans; the Employee Plan, the VIP Plan, and the Directors Plan. The Employee Plan is a qualified
retirement plan that is funded through a trust held at Wells Fargo Bank (Trustee). The other two plans are non-
qualified retirement plans. Benefits payable under the VIP Plan are secured by life insurance policies held in a rabbi
trust and the Directors Plan is not funded. The Company obtains annual actuarial valuations for all three plans.
37
Effective December 31, 2003, benefit accruals were frozen for all three plans. Employees continued to vest under
the benefits earned to date, but no covered participants earned additional benefits after the plan freeze. At January
31, 2012, substantially all active participants under the plans were fully vested.
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 assumed rate of increases 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.
Virco discounted the pension obligations for the various plans using the following rates:
Employee Plan
VIP Plan
Directors Plan
2011
2010
2009
4.5%
5.5%
5.75%
4.5%
6.0%
6.00%
4.5%
5.5%
5.75%
Because the Company froze future benefit accruals for all three defined benefit plans 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, 2012 or 2011.
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. For 2011, 2010 and 2009 the Company
used a 6.5% expected return on plan assets, net of expenses.
During 2008 the Company incurred a large loss on assets held for investment in the qualified pension trust. This
loss has adversely impacted the funded status of the plan, and required the Company to record a $6.8 million
increase in pension liability offset by an increase in other comprehensive loss. These losses could require the
Company to increase cash contributions to the plan over the next several years, and increased pension expense for
2009 by over $1 million as compared to 2008 pension expense.
During 2011 two events significantly impacted the pension plans. The first event was a reduction in the discount
rate utilized to calculate pension plan obligations. The reduction in discount rate caused the liability for pension
obligations to increase by approximately $3.7 million, $1.4 million, and $26,000 for the Employee Plan, the VIP
Plan, and the Directors Plan, respectively. The increase in liability resulted in a comparable increase to
Accumulated Other Comprehensive Income (AOCI). The second event was a $2.0 million settlement charge for the
Employee Retirement Plan. As part of a restructuring plan, the Company offered early retirement benefits to all
employees who voluntarily severed their employment with the Company. Although the early retirement benefit was
paid in cash and did not include any additional benefits payable from a retirement plan, the benefit formula was
structured to reward employees with significant years of service, the same employees who would had earned
retirement benefits prior to the plan freeze in 2003. The pension trust made significant lump sum distributions to
participants in the latter part of the year, resulting in settlement charges in the third and fourth quarters. Because the
VIP Plan and Director Plan do not allow lump sum payments, there was no similar settlement charge required.
It is the Company’s policy to contribute adequate funds to the trust accounts to cover benefit payments under the
VIP Plan and Directors 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. The Company
contributed $1.9 million, $0.7 million, and $4.3 million to the trust in 2011, 2010, and 2009, respectively.
38
Contributions during 2012 will depend upon actual investment results and benefit payments, but are anticipated to
be approximately $1.9 million. During 2011, 2010, and 2009, the Company paid approximately $451,000, $458,000,
and $476,000, respectively, in benefits per year under the non-qualified plans. It is anticipated that contributions to
non-qualified plans will be approximately $562,000 for 2012. At January 31, 2012, accumulated other
comprehensive loss of approximately $18.8 million ($15.3 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, 2012, a 1% reduction in
investment return would have increased expense by approximately $170,000, a 1% change in the rate of
compensation increase would had no impact, and a 1% reduction in the discount rate would have increased expense
by $224,000. A 1% reduction in the discount rate would have increased the pension benefit obligations by
approximately $4.5 million.
Stockholders’ Equity
The Company initiated a $0.025 per share quarterly cash dividend in the fourth quarter of 2007 and continued to pay
the $0.025 quarterly dividend through the second quarter of 2011. The cash dividend was suspended after the
second quarter of 2011 as a result of operating losses. In addition, the Company’s new credit facility with PNC
Bank prohibits the Company from paying dividends and repurchasing stock. Consequently, commencing
December 22, 2011 and for at least as long as this covenant is included in the Company’s credit facility, no
dividends will be paid by the Company to its stockholders. During 2011 the Company paid cash dividends of
$710,000. During 2010, the Company paid cash dividends of $1,418,000 and repurchased $344,000 of stock.
During 2009, the Company paid cash dividends of $1,421,000 and repurchased $654,000 of stock.
Virco issued a 10% stock dividend or 3/2 stock split every year beginning in 1982 through 2002. Although the stock
dividend had no cash consequences to the Company, the accounting methodology required for 10% dividends has
affected the equity section of the balance sheet. When the Company records a 10% stock dividend, 10% of the
market capitalization of the Company on the date of the declaration is reclassified from retained earnings to
additional paid-in capital. During the period from 1982 through 2002, 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, 2012 reflects additional paid-in capital of approximately $115 million and deficit
retained earnings of approximately $69 million. Other than the losses incurred during 2003 - 2005, 2010, and 2011
the retained deficit is a result of the accounting reclassification, and is not the result of accumulated losses.
Environmental and Contingent Liabilities
Environmental Compliance
Virco is subject to numerous federal, state, and local 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. In this context, Virco works diligently to remain in
compliance with all such environmental laws and regulations as these affect the Company’s operations. Moreover,
Virco has enacted policies for recycling and resource recovery that have earned repeated commendations, including:
recognition by the California Department of Resources Recycling and Recovery (CalRecycle) in 2011 and 2010 as a
Waste Reduction Awards Program (WRAP) honoree; recognition by the United States Environmental Protection
Agency in 2003 as a WasteWise Hall of Fame Charter Member, in 2002 as a WasteWise Partner of the Year and in
2001 as a WasteWise Program Champion for Large Businesses; and recognition by the Sanitation Districts of Los
Angeles County for compliance with industrial waste water discharge guidelines in 2007 through 2010. This is only
a partial list of Virco’s environmental awards and commendations; for a more complete list, go to www.virco.com
and click on the Corporate Stewardship header. In addition to these awards and commendations, Virco’s ZUMA®
and ZUMAfrd™ product lines were the first classroom furniture collections to earn indoor air quality certification
through the stringent GREENGUARD® Children & Schools Program. As a follow-up to the certification of ZUMA
and ZUMAfrd models in 2005, hundreds of other Virco furniture items – including all models in the Company’s
recently introduced TEXT® table line, as well as HWT Technology tables, Sage™ Contract chairs, and Civitas™
seating products – have earned GREENGUARD certification. Moreover, all Virco products covered by the
39
Consumer Product Safety Improvement Act of 2008 are in compliance with this legislation. All affected Virco
models are also in compliance with the California Air Resources Board rule implemented on January 1, 2009,
concerning formaldehyde emissions from composite wood products. Environmental laws have changed rapidly in
recent years, and Virco may be subject to more stringent environmental laws in the future. The Company has
expended, and may be expected to continue to expend, significant amounts in the future for compliance with
environmental rules and regulations, for the investigation of environmental conditions, for the installation of
environmental control equipment, or remediation of environmental contamination. Normal recurring expenses
relating to operating our factories in a manner that meets or exceeds environmental laws are matched to the cost of
producing inventory. It is possible that the Company’s operations may result in noncompliance with, or liability for
remediation pursuant to, environmental laws. Should such eventualities occur, the Company records liabilities for
remediation costs when remediation costs are probable and can be reasonably estimated. See “Risk Factors — We
could be required to incur substantial costs to comply with environmental requirements.” Violations of, and
liabilities under, environmental laws and regulations may increase our costs or require us to change our business
practices.
In 2011 and 2010, the Company was self-insured for product and general liability losses of up to $250,000 per
occurrence, for workers’ compensation losses up to $250,000 per occurrence, and for auto liability up to $50,000 per
occurrence. In prior years the Company has been self-insured for workers’ compensation, automobile, product, and
general liability losses. The Company has purchased insurance to cover losses in excess of the self-insured retention
or deductible up to a limit of $30,000,000. For the insurance year beginning April 1, 2012, the Company will be
self-insured for product and general liability losses up to $250,000 per occurrence, for workers’ compensation losses
up to $250,000 per occurrence, and for auto liability up to $50,000 per occurrence. In future years, the Company’s
exposure to self-insured retentions will vary depending upon the market conditions in the insurance industry and the
availability of cost-effective insurance coverage.
The Company has aggressively pursued a program to improve product quality, reduce product liability claims and
losses, and to aggressively defend product liability cases. This program has continued through 2011 and has
resulted in reductions in product liability claims and litigated product liability cases. In addition, the Company has
active safety programs to improve plant safety and control workers’ compensation losses. Management does not
anticipate that any related settlement, after consideration of the existing reserves for claims and potential insurance
recovery, would have a material adverse effect on the Company’s financial position, results of operations, or cash
flows.
Off-Balance Sheet Arrangements
The Company did not enter into any material off-balance sheet arrangements during its 2011 fiscal year, nor did the
Company have any material off-balance sheet arrangements outstanding at January 31, 2012.
New Accounting Pronouncements
In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition” (“ASC 605”) “Multiple Deliverable
Arrangements”, which modifies the requirements for determining whether a deliverable in a multiple element
arrangement can be treated as a separate unit of accounting by removing the criteria that objective and reliable
evidence of fair value exists for the undelivered elements. The new guidance requires consideration be allocated to
all deliverables based on their relative selling price using vendor specific objective evidence (VSOE) of selling
price, if it exists; otherwise selling price is determined based on third-party evidence (TPE) of selling price. If
neither VSOE nor TPE exist, management must use its best estimate of selling price (ESP) to allocate the
arrangement consideration. The Company adopted this update effective February 1, 2011. The adoption of the
amendments in ASU 2009-13 did not have a material impact on the consolidated financial position and the results of
operations.
In January 2011, the FASB issued ASU, 2011-06, Improving Disclosures about Fair Value Measurements. ASU
2011-06 amends the Fair Value Measurements and Disclosures Topic to require additional disclosure and clarify
existing disclosure requirements about fair value measurements. ASU 2011-06 requires entities to provide fair value
disclosures by each class of assets and liabilities, which may be a subset of assets and liabilities within a line item in
the statement of financial position. The additional requirements also include disclosure regarding the amounts and
40
reasons for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and separate presentation of
purchases, sales, issuances and settlements of items within Level 3 of the fair value hierarchy. ASU 2011-06 is
effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances and settlements which is effective for fiscal years beginning after December 15,
2011, and for interim periods within those fiscal years. We adopted ASU 2011-06 on February 1, 2011, which only
applies to our disclosures on the fair value of financial instruments held by the pension plans. The adoption of ASU
2011-06 did not have a material impact on our footnote disclosures. We have provided these disclosures in Note 4
below.
In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement
(Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP and IFRS , which amends ASC 820 providing consistent guidance on fair value measurement and disclosure
requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 is effective for
fiscal years beginning after December 15, 2011. We do not expect the adoption of ASU 2011-04 will have a material
impact on our consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 requires the
components of net income and other comprehensive income to be either presented in one continuous statement,
referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The current
option to report other comprehensive income and its components in the statement of stockholders’ equity will be
eliminated. While ASU 2011-05 changes the presentation of comprehensive income, there are no changes to the
components that are recognized in net income or other comprehensive income under current accounting guidance.
