V I R C O A N N U A L R E P O R T
FISCAL YEAR ENDED JANUARY 31, 2019
May 17, 2019
To The Shareholders of Virco Mfg. Corporation:
VALUES
Volatile input costs once again combined with fixed contract pricing to negatively impact operating margins in FYE 2019
(calendar 2018). This pattern has repeated itself several times since China was admitted to the World Trade Organization in
2001, each time with similar impacts on Virco. The underlying details may have been slightly different – in one event it was
Chinese demand for raw materials; most recently it was ripple effects from tariff tit-for-tat – but in every case the decision
to honor price commitments to our public school customers led to serious erosion of operating margins. Also, as with prior
examples of this pattern, the corrective is relatively simple (if somewhat painful for those same public school customers): a
compensating price increase.
China’s rise as one of the World’s major economies had the effect of putting a lid on global prices while also increasing
volatility on input costs. As this report was going to press that volatility was ongoing, but the good news is that our price
increase also appears to be proportionate and sufficient to correct last year’s disappointing results. Also looking forward, a
new pricing regime may be taking shape as demand shifts upward to school furniture with a higher service component. This
may provide additional buffering against offshore volatility.
As we embrace this more service-intensive business model, it seems appropriate to briefly explain how values act as a compass
for our relationship with employees, shareholders, students, teachers, principals, parents, suppliers, and even competitors.
Because values are longer-term than any particular strategy or tactic – indeed our values are multi-generational – they have
from time to time resulted in decisions that appear counterproductive to quarterly or annual results. Our intent with this
report is to help readers understand the ethical motives that underpin our business decisions. With all humility, we still believe
that doing the right thing has always been the right thing for our business.
The first of our values is voice. To us this means that everyone with a stake in a particular situation deserves to have their
voice sincerely heard and respected. We have benefited many times by listening to input from a diverse group of people with
skin in the game. But we only learn if we listen with sincerity.
Our second value is dignity. We try to treat everyone with individual dignity. This is more inclusive and welcoming than
treating people according to membership in a group or class. It demands that we listen well enough to truly understand each
person’s position and then respect the path that led them there.
The third value is fairness. It’s easy to over-think this one but maybe it’s best not to: just ask any fifth-grader.
Our fourth value is leadership. This is where the balancing occurs. Sometimes it’s hard to balance everyone’s aspirations,
especially when legitimate aspirations appear to be in conflict. Tradeoffs need to be made. Good leadership requires making
these tradeoffs under the umbrella of dignity and fairness. Some stakeholders may “win,” some may “lose,” but if they all
agree the process was fair, we have the collective strength to move forward.
The final value is merit. There will always be some who try to take advantage of us, confusing values with weakness. We
can and have been quite resolute in holding our ground when pushed. We actually find our values-based approach most
helpful in these challenging situations, strengthening our resolve and reinforcing our mutual commitment to a fair and
sustainable outcome.
For this year’s shareholder promotion, we offer several titles that reflect on values. The first is a carryover from last year: Walt
Whitman’s collected works, with his long poem Song of Myself and its famous lists of inclusion. If one of the outcomes of
f
a values-based approach is inclusion, then our record of employee longevity provides a happy example. Over 40% of our
Continued on last page
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Í Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
‘ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the fiscal year ended January 31, 2019.
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)
2027 Harpers Way, Torrance, California
(Address of principal executive offices)
95-1613718
(IRS Employer
Identification No.)
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:
The NASDAQ Stock Market LLC
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 ‘ No È
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 ‘ No È
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 È No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 È No ‘
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. È
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.
Large accelerated filer ‘
‘
Accelerated filer
Smaller reporting company È
Non-accelerated filer È
Emerging growth company ‘
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ‘ No È
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on July 31, 2018, was $66 million
(based upon the closing price of the registrant’s common stock on such day, as reported by NASDAQ).
As of April 1, 2019, there were 15,541,956 shares of the registrant’s common stock ($0.01 par value) outstanding.
Portions of the Registrant’s definitive proxy statement for its 2019 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.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments(cid:3)
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(cid:3)
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
Item 16. Form 10-K Summary(cid:3)
SIGNATURES
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Cautionary Statement Regarding Forward-Looking Statements
PART I
This report on Form 10-K contains a number of “forward-looking statements” that reflect the current views of Virco Mfg.
Corporation (the "Company" or "Virco") with respect to future events and financial performance, including, but not limited to,
statements concerning: availability of funding for educational institutions; plans and objectives of management for future
operations, including relating to the Company’s future products, pricing, marketing, seasonal fluctuations in demand,
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 cost and availability of
imported components; the availability and cost of labor; transportation costs; 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; current and
future investments in and utilization of infrastructure; and 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. Forward-looking statements also include the assumptions underlying or relating to any of the
foregoing statements. Such forward-looking statements are not guarantees of future performance and are subject to 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 expressed or implied in any forward-looking
statements. 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.
The forward-looking statements contained in this report on Form 10-K are made on the basis of the views and assumptions of
management regarding future events and business performance as of the date this report is filed with the SEC. We do not
undertake any obligation to update these statements to reflect events or circumstances occurring after the date this report is
filed.
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.
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®, Parameter®, Sage™, Analogy™ and Civitas™. 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.
Our fiscal year ends on January 31 of each year and references in this Annual Report on Form 10-K to a year refer to our
fiscal year. As such, references in this Annual Report to 2020, 2019, 2018 and 2017 relate to the fiscal years ended January 31,
2020, 2019, 2018 and 2017, respectively.
Item 1. Business
Introduction
Designing, producing and distributing high-value furniture for a diverse family of customers is a 69-year tradition at Virco Mfg.
Corporation (“Virco” or the “Company”, or in the first person, “we”, “us” or “our”). Virco was incorporated in California in
February 1950 and reincorporated in Delaware in April 1984. Virco started as a local manufacturer of chairs and desks for Los
Angeles-area schools, and over the years 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 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
Series; the recently introduced Analogy and Civitas furniture collections; Metaphor and Sage Series items for educational
settings; and the wide-ranging Plateau and Text Series.
3
Along with serving customers in the education market - which in addition to preschool through 12th grade public and private
schools includes: junior and community colleges; four-year colleges and universities; trade, technical and vocational schools -
Virco is a significant furniture and equipment supplier for 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.
We also sell to wholesalers, distributors, traditional retailers and catalog retailers that serve these same markets.
To meet the furniture and equipment needs of our customers, Virco leases a 560,000 sq. ft. office, manufacturing and
warehousing facility located on 23.5 acres of land in Torrance, California; this facility includes our corporate headquarters,
West Coast showroom, and our West Coast distribution operations. To complement our Torrance-based operations, Virco owns
three manufacturing and distribution facilities in Conway, Arkansas. The primary facility is located on 100 acres of land in
Conway, Arkansas, containing 1,200,000 sq. ft. of manufacturing, warehousing, and office space. With high-density storage
systems, 70 dock doors dedicated to outbound freight, and substantial yard capacity to store and stage trailers, this facility
supports Virco's ability to handle increased sales during our peak summer delivery season and enhances the efficiency with
which orders are filled. Virco also operates two other facilities in Conway. The first is a 375,000 sq. ft. factory - acquired in
1954 and expanded and modernized in subsequent years - where a variety of operations take place, including the manufacture
of fabricated steel components, chrome plating, and plastic injection-molding; components generated here are transferred to
other facilities for assembly into finished goods. The second is a 175,000 sq. ft. manufacturing facility where compression-
molded hard plastic components are fabricated and stored. The Company occupied this building under a series of leases for
approximately 20 years and purchased this facility in the third quarter of the fiscal year ended January 31, 2018.
New Products and Markets
Because the product needs and preferences of our customers continue to evolve - and in response to competitive furniture and
equipment offerings from domestic and offshore suppliers - Virco maintains an active new product development program.
We've worked with accomplished designers - such as Peter Glass, Richard Holbrook, and Bob Mills - to introduce exciting
furniture and equipment solutions for contemporary applications. In addition to new product programs, our domestic factories
allow the Company to respond to custom requests or modifications to existing product offerings made by our customers. Often
these custom requests are incorporated into our product offering for all customers. Over the past three years, Virco has
launched a substantial number of new products, including the products discussed below.
In the fiscal year ended January 31, 2018, Virco further expanded our product offerings to include products that broaden our
solutions for technology, collaborative learning, higher education and multi-functional areas of the campus. The new 5700
Series Tables feature built-in wire management and were designed to support technology, training and media-savvy classrooms.
Targeting higher-education, business and dining environments, our new Parison ™ Series chairs offer an elegant and refined
look in 4-leg, mobile and task chairs as well as stools. The Metonymy™ Series fits well in classrooms, commons, libraries and
living spaces. With its highly functional and compact design, the Metonymy set offers flexible usage including a sturdy desk
with padded seat and footrest as well as a step stool, podium or standing desk. Virco’s 4000 and 5000 Series collaborative
activity tables continue to fill the need for active, flexible spaces and we further broadened our line to include new shapes and
sizes as well as a Floor Table Conversion Kit for the 4000 Series tables. The floor table provides a solution for allowing
students to select flexible seating, including having a stable surface while sitting low to the ground.
Many of today’s modern classrooms are focusing on creating more dynamic, active and flexible environments for their 21st
Century learners. Virco has continued to innovate around its line of Healthy Movement furniture and introduced three new lines
of flexible seating that take movement and choice to a new level. The Room to Move Collection was previewed at the
EDspaces show in October 2017 and is based on the idea that today’s classrooms are active, dynamic places where students are
often given room to move - empowering them with choices of where to sit, how to sit and even when to sit. The Floor Rocker
(available in Analogy, Sage and ZUMA styles) provides a safe, durable and ergonomic option for floor seating. The C2M
(Choose to Move) 4-Leg Chair won the EDspaces Innovation in Seating Award and offers an empowering new twist on flexible
seating with a patent-pending mode selector that allows the same chair to easily transform from fixed to active seating. Like
the C2M chair, the R2M (Room to Move) Mobile Task Chair offers movement in all directions - front-to-back and side-to-side
- as well as the mobility and adjustability of a task chair. All these products enable healthy movement and flexibility in the
classroom while blending with existing Virco furniture.
In the fiscal year ended January 31, 2019 (“fiscal 2019”), Virco continued with the full launch of our Room to Move
Collection, bringing our new Floor Rockers and C2M and R2M chairs to market, further supporting today’s varied classroom
and student needs. Adding additional comfort and design appeal to the Floor Rocker family, we introduced the Sage Floor
Rocker with Padded Seat, now available in nine coordinating colors. Also new to our Healthy Movement seating is the Adjust-
Right Stool. Designed for use in one-on-one settings, this stool adapts to each user as they develop and strengthen their core
and sense of balance. Understanding that collaboration and engagement take place beyond the walls of a classroom, Virco
introduced the Plateau Series Media Tables. With collaborative environments in mind, these tables were designed to bring
4
groups of people together in schools and the workplace. Featuring a TV mount for screens and built-in USB and Power Ports,
students and colleagues can easily exchange ideas and share content. To address changing preferences and meet the needs of
designers, Virco added to our robust color program by introducing two new soft plastic colors with vibrant, modern tones,
Kelly Green and Lemon Yellow, as well as expanding our edge banding color offering for our 4000 and 5000 series tables. We
also added new upholstery colors to complement our existing pallet.
As of January 31, 2019, the Company employed approximately 840 full-time employees, 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 delivery of furniture, fixtures and equipment (“FF&E”).
In the past decade, due to budgetary constraints, many schools 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 delivery 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 with Virco products - the Company is now able to provide “one-stop shopping” for all FF&E needs in our educational
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;
and trade, technical and vocational schools. Virco also serves 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, internet and catalog retailers that serve
these same markets.
Manufacturing and Distribution
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 dealer network. In addition, Virco has a Corporate Sales
Group to pursue international business wholesalers, mail order accounts and national chains. The Company also has an array of
support services, including complete package solutions for the FF&E line item on school budgets; computer-assisted layout
planning; transportation planning; and product delivery.
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. The Company believes that its domestic manufacturing capabilities are a
significant strength. The Company has effectively used product selection, color selection, and dependable execution of
delivery 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.
5
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 fiscal 2019 and 2018,
approximately 50- 55% of the Company's total sales were delivered in June, July, and August. Shipments of furniture during
peak weeks 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 FF&E line item on a new school
project or school budget. Virco also provides a variety of products for preschool markets and has 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, 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 - Virco offers a full line of classroom seating in a variety of price points providing high value and quality across all
types of seating, from traditional to modern solutions. The ergonomically supportive ZUMA® line designed by Peter Glass
and Bob Mills was launched in 2004 and continues to show year over year growth. In addition to fixed-height 4-leg chairs, the
ZUMA line includes cantilever chairs; tablet arm chairs with a fixed or articulating work surface and a compact footprint; and
steel-frame rockers. The Sage™ line, originally designed to serve students in college, university and other adult education
settings - and on high school campuses - now offers a 13” and a 15” 4-leg chair and a corresponding pair of cantilever chairs
for younger or smaller students; there's also a selection of Sage rockers for K-12 applications and several tablet arm units.
Selected adult-height Sage models can also now be ordered with a padded, upholstered seat. The Analogy seating line includes
fixed-height 4-leg chairs, cantilever chairs; tablet arm chairs with a fixed or articulating work surface and a compact footprint;
and steel-frame rockers. Other Virco seating choices include the Metaphor® Series - an updated sequel to Virco's best-selling
Classic Series™ furniture with improvements in comfort, ergonomics, stackability, and manufacturing efficiencies. The Sage
Contract line is targeted for offices and reception areas, colleges, hospitality venues and other adult environments. Virco
expanded the Sage Contract line with the addition of a mobile tablet-arm workstation that includes an integrated bookrack to
further penetrate the higher education market. Civitas™ chairs and stools are intended for foodservice, libraries, media centers,
circulation areas, and related areas where people gather. Additional Virco seating alternatives range from 120, 121 and 122
Series stools to contoured I.Q.® Series classroom chairs by Richard Holbrook; comfortable, attractive Virtuoso® chairs by
Charles Perry; and Analogy™ Series chairs by Peter Glass and Bob Mills. The N2 Series was designed by Virco as a
comprehensive, ergonomic seating line that specifically caters to the budget conscious consumer. 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 serves additional markets such as event venues and training spaces with a line of folding chairs and upholstered stack
chairs, as well as additional plastic stack chairs and upholstered ergonomic chairs.
TABLES - Our broad collection of tables offer solutions for K-12 classrooms and multi-use areas across the entire campus as
well as serving higher learning, event, training and administrative spaces. Our 4000 and 5000 Series Activity Tables provide a
broad range of shapes, sizes and heights ideal for collaborative learning. Virco’s TEXT® table collection for learning
environments - designed by Peter Glass and Bob Mills- features 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. TEXT Tilt-Top Height Adjustable Table further
expand Virco’s reach into the seminar, training room, and higher education markets by enhancing the functionality and
flexibility of the table while strengthening the Virco and TEXT brands. The Tetra™ Series is a versatile collection of tables and
student desks suitable for various environments. From classrooms to open-office spaces, the Tetra is simple enough to serve as
an everyday workstation but can be customized to suit the needs of a fast-paced computer lab or seminar training room.
Lunada® tables, combining Virco's popular Lunada bi-point bases with a selection of 20 top sizes, 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 cafe tops, Lunada bases by
Peter Glass provide eye-catching table solutions for hospitality settings. Civitas tops and bases provide excellent furniture
solutions for casual spaces where people gather. Virco’s Makerspace tables are designed specifically for hands-on learning
6
environments most commonly found in vocational classes, makerspace areas and STEM / STEAM centered education. Virco
also carries traditional folding tables, CT Series tables with a hand crank mechanism for top height adjustment, and office
tables, as well as the computer tables and mobile tables described below.
COMPUTER FURNITURE - The TEXT and Tetra Series table collections described in the preceding paragraph provides an
array of computer furniture choices for learning or business environments; Virco's Flip-Top Technology tables and HWT
(Hinged Wire Trough) Technology tables 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. To address the demand for
collaborative solutions in a computer lab environment, Virco added the Quarter Round 8700 Series Computer Table that allows
multiple tables to be grouped together while maintaining a technology-based environment. The 5700 Series features the thick
profile leg of the 5000 Series with integrated technology for a modern look. 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. Virco offers Instructor Media Stations and Towers that include several
options for media storage and presentation.
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. To expand on the popularity of the 785 Student Desk, Virco added a
Collaborative Top work surface as an option on all 785 desk models, which facilitates convenient grouping of desks for break-
out sessions and classroom collaboration. The Sage Contract saw the addition of an optional bookrack, which combined with
the tablet arm and caster options, creates a complete mobile workstation for a variety of environments. The Molecule is a
student desk with a unique shaped collaborative work surface that can be used by a single student or grouped together with
multiple Molecules to create various arrangements and group settings. Related products include an array of tablet arm units,
new Agile Combo models and new Analogy™ Series combo chair desks. Selected models are available with durable, colorfast
Martest 21® or Fortified Recycled Wood™ hard plastic components. For teachers, principals and district administrators - and
for business environments - Virco offers an extensive range of Parameter® desks, returns and credenzas designed by Peter
Glass and Bob Mills. Textameter™ mobile workstations provide additional furniture choices for educators.
ADMINISTRATIVE OFFICE FURNITURE - In addition to the Plateau® Office Solutions, Parameter®, and Textameter™
product lines, Virco 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. Other products range from 53 Series
wardrobe tower cabinets and Parameter file credenzas to Parameter mobile pedestals and Plateau bookcases in popular 36”
wide and 48” wide models that work in classroom settings and related educational environments as well as 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
Chemsurf® and epoxy resin tops. Virco's ZUMA®, Sage™, Analogy™, N2, Telos®, Metaphor®, I.Q.®, Classic Series™, and
3000 Series collections include pneumatically adjustable lab stools with high-range seat-height adjustment and a steel foot-ring.
Virco also carries a selection of wood-frame science tables with Chemsurf and epoxy resin tops.
MOBILE FURNITURE - Cafeterias are perfect venues for the ever-popular Virco mobile tables - including a selection of oval
mobile tables with attached benches or stools - while classrooms benefit from the spacious storage capacity of Virco mobile
cabinets; additional mobile cabinet models with a magnetic marker back are available. ADA compliant Mobile Bench & Stool
Tables were also introduced to the Virco line of mobile products to expand on our wheelchair accessible solutions. 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. For 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 the Greenguard® Children &
Schools Program for indoor air quality. Virco's ZUMA and ZUMAfrd™ products earned the distinction of being the first
classroom furniture models to be certified by the Greenguard Children & Schools Program, now known as Greenguard Gold
certification. All of the models in the Company's most recently introduced product lines - including Analogy™ furniture
models and Textameter™ instructor workstations - 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,
7
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.
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. Virco now offers customized,
space-efficient workstations by Interior Concepts™ for technology and language labs, media centers, computer classrooms,
reception areas and offices. Interior Concepts is one of the many vendors with which the Company partners 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 net sales in fiscal 2019.
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. Virco also offers Inside Delivery (to an inside location), or Full-
Service Delivery (delivered and placed in the classroom).
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 fiscal
2019 and 2018.
Raw Materials
Virco purchases steel, aluminum, plastic, polyurethane, polyethylene, polypropylene, plywood, particleboard, medium density
fiberboard (MDF), 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, can be volatile. Historically the Company has experienced years
where the price of steel, plastic, and wood have spiked significantly; often because of global demand or tariffs on international
supply but also in response to domestic supply interruptions. In fiscal 2018 the cost of commodities increased, but not
dramatically or suddenly. In fiscal 2019, the Company was significantly affected by cost increases in commodities. In the first
quarter of fiscal 2019, a 25% tariff on steel was enacted by the federal government. While Virco sources most of its steel
domestically, domestic prices increased concurrently with the effective date of the tariff on foreign steel. In addition to
increased steel costs, the Company incurred a 10% increase in the cost of certain plastics and an 8% increase in the cost of
cartons.
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 substantially during fiscal 2019. The Company incurred a sharp cost increase of approximately
10% in July and incurred a 10% tariff in October.
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 in commodities. 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 of its fiscal year. 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 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. The Company typically benefits from any decreases in raw material costs under the contracts described above.
8
Marketing and Distribution
Virco serves its customers through a well-trained, nationwide sales and support team, as well as a dealer network. In addition,
Virco has a Corporate Sales Group to pursue international sales, wholesalers, mail order accounts and national chains where
management believes it would be more efficient to have a single sales representative or group approach, 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 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 support team
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 several 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 places of worship. This market includes 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 net sales in fiscal 2019. 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 “Item 1A. Risk Factors: Approximately 60% 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 61% of sales in fiscal 2019 and 58% of sales in fiscal 2018. We have had a history of contracts with the
purchasing organization and was most recently awarded in fiscal 2018, a five-year contract with this organization that extends
through December 2022, with two two-year extensions extending through 2026. If Virco were unable to sell under this
contract, we believe we would be able to sell to the vast majority of our customers under alternative contracts.
The Company’s education customers typically do not have logistic capabilities and more than 75% of sales are FOB destination
and include freight to customer. Sales of furniture that are sold FOB factory are typically made to resellers of our product who
in turn provide logistics to the ultimate customer. Approximately 90% of the Company’s freight is supplied by third party
carriers. Utilizing third party carriers is an effective method of addressing the significant seasonal peak in summer and
moderating excess capacity issues in the slow season. Reliance on third-party carriers can expose the Company to freight rate
volatility, fuel surcharges, and to capacity constraints in the transportation industry. Historically, the Company has been able to
obtain adequate capacity from freight vendors to service the summer season.