This new guidance is effective for the Company beginning February 1, 2012 and requires retrospective application.
As this guidance only amends the presentation of the components of comprehensive income, the adoption will not
have an impact on the Company’s consolidated financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to interest rate risk related to its seasonal borrowings used to finance additional inventory
and receivables. Rising interest rates may adversely affect the Company’s results of operations and cash flows
related to its variable-rate bank borrowings under the credit line with PNC. Accordingly, a 100 basis point upward
fluctuation in PNC’s base rate would have caused the Company to incur additional interest charges of approximately
$100,000 for the 12 months ended January 31, 2012 (assuming the credit line with PNC had been in place for all of
2011). The Company would have benefited from a similar interest savings if the base rate were to have fluctuated
downward by a like amount.
The Company has used derivative financial instruments to reduce interest rate risks. The Company does not hold or
issue derivative financial instruments for trading purposes. All derivatives are recognized as either assets or
liabilities in the statement of financial condition and are measured at fair value. At January 31, 2012 and 2011, the
Company had no derivative instruments.
The Company’s business is subject to changes in the price of raw materials used to manufacture its products, such as
steel, plastic, wood, aluminum, polyethylene, polypropylene, plywood, particleboard, and cartons, as well as the
price of petroleum, which not only affects the cost of plastic, but also the Company’s transportation costs and costs
of operating its manufacturing facilities. With respect to the Company’s annual contracts (or those contracts that
have longer terms), the Company may have limited ability to increase prices during the term of the contract. The
Company has, however, negotiated increased flexibility under many of these contracts allowing the Company to
increase prices on future orders. Nevertheless, even with respect to these more flexible contracts, the Company does
not have the ability to increase prices on orders received prior to any announced price increases. Due to the
intensely seasonal nature of its business, the Company may receive significant orders during the first and second
quarters for delivery in the second and third quarters. With respect to any of the contracts described above, if the
costs of raw materials increase suddenly or unexpectedly, the Company cannot be certain that it will be able to
implement corresponding increases in its sales prices in order to offset such increased costs. Significant cost
increases in providing products during a given contract period can adversely impact operating results and have done
so during prior years, especially 2008, and 2011. The Company typically benefits from any decreases in raw
material costs under the contracts described above.
41
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2012 and 2011
Consolidated Statements of Operations for the Years Ended January 31, 2012, 2011 and 2010
Page
43
44
45
47
Consolidated Statements of Stockholders’ Equity for the Years Ended January 31, 2012, 2011 and 2010
48
Consolidated Statements of Cash Flows for the Years Ended January 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
Schedule II — Valuation and Qualifying Accounts and Reserves for the Years ended January 31, 2012,
2011 and 2010
49
50
73
42
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Virco Mfg. Corporation (the “Company”) is responsible for establishing and maintaining
adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over
financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting
is a process designed by, or supervised by, the Company’s principal executive and principal financial officers, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting is supported by written policies and procedures, that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s
management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In connection with the preparation of the Company’s annual financial statements, management of the Company
has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of
January 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the
design of the Company’s internal control over financial reporting and testing of the operational effectiveness of the
Company’s internal control over financial reporting.
Based on this assessment, management did not identify any material weakness in the Company’s internal control
over financial reporting, and management has concluded that the Company’s internal control over financial
reporting was effective as of January 31, 2012.
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Virco Mfg. Corporation
We have audited the accompanying consolidated balance sheets of Virco Mfg. Corporation as of January 31, 2012
and 2011, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the
three years in the period ended January 31, 2012. Our audits also included the financial statement schedule listed in
the Index at Items 15. These financial statements and schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the
Company’s internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Virco Mfg. Corporation at January 31, 2012 and 2011, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended January 31, 2012, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set for the therein.
/s/ Ernst & Young LLP
Los Angeles, California
April 25, 2012
44
January 31,
2012
2011
(In thousands)
$
2,897
$
1,528
12,743
401
324
10,462
168
367
6,273
10,623
10,895
9,618
13,773
11,980
27,791
35,371
1,652
1,619
45,808
49,515
1,671
1,213
47,797
120,181
2,549
1,671
1,437
47,797
118,799
2,699
173,411
172,403
134,203
130,342
39,208
42,061
2,200
7,009
2,605
6,407
$ 94,225
$ 100,588
Virco Mfg. Corporation
Consolidated Balance Sheets
Assets
Current assets
Cash
Trade accounts receivables (net of allowance for doubtful accounts of $350 and $200
in 2011 and 2010)
Other receivables
Income tax receivable
Inventories
Finished goods, net
Work in process, net
Raw materials and supplies, net
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment
Land
Land improvements
Buildings and building improvements
Machinery and equipment
Leasehold improvements
Less accumulated depreciation and amortization
Net property, plant and equipment
Deferred tax assets, net
Other assets
Total assets
See accompanying notes.
45
Virco Mfg. Corporation
Consolidated Balance Sheets
Liabilities
Current liabilities
Accounts payable
Accrued compensation and employee benefits
Current portion of long-term debt
Deferred tax liabilities
Other accrued liabilities
Total current liabilities
Non-current liabilities
Accrued self-insurance retention
Accrued pension expenses
Income tax payable
Long-term debt, less current portion
Other accrued liabilities
Total non-current liabilities
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 14,354,046
shares in 2011 and 14,204,998 shares in 2010
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
January 31,
2012 2011
(In thousands, except share data)
$ 11,684
3,797
5,497
1,221
4,641
$
9,536
3,946
12
1,398
5,125
26,840
20,017
1,915
25,069
488
6,011
3,006
1,770
18,027
722
6,519
3,131
36,489
30,169
—
—
144
115,060
(68,980)
(15,328)
142
114,467
(54,465)
(9,742)
30,896
50,402
$ 94,225
$ 100,588
46
Virco Mfg. Corporation
Consolidated Statements of Operations
Year ended January 31,
As Adjusted
2012
2010
(In thousands, except per share data)
2011
Net sales
Costs of goods sold
Gross profit
Selling, general and administrative expenses
(Gain) loss on sale of property, plant and equipment
Restructuring expense
Interest expense, net
Loss before income taxes
Income tax expense (benefit)
Net loss
Dividend declared:
Cash
Net loss per common share (a):
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
____________
$ 166,441
118,283
$ 180,995
129,621
$190,513
129,423
48,158
51,374
61,090
56,215
(1)
4,570
1,122
58,891
(7)
—
1,077
61,412
2
—
1,127
(13,748)
55
(8,587)
9,007
(1,451)
(726)
$ (13,803)
$ (17,594)
$
(725)
$
$
$
0.05
$
0.10
(0.97)
(0.97)
$
$
(1.25)
(1.25)
$
$
$
0.10
(0.05)
(0.05)
14,235
14,235
14,130
14,130
14,155
14,155
(a) Net loss per share was calculated based on basic shares outstanding due to the anti-dilutive effect on the inclusion
of common stock equivalent shares.
See accompanying notes.
47
Virco Mfg. Corporation
Consolidated Statements of Stockholders’ Equity
In thousands, except share data
Balance at January 31, 2009, as adjusted
Shares
14,238,994
Amount
142
$
Additional
Paid-in
Capital
$114,067
Accumulated
Deficit
$
(33,307)
Other
Comprehensive
Income (Loss)
Accumulated
Other
Comprehensive
Loss
$
(9,382)
Total
$ 71,520
Net loss, as adjusted
Pension adjustments, net of tax effect of $147
Comprehensive loss
Shares vested
Stock compensation expense
Stock repurchased
Cash dividends
—
—
—
118,845
—
(194,795)
—
—
—
—
2
—
(2)
—
—
—
—
(120)
857
(652)
—
(725)
$
(725)
(189)
(914)
—
—
—
—
—
(1,421)
—
(189)
—
—
—
—
—
(725)
(189)
—
(118)
857
(654)
(1,421)
Balance at January 31, 2010, as adjusted
14,163,044
$
142
$114,152
$
(35,453)
$
(9,571)
$ 69,270
Net loss
Pension adjustments
Comprehensive loss
Shares vested
Stock compensation expense
Stock repurchased
Cash dividends
Balance at January 31, 2011
Net loss
Pension adjustments
Comprehensive loss
Shares vested and others
Stock compensation expense
Cash dividends
—
—
—
141,838
—
(99,884)
—
14,204,998
$
—
—
—
149,048
—
—
—
—
—
1
—
(1)
—
142
—
—
—
2
—
—
—
—
(17,594)
$
(17,594)
—
(17,594)
—
(171)
(171)
(171)
—
(141)
799
(343)
—
$114,467
$
—
—
—
—
(1,418)
(54,465)
(17,765)
—
—
—
—
—
(9,742)
—
(140)
799
(344)
(1,418)
$ 50,402
$
—
—
—
(142)
735
—
(13,803)
$
(13,803)
—
(13,803)
—
—
(2)
—
(710)
(5,586)
(5,586)
(5,586)
(19,389)
—
—
—
—
—
(142)
735
(710)
Balance at January 31, 2012
14,354,046
$
144
$115,060
$
(68,980)
$
(15,328)
$ 30,896
See accompanying notes.
48
Virco Mfg. Corporation
Consolidated Statements of Cash Flows
Operating activities
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities
Depreciation and amortization
Provision for doubtful accounts
(Gain) loss on sale of property, plant and equipment
Deferred income taxes
Stock-based compensation
Changes in operating assets and liabilities
Trade accounts receivable
Other receivables
Inventories
Income taxes
Prepaid expenses and other current assets
Accounts payable and accrued liabilities
Net cash (used in) provided by operating activities
Investing activities
Capital expenditures
Proceeds from sale of property, plant and equipment
Net investment in life insurance
Net cash used in investing activities
Financing activities
Proceeds from long-term debt
Repayment of long-term debt
Purchase of treasury stock
Cash dividend paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest
Income tax, net
Non-cash activities
Decrease in accrued asset retirement obligations
See accompanying notes.
Year Ended January 31,
2012
2011
(In thousands)
As Adjusted
2010
$
(13,803) $
(17,594) $
(725)
5,021
196
(1)
229
735
(2,476)
(233)
7,579
(369)
(32)
2,244
(910)
(2,159)
2
170
(1,987)
29,263
(24,287)
—
(710)
4,266
1,369
1,528
2,897
1,122
32
5,352
79
(7)
9,859
799
3,586
(27)
8,218
(506)
(584)
(3,723)
5,452
(3,002)
39
149
(2,814)
5,387
127
2
(916)
857
(61)
269
(2,070)
58
146
(5,869)
(2,795)
(5,345)
27
36
(5,282)
35,648
(36,041)
(344)
(1,418)
(2,155)
29,043
(22,233)
(654)
(1,421)
4,735
483
1,045
1,528 $
(3,342)
4,387
1,045
1,077 $
68
1,127
176
$
$
(100) $
— $
(200)
$
$
$
49
VIRCO MFG. CORPORATION
Notes to Consolidated Financial Statements
January 31, 2012
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 62 years of
manufacturing operations have resulted in a wide product assortment. Major products include mobile tables, mobile
storage equipment, desks, computer furniture, chairs, activity tables, folding chairs and folding tables. The Company
manufactures its products in Torrance, California, and Conway, Arkansas, for sale primarily in the United States.