Seasonality
The educational sales market is extremely seasonal. Approximately 52% of net sales in fiscal 2019 and 55% of net sales in
fiscal 2018 were delivered in June, July and August. 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 Our “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. Because of this seasonality, Virco
9
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 raw materials and components, 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 peak 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 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.
As a result of the seasonality of our business, our manufacturing capacity is dictated by the capacity requirement during the
months of June, July and August. Because of this seasonality, factory utilization is lower during the slow season. The
Company utilizes a variety of tactics to address this seasonal business. During the summer months, which comprise our second
and third fiscal quarters, our full-time personnel utilization generally is at or exceeds full capacity. The Company utilizes
temporary labor and significant overtime to meet these seasonal requirements. During the slow portions of the year, temporary
labor and overtime are eliminated to moderate the off-season costs. Our manufacturing facility capacity utilization generally
remains less than 100% during these off-season months; because physical structure capacity cannot be adjusted as readily as
personnel capacity, we have secured sufficient physical structure capacity to accommodate our current needs as well as for
anticipated future growth. Our physical structure utilization is significantly lower during the first and fourth quarters of each
year than it is during the second and third quarters.
The Company utilizes a comparable strategy to address warehousing and distribution requirements. During summer months,
temporary labor is hired to supplement experienced warehouse and distribution personnel. More than 90% of the Company's
freight is provided by third-party carriers. Utilizing third-party carriers is an effective method of addressing the significant
seasonal peak in summer and moderating excess capacity issues in the slow season. Reliance on third party carriers can expose
the Company to freight rate volatility, fuel surcharges, and to capacity constraints in the transportation industry. The Company
has secured sufficient warehouse capacity to accommodate our current needs as well as anticipated future growth.
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 and adjusts 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 standardized, 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 customer’s specific product and color requests are identified, 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
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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), Artco-Bell, KI Inc., Smith System,
Columbia, Scholarcraft, Paragon, Alumni, Academia, and VS America. Our competitors that purchase and re-sells furniture
include School Outfitters, School Specialty (SCHS). MeTEOR (formerly Contrax) is a significant nationwide reseller focusing
on projects. In addition to School Specialty and MeTEOR, there are numerous catalogers, internet resellers, and smaller local
education furniture dealers that sell into local markets. Competitors in contract and hospitality furniture vary depending upon
the specific product line or sales market and include Falcon Products, National Public Seating, 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 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, 2019, totaled approximately $21.4 million and approximated eight weeks of sales, compared
to $17.2 million at January 31, 2018. Substantially all of the backlog will ship during the fiscal year ending January 31, 2020.
Patents and Trademarks
In the last 15 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 19 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.”
To distinguish genuine Virco products from competitors' products, Virco has obtained the rights to certain trademarks and trade
names 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 trade names 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 trade name, except perhaps “Virco,” which the Company has
protected and enhanced as an emblem of quality educational furniture for over 69 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, 2019, Virco and its subsidiaries employed approximately 840 full-time employees across our facilities. Of
this number, approximately 665 are involved in manufacturing and distribution, approximately 110 in sales and marketing and
approximately 65 in administration. The Company also utilizes temporary workers as necessary to meet seasonal production,
warehousing or distribution requirements that cannot be filled by its full-time workforce. During 2019, the Company employed
a range of 300 - 400 temporary workers during the months of June, July and August, with smaller numbers immediately
preceding and following these months.
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
11
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 2012 and 2011 as a Waste Reduction Awards Program (WRAP) honoree; recognition by the United States
Environmental Protection Agency in 2004 as a WasteWise Hall of Fame Charter Member, in 2003 as a WasteWise Partner of
the Year and in 2002 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 2008 through 2011. 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, now
known as Greenguard Gold certification. As a follow-up to the certification of ZUMA and ZUMAfrd models in 2006,
hundreds of other Virco furniture items - including Analogy™ furniture models and Textameter™ instructor workstations -
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 and Toxic Substances Control Act rule 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 fiscal 2019, Virco derived approximately 6.7% of its revenues from customers located outside of the United States
(primarily Canada).
During fiscal 2018, Virco derived approximately 6.3% of its revenues from customers located outside of the United States
(primarily Canada).
The Company determines sales to these markets based upon the customers' principal place of business.
During fiscal 2019 and 2018, the Company did not have any long-lived assets outside of the United States.
Executive Officers of the Registrant
As of April 1, 2019, 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
Robert A. Virtue (1)
Douglas A. Virtue (2) President
Robert E. Dose (3)
Chairman of the Board and Chief Executive Officer
Office
Senior Vice President - Chief Financial Officer, Secretary and
Treasurer
Age at
January 31, 2019
86
60
Has Held
Office Since
1990
2014
62
1995
________________________
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(1)
(2)
(3)
Appointed Chairman in 1990; has been employed by the Company for 62 years and served as the President from
1982 until 2014 and Chief Executive Officer since 1988.
Appointed President in 2014; has been employed by the Company for 33 years and has served in Production Control,
as Contract Administrator, as Manager of Marketing Services, as General Manager of the Torrance Division, as
Corporate Executive Vice President and currently as President.
Appointed in 1995; has been employed by the Company for 28 years and has served as the Corporate Controller, and
currently as Senior Vice President of Finance, Secretary and Treasurer.
None of the Company’s executive officers have written 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 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 tax revenues and general
economic conditions. If the economy weakens, funding for education may fail to improve or decrease, 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, state and local tax revenues for many of our customers are flat or
decline, restricting funding for K-12 education spending, which typically leads to a decrease in demand for school furniture.
Sustained declines in the per-student funding levels provided for in state and local budgets in the future could have a materially
adverse impact on our business, financial condition and results of operations as they have in the past.
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. Many states are adversely
impacted by underfunded retirement and health insurance obligations and face competing requests for available funding. Tax
revenues and other state funds may be allocated to underfunded benefit obligations instead of education. If states in which we
do business cut spending for education to address such budgetary shortfalls or for other reasons, our sales in those states will
likely decline and 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.
13
The educational furniture market is characterized by price competition, as many sales occur on a bid basis and are based on
demand related to educational funding available to schools. When 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 other standards for the education
environment and for product performance, we must periodically introduce new products or modify existing ones. The
introduction of new or modification of existing 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 a year or more, and further time may be required to achieve customer acceptance. Accordingly, the launch of
any 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 or modified products or lack of customer acceptance of such
products could limit our sales growth or cause our sales to decline.
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 will likely not be able to implement corresponding increases in our sales prices for such products or services 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.
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. 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 a deteriorating 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
tariffs, fluctuations in currency exchange rates as well as the impact of natural disasters, war and other factors that may disrupt
the transportation systems, ports, 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
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volatile in prior 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 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.
In fiscal 2019, the Company incurred significant cost increases for a variety of raw materials and components. In the first
quarter of fiscal 2019, the federal government imposed a 25% tariff on imported steel. The Company purchases a large portion
of steel from domestic suppliers, but the cost of domestic steel increased concurrently with the tariff on foreign steel. In the
second quarter, the cost of many imported components increased by approximately 10%. In the third quarter, the federal
government imposed a 10% tariff on imported components from China. Certain plastics increased by approximately 10% over
the year and cartoning increased by approximately 8%.
The Company has increased list prices for its products in fiscal 2020 in an effort to recover all or a portion of the increased
material costs.
We are affected by the cost of petroleum-based products and increases in petroleum prices could reduce our margins
and profits.
The profitability of our operations is sensitive to the cost of fuel, which materially affects our transportation costs, the costs of
petroleum-based materials (like plastics) and the costs of energy (including electricity and natural gas) used in operating our
manufacturing facilities. Petroleum prices have fluctuated significantly in recent years and are expected to rise from current
levels. 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
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.
Cost and availability of third-party freight can adversely affect profitability and results of operations.
The majority of our sales are FOB destination and include freight from Virco’s facilities to the customer location. Virco
depends upon third-party carriers for more than 90% of customer deliveries. The size of many carriers’ fleets varies due to
economic conditions. Increased regulation and more stringent enforcement of federal regulations governing the transportation
industry (especially regarding drivers) have adversely impacted the cost and availability of transportation services. Further,
there may be a lack of available trained and licensed drivers, which may reduce the availability of transportation services.
Inability to obtain adequate third-party freight on a timely basis during the summer delivery season can adversely affect cost to
deliver products to customers and the level of customer service, which can in turn adversely impact future sales.
The Company imports component parts from international sources (primarily China). Disruptions in the cost or availability of
ocean freight or disruptions in port operations, may adversely impact the Company’s ability to obtain adequate component parts
to support sales, particularly in the busy summer season.
Approximately 60% 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 delivery
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 61% of Virco's sales in fiscal 2019 and 58% of
Virco's sales in fiscal 2018 were priced under this nationwide contract/price list. In 2015, the Company was awarded a three-
year extension through December 31, 2017, with two one-year extensions through December 31, 2019. In November 2017, the
Company was awarded a five-year contract extending through December 2022 along with two two-year extensions through
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2026. 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 classroom delivery 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. In addition, there can be no assurance that the Company will meet the requirements of its financial
covenants on an ongoing basis or that should it fail to meet such covenants in the future, the agent and lender under the
Credit Agreement will agree to waivers or amendments with respect thereto.
Our credit facility with PNC, among other things, largely prevents us from incurring any additional indebtedness, limits capital
expenditures, limits 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 periodic
financial covenants, which currently include a minimum fixed charge coverage ratio requirement. As a result of the foregoing,
our operational 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 is 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 any 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 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. There can be no
assurance that the Company will meet the requirements of its financial covenants on an ongoing basis or that, should it fail to
meet such covenants, the Agent and Lender under our credit facility will agree to waivers or amendments with respect thereto.
If we breach any of our financial covenants without receiving a corresponding waiver or amendment, the Agent and Lender
may accelerate our credit facility and impose default interest and other fees, any of which could have a material adverse effect
on our financial condition and results of operations.
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. Our current credit
facility with PNC Bank matures on March 19, 2023. On an annual basis, we prepare a lender approved 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. Uncertainty in the credit markets may negatively impact our ability to
obtain approval of our annual forecast, changes in our forecast or renew our credit facility upon its maturity in 2023 on
favorable terms or at all. If we are unable to access or 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
fourth quarter of the prior year and 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
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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 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 and other legal requirements. Violations
of, and liabilities under, these 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.
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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 and Toxic Control Substances Act rule,
concerning formaldehyde emissions from composite wood products.
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 cover for any product liability claims.
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 one
nonqualified pension plan. 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 historically low 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 35% 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. Because
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. For example, our certificate of incorporation
currently 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 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
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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.
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:
•
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•
•
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•
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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. This facility is occupied under a lease expiring on April 30, 2025. This 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. This facility and the underlying real estate, along with the rest of the Company’s assets, secure the Company’s
obligations under its credit facility.
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 was occupied under a
series of leases for approximately 20 years. In August 2017, the Company purchased this building.
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Item 3. Legal Proceedings
Virco is involved in legal proceedings from time to time in the ordinary course of business. In the opinion of the Company,
such legal proceedings are not material in amount or management expects that the Company will be successful on the merits in
pending cases against the Company or 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.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The NASDAQ Global Market is the principal market on which Virco Mfg. Corporation (VIRC) stock is traded. As of April 17,
2019, there were approximately 161 registered stockholders according to the Company's transfer agent records. As of such date,
there were approximately 1,135 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. 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 was prohibited from paying dividends. On April 4, 2016, the Company
entered into Amendment No. 12 to the PNC line of credit. This amendment, among other modifications, allows the Company
to pay dividends or conduct stock repurchases in an amount up to $1.3 million per year. In March 2018, the Company entered
into Amendment No. 17 to the PNC line of credit. This amendment, among other modifications, allows the Company to pay
dividends or conduct stock repurchases in an amount up to $2.0 million per year. In December 2017, the Company declared a
quarterly cash dividend of $0.015 per share, payable January 10, 2018 to shareholders of record as of December 28, 2017. In
March 2018, the Company declared a quarterly cash dividend of $0.015 per share, payable April 10, 2018 to shareholders of
record as of March 23, 2018. In June 2018, the Company declared a quarterly cash dividend of $0.015 per share, payable July
10, 2018 to shareholders of record as of June 26, 2018. In September 2018, the Company declared a quarterly cash dividend
of $0.015 per share, payable October 10, 2018 to shareholders of record as of September 26, 2018. In December 2018, the
Company declared a quarterly cash dividend of $0.015 per share, payable January 10, 2019 to shareholders of record as of
December 27, 2018. In April 2019, the Company entered into Amendment No. 20 to the PNC Revolving Credit and Security
Agreement. This amendment, among other modifications, prohibits the Company from paying cash dividends or repurchasing
stock commencing on February 1, 2019 and ending January 31, 2020.
Stock Repurchases
The Company did not repurchase any shares of its stock during 2019 and 2018.
Item 6. Selected Financial Data
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act as of our second quarter of fiscal
2019 and are not required to provide the information under this item.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
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; and trade,
technical and vocational schools. Virco also serves 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, catalog retailers, and internet 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, is highly integrated. The Company purchases coils
of steel, plastic resin, particle board, and other raw materials and fabricated finished goods for education market. The
Company markets and sells direct to the schools and provides project management and logistics. The Company also sells to
schools FOB destination, with more than 50% of sales delivered FOB classroom.
As part of this integrated business model, the Company has developed 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, delivery, 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 furniture, fixtures and equipment (“FF&E”) requirements from one
source.
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Virco's product offering consists primarily of items manufactured by Virco, complemented with products sourced from other
furniture manufacturers. Our product offerings are continually enhanced with an ongoing new product development program
that incorporates internally-developed products 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 fiscal 2019 and
2018, approximately 52% and 55% respectively of the Company's total sales were delivered in June, July and August. Average
weekly shipments during July and August can be as great as six times the level of average weekly shipments in the winter
months. Virco's substantial warehouse space allows the Company to build and ship 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 for the last 16 years.
The Company has seen moderate improvement in its primary market in the last four years, but spending on furniture, fixtures
and equipment is well below the level experienced prior to the recession. Schools suffered significant budgetary pressures
from 2002 to 2005 following the “dot com” bust and post “9/11” era, followed by a recovery from 2006 - 2007. Following the
recession in 2008, the industry suffered from reduced funding and severe budget shortages impacting years from 2010 through
2014.
The budgetary pressures directly impact 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.
Approximately 80-85% of a school's operating budget is for the salaries and benefits for school teachers and administrators.
Increasing costs for medical insurance, combined with pressures from unfunded post-retirement medical and pension
obligations reduces funds available for other purposes. In response to these budgetary pressures, schools typically elect to
retain teachers and spend less on repairs, maintenance and replacement furniture, which in turn reduces the demand for, and
sales of, the Company's products. In recent years there has been an improvement in state and local tax collections, and most
state and local governments have seen their tax receipts return to the pre-2008 levels.
In response to the 2008 recession, passage of new bond issuances declined, and the related bond funded project completions
decreased materially for several years. In recent years the completions of bond funded projects have recovered from the low
point subsequent to 2008, but projects remain well below the pre-2008 levels. In the recent elections we observed an increase
in bond passages. Due to the time requirement to plan and construct a new school or major remodel, there is a time lag
frequently ranging from one to three years between bond passage and when the bond funding translates into furniture sales.
Sales of product for completions of new schools, additions and renovations improved in the year ended January 31, 2019, and
is anticipated to be favorable for the year ending January 31, 2020 ("fiscal 2020").
While the current operating environment continues to show moderate year-over-year improvement, under-funding of our
education system continues to be an on-going concern. A 2016 report from the National Council on School Facilities estimates
that on every school day, approximately 50 million students and six million adults use publicly funded K-12 facilities. For state
and local governments, spending on these facilities is the largest capital expenditure outside of highways. It was estimated that
public schools spend approximately $99 billion per year on maintenance, operations and capital spending. The study estimates
that a desirable level of spending would be $145 billion, leaving an annual shortfall of $46 billion.
The significant budgetary challenges faced by the education industry have had an impact on the Company’s business model
over this time frame and have created opportunities as well. In the 1990’s, the Company’s primary customers were the school
business officials at a school district, and deliveries of furniture typically were to a district warehouse. In response to their
budgetary challenges, many school districts closed warehouses and reduced janitorial and support staff in order to retain
accredited teachers. Selling efforts must now reach school principals and administrative staff in addition to the district business
offices. Sales priced under national contracts or buying groups are displacing competitive bids administered by professional
purchasing departments. Distribution has become a more meaningful component of our business as most deliveries are to
school sites, and often include inside delivery to the classroom. This evolution adds to the seasonal challenges of our business,
but also creates opportunities to suppliers that can execute during the short summer delivery window.
The furniture industry in general, including the market for school furniture, has been significantly impacted by low cost
competition from manufacturers based in China. Competition from China increased dramatically after admission of China to
the World Trade Organization in 2001. Subsequent to this date, many of our domestic manufacturing competitors closed their
factories and sourced product from China. To our knowledge, no new factories or significant manufacturing enhancements
were constructed to support the school furniture market during this period. Virco pursued a different strategy which
exacerbated operating challenges following these events, but now leave us with what we believe to be a significant competitive
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advantage. 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 fifteen years, the
Company has worked continuously to significantly reduce and control 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, 2019, was approximately 840 compared to a peak of nearly 2,950 in
August 2000. Factory overhead in fiscal 2019 declined by more than 50% compared to fiscal 2001. 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 its ambitious product development program. Our domestic fabrication allowed the
Company to develop significant product variety, color choices and custom products that are very difficult to replicate with a
supply chain extending to China. Finally, many education furniture products are bulky, with a large cube relative to the selling
price. The cost of ocean freight from overseas for these bulky items offsets the cost advantages for overseas production.
The Company’s operating results can be impacted significantly by cost and volatility of commodities, especially steel, plastic,
wood and energy. 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. The Company moderates this exposure by building significant quantities
of finished goods and component parts during the first and second quarters. In the year ended January 31, 2017 commodity
costs, particularly steel, increased significantly but the Company had already sourced and produced the majority of the product
delivered during the summer. During the year ended January 31, 2018, commodity costs increased throughout the year, but
without volatile spikes. In the year ended January 31, 2019 commodity costs were volatile, in large part due to tariffs on
imported steel and Chinese furniture components. The majority of Virco’s sales include freight to the customer facility and the
cost or availability of transportation equipment can adversely impact both profitability and customer service. Significant cost
increases in manufacturing or distributing products during a given contract period can adversely impact operating results and
have done so during prior years. The Company typically benefits from any decreases in raw material or distribution costs
under the contracts described above.
During the year ending January 31, 2020, the Company anticipates continued uncertainty and volatility in commodity costs,
particularly with respect to certain raw materials, transportation and energy. In fiscal 2019, tariffs on imported steel and
furniture components introduced significant volatility and cost increases as prices on domestic steel also increased. In fiscal
2018, the cost of commodities increased during the year.
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 make quality education an ongoing priority for future government spending. Third, many
schools have responded to the budget strains by reducing their support infrastructure. This change provides opportunities to
provide 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 delivery of furniture into 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. Fourth, many suppliers previously shut down or dramatically curtailed their
domestic manufacturing capabilities, making it difficult for competitors to adapt to dynamic fluctuations in demand or provide
custom colors or finishes during a narrow seasonal summer delivery window when they are reliant upon a supply chain
extending to Asia or elsewhere. Meanwhile, Virco has continued to invest in automation at its domestic manufacturing
facilities, adding flat metal forming processes to its manufacturing capabilities and bringing production into its factories of
items formerly sourced from other suppliers (both domestic and international). Domestic production facilitates our product
development process, enabling the Company to more rapidly develop new products, release extensions of product families and
offer customized variants of our product offering. Virco views its domestic factories as a strategic resource for providing its
customers with timely delivery of a broad selection of colors, finishes, laminates, and product styles.
Critical Accounting Policies and Estimates
This discussion and analysis of Virco's financial condition and results of operations is based upon the Company's consolidated
financial statements (the “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
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assets and liabilities. On an on-going basis, management evaluates such estimates, including those related to valuation of
inventory and related excess and obsolescence reserves, self-insured retention for workers' compensation insurance, 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:
Inventory Valuation: Inventory is valued at the lower of cost or net realizable value (determined on a first-in, first-out basis)
and includes material, labor and factory overhead. The Company estimated slow-moving and obsolete inventory to reflect the
difference between the cost of inventory and the estimated net realizable value. Valuation adjustments to inventory 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 valuation adjustments may
be required. Due to reductions in sales volume in the past years, the Company's manufacturing facilities are operating at
reduced levels of capacity. The Company records the cost of excess capacity as a period expense, not as a component of
capitalized inventory valuation.
Self-Insured Retention: For fiscal 2019 and 2018 the Company was self-insured for product liability losses ranging up to
$250,000 per occurrence, workers' compensation losses up to $250,000 per occurrence and 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 risk-free discount rate of 4% and 2% for fiscal 2019 and 2018. 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 were 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 fiscal 2020 will be comparable to the retention
levels for fiscal 2019.