The Company operates in a seasonal business, and requires significant amounts of working capital under its credit
facility to fund acquisitions of inventory and finance receivables during the summer delivery season. Restrictions
imposed by the terms of the Company’s credit facility may limit the Company’s operating and financial flexibility.
However, management believes that its existing cash and available borrowings under its credit facility, and any cash
generated from operations will be sufficient to fund its working capital requirements, capital expenditures and other
obligations through the next 12 months.
Principles of Consolidation
The consolidated financial statements include the accounts of Virco Mfg. Corporation and its wholly owned
subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Management Use of Estimates
Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities — and disclosure of contingent assets and liabilities — at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting period. Significant estimates made by
management include, but are not limited to, valuation of inventory; deferred tax assets and liabilities; useful lives of
property, plant, and equipment; liabilities under pension, warranty, self-insurance, and environmental claims; and
the ultimate collection of accounts receivable. Actual results could differ from these estimates.
Fiscal Year End
Fiscal years 2011, 2010 and 2009, refer to the fiscal years ended January 31, 2012, 2011 and 2010, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of
accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains allowances
for potential credit losses. Sales to the Company’s recurring customers are generally made on open account with
terms consistent with the industry. Credit is extended based on an evaluation of the customer’s financial condition
and payment history. Past due accounts are determined based on how recently payments have been made in relation
to the terms granted. Amounts are written off against the allowance in the period that the Company determines that
the receivable is not collectable. The Company purchases insurance on receivables from certain commercial
customers to minimize the Company’s credit risk. The Company does not typically obtain collateral to secure credit
risk. Customers with inadequate credit are required to provide cash in advance or letters of credit. The Company
does not assess interest on receivable balances. A substantial percentage of the Company’s receivables come from
low-risk government entities. No customer exceeded 10% of the Company’s sales for each of the three years ended
January 31, 2012. Foreign sales were approximately 7%, 6% and 7% of the Company’s sales for fiscal years 2011,
2010 and 2009, respectively.
50
No single customer accounted for more than 10% of the Company’s accounts receivable at January 31, 2012 or
2011. Because of the short time between shipment and collection, the net carrying value of receivables approximates
the fair value for these assets.
Fair Values of Financial Instruments
The fair values of the Company’s cash, accounts receivable, and accounts payable approximate their carrying
amounts due to their short-term nature.
Financial assets 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.
Inventories
Inventory is valued at the lower of cost or market (determined on a first-in, first-out basis) and includes material,
labor, and factory overhead. The Company maintains allowances for estimated slow moving and obsolete inventory
to reflect the difference between the cost of inventory and the estimated market value. Allowances for slow moving
and obsolete inventory are determined through a physical inspection of the product in connection with a physical
inventory, a review of slow-moving product, and consideration of active marketing programs. The market for
education furniture is traditionally driven by value, not style, and the Company has not typically incurred significant
obsolescence expenses. If market conditions are less favorable than those anticipated by management, additional
allowances may be required. Due to reductions in sales volume in the past years, the Company’s manufacturing
facilities are operating at reduced levels of capacity. The Company records the cost of excess capacity as a period
expense, not as a component of capitalized inventory valuation.
On January 31, 2011, the Company elected to change its costing method for the material component of raw
materials, work in process, and finished goods inventory to the lower of cost or market using the first-in, first-out
(“FIFO”) method, from the lower of cost or market using the last-in, first out (“LIFO”) method. The labor and
overhead components of inventory have historically been valued on a FIFO basis. The Company believes that the
FIFO method for the material component of inventory is preferable as it conforms the inventory costing methods for
all components of inventory into a single costing method and better reflects current acquisition costs of those
inventories on our consolidated balance sheets. Additionally, presentation of inventory at FIFO aligns the financial
reporting with the Company’s borrowing base under its line of credit (see Note 3 for further discussion of the line of
credit). Further, this change will promote greater comparability with companies that have adopted International
Financial Reporting Standards, which does not recognize LIFO as an acceptable accounting method. In accordance
with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 250,
Accounting Changes and Error Corrections, all prior periods presented have been adjusted to apply the new
accounting method retrospectively. In addition, as an indirect effect of the change in our inventory costing method
from LIFO to FIFO, the Company recorded additional inventory lower of cost or market expenses and changes in
deferred tax assets and income tax expense.
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:
51
Land improvements
Buildings and building improvements
Machinery and equipment
Leasehold improvements
5 to 25 years
5 to 40 years
3 to 10 years
shorter of lease or useful life
The Company did not capitalize interest costs as part of the acquisition cost of property, plant and equipment for the
years ended January 31, 2012, 2011 and 2010. The Company capitalizes the cost of significant repairs that extend
the life of an asset. Repairs and maintenance that do not extend the life of an asset are expensed as incurred.
Depreciation and amortization expense was $5,021,000, $5,352,000 and $5,387,000 for the fiscal years ended
January 31, 2012, 2011 and 2010, respectively.
The Company capitalizes costs associated with software developed for its own use. Such costs are amortized over
three to seven years from the date the software becomes operational. At January 31, 2012 and 2011, the Company
had no capitalized software.
The Company subleased space at one of its facilities on a month-to-month basis during 2011, 2010 and 2009. Rental
income was $40,000 for fiscal 2011, 2010, and 2009.
The Company has established asset retirement obligations related to leased manufacturing facilities in accordance
with FASB 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 $545,000 and $636,000 at January 31, 2012 and 2011, respectively.
Balance at beginning of period
Decrease in obligation
Accretion expense
Balance at end of period
Impairment of Long-Lived Assets
January 31,
2012
$ (636,000)
100,000
(9,000)
2011
$ (627,000)
—
(9,000)
$ (545,000)
$ (636,000)
An impairment loss is recognized in the event facts and circumstances indicate the carrying amount of an intangible
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.
Net Loss per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares
outstanding. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of
common shares outstanding plus the dilution effect of convertible securities. The following table sets forth the
computation of basic and diluted loss per share:
52
In thousands, except per share data
Numerator
Net loss
Denominator
Weighted-average shares — basic
2011
2010
As Adjusted
2009
$ (13,803)
$ (17,594)
$
(725)
14,235
14,130
14,155
Common equivalent shares from common stock options and warrants
—
—
—
Weighted-average shares — diluted (1)
14,235
14,130
14,155
Net loss per common share
Basic
Diluted
____________
$
(0.97)
(0.97)
$
(1.25)
(1.25)
$ (0.05)
(0.05)
(1) For the period ended January 31, 2012, approximately 56,000 shares of common stock equivalents were
excluded in the computation of diluted net income per share, as the effect would be anti-dilutive. For the period
ended January 31, 2011, approximately 59,000 common stock equivalents were excluded in the computation of
diluted net income per share, as the effect would be anti-dilutive. Effective June 6, 2006, in connection with a
stock purchase agreement, the Company issued warrants to purchase 268,010 shares of common stock at an
exercise price of $6.06. Effective September 30, 2006, in connection with a stock purchase agreement, the
Company issued warrants to purchase 14,364 shares of common stock at an exercise price of $6.53. All warrants
expired during fiscal 2011.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets in accordance with FASB ASC Topic 805,
“Business Combinations,” and FASB ASC Topic 350, “Intangibles — Goodwill and Other Assets”. Under FASB
ASC Topic 350, goodwill and intangible assets deemed to have an indefinite life are not amortized but are subject to
annual impairment tests. Impairment tests are prepared in the fourth quarter of each fiscal year or more frequently if
events or circumstances occur that would indicate a reduction in the fair value. Other intangible assets are amortized
on a straight line basis over their useful lives (3-17 years).
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 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, 2012 and 2011, the Company had not capitalized any
remediation costs and had not recorded any amortization expense in fiscal years 2011, 2010 and 2009.
Advertising Costs
Advertising costs are expensed in the period during which the advertising space is run. Selling, general and
administrative expenses include advertising costs of $1,395,000 in 2011, $1,118,000 in 2010, and $1,726,000 in
2009. Prepaid advertising costs reported as an asset on the balance sheet at January 31, 2012 and 2011, were
$208,000 and $298,000, respectively.
53
Product Warranty Expense
The Company provides a product warranty on most products. The standard warranty offered on products sold
through January 31, 2005 is five years. Effective February 1, 2005, the standard warranty was increased to 10 years
on products sold after February 1, 2005. The Company generally provides that customers can return a defective
product during the specified warranty period following purchase in exchange for a replacement product or that the
Company can repair the product at no charge to the customer. The Company determines whether replacement or
repair is appropriate in each circumstance. The Company uses historic data to estimate appropriate levels of
warranty reserves. Because product mix, production methods, and raw material sources change over time, historic
data may not always provide precise estimates for future warranty expense. The Company recorded warranty
reserves of $1,400,000 and $2,300,000 as of January 31, 2012 and 2011, respectively.
Self-Insurance
In 2011 and 2010, the Company was self-insured for product and general liability losses up to $250,000 per
occurrence, for workers’ compensation losses up to $250,000 per occurrence, and for auto liability up to $50,000 per
occurrence. In prior years the Company had been self-insured for workers’ compensation, automobile, product, and
general liability losses. 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 4.50% in 2011 and 5.50%
in 2010.
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.
Reclassifications
Certain reclassifications have been made to the prior year balance sheet to conform to the current year presentation.
Reclassifications did not have a material impact to the balance sheet or results of operations.
Revenue Recognition
The Company recognizes all sales when title passes under its various shipping terms, when installation services are
performed and when collectability is reasonably assured. The Company reports sales net of sales returns and
allowances and sales tax imposed by various government authorities.
Shipping and Installation Fees
Revenues related to shipping and installation are included as revenue in net sales. Costs related to shipping and
installations are included in operating expenses. For the fiscal years ended January 31, 2012, 2011 and 2010,
shipping and installation costs of approximately $15,804,000, $16,884,000 and $16,380,000, respectively, were
included in selling, general and administrative expenses.
Accounting for Income Taxes
The Company recognizes deferred income taxes under the asset and liability method of accounting for income taxes
in accordance with the provisions of FASB ASC Topic 740, “Accounting for Income Taxes.” Deferred income taxes
are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted
statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation
allowance against deferred tax assets is recorded when it is determined to be more likely than not that the asset will
not be realized.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”)
now codified as FASB ASC Topic 740. FASB ASC Topic 740 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FASB ASC
Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than
54
not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of
the position. The tax benefits recognized in the financial statements from such a position should be measured based
on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FASB ASC
Topic 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, and
accounting in interim periods and requires increased disclosures.