Defined Benefit Obligations: The Company has two defined benefit plans, the Virco Employees Retirement Plan (the
“Employee Plan”) and the Virco Important Performers Plan (the “VIP Plan”), which provide retirement benefits to employees.
Virco discounted the pension obligations for the various plans using the following discount rates for the fiscal years ended
January 31:
Employee Plan
VIP Plan
2019
3.75%
4.00%
2018
3.75%
4.00%
Because new benefit accruals for both plans were frozen by the Company effective December 31, 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 fiscal 2019 and 2018. The VIP Plan is unfunded and has no plan assets. These rate assumptions can
vary due to changes in interest rates and expected returns in the stock market. In prior years, the discount rate has decreased,
causing pension expense and pension obligations to increase.
Because the plans have been frozen for many years, there is no service cost related to the plans. In fiscal 2019, due to a large
number of lump sum benefits paid to retired and terminated employees, the Company has incurred settlement costs for the
Employee Plan. In effort to “de-risk” the Employee Plan, the Company intends to continue to reach out to and offer lump sum
benefits to terminated and retired employees, which may result in settlement costs in the future. The Company did not incur
settlement costs in fiscal 2018.
Due to the size of the Company's pension obligations, a one percent change in discount rates can cause a material change in the
pension obligations. A one percent reduction in discount rates would cause obligations under the Plans to increase by
approximately $3.4 million. The retirement obligations would decrease by similar amounts if discount rate were to increase by
a comparable percentage. The Company obtains annual actuarial valuations for all 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
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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 has a valuation allowance of $1,756,000 against certain state deferred tax assets that the Company
does not believe it is more-likely-than-not to realize. At January 31, 2019, the Company has net operating loss carryforwards
of approximately $15,299,000 for federal and $33,429,000 for state income tax purposes, expiring at various dates through
January 31, 2039.
Results of Operations (2019 vs. 2018)
Financial Results and Cash Flow
The Company incurred a pre-tax loss of ($1,117,000) on net sales of $200,716,000 for fiscal 2019, compared to pre-tax profit
of $2,414,000 on net sales of $189,287,000 in fiscal 2018. Net loss improved to a loss of ($1,614,000) for fiscal 2019 from
($3,209,000) in fiscal 2018. The fiscal 2019 tax provision included a valuation allowance for certain deductions. The fiscal
2018 tax provision includes a $4.4 million unfavorable rate adjustment from the Tax Cuts and Jobs Act (TCJA) passed on
December 22, 2017. Net loss per basic share improved to a loss of $0.10 for the fiscal 2019, compared to a loss of $0.21 in the
prior year, due primarily to the income tax effects described above. Cash flow provided by operations was $2,363,000 in fiscal
2019, compared to $1,682,000 in fiscal 2018.
Net Sales
Virco's net sales increased by 6.0% in fiscal 2019 to $200,716,000 compared to $189,287,000 in fiscal 2018. The increase in
net sales was attributable to growth in project business, which included larger more complex orders.
In effort to grow sales and market share, list selling prices were increased moderately during the fiscal year ended January 31,
2019. Growth in sales was substantially due to increases in project business. Project business has many characteristics that
differ from orders funded from school operating budgets. Project business is usually bond funded, typically includes product
that Virco procures from vendor partners to complete an entire school and always includes Virco full service. Project orders are
typically large more complicated orders and are usually subject to a greater level of competition from other suppliers.
For fiscal 2020, the Company anticipates that the budgetary challenges for state and local governments will continue to affect
growth in net sales. The Company intends to significantly increase selling prices to recover increased commodity costs and the
costs of tariffs on imported steel and furniture components. The increased costs may have an adverse impact on sales volume.
Recent elections have resulted in an increased level of bond passages, but there is typically a delay between when a bond is
passed and when it translates into furniture orders. Increased bond funding favorably impacted business for fiscal 2019 and is
anticipated to be beneficial for fiscal 2020. As we have throughout this economic cycle, the Company continues to focus on
strategies to develop and strengthen its brand with an aggressive product development campaign. We will continue to use our
domestic factories to provide greater flexibility for custom specifications such as laminates, colors and on-time delivery. The
Company will continue to emphasize the value, design, variety of its products, the value of its distribution, delivery, classroom
delivery and project management capabilities, and the importance of timely deliveries during the peak seasonal delivery period.
The Company plans to increase selling prices to recover increased costs of commodities and to improve gross margins. To
increase or maintain market share during fiscal 2020, when market conditions warrant, the Company may selectively compete
based on direct prices to build or maintain its market share.
Cost of Sales
Cost of sales was 66.6% of net sales in fiscal 2019 and 65.4% of sales in fiscal 2018. The increase in cost of sales as a
percentage of sales was primarily attributable to increased material costs. In the first quarter of fiscal 2019, the federal
government imposed a 25% tariff on imported steel. The Company sources most of its steel domestically, but domestic steel
increased by a like amount concurrently with the tariffs on foreign steel. In the third quarter of fiscal 2019, the federal
government imposed a 10% tariff on imported Chinese furniture components. In addition to the tariffs, the Company incurred
increased costs for imported components, increased costs for plastic and finally increased cost for packaging. The Company
also incurred increased manufacturing expenses, primarily for employee compensation. The Company has been required to
increase salaries and wages in response to a very competitive labor market. The Company increased selling prices at the
beginning of the year in an effort to improve margins but did not fully recover the increased costs during fiscal 2019.
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During fiscal 2020, the Company anticipates continued uncertainty and volatility in commodity costs, particularly with respect
to certain raw materials, transportation, energy and tariffs due to potential macroeconomic events. Due in part to volatile
transportation and energy costs, we may incur higher commodity costs in fiscal 2020. 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 fiscal 2019, increased by approximately 7.3% to $64,751,000 compared to
$60,347,000 in fiscal 2018 and increased as a percentage of sales to 32.3% of sales in fiscal 2019 from 31.9% in fiscal 2018.
Service costs, including warehousing, freight and classroom delivery costs increased in dollars and increased by 0.6% as a
percentage of sales. The increase in costs was driven by the increased project business which typically has more complex and
service intensive orders. Selling costs increased in dollars compared to the prior year but were flat as a percentage of sales.
Increased selling costs were attributable to variable selling expenses. G&A spending increased in terms of dollars but was flat
as a percentage of sales. Interest expense was $646,000 higher in fiscal 2019 compared to fiscal 2018 because of increased
average borrowing and increased interest rates.
Provision for Income Taxes
The Company has a partial valuation allowance of $1,756,000 against certain state deferred tax assets that the Company does
not believe is more-likely-than-not to be realized. At January 31, 2019, the Company has net operating loss carryforwards of
approximately $15,299,000 for federal and $33,429,000 for state income tax purposes, expiring at various dates through
January 31, 2039.
For fiscal 2019 the effective tax rate was negative 44%. This rate was primarily attributable to a valuation allowance on certain
components for the Federal and State net operating loss.
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA) on December 22, 2017 which, among other changes, reduced the
federal income tax rate effective January 1, 2018 to 21%. Because Virco’s fiscal year ended January 31, 2018, 11 of the 12
months were subject to the 34% graduated rate and one month at the 21% rate, for an effective federal rate of 32.9%. As a
result of the reduction in the federal tax rate, the value of the Company’s deferred tax assets decreased by $4,438,000 as of
January 31, 2018.
It is expected the effective tax rate for fiscal 2020 will be approximately 27%.
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 to offset the related increased costs.
In fiscal 2017, the cost of steel increased significantly, but the increase did not occur until after the Company had sourced the
majority of its steel for the summer delivery season. In fiscal 2018, the cost of commodities increased over the course of the
year but did not spike as suddenly as in some prior periods. In fiscal 2019, the Company incurred severe and sudden increase is
material and component costs. In the first quarter, the federal government imposed a 25% tariff on imported steel. The
Company purchases the majority of its steel from domestic sources, but the cost of domestic steel increased concurrently with
the effective date of the tariffs on foreign steel. During the summer, the cost of imported components increased by as much as
15%, primarily due to increased costs incurred by Chinese suppliers. In October, a 10% tariff was imposed on Chinese
furniture and components.
For fiscal 2020, the Company anticipates continued volatility in costs, particularly with respect to certain raw materials,
transportation, and energy. Anticipated adverse volatility for fiscal 2020 could be severe in light of tariffs imposed or
threatened on imported commodities. There is continued uncertainty with respect to steel and other raw material costs,
including plastics, that are affected by the price of oil. 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. Virco depends upon
third party carriers for more than 90% of customer deliveries. Subsequent to 2010, many carriers went out of business or were
required to reduce the size of their fleets due to economic conditions and have not increased their fleets as the economy has
improved. Recent regulation and more stringent enforcement of federal regulations governing the transportation industry
(especially regarding drivers) have adversely impacted the cost and availability of freight services. Virco expects to incur
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continued pressure on employee benefit costs. The Company has renewed health insurance contracts for its employees through
December 2019 but costs after that date may be adversely impacted by current legislation, claim costs and industry
consolidation. Virco has aggressively addressed these costs by controlling headcount, freezing pension benefits and passing on
a portion of increased medical costs to employees.
To recover the cumulative impact of increased costs, the Company has increased published list prices for fiscal 2020. Due to
current economic conditions, the Company anticipates continued significant price competition in fiscal 2020 and may not be
able to raise prices without risk of losing market share. 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 fiscal 2020, as a percentage of sales, could be higher than in fiscal 2019. 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 fourth quarter of the prior year and 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 order to provide “one stop shopping” for all FF&E needs, Virco purchases and re-sells certain finished
goods from other furniture manufacturers. When practical, these furniture items are drop shipped from the Company's supplier.
Where cost effective, the Company will bring the item into the Virco warehouse and the third-party products will be shipped
along with product manufactured by Virco. The Company did not carry material amounts of vendor inventory during the fiscal
years ended January 31, 2019 and 2018.
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 fulfills large orders of
furniture for a new school or significant refurbishment of an existing school. Customers with large projects may require
architect sign off, school board approval prior to payment or punch list completion, all of which can delay payment.
Because of the seasonality of our business, our manufacturing and distribution capacity is dictated by the capacity requirement
during the months of June, July and August. Because of this seasonality, factory utilization is lower during the slow season.
The Company utilizes a variety of tactics to address the seasonality of its business. During the summer months, which
comprise our second and third fiscal quarters, our personnel utilization generally is at or close to full capacity. The Company
utilizes temporary labor and significant overtime to meet the seasonal requirements. During the slow portions of the year,
temporary labor and overtime are eliminated to moderate the off-season costs. Our manufacturing facility capacity utilization
generally remains less than 100% during these off-season months; because physical structure capacity cannot be adjusted as
readily as personnel capacity, we have secured sufficient physical structure capacity to accommodate our current needs as well
27
as for anticipated future growth. Our physical structure utilization is significantly lower during the first and fourth quarters of
each year than it is during the second and third quarters.
The Company utilizes a comparable strategy to address warehousing and distribution requirements. During summer months,
temporary labor is hired to supplement experienced warehouse and distribution personnel. More than 90% of the Company's
freight is provided by third-party carriers. The Company has secured sufficient warehouse capacity to accommodate our
current needs as well as anticipated future growth.
Line of Credit
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 has been amended a number of times
subsequent, including through the nineteenth amendment in March 2019, which, among other things, extended the maturity
date of the Credit Agreement for three years until March 19, 2023, increased the maximum availability under the Credit
Agreement to $65,000,000, modified, eliminated or waived covenants, amended seasonal advances and established a
$2,000,000 line for equipment financing.
The Credit Agreement provides the Borrowers with a secured revolving line of credit (the “Revolving Credit Facility”) of up to
$65,000,000, with seasonal adjustments to the credit limit and subject to borrowing base limitations and includes a sub-limit of
up to $3,000,000 for issuances of letters of credit. In addition, the Credit Agreement provides an Equipment Line for purchases
of equipment up to $2,000,000. The Revolving Credit Facility is an asset-based line of credit that is subject to a borrowing
base limitation and generally provides for advances of up to 85% of eligible accounts receivable, plus a percentage equal to the
lesser of 60% of the value of eligible inventory or 85% of the liquidation value of eligible inventory, plus an amount ranging
from $8,000,000 to $14,000,000 from December 1 through August 31 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 March 19, 2023, 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.
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 1.25%, and the applicable margin
for Eurodollar Currency Rate loans is a percentage within a range of 1.75% to 2.25%, 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 interest rate at January 31, 2019 was 6.25%.
For the fiscal year ended January 31, 2016, the Credit Agreement contained a covenant that forbade the Company from issuing
dividends or making payments with respect to the Company's capital stock. On April 4, 2016 the Company entered into an
amendment allowing the Company to pay dividends or conduct stock repurchases in an amount up to $1.3 million per year. In
March 2018 the Company entered into another amendment increasing the limit on dividends and stock repurchases to $2.0
million. As the result of the Company’s non-compliance with certain covenants of the Credit Agreement at January 31, 2019,
described below, the Company entered into Amendment No. 20 that eliminated the Company’s ability to pay dividends or
repurchase stock commencing on February 1, 2019 and ending January 31, 2020. In addition, the Credit Agreement 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, 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 requires the Company to maintain compliance with a minimum fixed charge coverage ratio. As of
January 31, 2019, the Credit Agreement required the Company to maintain: (i) a minimum fixed charge coverage ratio of at
least 1.10 to 1.00 for the four consecutive fiscal quarters ending January 31, 2019. The actual results of the Company with
respect to the foregoing financial covenant for the period ending January 31, 2019 were as follows: (i) the Company maintained
a fixed charge coverage ratio of greater than 0.96 to 1.00 for the four consecutive fiscal quarters ended January 31, 2019.
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Because the actual fixed charge coverage ratio did not meet the covenant, the Company violated its covenant at January 31,
2019. In April 2019, the Company entered into Amendment No. 20 to the Credit Agreement that waived the event of default at
January 31, 2019 and amended the future minimum fixed charge coverage ratio covenant for fiscal 2020 and amended the
minimum EBITDA covenant for the quarter ended April 30, 2019. The amended agreement requires the Company to maintain:
(i) a minimum fixed charge coverage ratio as follows: (a) for the consecutive two fiscal quarter period ending July 31, 2019,
2.25 to 1.00, and (b) for each consecutive four fiscal quarter period ending thereafter, 1.10 to 1.00; and (ii) EBITDA of not less
than negative $5,000,000 for the three consecutive fiscal month period ending on April 30, 2019. In addition, certain
restrictions were placed upon the Company’s capital expenditures limiting the amount: (a) in the first fiscal quarter ending
April 30, 2019 in an aggregate amount in excess of $900,000, (b) in the consecutive two fiscal quarter periods ending July 31,
2019 in an aggregate amount in excess of $1,900,000, (c) in the consecutive three fiscal quarter period ended October 31, 2019
in an aggregate amount in excess of (i) $3,900,000, if an only if, the Borrowers’ EBITDA for the consecutive two fiscal quarter
period ending July 31, 2019 exceeds $8,500,000 or (ii) $2,900,000 if Borrowers’ EBITDA for such period is less than or equal
to $8,500,000 and (d) in the consecutive four fiscal quarter period ending January 31, 2020 or any fiscal year thereafter, in an
aggregate amount for all Borrowers in excess of $8,000,000. Based on the amended covenants and the Company’s forecast,
management believes compliance in fiscal 2020 is probable.
In addition, the Credit Agreement, in effect as of January 31, 2019, contains a clean down provision that requires the Company
to reduce borrowings under the line of credit to less than $8,000,000 for a period of 30 consecutive days during the Company’s
fourth fiscal quarter of each fiscal year. The clean down provision allows the Company to maintain the minimum outstanding
balance of $8,000,000 to be carried on an uninterrupted period extending beyond one year and ultimately due at the schedule
maturity date in March 2023. Subsequent to year end, the Company entered into Amendment No. 19 that increased the clean
down requirement to $10,000,000, thereby allowing the Company to refinance an additional $2,000,000 of its short-term
borrowings under the line of credit on a long-term basis. 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.
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 at its discretion. In addition, certain of the covenants and representations
and warranties set forth in the Credit Agreement contain limited or no materiality thresholds, and many of the representations
and warranties must be true and correct in all material respects upon each borrowing, which the Borrowers expect to occur on
an ongoing basis. There can be no assurance that the Borrowers will be able to comply with all such covenants and be able to
continue to make such representations and warranties on an ongoing basis.
The Company's line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer
season. Approximately $11,231,000 was available for borrowing as of January 31, 2019.
Long-Term Capital Requirements
In addition to short-term liquidity considerations, the Company continually evaluates long-term capital requirements. From
fiscal 1998 through 2001, 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 and capital expenditures have remained
below depreciation from 2002 through 2017. Capital expenditures increased materially in fiscal 2018, primarily due to the $7.2
million acquisition of a component manufacturing facility. This facility had previously been occupied under operating leases.
Upon purchase of the building, annual depreciation expense for the building is anticipated to be approximately $300,000 per
29
year less than current rent expense. Annual debt service payments are anticipated to be approximately $300,000 per year less
than current rent expense. Capital expenditures will continue to focus on automation, both in the factory and software
applications, and new product development along with the tooling and new processes required to produce new products. The
Company has identified several opportunities for capital expenditures during the next five years. The Company has established
a goal of limiting capital spending to approximately $6,000,000 for fiscal 2020. Our Revolving Credit Facility with PNC Bank
has been amended to provide a line for equipment and covenants have been modified to allow for anticipate capital
expenditures for fiscal 2020.
Retirement Obligations
The Company provides retirement benefits to employees under two defined benefit retirement plans; the Employee Plan and
the VIP Plan. The Employee Plan is a qualified retirement plan that is funded through a trust held at PNC Bank (Trustee). The
other plan is non-qualified retirement plan. Benefits payable under the VIP Plan are secured by life insurance policies and
securities held in a rabbi trust. The Company obtains annual actuarial valuations for retirement plans.
Because the plans have been frozen for many years, there is no service cost related to the plans. In recent years, due to a large
number of lump sum benefits paid to retired and terminated employees, the Company has incurred settlement costs for the
Employee Plan. In effort to “de-risk” the Employee Plan, the Company intends to continue to reach out to and offer lump sum
benefits to terminated and retired employees, which may result in settlement costs in the future. The Company incurred
$538,000 of settlement costs in fiscal 2019. The Company did not incur settlement costs in fiscal 2018. It is the Company's
policy to contribute adequate funds to the trust accounts to cover benefit payments under the VIP Plan and to maintain the
funded status of the Employee Plan at a level which is adequate to avoid significant restrictions to the Employee Plan under the
Pension Protection Act of 2006. The Company contributed $0.8 million and $1.4 million to the trust in fiscal 2019 and 2018,
respectively. Contributions during 2020 will depend upon actual investment results and benefit payments but are anticipated to
be approximately $4.5 million. During fiscal 2019 and 2018, the Company paid approximately $281,000 and $345,000,
respectively, in benefits per year under the non-qualified plan. It is anticipated that contributions to the non-qualified plan will
be approximately $281,000 for fiscal 2020. At January 31, 2019, accumulated other comprehensive loss of approximately $9.0
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, 2019, a 1% reduction in investment
return would have increased expense by approximately $251,000, a 1% change in the rate of compensation increase would
have no impact, and a 1% reduction in the discount rate would have increased expense by $81,000.
Stockholders' Equity
The Company entered into a credit facility with PNC Bank in December 2011 that prohibited the Company from paying
dividends and 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. In April 2016, the Company entered into Amendment No. 12 with the
Bank allowing the Company to pay dividends or conduct stock repurchases in an amount up to $1.3 million per year. In March
2018, the Company entered into Amendment No. 17 which allows the Company to pay dividends or conduct stock repurchases
in an amount up to $2.0 million. Subsequent to January 31, 2019 the Company entered into Amendment No. 20 suspending the
Company’s ability to pay cash dividends or repurchase stock.
Virco issued a 10% stock dividend or 3/2 stock split every year beginning in 1983 through 2003. Although the stock dividend
had no cash consequences to the Company, the accounting methodology required for 10% dividends 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 1983 through 2003, the cumulative effect of the stock dividends has been to reclassify over $122 million from retained
earnings to additional paid-in capital. The equity section of the balance sheet on January 31, 2019 reflects additional paid-in
capital of approximately $118 million and accumulated deficit of approximately $52 million. Other than the losses incurred
during 2004-2006, 2011-2014 and 2018-2019 the accumulated 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
30
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 2012 and 2011 as a Waste Reduction Awards Program (WRAP) honoree; recognition by the United States
Environmental Protection Agency in 2004 as a WasteWise Hall of Fame Charter Member, in 2003 as a WasteWise Partner of
the Year and in 2002 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 2008 through 2011. This is only a
partial list of Virco's environmental awards and commendations; for a more complete list, go to www.virco.com.
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, now
known as Greenguard Gold certification. As a follow-up to the certification of ZUMA and ZUMAfrd models in 2006,
hundreds of other Virco furniture items - including Analogy furniture models and Textameter instructor workstations - 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 and Toxic Control Substances Act rule 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 fiscal 2019 and 2018, the Company was self-insured for product liability losses of up to $250,000 per occurrence, general
liability losses of up to $50,000 per occurrence, workers' compensation losses up to $250,000 per occurrence and 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, 2019, the Company will be self-
insured for product liability losses up to $250,000 per occurrence, general liability losses up to $50,000 per occurrence,
workers' compensation losses up to $250,000 per occurrence, and 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 fiscal 2019 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 & Contractual Obligations
The Company did not enter into any material off-balance sheet arrangements during fiscal 2019, nor did the Company have any
material off-balance sheet arrangements outstanding at January 31, 2019, except for certain lease commitments. We maintain
certain operating leases, purchase commitments and other contractual obligations disclosed in Note 7, Commitments, to the
Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data, to this Annual Report on
Form 10-K.