2. New Accounting Pronouncements
In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition” (“ASC 605”) “Multiple Deliverable
Arrangements”, which modifies the requirements for determining whether a deliverable in a multiple element
arrangement can be treated as a separate unit of accounting by removing the criteria that objective and reliable
evidence of fair value exists for the undelivered elements. The new guidance requires consideration be allocated to
all deliverables based on their relative selling price using vendor specific objective evidence (VSOE) of selling
price, if it exists; otherwise selling price is determined based on third-party evidence (TPE) of selling price. If
neither VSOE nor TPE exist, management must use its best estimate of selling price (ESP) to allocate the
arrangement consideration. The Company adopted this update effective February 1, 2011. The adoption of the
amendments in ASU 2009-13 did not have a material impact on the consolidated financial position and the results of
operations.
In January 2011, the FASB issued ASU, 2011-06, Improving Disclosures about Fair Value Measurements. ASU
2011-06 amends the Fair Value Measurements and Disclosures Topic to require additional disclosure and clarify
existing disclosure requirements about fair value measurements. ASU 2011-06 requires entities to provide fair value
disclosures by each class of assets and liabilities, which may be a subset of assets and liabilities within a line item in
the statement of financial position. The additional requirements also include disclosure regarding the amounts and
reasons for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and separate presentation of
purchases, sales, issuances and settlements of items within Level 3 of the fair value hierarchy. ASU 2011-06 is
effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances and settlements which is effective for fiscal years beginning after December 15,
2011, and for interim periods within those fiscal years. We adopted ASU 2011-06 on February 1, 2011, which only
applies to our disclosures on the fair value of financial instruments held by the pension plans. The adoption of ASU
2011-06 did not have a material impact on our footnote disclosures. We have provided these disclosures in Note 4
below.
In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement
(Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP and IFRS , which amends ASC 820 providing consistent guidance on fair value measurement and disclosure
requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 is effective for
fiscal years beginning after December 15, 2011. We do not expect the adoption of ASU 2011-04 will have a material
impact on our consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 requires the
components of net income and other comprehensive income to be either presented in one continuous statement,
referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The current
option to report other comprehensive income and its components in the statement of stockholders’ equity will be
eliminated. While ASU 2011-05 changes the presentation of comprehensive income, there are no changes to the
components that are recognized in net income or other comprehensive income under current accounting guidance.
This new guidance is effective for the Company beginning February 1, 2012 and requires retrospective application.
As this guidance only amends the presentation of the components of comprehensive income, the adoption will not
have an impact on the Company’s consolidated financial position or results of operations.
3. Debt
Outstanding balances (in thousands) for the Company’s long-term debt were as follows:
55
In thousands, except per share data
Revolving credit line
Other
Total long-term debt
Less current portion
Non-current portion
January 31,
2012
2011
$ 11,485
23
11,508
5,497
$ 6,011
$ 6,496
35
6,531
12
$ 6,519
On December 22, 2011 (the “Closing Date”), the Company and Virco Inc., a wholly owned subsidiary of the
Company (“Virco Inc.” and, together with the Company, the “Borrowers”) entered into a Revolving Credit and
Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and
lender (“PNC”). The Credit Agreement provides the Borrowers with a secured revolving line of credit (the
“Revolving Credit Facility”) of up to $60,000,000, with seasonal adjustments to the credit limit and subject to
borrowing base limitations, and includes a sub-limit of up to $3,000,000 for the issuance of letters of credit. The
Revolving Credit Facility is an asset-based line of credit that is subject to a borrowing base limitation and generally
provides for advances of up to 85% of eligible receivables, plus a percentage equal to the lesser of 60% of the value
of eligible inventory or 85% of the liquidation value of eligible inventory, plus an amount ranging from $6,000,000
to $12,000,000 from March 1 through July 15 of each year, minus undrawn amounts of letters of credit and reserves.
The Revolving Credit Facility is secured by substantially all of the Borrowers’ personal property and certain of the
Borrowers’ real property. The principal amount outstanding under the Credit Agreement and any accrued and
unpaid interest is due no later than December 22, 2014, and the Revolving Credit Facility is subject to certain
prepayment penalties upon earlier termination of the Revolving Credit Facility. Prior to the maturity date, principal
amounts outstanding under the Credit Agreement may be repaid and reborrowed at the option of the Borrowers
without premium or penalty, subject to borrowing base limitations, seasonal adjustments and certain other
conditions.
On the Closing Date, the Borrowers drew down approximately $9,800,000 under the Revolving Credit Facility to
repay in full all indebtedness outstanding under its prior revolving facility governed by the Second Amended and
Restated Credit Agreement dated as of March 12, 2008 (as amended, the “Prior Revolving Credit Agreement”) by
and between the Company and Wells Fargo Bank, National Association (“Wells Fargo”), and to pay fees and
expenses related to the Credit Agreement. The Company intends to utilize the Revolving Credit Facility for
liquidity and working capital purposes.
The Revolving Credit Facility bears interest, at the Borrowers’ option, at either the Alternate Base Rate (as defined
in the Credit Agreement) or the Eurodollar Currency Rate (as defined in the Credit Agreement), in each case plus an
applicable margin. The applicable margin for Alternate Base Rate loans is a percentage within a range of 0.75% to
1.75%, and the applicable margin for Eurodollar Currency Rate loans is a percentage within a range of 1.75% to
2.75%, in each case based on the EBITDA of the Borrowers at the end of each fiscal quarter, and may be increased
at PNC’s option by 2.0% during the continuance of an event of default. Accrued interest with respect to principal
amounts outstanding under the Credit Agreement is payable in arrears on a monthly basis for Alternative Base Rate
loans, and at the end of the applicable interest period but at most every three months for Eurodollar Currency Rate
loans.
The Credit Agreement contains a covenant that forbids the Company from issuing dividends or making payments
with respect to the Company’s capital stock, and contains numerous other covenants that limit under certain
circumstances the ability of the Borrowers and their subsidiaries to, among other things, merge with or acquire other
entities, incur new liens, incur additional indebtedness, repurchase stock, sell assets outside of the ordinary course of
business, enter into transactions with affiliates, or substantially change the general nature of the business of the
Borrowers, taken as a whole. The Credit Agreement also requires the Company to maintain certain financial
56
covenants, including a minimum tangible net worth, minimum EBITDA amounts and a minimum fixed charge
coverage ratio.. In addition, there is 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 days each fiscal year. The Company believes that normal
operating cash flow will allow it to meet the “clean down” requirement with no adverse impact on the Company’s
liquidity. The Company was in compliance with its covenants at January 31, 2012.
Events of default (subject to certain cure periods and other limitations) under the Credit Agreement include, but are
not limited to, (i) non-payment of principal, interest or other amounts due under the Credit Agreement, (ii) the
violation of terms, covenants, representations or warranties in the Credit Agreement or related loan documents,
(iii) any event of default under agreements governing certain indebtedness of the Borrowers and certain defaults by
the Borrowers under other agreements that would materially adversely affect the Borrowers, (iv) certain events of
bankruptcy, insolvency or liquidation involving the Borrowers, (v) judgments or judicial actions against the
Borrowers in excess of $250,000, subject to certain conditions, (vi) the failure of the Company to comply with
Pension Benefit Plans (as defined in the Credit Agreement), (vii) the invalidity of loan documents pertaining to the
Credit Agreement, (viii) a change of control of the Borrowers and (ix) the interruption of operations of any of the
Borrowers’ manufacturing facilities for five consecutive days during the peak season or fifteen consecutive days
during any other time, subject to certain conditions.
Pursuant to the Credit Agreement, substantially all of the Borrowers’ accounts receivable are automatically and
promptly swept to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Borrowers.
Due to this automatic liquidating nature of the Revolving Credit Facility, if the Borrowers breach any covenant,
violate any representation or warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing
base calculation, the Borrowers may not have access to cash liquidity unless provided by PNC in its discretion. In
addition, certain of the covenants and representations and warranties set forth in the Credit Agreement contain
limited or no materiality thresholds, and many of the representations and warranties must be true and correct in all
material respects upon each borrowing, which the Borrowers expect to occur on an ongoing basis. There can be no
assurance that the Borrowers will be able to comply with all such covenants and be able to continue to make such
representations and warranties on an ongoing basis.
The Company’s new line of credit with PNC is structured to provide seasonal credit availability during our peak
summer season. The Company believes that this new facility will provide sufficient liquidity to meet its capital
requirements in the next 12 months. Approximately $2,849,000 was available for borrowing as of January 31, 2012.
At January 31, 2011, the Company had outstanding borrowings of $6,496,000 pursuant to its Prior Revolving Credit
Agreement with Wells Fargo Bank. The revolving line under its prior facility typically provided for advances of up
to 80% on eligible accounts receivable and 20% — 60% on eligible inventory, subject to the specific terms of the
facility. The advance rates fluctuated depending on the time of year and the types of assets. The interest rate was at
prime or LIBOR plus 2.5%. The agreement had an unused commitment fee of 0.375%. Availability under the line
was $11,116,000 at January 31, 2011.
Long-term debt repayments are approximately as follows (in thousands):
Year ending January 31,
2013
2014
2015
2016
2017
Thereafter
$ 5,497
6,011
—
—
—
—
Management believes that the carrying value of debt approximated fair value at January 31, 2012 and 2011, as all of
the long-term debt bears interest at variable rates based on prevailing market conditions.
The descriptions set forth herein of the Revolving Credit Agreement and Prior Revolving Credit Agreement are
qualified in their entirety by the terms of such agreements, each of which has been filed with the Securities and
Exchange Commission.
57
4. Retirement Plans
Pension Plans
The Company maintains three defined benefit pension plans, the Virco Employees Retirement Plan (“Employee
Plan”), the Virco Important Performers Retirement Plan (“VIP Plan”), and the Non-Employee Directors Retirement
Plan (“Directors Plan”). The Company and its subsidiaries cover all employees 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.
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. The VIP Plan benefits are secured by a life insurance program. The cash
surrender values of the policies securing the VIP Plan were $2,973,000 and $2,903,000 at January 31, 2012 and
2011, respectively. These cash surrender values are included in other assets in the consolidated balance sheets. The
Company maintains a rabbi trust to hold assets related to the VIP Retirement Plan and a Split $ Life Insurance Plan.
Substantially all assets securing the VIP Plan are held in the rabbi trust. Benefit accruals under the VIP Plan were
frozen effective December 31, 2003.
In April 2001, the Board of Directors established the Directors Plan, a non-qualified plan for non-employee directors
of the Company. The Directors Plan provides a lifetime annual retirement benefit equal to the director’s annual
retainer fee for the fiscal year in which the director terminates his or her position with the Board, subject to the
director providing 10 years of service to the Company. At January 31, 2012, the Directors Plan did not hold any
assets. Benefit accruals under the Directors Plan were frozen effective December 31, 2003.
The annual measurement date for all plans for the fiscal years ended January 31, 2012, 2011, and 2010 is
January 31. Effective December 31, 2003, the Company froze all future benefit accruals under the plans.
Employees can continue to vest under the benefits earned to date, but no covered participants will earn additional
benefits under the plan freeze.
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.
Because the Company froze future benefit accruals for all three defined benefit plans, the compensation increase
assumption had no impact on pension expense, accumulated benefit obligation or projected benefit obligation for the
period ended January 31, 2012 or 2011.
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. Two of the Company’s defined benefit
pension plans (the VIP Plan and the Directors Plan) are executive benefit plans that are not funded and are subject to
the Company’s creditors. Because these plans are not funded, the assumed rate of return has no impact on pension
expense or the funded status of the plans.
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 75% of the trust assets are managed by investment advisors and held in common trust funds with the
58
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 long-term asset allocation target provided to the investment advisors is 80% stock and 20% bond, with
maximum allocations of 80% large cap stocks, 30% small cap stocks, and 30% international stock. The Company
has established a custom benchmark derived from a variety of stock and bond indices that are weighted to
approximate the asset allocation provided to the investment advisors. The investment advisors’ performance is
compared to the custom index as part of the evaluation of the investment advisors’ performance. The Retirement
Plan Committee receives monthly reports from the investment advisors and meets periodically with them to discuss
investment performance.
At January 31, 2012 and 2011, the amount of the plan assets invested in bond or short-term investment funds was
6% and 7%, respectively, and the balance of the trust was held in equity funds or 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 Directors Plan and to maintain the funded status of the Employee Plan at
level which is adequate to avoid significant restrictions to the Qualified Plan under the Pension Protection Act of
2006.
During 2011 two events significantly impacted the pension plans. The first event was a reduction in the discount
rate utilized to calculate pension plan obligations. The reduction in discount rate caused the liability for pension
obligations to increase by approximately $3.7 million, $1.4 million, and $26,000 for the Employee Plan, the VIP
Plan, and the Directors Plan, respectively. The increase in liability resulted in a comparable increase to
Accumulated Other Comprehensive Income (“AOCI”). The second event was a $2.0 million settlement charge for
the Employee Retirement Plan. As part of a restructuring plan, the Company offered early retirement benefits to all
employees who voluntarily severed their employment with the Company. Although the early retirement benefit was
paid in cash and did not include any additional benefits payable from a retirement plan, the benefit formula was
structured to reward employees with significant years of service, the same employees who would have earned
retirement benefits prior to the Employee Plan freeze in 2003. The pension trust made significant lump sum
distributions to participants in the latter part of the year, resulting in settlement charges in the third and fourth
quarters. Because the VIP Plan and Director Plan do not allow lump sum payments, there was no similar settlement
charge required.
Payments from the Employee Plan pension trust to plan participants are estimated to be $1,403,000 during the fiscal
year ending January 31, 2013. It is anticipated that the Company will contribute approximately $1.9 million to the
trust in 2012. Actual contributions will depend upon investment return on the plan assets. Payments made under the
Employee Plan are made from the trust fund. It is anticipated that the Company will be required to contribute
approximately $562,000 to the non-qualified plans during the fiscal year ending January 31, 2013. Payments made
under the VIP Plan and Directors Plan are made by the Company.
59
The following table sets forth (in thousands) the funded status of the Company’s pension plans at January 31, 2012,
and 2011:
Employee Plan
VIP Plan
Directors Plan
01/31/2012
01/31/2011
01/31/2012
01/31/2011
01/31/2012
01/31/2011
Change in Benefit Obligation
Benefit obligation at beg. of year
Service cost
Interest cost
Participant contributions
Amendments
Actuarial losses (gains)
Plan settlement
Benefits paid
Benefit obligation at end of year
Change in Plan Assets
Fair value at beg. of year assets
Actual return on plan assets
Company contributions
Settlements
Benefits paid
Fair value at end of year
Funded Status
Unfunded status of the plan
$ 27,080
—
1,370
—
—
5,537
(3,791)
(613)
$ 29,583
$ 17,737
(415)
1,890
(3,791)
(613)
$ 14,808
$ 25,268
$
—
1,406
—
—
1,880
—
(1,474)
$ 27,080
$ 16,192
2,338
681
—
(1,474)
$ 17,737
$
$
$
6,529
—
379
—
—
1,622
—
(451)
8,079
—
—
451
—
(451)
—
$
$
$
$
6,076
—
350
—
—
561
—
(458)
6,529
—
—
458
—
(458)
—
$
$
$
$
450
—
23
—
—
7
—
—
480
—
—
—
—
—
—
$ (14,775)
$ (9,343)
$ (8,079)
$ (6,529)
$
(480)
Amounts Recognized in Statement of Financial Position
Current liabilities
Non-current liabilities
Accrued benefit cost
—
(14,775)
$ (14,775)
—
(9,343)
$ (9,343)
(495)
(7,584)
$ (8,079)
(412)
(6,117)
$ (6,529)
Amounts Recognized in Statement of Financial Position
and Operations
Accrued benefit liability
Accumulated other comp. loss (gain)
Net amount recognized
Items not yet Recognized as a Component of Net Periodic
Pension Expense, Included in AOCI
Unrecognized net actuarial loss (gain)
Unamortized prior service costs
Net initial asset recognition
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive Income
Net loss (gain)
Prior service cost
Amortization of (loss) gain
Amortization of prior service cost (credit)
Amortization of initial asset
Total recognized in other
Comprehensive Income
Items to be Recognized as a Component of 2012 Periodic
Pension Cost
Prior service cost
Net actuarial loss (gain)
Supplemental Data
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$ (14,775)
16,195
1,420
$
$ (9,343)
12,226
2,883
$
$ (8,079)
1,571
$ (6,508)
$ (6,529)
1,115
$ (5,414)
$ 16,195
—
—
$ 16,195
$ 12,226
—
—
$ 12,226
$
$
1,571
—
—
1,571
$
$
1,115
—
—
1,115
$
$
7,060
—
(3,091)
—
—
3,969
$
589
—
(972)
—
—
$
(383)
$
—
1,423
$ 1,423
$
—
1,050
$ 1,050
$ 29,583
29,583
14,808
$ 27,080
27,080
17,737
$
$
$
$
$
1,622
—
(51)
—
—
1,571
—
205
205
8,079
8,079
—
$
$
$
$
$
561
—
—
—
—
561
—
51
51
6,529
6,529
—
$
$
$
$
$
$
$
$
$
$
(67)
(413)
(480)
(480)
(38)
(518)
(38)
—
—
(38)
7
—
39
—
—
46
—
—
—
480
480
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
463
—
25
—
—
(38)
—
—
450
—
—
—
—
—
—
(450)
(67)
(383)
(450)
(450)
(84)
(534)
(84)
—
—
(84)
(38)
—
31
—
—
(7)
—
(38)
(38)
450
450
—
60
Components of Net Cost
Service cost
Interest cost
Expected return on plan assets
Amortization of transition amount
Recognized (gain) loss due to curtailments
Amortization of prior service cost
Recognized net actuarial loss
Benefit cost
Estimated Future Benefit Payments
FYE 01-31-2013
FYE 01-31-2014
FYE 01-31-2015
FYE 01-31-2016
FYE 01-31-2017
FYE 01-31-2018 to 2022
Total
Weighted Average Assumptions to Determine Benefit
Obligations at Year-End
Discount rate
Rate of compensation increase
Weighted Average Assumptions to Determine Net Periodic
Pension Cost
Discount rate
Expected return on plan assets
Rate of compensation increase
Employee Plan
VIP Plan
Directors Plan
01/31/2012
01/31/2011
01/31/2012
01/31/2011
01/31/2012
01/31/2011
$
$
—
350
—
—
—
—
—
350
$
$
—
1,406
(1,048)
—
—
—
972
1,330
$
$
—
1,370
(1,107)
—
—
—
3,091
3,354
$
1,403
1,319
1,675
1,703
2,191
7,984
$ 16,275
$
$
$
$
—
379
—
—
—
—
51
430
495
488
467
455
432
1,973
4,310
$
$
—
25
—
—
—
(31)
(6)
$
$
$
$
—
23
—
—
—
(39)
(16)
67
62
58
53
48
172
460
4.50%
N/A
5.50%
N/A
4.50%
N/A
6.00%
N/A
4.50%
N/A
5.50%
N/A
5.50%
6.50%
N/A
5.75%
6.50%
N/A
6.00%
N/A
N/A
6.00%
N/A
N/A
5.50%
N/A
N/A
5.75%
N/A
N/A
Fair Value Measurements of Plan Assets
Employee Plan
Level 1 Measurement
Cash & Cash Equivalents
Common Stock
Total Level 1
Level 2 Measurement
Bond Index Fund
Total Return Bond Fund
US Aggregate Bond Index Fund
Large Cap Growth Index Fund
Large Cap Value Index Fund
Russell 2000 Index Fund
International Equity Index Fund
Managed Investment Fund
Vanguard MSCI Emerging Markets Fund
Total Level 2
Level 3 Measurement
None
401(k) Retirement Plan
01/31/2012
01/31/2011
$
334
3,538
$ 3,872
$
245
3,673
$ 3,918
$
223
306
288
3,652
2,776
1,380
1,111
632
568
$ 10,936
$
395
358
436
3,750
2,835
3,253
2,131
661
—
$ 13,819
N/A
N/A
The Company’s retirement plan, which covers all U.S. employees, allows participants to defer from 1% to 50% of
their eligible compensation through a 401(k) retirement program. Through December 31, 2001, the plan included an
61
employee stock ownership component. The plan continues to include Virco stock as one of the investment options.
At January 31, 2012 and 2011, the plan held 754,241 shares and 749,020 shares of Virco stock, respectively. For the
fiscal years ended January 31, 2012, 2011 and 2010, there was no employer match and therefore no compensation
cost to the Company.
Life Insurance
The Company provided current and post-retirement life insurance to certain salaried employees with split-dollar life
insurance policies under the Dual Option Life Insurance Plan. Effective January 2004, the Company terminated this
plan for active employees. Cash surrender values of these policies, which are included in other assets in the
consolidated balance sheets, were $3,134,000 and $3,063,000 at January 31, 2012 and 2011, respectively. The
Company maintains a rabbi trust to hold assets related to the Dual Option Life Insurance Plan. Substantially all
assets securing this plan are held in the rabbi trust. As of January 31, 2012 and 2011, the Company has purchased
life insurance on the lives of the participants that will pay death benefits of approximately $5,978,000.
Liability beginning of year
Accretion expense
Present value of death benefits paid
Liability end of year
5. Stock-Based Compensation and Stockholders’ Rights
Stock Incentive Plans
01/31/2012
$1,964,000
110,000
—
01/31/2011
$1,997,000
104,000
(137,000)
$2,074,000
$1,964,000
The Company’s two stock plans are the 2007 Employee Stock Incentive Plan (the “2007 Plan”) and the 1997
Employee Incentive Stock Plan (the “1997 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 68,960 awards during fiscal 2011. As of January 31, 2012, there were approximately 131,200
shares available for future issuance under the 2007 Plan.
The 1997 Plan expired in 2007 and there were no unexercised options outstanding at January 31, 2012. Stock
options awarded to employees under the 1997 Plan had to be at exercise prices equal to the fair market value of the
Company’s common stock on the date of grant. Stock options generally have a maximum term of 10 years and
generally become exercisable ratably over a five-year period.