New Accounting Pronouncements
See disclosure of recently adopted and recently issued but not yet adopted accounting standards in Note 2 to the Consolidated
Financial Statements contained in Item 8. Financial Statements and Supplementary Data to this Annual Report on Form 10-K.
31
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act as of our second quarter of fiscal
2019 and are not required to provide the information under this item.
32
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2019 and 2018
Consolidated Statements of Operation for the Years Ended January 31, 2019 and 2018(cid:3)
Consolidated Statements of Comprehensive Loss for the Years Ended January 31, 2019 and 2018(cid:3)
Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2019 and 2018(cid:3)
Consolidated Statements of Cash Flows for the Years Ended January 31, 2019 and 2018
Notes to Consolidated Financial Statements
Page
Numbers
34
36
38
39
40
41
42
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Virco Mfg. Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Virco Mfg. Corporation and subsidiaries (the "Company") as
of January 31, 2019, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash
flows, for the fiscal year ended January 31, 2019, and the related notes and the schedule listed in the Index at Item 15(2)
(collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of January 31, 2019, and the results of its operations and its cash flows for
the year ended January 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting
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.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Los Angeles, California
May 1, 2019
We have served as the Company's auditor since 2018.
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Virco Mfg. Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Virco Mfg. Corporation (the “Company”) as of January 31,
2018, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year
ended January 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15 (2) (collectively
referred to as the “Consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at January 31, 2018, and the results of its operations and its cash flows
for the year ended January 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting
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.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We served as the Company’s auditor from 1993 to 2018.
Los Angeles, California
April 27, 2018, except for the adoption of Accounting Standards Update 2017-07 in Note 2, as to which the date is May 1, 2019
35
Virco Mfg. Corporation
Consolidated Balance Sheets
Assets
Current assets
Cash
Trade accounts receivables (net of allowance for doubtful accounts of $200 at January
31, 2019 and 2018)
Other receivables
Income tax receivable
Inventories, 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
Total property, plant and equipment
Less accumulated depreciation and amortization
Net property, plant and equipment
Deferred income tax assets, net
Other assets
Total assets
See accompanying notes to consolidated financial statements.
January 31,
2019
2018
(In thousands, except share and par value
data)
$
738
$
534
13,253
40
175
47,289
1,616
63,111
3,731
688
51,176
108,253
830
164,678
122,758
41,920
9,598
8,484
11,385
29
171
42,057
1,537
55,713
3,731
688
51,176
103,015
809
159,419
116,977
42,442
10,093
8,375
$
123,113
$
116,623
36
Virco Mfg. Corporation
Consolidated Balance Sheets
January 31,
2019
2018
(In thousands, except share and par value data)
$
17,760
$
4,568
5,504
4,293
32,125
1,190
14,487
45
15,910
2,329
33,961
14,106
4,779
4,681
4,157
27,723
1,425
14,664
44
12,000
2,055
30,188
Liabilities
Current liabilities
Accounts payable
Accrued compensation and employee benefits
Current portion of long-term debt
Other accrued liabilities
Total current liabilities
Non-current liabilities
Accrued self-insurance
Accrued retirement benefits
Income tax payable
Long-term debt, less current portion
Other long-term 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
15,541,956 shares in 2019 and 15,357,457 shares in 2018
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
155
118,106
(52,192)
(9,042)
57,027
$
123,113
$
154
117,465
(49,648)
(9,259)
58,712
116,623
37
Virco Mfg. Corporation
Consolidated Statements of Operation
Net sales
Costs of goods sold
Gross profit
Selling, general and administrative expenses
Gain on sale of property, plant & equipment
Operating income
Pension expense
Interest expense, net
(Loss) income before income taxes
Income tax expense
Net loss
Net loss per common share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
Year ended January 31,
2019
2018
(In thousands, except per share data)
$
$
$
$
$
200,716
133,635
67,081
64,751
(1)
2,331
1,257
2,191
(1,117)
497
(1,614) $
(0.10) $
(0.10) $
15,421
15,421
189,287
123,816
65,471
60,347
(16)
5,140
1,181
1,545
2,414
5,623
(3,209)
(0.21)
(0.21)
15,244
15,244
38
Virco Mfg. Corporation
Consolidated Statements of Comprehensive Loss
Net loss
Other comprehensive loss:
Pension adjustments (net of tax $76 and $1,267 in 2019 and 2018, respectively)
Comprehensive loss
See accompanying notes to consolidated financial statements.
Years ended January 31,
2019
2018
(In thousands)
(1,614) $
(3,209)
217
(1,397) $
2,135
(1,074)
$
$
39
Virco Mfg. Corporation
Consolidated Statements of Stockholders’ Equity
In thousands, except share data
Balance at February 1, 2017
Beginning balance adjustment to retained
earnings as a result of the adoption of ASU
2016-09
Net loss
Pension adjustments, net of tax effect of
$1,267
Cash dividends
Shares vested
Stock compensation expense
Balance at January 31, 2018
Net loss
Pension adjustments, net of tax effect of $ 76
Cash dividends
Shares vested
Stock compensation expense
Balance at January 31, 2019
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholder's
Equity
15,179,664
$
152
$
116,976
$
(46,380) $
(11,394) $
59,354
—
—
—
177,793
—
—
—
2
—
—
—
—
(341)
830
171
(3,209)
—
(230)
—
—
—
—
2,135
—
—
171
(3,209)
2,135
(230)
(339)
830
15,357,457
$
154
$
117,465
$
(49,648) $
(9,259) $
58,712
—
—
—
184,499
—
—
—
—
1
—
—
—
—
(267)
908
(1,614)
—
(930)
—
—
—
217
—
—
—
(1,614)
217
(930)
(266)
908
15,541,956
$
155
$
118,106
$
(52,192) $
(9,042) $
57,027
See accompanying notes to consolidated financial statements.
40
Virco Mfg. Corporation
Consolidated Statements of Cash Flows
Operating activities
Net loss
Adjustments to reconcile net income to net cash provided by operating activities:
Year Ended January 31,
2019
2018
(In thousands)
$
(1,614) $
(3,209)
Depreciation and amortization
(Decrease) increase in provision for doubtful accounts
Gain on sale of property, plant and equipment
Deferred income taxes
Stock-based compensation
Defined benefit plan, recognized net loss due to settlements
Amortization of net actuarial loss for pension plans
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 provided by operating activities
Investing activities
Capital expenditures
Purchase of manufacturing facility
Proceeds from sale of property, plant and equipment
Proceeds for life insurance
Investments in life insurance
Net cash used in investing activities
Financing activities
Proceeds from long-term debt
Repayment of long-term debt
Tax withholding payments on share-based compensation
Payment on deferred financing costs
Cash dividend paid
Net cash provided by 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 of refunds
See accompanying notes to consolidated financial statements.
41
5,791
(3)
(1)
419
908
538
795
(1,868)
(10)
(5,232)
(3)
(79)
2,722
2,363
(5,395)
—
3
5
(61)
(5,448)
54,711
(49,978)
(265)
(249)
(930)
3,289
204
534
738
$
5,466
55
(16)
5,821
830
—
955
(1,470)
181
(6,368)
112
73
(748)
1,682
(6,208)
(7,200)
22
119
—
(13,267)
36,742
(25,072)
(339)
—
—
11,331
(254)
788
534
2,191
$
96
1,545
46
$
$
VIRCO MFG. CORPORATION
Notes to Consolidated Financial Statements
January 31, 2019
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 69 years of manufacturing operations have
resulted in a wide product assortment. Major products include mobile tables, mobile storage equipment, desks, computer
furniture, chairs, activity tables, folding chairs and folding tables. The Company manufactures its products in Torrance,
California, and Conway, Arkansas, for sale primarily in the United States.
The Company operates in a seasonal business and requires significant amounts of working capital under its credit facility to
fund acquisitions of inventory and finance receivables during the summer delivery season. Restrictions imposed by the terms of
the Company’s credit facility may limit the Company’s operating and financial flexibility (see Note 3).
Reclassification
Certain amounts in the prior period statement of cash flows have been reclassified to conform to the presentation of the current
period financial statements. These reclassifications had no effect on the previously reported net loss.
Principles of Consolidation
The consolidated financial statements include the accounts of Virco Mfg. Corporation and its wholly-owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
Management Use of Estimates
Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to
make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities - and
disclosure of contingent assets and liabilities - at the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Significant estimates made by management include, but are not limited to,
valuation of inventory; deferred tax assets and liabilities; useful lives of property, plant and equipment; liabilities under
pension, warranty, self-insurance and environmental claims; and the accounts receivable allowance for doubtful accounts.
Actual results could differ from these estimates.
Fiscal Year End
Fiscal years 2019 and 2018 refer to the fiscal years ended January 31, 2019 and 2018, 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 net sales for fiscal years
ended January 31, 2019 and 2018. Foreign net sales were approximately 6.7% and 6.3% of the Company’s net sales for fiscal
years 2019 and 2018, respectively.
No single customer accounted for more than 10% of the Company’s accounts receivable at January 31, 2019 or 2018. Because
of the short time between shipment and collection, the net carrying value of receivables approximates the fair value for these
assets.
42
Cash
Cash consists of cash on hand, and the Company has no cash equivalents. Outstanding checks, representing a book overdraft,
are classified in accounts payable on the accompanying consolidated balance sheets and in operating activities in the
accompanying consolidated statements of cash flows.
Fair Values of Financial Instruments
The fair values of the Company’s cash, accounts receivable, and accounts payable approximate their carrying amounts due to
their short-term nature.
Financial assets and liabilities measured at fair value on a recurring basis are classified in one of the three following categories,
which are described below:
Level 1 — Valuations based on unadjusted quoted prices for identical assets in an active market.
Level 2 — Valuations based on quoted prices in markets where trading occurs infrequently or whose values are based on
quoted prices of instruments with similar attributes in active markets.
Level 3 — Valuations based on inputs that are unobservable and involve management judgment and our own assumptions
about market participants and pricing.
Financial assets measured at fair value on a recurring basis include assets associated with the Virco Employees Retirement Plan
(see Note 4).
Inventories
Inventory is valued at the lower of cost or net realizable value (determined on a first-in, first-out basis) and includes material,
labor and factory overhead. The Company maintains valuation allowances to write off estimated slow moving and obsolete
inventory to reflect the difference between the lower of cost of inventory and the net realizable 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.