The shares of common stock issued upon exercise of a previously granted stock option are considered new issuances
from shares reserved for issuance upon adoption of the various plans. While the Company does not have a formal
written policy detailing such issuance, it requires that the option holders provide a written notice of exercise to the
stock plan administrator and payment for the shares prior to issuance of the shares.
62
Accounting for the Plans
A summary of the Company’s stock option activity, and related information for the years ended January 31, is as
follows:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
2012
2011
2010
Weighted-
Average
Exercise
Price
$ 8.82
—
—
—
Options
12,100
—
—
(12,100)
—
—
—
—
Weighted-
Average
Exercise
Price
$ 8.82
—
—
—
Options
12,100
—
—
—
Options
102,869
—
—
(90,769)
12,100
8.82
12,100
12,100
8.82
12,100
Weighted-
Average
Exercise
Price
$ 10.79
—
—
11.06
8.82
8.82
The data included in the above table has been retroactively adjusted, if applicable, for stock dividends.
Restricted Stock Unit Awards
The following table presents a summary of restricted stock and stock unit awards:
Expense for 12 months ended
1/31/2012
1/31/2011
1/31/2010
Unrecognized
Compensation
Cost at
1/31/2012
2007 Plan
68,960 Grants of Restricted Stock, issued 6/21/2011, vesting
over 1 year
$ 133,000
—
—
$
66,000
56,455 Grants of Restricted Stock, issued 6/8/2010, vesting
over 1 year
58,000
116,000
—
—
382,500 Restricted Stock Units, issued 6/16/2009, vesting
over 5 years
235,000
268,000
178,000
527,000
49,854 Restricted Stock Units, issued 6/16/2009, vesting
over 1 year
—
58,000
116,000
—
262,500 Restricted Stock Units, issued 6/19/2007, vesting
over 5 years
309,000
357,000
357,000
99,000
35,644 Grants of Restricted Stock, issued 6/17/2008,
vesting over 1 year
1997 Plan
270,000 Restricted Stock Units, issued 6/30/2004, vesting
over 5 years
Totals for the period
—
— 58,000
—
— 147,000
—
—
$ 735,000
$ 799,000
$ 856,000
$
692,000
63
A summary of the Company’s restricted stock unit awards activity, and related information for the following years
ended January 31, is as follows:
2012
2011
2010
Weighted-
average fair
value of
restricted
stock units
4.19
$
2.89
4.29
4.31
Restricted
stock units
467,455
68,960
(178,455)
(67,000)
Weighted-
average fair
value of
restricted
stock units
4.38
$
3.10
4.47
Restricted
stock units
589,854
56,455
(178,854)
—
Weighted-
average fair
value of
restricted
stock units
6.59
$
3.51
3.52
Restricted
stock units
296,644
432,354
(139,144)
—
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
290,960
3.80
467,455
4.19
589,854
4.38
Weighted-average fair value of
restricted stock units granted
during the year
Stockholders’ Rights
$
2.89
$
3.10
$
3.51
On October 15, 1996, the Board of Directors declared a dividend of one preferred stock purchase right (the
“Rights”) for each outstanding share of the Company’s common stock. Each of the Rights entitles a stockholder to
purchase for an exercise price of $50.00 ($20.70, as adjusted for stock splits and stock dividends), subject to
adjustment, one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock of the
Company, or under certain circumstances, shares of common stock of the Company or a successor company with a
market value equal to two times the exercise price. The Rights are not exercisable, and would only become
exercisable for all other persons when any person has acquired or commences to acquire a beneficial interest of at
least 20% of the Company’s outstanding common stock. The Rights have no voting privileges, and may be
redeemed by the Board of Directors at a price of $.001 per Right at any time prior to the acquisition of a beneficial
ownership of 20% of the outstanding common stock. There are 200,000 shares (483,153 shares as adjusted by stock
splits and stock dividends) of Series A Junior Participating Cumulative Preferred Stock reserved for issuance upon
exercise of the Rights. On July 31, 2007, the Company and Mellon Investor Services LLC entered into an
amendment to the Rights Agreement governing the Rights. The amendment, among other things, extended the term
of the Rights issued under the Rights Agreement to October 25, 2016, removed the dead-hand provisions from the
Rights Agreement, and formally replaced the former Rights Agent, The Chase Manhattan Bank, with its successor-
in-interest, Mellon Investor Services LLC.
6. Comprehensive Loss
Comprehensive loss was $19,389,000, $17,765,000 and $914,000 for the years ended January 31, 2012, 2011 and
2010, respectively. Accumulated other comprehensive loss at January 31, 2012 and 2011, is composed of minimum
pension liability adjustments.
7. Income Taxes
The income tax expense (benefit) for the last three years is reconciled to the statutory federal income tax rate using
the liability method as follows (in thousands):
64
Statutory
State taxes (net of federal tax)
Change in valuation allowance
State rate adjustment
Other
Year ended January 31,
2012
$(4,674)
(799)
6,043
(288)
(227)
2011
$ (2,920)
(445)
13,989
(1,365)
(252)
As Adjusted
2010
$
(493)
61
(437)
(12)
155
$
55
$ 9,007
$
(726)
Significant components of the expense (benefit) for income taxes (in thousands) attributed to continuing operations
are as follows:
Current
Federal
State
Deferred
Federal
State
Change in valuation allowance
Year ended January 31,
As Adjusted
2012
2011
2010
$ — $
(173)
(459)
(393)
$
(173)
(852)
(4,581)
(1,235)
(3,482)
(648)
(5,816)
6,044
(4,130)
13,989
228
9,859
(17)
207
190
(413)
(66)
(479)
(437)
(916)
$
55
$ 9,007
$
(726)
Deferred tax assets and liabilities (in thousands) are comprised of the following:
Deferred tax assets
Accrued vacation and sick leave
Retirement plans
Insurance reserves
Warranty
Net operating loss carryforwards
Intangibles
Inventory
Other
Year ended January 31,
2012
2011
$
879
9,820
1,183
595
11,255
338
146
1,486
$ 1,009
7,110
1,113
996
6,609
397
—
1,551
$ 25,702
$ 18,785
65
Deferred tax assets
Tax in excess of book depreciation
Inventory
Other
Valuation allowance
Net deferred tax asset
Reported as:
Current deferred tax liabilities
Long-term deferred tax assets
Year ended January 31,
2012
2011
$ (1,793) $ (2,187)
(732)
(111)
$ (1,864) $ (3,030)
—
(71)
(22,859)
(14,548)
$
979
$ 1,207
$ (1,221) $ (1,398)
2,605
2,200
The following table summarizes the activity related to our gross unrecognized tax benefits from February 1, 2010 to
January 31, 2012 (in thousands):
Balance as of February 1,
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
Decreases related to lapsing of statue of limitations
Balance as of January 31,
$
January 31,
2012
2011
$
406
—
—
—
(135)
636
—
(18)
—
(212)
$
271
$
406
At January 31, 2012, the Company’s unrecognized tax benefits associated with uncertain tax positions were
$271,000, of which $179,000 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 $217,000 at January 31, 2012, and
$315,000 at January 31, 2011. The Company is currently under IRS examination for its tax return for the year ended
January 31, 2011. The years ended January 31, 2010 and January 31, 2012 remain open for examination by the IRS.
The years ended January 31, 2008 through January 31, 2012 remain open for examination by state tax authorities.
The Company is not currently under state examination.
The specific timing of when the resolution of each tax position will be reached is uncertain. As of January 31, 2012,
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.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that
some portion or all of the 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. The Company considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company
incurred a substantial operating loss for the year ended January 31, 2011. During the fourth quarter of the year ended
January 31, 2011, based on this consideration, the Company determined the realization of a majority of the net
deferred tax assets no longer met the more likely than not criteria and a valuation allowance was recorded against
the majority of the net deferred tax assets totaling $22,859,000 and $14,548,000 at January 31, 2012 and 2011,
66
respectively. At January 31, 2012, the Company had net operating loss carryforwards for federal and state income
tax purposes, expiring at various dates through 2033. Federal net operating losses that can potentially be carried
forward totaled approximately $21,980,000 at January 31, 2012. State net operating losses that can potentially be
carried forward totaled approximately $45,785,000 at January 31, 2012.
8. Commitments
The Company has operating leases on real property and equipment that expire at various dates. The Torrance, CA
manufacturing and distribution facility is leased under a 5-year operating lease that expires on February 28, 2015.
One of the Conway, AR manufacturing facilities is leased under a 10-year operating lease that expires on March 31,
2018. The Company leases machinery and equipment under a 5-year operating lease arrangement. The Company has
the option of buying out the assets at the end of the lease period. 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 rent expense on a straight-line basis based on contractual lease payments. Allowances from lessors for tenant
improvements have been included in the straight-line rent expense for applicable locations. Tenant improvements
are capitalized and depreciated over the remaining life of the applicable lease.
Minimum future lease payments (in thousands) for operating leases in effect as of January 31, 2012, are as follows:
Year ending January 31,
2013
2014
2015
2016
2017
Thereafter
Total minimum lease payments
Less sublease revenues
Rent expense relating to operating leases was as follows (in thousands):
Year ended January 31,
2012
2011
2010
$ 6,016
5,803
5,388
1,146
479
559
19,391
(708)
$ 18,683
$ 6,619
7,372
8,258
The Company has issued purchase commitments for raw materials at January 31, 2012, of approximately
$14,777,000. There were no commitments in excess of normal operating requirements.
9. 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 been identified as a
67
potentially responsible party pursuant to the Comprehensive Environmental Response Compensation and Liability
Act (“CERCLA”), for remediation costs associated with waste disposal sites previously used by it. In general,
CERCLA can impose liability for costs to investigate and remediate contamination without regard to fault or the
legality of disposal and, under certain circumstances, liability may be joint and several, resulting in one party being
held responsible for the entire obligation. The Company reserves amounts for such matters when expenditures are
probable and reasonably estimable. At January 31, 2011 the Company had reserves of $138,000 for such
environmental contingencies. During the year ended January 31, 2012 the Company reached an agreement to settle
the liability for $138,000.
The Company has a self-insured retention for product and general liability losses up to $250,000 per occurrence,
workers’ compensation liability losses up to $250,000 per occurrence, and for automobile liability losses up to
$50,000 per occurrence. The Company has purchased insurance to cover losses in excess of the retention up to a
limit of $30,000,000. The Company has obtained an actuarial estimate of its total expected future losses for liability
claims and recorded a liability equal to the net present value of $2,915,000 and $2,770,000 at January 31, 2012 and
2011, respectively, based upon the Company’s estimated payout period of five years using a 4.5% and 5.5%
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,
2012
2013
2014
2015
2016
Total
Discount to net present value
$
710
600
600
600
600
3,110
(195)
$ 2,915
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.
10. Warranty
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. 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. Warranty expense increased during 2010 and 2011 due to the
Company’s decision to replace a component on a certain style of chair. These replacements were completed during
2011 at a cost less than originally anticipated as the Company was able to perform field repairs at a favorable cost
rather than incurring replacement costs. The repair / replacement of this component was not related to the safety of
the product and has no exposure relating to product liability reserves. At the current time, management cannot
reasonably determine whether warranty claims for the upcoming fiscal year will be less than, equal to, or greater
than warranty claims incurred in 2011. The following is a summary of the Company’s warranty-claim activity
during 2011 and 2010.
68
(In thousands)
Beginning balance
Provision
Costs incurred
Ending balance
11. Subsequent Events
January 31,
2012
2011
$ 2,300
(64)
(836)
$ 1,675
1,519
(894)
$ 1,400
$ 2,300
The Company has evaluated events subsequent to January 31, 2012, to assess the need for potential recognition or
disclosure in this report. Such events were evaluated through the date these financial statements were issued. Based
upon this evaluation, it was determined that no other subsequent events occurred that require recognition or
additional disclosure in the financial statements.
12. Quarterly Results (Unaudited)
Fiscal year ended January 31, 2011 data has been modified to reflect our fourth quarter 2010 change in accounting
principle for our method of accounting for inventory. The Company’s quarterly results for the years ended
January 31, 2012 and 2011 as adjusted, are summarized as follows (in thousands, except per share data):
Year ended January 31, 2012
Net sales
Gross profit
Net (loss) income
Per common share
Net (loss) income (a)
Basic
Assuming dilution
Year ended January 31, 2011
Net sales
Gross profit
Net (loss) income
Per common share
Net (loss) income (a)
Basic
Assuming dilution
____________
Q1
Q2
Q3
Q4
$24,256
6,778
(5,400)
$62,817
19,882
2,732
$53,074
16,041
(3,299)
$26,294
5,457
(7,836)
$ (0.38)
(0.38)
$ 0.19
0.19
$ (0.23)
(0.23)
$ (0.55)
(0.55)
$24,860
6,271
(5,081)
$72,363
22,972
4,037
$60,779
17,193
154
$22,993
4,938
(16,704)
$ (0.36)
(0.36)
$ 0.28
0.28
$ 0.01
0.01
$ (1.18)
(1.18)
(a) Net loss per share was calculated based on basic shares outstanding due to the anti-dilutive effect on the
inclusion of common stock equivalent shares.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to
be disclosed in reports filed with the Commission pursuant to the Exchange Act is recorded, processed, summarized
69
and reported within the time periods specified in the Commission’s rules and forms, and that such information is
accumulated and communicated to the Company’s management, including its President and Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Assessing the
costs and benefits of such controls and procedures necessarily involves the exercise of judgment by management,
and such controls and procedures, by their nature, can provide only reasonable assurance that management’s
objectives in establishing them will be achieved.
Virco carried out an evaluation, under the supervision and with the participation of the Company’s management,
including its President and Chief Executive Officer along with its Chief Financial Officer, of the effectiveness of the
design and operation of disclosure controls and procedures as of the end of the period covered by this Annual Report
pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Company’s President and Chief Executive
Officer along with the Company’s Chief Financial Officer concluded that Virco’s disclosure controls and procedures
are effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting during the fourth fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting. See “Management’s Report on Internal Control over Financial Reporting”.
Item 9B. Other Information
None.
70
PART III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
Except for the information disclosed in Part 1 under the heading “Executive Officers” of the Registrant, the
information required by this Item regarding directors shall be incorporated by reference to information set forth in
the Company’s definitive Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year end
of January 31, 2012.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to information set forth in the Company’s
definitive Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year end of January 31,
2012.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated by reference to information set forth in the Company’s
definitive Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year end of January 31,
2012.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to information set forth in the Company’s
definitive Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year end of January 31,
2012.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to information set forth in the Company’s
definitive Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year end of January 31,
2012.
71
Item 15. Exhibits, Financial Statement Schedules
PART IV
1. The following consolidated financial statements of Virco Mfg. Corporation are set forth in Item 8 of this
report.
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets — January 31, 2012 and 2011
Consolidated statements of operations — Years ended January 31, 2012, 2011, and 2010
Consolidated statements of stockholders’ equity — Years ended January 31, 2012, 2011, and 2010
Consolidated statements of cash flows — Years ended January 31, 2012, 2011, and 2010
Notes to consolidated financial statements — January 31, 2012
44
45
47
48
49
50
72
2. The following consolidated financial statement schedule of Virco Mfg. Corporation is included in Item 15:
VIRCO MFG. CORPORATION AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JANUARY 31, 2012, 2011 AND 2010
(In Thousands)
Allowance for doubtful accounts for the period
Col. A
ended:
January 31, 2012
January 31, 2011
January 31, 2010
Inventory valuation reserve for the period ended,
as adjusted:
January 31, 2012
January 31, 2011
January 31, 2010
Warranty reserve for the period ended:
January 31, 2012
January 31, 2011
January 31, 2010
Product, general, workers’ compensation and
automobile liability reserves for the period
ended:
January 31, 2012
January 31, 2011
January 31, 2010
Deferred tax valuation allowance for the period
ended:
January 31, 2012
January 31, 2011
January 31, 2010
Col. B
Beginning Balance
Col. C
Charged to
Expenses
Col. E
Deductions from
Reserves
Col. F
Ending Balance
$
$
$
$
$
$
200
200
200
187 $
79
127
3,750
3,500
3,150
$
150 $
250
350
2,300
1,675
1,950
$
(64) $
1,519
710
$
$
2,770
2,614
2,345
14,548
490
927
145 $
156 $
269
8,311 $
14,058 $
269
$
$
$
$
$
37
79
127
—
—
—
836
894
985
—
—
—
—
—
706
350
200
200
3,900
3,750
3,500
1,400
2,300
1,675
2,915
2,770
2,614
22,859
14,548
490
All other schedules for which provision is made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions, are inapplicable, or are included in the
Financial Statements or Notes thereto, and therefore are not required to be presented under this Item.
3. Exhibits
See Index to Exhibits. The exhibits listed in the accompanying Index to Exhibits are filed as part of this report.
73
Pursuant to the requirements of Section 13 or 15 (d) 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.
SIGNATURES
Date: April 25, 2012
VIRCO MFG. CORPORATION
By:
/s/ Robert A. Virtue
Robert A. Virtue
Chairman of the Board and Chief Executive Officer
74
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Robert A. Virtue and Robert E. Dose his/her true and lawful attorney-in-fact and agent, with full power of
substitution and, for him/her and in his/her name, place and stead, in any and all capacities to sign any and all
amendments to this report on Form 10-K, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent
full power and authority to do and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his/her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Robert A. Virtue
Robert A. Virtue
/s/ Douglas A. Virtue
Douglas A. Virtue
/s/ Robert E. Dose
Robert E. Dose
/s/ Bassey Yau
Bassey Yau
/s/ Donald S. Friesz
Donald S. Friesz
/s/ Thomas J. Schulte
Thomas J. Schulte
/s/ Robert K. Montgomery
Robert K. Montgomery
/s/ Albert J. Moyer
Albert J. Moyer
/s/ Glen D. Parish
Glen D. Parish
/s/ Donald A. Patrick
Donald A. Patrick
/s/ James R. Wilburn
James R. Wilburn
/s/ William L. Beer
William L. Beer
Chairman of the Board, Chief Executive
April 25, 2012
Officer, President and Director (Principal Executive
Officer), Director
Executive Vice President, Director
April 25, 2012
Vice President, Finance, Secretary and
Treasurer (Principal Financial Officer)
April 25, 2012
Vice President, Accounting, Corporate
April 25, 2012
Controller, Assistant Secretary and Assistant Treasurer
(Principal Accounting Officer)
April 25, 2012
April 25, 2012
April 25, 2012
April 25, 2012
April 25, 2012
April 25, 2012
April 25, 2012
April 25, 2012
Director
Director
Director
Director
Director
Director
Director
Director
75
VIRCO MFG. CORPORATION
EXHIBITS TO FORM 10-K ANNUAL REPORT
for the Year Ended January 31, 2012
Description
Certificate of Incorporation of the Company dated April 23, 1984, as amended (incorporated by reference
to Exhibit 1 to the Company’s Form 8-A12B (Commission File No. 001-08777), filed with the
Commission on June 18, 2007).
Amended and Restated Bylaws of the Company dated September 10, 2001 (incorporated by reference to
Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q (Commission File No. 001-08777), filed
with the Commission on September 14, 2001).
First Amendment to Amended and Restated Bylaws of the Company dated October 25, 2007 (incorporated
by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (Commission File No. 001-
08777), filed with the Commission on October 31, 2007).
Second Amendment to Amended and Restated Bylaws of the Company dated February 15, 2011
(incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (Commission File
No. 001-08777), filed with the Commission on February 22, 2011).
Rights Agreement dated as of October 18, 1996, by and between the Company and Mellon Investor
Services (as assignee of The Chase Manhattan Bank), as Rights Agent (incorporated by reference to
Exhibit 1 to the Company’s Form S-8 Registration Statement (Commission File No. 001-08777), filed with
the Commission on October 25, 1996).
Amendment dated as of April 30, 2007, by and between the Company and Mellon Investor Services LLC
to the Rights Agreement by and between the Company and The Chase Manhattan Bank dated as of
October 18, 1996 (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on
Form 10-Q filed with the Commission on June 8, 2007).
Form of Virco Mfg. Corporation Employee Stock Ownership Plan (the “ESOP”) (incorporated by
reference to Exhibit 4.1 to the Company’s Form S-8 Registration Statement (Commission File No. 33-
65098), filed with the Commission on June 25, 1993).
Trust Agreement for the ESOP (incorporated by reference to Exhibit 4.2 to the Company’s Form S-8
Registration Statement (Commission File No. 33-65098), filed with the Commission on June 25, 1993).
Form of Registration Rights Agreement for the ESOP (incorporated by reference to Exhibit 4.3 to the
Company’s Form S-8 Registration Statement (Commission File No. 33-65098), filed with the Commission
on June 25, 1993).
1993 Stock Incentive Plan of the Company (incorporated by reference to Exhibit 4.1 to the Company’s
Form S-8 Registration Statement (Commission File No. 33-65098), filed with the Commission on
June 1993).
Lease dated February 1, 2006, between FHL Group, a California Corporation, as landlord and Virco Mfg.
Corporation, a Delaware Corporation, as tenant (incorporated by reference to Exhibit 99.1 to the
Company’s Current Report on Form 8-K filed with the Commission on February 3, 2006).
Exhibit
Number
3.1
3.2
3.3
3.4
4.1
4.2
10.1
10.2
10.3
10.5
10.6
10.15
Stock Purchase Agreement dated June 6, 2006, between the Company and Wedbush, Inc. and Wedbush
Morgan Securities, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed with the Commission on June 8, 2006).
76
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Warrant Agreement dated June 6, 2006, between the Company and Wedbush, Inc. (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on
June 8, 2006).
Warrant Agreement dated June 6, 2006, between the Company and Wedbush Morgan Securities, Inc.
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
Commission on June 8, 2007).
Amended Stock Purchase Agreement dated August 29, 2006, between the Company and Steve Presley, Ed
Gyenes, Nick Wilson, Scotty Bell, Patty Quinones, Eric Nordstrom, Larry Maddox, James Simms, Bassey
Yau, Robert Virtue, Doug Virtue and Evan Gruber (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed with the Commission on December 11, 2006).
Design Agreement dated January 21, 2008, between the Company and Peter Glass Design, LLC, and
Hedgehog Design, LLC. (incorporated by reference to Exhibit 10.1 and 10.2 to the Company’s Current
Report on Form 8-K filed with the Commission on January 25, 2008).
Second Amended and Restated Credit Agreement, dated as of March 12, 2008, between Virco Mfg.
Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Commission on March 24, 2008).
Revolving Line of Credit Note, dated as of March 12, 2008, by Virco Mfg. Corporation in favor of Wells
Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed with the Commission on March 24, 2008).
Master Reaffirmation Agreement dated as of March 12, 2008, among Virco Mfg. Corporation, Virco
Mgmt. Corporation, Virco Inc. and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on March 24,
2008).
Amended and Restated Mortgage, dated as of March 12, 2008, by Virco Mfg. Corporation in favor of
Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.4 to the Company’s
Current Report on Form 8-K filed with the Commission on March 24, 2008).
Amendment No. 1 to the Second Amended and Restated Credit Agreement, dated as of July 31, 2008,
between Virco Mfg. Corporation and Wells Fargo Bank, National Association (incorporated by reference
to Exhibit 10.2 to the Company’s Quarterly Report on Form 10Q filed with the Commission on
September 9, 2008).
Amendment No. 2 to Second Amended and Restated Credit Agreement, dated as of March 27, 2009, by
Virco Mfg. Corporation and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.25 to the Company’s Annual Report on Form 10K filed with the Commission on April 16,
2009).
Lease amendment dated August 14, 2008, between AMB Property, L.P., a Delaware Limited Partnership,
as landlord and Virco Mfg. Corporation, a Delaware Corporation, as tenant (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10Q filed with the Commission on September 9,
2008).
Amendment No. 3 to Second Amended and Restated Credit Agreement, dated as of March 27, 2009, by
Virco Mfg. Corporation and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.25 to the Company’s Annual Report on Form 10-K filed with the Commission on April 16,
2009).
77
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
Amendment No. 4 to Second Amended and Restated Credit Agreement, dated as of April 28, 2011, by
Virco Mfg. Corporation and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10Q filed with the Commission on June 7, 2011).
Amendment No. 5 to Second Amended and Restated Credit Agreement, dated as of July 30, 2011, by Virco
Mfg. Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10Q filed with the Commission on September 10, 2011).
Amendment No. 6 to Second Amended and Restated Credit Agreement, dated as of October 29, 2011, by
Virco Mfg. Corporation and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10Q filed with the Commission on December 9,
2011).
Amendment No. 7 to Second Amended and Restated Credit Agreement, dated as of January 31, 2011, by
Virco Mfg. Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit
10.31 to the Company’s Annual Report on Form 10K filed with the Commission on April 15, 2011) .
Amendment No. 8 to Second Amended and Restated Credit Agreement, dated as of May 31, 2011, by
Virco Mfg. Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit
10.1 to the Company’s Quarterly Report on Form 10Q filed with the Commission on June 9, 2011).
Separation Agreement and General Release of Claims between Virco Mfg. Corporation and Larry O.
Wonder, dated May 24, 2011 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly
Report on Form 10Q filed with the Commission on June 9, 2011).
Virco Mfg. Corporation 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8K filed with the Commission on June 27, 2011).
Separation Agreement between Virco Mfg. Corporation and Lori Swafford, dated September 22, 2011
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10Q filed with the
Commission on December 15, 2011).
Revolving Credit and Security Agreement dated as of December 22, 2011 by and among Virco Mfg.
Corporation and Virco Inc., as borrowers, and PNC Bank, National Association, as the lender and
administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form
8K filed with the Commission on December 22, 2011).
21.1*
List of All Subsidiaries of Virco Mfg. Corporation.
23.1*
Consent of Independent Registered Public Accounting Firm.
31.1*
31.2*
Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities and Exchange
Act of 1934, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities and Exchange
Act of 1934, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
78
32.1*
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
____________
* Filed herewith.
79
Exhibit 21.1
LIST OF SUBSIDIARIES
Virco Inc.
2027 Harpers Way
Torrance, CA 90501
80
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-32539) pertaining to the Virco Mfg. Corporation 1997 Stock
Incentive Plan,
(2) Registration Statement (Form S-8 No. 333-51717) pertaining to the Virco Mfg. Corporation Employee Stock
Ownership Plan,
(3) Registration Statement (Form S-8 No. 333-74832) pertaining to the Virco Mfg. Corporation 401(K) Savings
Plan,
(4) Registration Statement (Form S-8 No. 333-143874) pertaining to the Virco Mfg. Corporation 2007 Stock
Incentive Plan, and
(5) Registration Statement (Form S-8 No. 333-175638) pertaining to the Virco Mfg. Corporation 2011 Stock
Incentive Plan;
of our reports dated April 25, 2012, with respect to the consolidated financial statements and schedule of Virco Mfg.
Corporation included in this Annual Report (Form 10-K) for the year ended January 31, 2012.
/s/ Ernst & Young LLP
Los Angeles, California
April 25, 2012
81
Exhibit 31.1
I, Robert A. Virtue, certify that:
1. I have reviewed this Form 10-K of Virco Mfg. Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: April 25, 2012
/s/ Robert A. Virtue
Robert A. Virtue
President, Chief Executive Officer and Chairman of
the Board (Principal Executive Officer)
82
Exhibit 31.2
I, Robert E. Dose, certify that:
1. I have reviewed this Form 10-K of Virco Mfg. Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: April 25, 2012
Vice President — Finance, Secretary and Treasurer
(Principal Financial Officer)
/s/ Robert E. Dose
Robert E. Dose
83
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, in his capacity as an officer of Virco Mfg. Corporation (the “Company”),
for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to his own knowledge:
• The Annual Report of the Company on Form 10-K for the period ended January 31, 2012, fully complies with
the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
• The information contained in such report fairly presents, in all material respects, the financial condition and
results of operation of the Company.
Dated: April 25, 2012
/s/ Robert A. Virtue
Robert A. Virtue
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
/s/ Robert E. Dose
Vice President — Finance, Secretary and Treasurer
(Principal Financial Officer)
A signed original of this written statement required by Section 906 has been provided to Virco Mfg. Corporation and
will be retained by Virco Mfg. Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
84
Annual Meeting
Supplemental Stockholders’ Information
The Annual Meeting of Virco stockholders will be held on Tuesday, June 19, 2012, at 10:00 a.m., at 2027 Harpers
Way, Torrance, CA 90501. The record date for this meeting is April 23, 2012. The Proxy Statement and Proxy
pertaining to this meeting will be mailed on or about May 22, 2012.
SEC Form 10-K
A copy of the annual report to the Securities and Exchange Commission on Form 10-K may be obtained without charge
upon written request to:
Corporate Secretary
Virco Mfg. Corporation
2027 Harpers Way
Torrance, CA 90501
www.virco.com
Virco Common Stock
The NASDAQ is the principal market on which Virco Mfg. Corporation (VIRC) stock is traded. As of April 1, 2012,
there were approximately 264 registered stockholders according to the transfer agent records. There are approximately
1,106 beneficial stockholders.
Stockholder Records
Records pertaining to stockholdings and dividends are maintained by Computershare Shareowner Services LLC.
Inquiries with respect to these matters, as well as notices of address changes, should be directed to:
Computershare Shareowner Services LLC
Stock Transfer Department
Newport Office Center VII
480 Washington Blvd.
Jersey City, NJ 07310
Phone: (877) 261-9278
Foreign: (201) 680-6578
TDD for Hearing Impaired: (800) 231-5469
TDD for Foreign Shareowners: (201) 680-6610
website address: www.bnymellon.com/shareowner/isd
If a stock certificate is lost or mutilated, immediately communicate with Computershare Shareowner Services LLC at
the above addresses.
Additional Services for Stockholders
Information about the Company is now available to stockholders at the Company’s website (www.virco.com). A brief
description of Virco’s product line is offered together with illustrations showing a sampling of our furniture.
Quarterly Dividend and Stock Market Information
Cash Dividends Declared
2011
2010
Common Stock Range
2011
2010
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$ 0.05
$ 0.05
-
-
-
-
0.05
-
High
$ 3.51
3.43
2.73
1.87
Low
High
Low
$ 2.83
2.35
1.35
1.31
$ 4.10
3.85
3.20
3.07
$ 3.07
2.34
2.60
2.41
The data included in the above table has been retroactively adjusted, if applicable, for the stock split and stock dividends.
85
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Directors, Officers, Facilities
Directors
Officers
Robert A. Virtue
President, Chairman of the Board
and Chief Executive Officer
Robert A. Virtue
President, Chairman of the Board
and Chief Executive Officer
William L. Beer
Former President and Chief Executive
Officer of Wenger Corporation
Douglas A. Virtue
Executive Vice President
J. Scott Bell
Vice President – General Manager,
Conway Division
Robert E. Dose
Vice President – Finance,
Secretary and Treasurer
Patricia Quinones
Vice President – Logistics, Marketing
Services and Information Technology
D. Randal Smith
Vice President – Marketing &
Corporate Stewardship
Nick Wilson
Vice President – General Manager,
Torrance Division
Bassey Yau
Vice President – Corporate
Controller, Assistant Secretary and
Assistant Treasurer
Donald S. Friesz
Former Vice President – Sales
and Marketing
Robert K. Montgomery
Managing Director of Montgomery
Vineyard and Retired Former Partner
of Gibson, Dunn & Crutcher LLP
Albert J. Moyer
Board Member of MaxLinear, Inc.,
Collectors Universe, and CalAmp
Corporation
Thomas J. Schulte
Partner-In-Charge of RBZ, LLP
Glen D. Parish
Former Vice President and General
Manager, Conway Division
Donald A. Patrick
Management Consultant
Former Vice President, Diversified
Business Resources, Inc.
Douglas A. Virtue
Executive Vice President
Dr. James R. Wilburn
Dean of the School of Public Policy
Pepperdine University
Independent Registered
Public Accounting Firm
Ernst & Young LLP
725 South Figueroa Street,
Suite 500
Los Angeles, CA 90017
Legal Counsel
Gibson, Dunn & Crutcher
2029 Century Park East
Los Angeles, California 90067
Corporate Headquarters
2027 Harpers Way
Torrance, California 90501
(310) 533-0474
Major Facilities
Torrance Division
2027 Harpers Way
Torrance, California 90501
Conway Division
Highway 65, South
Conway, Arkansas 72032
2011 ANN UAL REP O R T
EQUIPMENT FOR EDUCATORS ™
VIRCO MFG. CORPORATIO N
20 27 HARPERS WAY
T OR RANCE, CA 90501
HIGHWAY 65, SOUTH
CONWAY, AR 72032
P HONE: 800-448-4726
WEB: www.virco.com
Printed in U.S.A.
Ref #12055