The following table presents an updated breakdown of the Company’s net inventory (in thousands) as of January 31:
Finished goods
Work In Process
Raw materials
Inventories, net
Property, Plant and Equipment
2019
2018
$
$
15,908
18,820
12,561
47,289
$
$
13,054
16,627
12,376
42,057
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:
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
43
The Company capitalizes the cost of betterments that extend the life of an asset. Repairs and maintenance that do not extend the
life of an asset are expensed as incurred. Repair and maintenance expense was $2,145,000 and $1,518,000 for fiscal years
ended January 31, 2019 and 2018, respectively. Property, plant and equipment purchased during the year that remains unpaid
as of January 31, 2019 was $593,000.
The Company has established asset retirement obligations related to leased manufacturing facilities in accordance with
Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 410, Asset Retirement and
Environmental Obligations. Accrued asset retirement obligations are recorded at net present value and discounted over the life
of the lease. Asset retirement obligations, included in other non-current liabilities were $179,000 and $170,000 at January 31,
2019 and 2018, respectively.
Balance at beginning of period
Decrease in obligation
Accretion expense
Balance at end of period
Impairment of Long-Lived Assets
January 31,
2019
170,000
—
9,000
179,000
$
$
2018
590,000
(425,000)
5,000
170,000
$
$
An impairment loss is recognized in the event facts and circumstances indicate the carrying amount of a long-lived asset may
not be recoverable, and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Impairment
is recorded based on the excess of the carrying amount of the impaired asset over the fair value. Generally, fair value represents
the Company’s expected future cash flows from the use of an asset or group of assets, discounted at a rate commensurate with
the risks involved. There were no impairments for fiscal years ended January 31, 2019 and 2018.
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 income by the weighted-average number of common shares outstanding
plus the dilutive effect of stock award grants. The following table sets forth the computation of basic and diluted loss per share:
In thousands, except per share data
Numerator
Net loss
Denominator
Weighted-average shares — basic
Dilutive effect of common stock equivalents from equity incentive plans
Weighted-average shares — diluted (a)
Net loss per common share
Basic
Diluted
January 31,
2019
2018
$
(1,614) $
(3,209)
15,421
—
15,421
15,244
—
15,244
$
(0.10) $
(0.10)
(0.21)
(0.21)
(a) For fiscal year 2019 and 2018, approximately 149,000 and 147,000 shares of common stock equivalents were excluded in
the computation of diluted net income per share, as the effect would be anti-dilutive since the Company reported a net loss.
Environmental Costs
The Company is subject to numerous environmental laws and regulations in the various jurisdictions in which it operates that
(a) govern operations that may have adverse environmental effects, such as the discharge of materials into the environment, as
well as handling, storage, transportation and disposal practices for solid and hazardous wastes, and (b) impose liability for
response costs and certain damages resulting from past and current spills, disposals or other releases of hazardous materials.
Normal, recurring expenses related to operating the Company's factories in a manner that meets or exceeds environmental laws
and regulations are matched to the cost of producing inventory.
44
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, 2019 and 2018, the Company had not capitalized any remediation costs and had
not recorded any amortization expense in fiscal years 2019 and 2018.
Advertising Costs
Advertising costs are expensed in the period during which the advertising space is run. Selling, general and administrative
expenses include advertising costs for the years ended January 31, 2019 and 2018 of $1,134,000 and $974,000, respectively.
Prepaid advertising costs reported as a prepaid asset on the accompanying consolidated balance sheet at January 31, 2019 and
2018, were $254,000 and $355,000, respectively.
Product Warranty Expense
The Company provides a product warranty on most products. The standard warranty offered on products sold through
January 31, 2013 is ten years. Effective February 1, 2014 through December 31, 2016, the Company modified its warranty to a
limited lifetime warranty. Effective January 1, 2017, the Company modified the warranty offered to provide specific warranty
periods by product component, with no warranty period longer than ten years. The Company generally provides that customers
can return a defective product during the specified warranty period following purchase in exchange for a replacement product
or the repair of the product by the Company at no charge to the customer. The Company determines whether replacement or
repair is appropriate in each circumstance. The Company uses historic data to estimate appropriate levels of warranty reserves.
Because product mix, production methods and raw material sources change over time, historic data may not always provide
precise estimates for future warranty expense. The Company recorded warranty reserves of $700,000 and $925,000 as of
January 31, 2019 and 2018, respectively, as other long-term liabilities in the accompanying consolidated balance sheets. The
current portion of the warranty reserve was $325,000 and $400,000 as of January 31, 2019 and 2018, respectively, and included
in other accrued liabilities in the accompanying consolidated balance sheets.
Self-Insurance
In 2019 and 2018, the Company was self-insured for product and general liability losses up to $250,000 per occurrence,
workers’ compensation losses up to $250,000 per occurrence, and auto liability up to $50,000 per occurrence. Actuaries assist
the Company in determining its liability for the self-insured component of claims, which have been discounted to their net
present value utilizing a discount rate of 4.00% in 2019 and 2.00% in 2018.
Stock-Based Compensation Plans
The Company recognizes stock-based compensation cost for shares that are expected to vest, on a straight-line basis, over the
requisite service period of the award.
Virco issued a 10% stock dividend or 3/2 stock split every year beginning in 1983 through 2003. Although the stock dividend
had no cash consequences to the Company, the accounting methodology required for 10% dividends 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 1983 through 2003, the cumulative effect of the stock dividends has been to reclassify over $122 million from retained
earnings to additional paid-in capital. The equity section of the balance sheet on January 31, 2019 reflects additional paid-in
capital of approximately $118 million and accumulated deficit of approximately $52 million. Other than the losses incurred
during 2004-2006, 2011-2014 and 2018-2019, the accumulated deficit is a result of the accounting reclassification and is not
the result of accumulated losses.
Accumulated Other Comprehensive (Loss) Income, Net of Tax
The following table summarizes the changes in accumulated balances of other comprehensive (loss) income for the years
ended January 31, 2019 and 2018:
45
(in thousands)
Balance as of beginning of year
Other comprehensive (loss) income before reclassifications
Amounts reclassified from AOCI
Net current period other comprehensive income
January 31,
2019
2018
$
(9,259) $
(11,394)
(1,116)
1,333
217
1,180
955
2,135
Balance as of end of year
$
(9,042) $
(9,259)
The reclassifications out of accumulated other comprehensive (loss) income of $1,333,000 and $955,000 for the years ended
January 31, 2019 and 2018, respectively, related to amortization of actuarial losses and settlements.
Revenue Recognition
The Company adopted Financial Accounting Standards Board (“FASB”) ASC 606, Revenue from Contracts with Customers
(“ASC 606”) effective February 1, 2018 using the modified retrospective method to apply this guidance to all open contracts at
the date of initial application. The results of applying ASC 606 were insignificant and did not have a material impact on our
consolidated financial condition, results of operations, cash flows, business processes, controls or systems.
The Company manufactures, markets and distributes a wide variety of school and office furniture to wholesalers, distributors,
educational institutions and governmental entities. Revenue is recorded for promised goods or services when control is
transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for
those goods or services.
Contractual Arrangements with Customers
The Company's sales generally involve a single performance obligation to deliver goods pursuant to customer purchase orders.
Prices for our products are based on published price lists and customer agreements. The Company has determined that the
performance obligations are satisfied at a point in time when the Company completes delivery per the customer contract. The
majority of sales are free on board ("FOB") destination where the destination is specified per the customer contract and may
include delivering the furniture into the classroom, school site or warehouse. Sales of furniture that are sold FOB factory are
typically made to resellers of our product, who in turn provide logistics to the ultimate customer. Once a product has been
delivered per the shipping terms, the customer is able to direct the use of, and obtain substantially all of the remaining benefits
from, the asset. The Company considers control to have transferred upon shipment or delivery in accordance with shipping
terms, because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company
has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. The
Company offers sales incentives and discounts through various regional and national programs to our customers. These
programs include product rebates, product returns allowances and trade promotions. Variable consideration for these programs
is estimated in the transaction price at contract inception based on current sales levels and historical experience using the
expected value method, subject to constraint.
The Company generates revenue primarily by manufacturing and distributing products through resellers and direct-to-
customers. Control transfers to both resellers and direct customers at a point in time when the delivery process is complete as
determined by the corresponding shipping terms. Therefore, we do not consider them to be meaningfully different revenue
streams given similarities in the nature of the products, performance obligation and distribution processes. Sales are
predominately in the United States and to a similar class of customer. We do not manage or evaluate the business based on
product line or any other discernable category.
For product produced by and sourced from third parties, management has determined that it is the principal in all cases, since it
(i) bears primary responsibility for fulfilling the promise to the customer; (ii) bears inventory risk before and/or after the good
or service is transferred to the customer; and (iii) has discretion in establishing the price for the sale of good or service to the
customer.
46
Contract Assets and Liabilities
Payment terms are established on the Company’s pre-established credit requirements based upon an evaluation of customers’
credit quality. Most customers obtain payment terms between 1-30 days and an asset is recognized for the related accounts
receivable.
Contract liabilities are recognized for contracts where payment has been received in advance of delivery. The contract liability
balance can vary significantly depending on the timing of when an order is placed and when shipment or delivery occurs. As of
January 31, 2019, other than accounts receivable, the Company had no material contract assets, contract liabilities or deferred
contract costs recorded on its condensed consolidated balance sheet.
Costs of fulfilling customers’ purchase orders, such as shipping, handling and delivery, which occur prior to the transfer of control,
are recognized in selling, general and administrative expense when incurred.
Practical Expedients & Optional Exemptions
Significant Financing Component - as we expect the period between when we transfer control of the promised good or service
to a customer and when the customer pays for that good or service will be one year or less, the Company elected to apply the
practical expedient for significant financing components.
Remaining Performance Obligations - due to the short-term duration of the Company’s contracts with customers and
fulfillment of performance obligations, the Company has elected not to disclose the information regarding the remaining
performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue.
Cost to Obtain a Customer - we pay certain costs to obtain a customer contract such as commissions. As our customer contracts
have a contractual term of one year or less, we have elected to apply the practical expedient and expense these costs in selling,
general and administrative expense as incurred, which is consistent with our historical practice.
For fiscal year ended January 31, 2018, the Company recognizes revenue in accordance with FASB ASC Topic 605, Revenue
Recognition. Revenue is recognized when title passes under its various shipping terms, when classroom delivery services are
complete and when collectability is reasonably assured. The Company reports sales net of sales returns and allowances, sales
taxes imposed by various government authorities, cash discounts and rebate to customers. In most instances, the Company sells
furniture on bids and contracts, which may include multiple elements. For sales that include freight to the customer, many sales
are delivered on the same day shipped, with an average delivery being in route for 1 to 3 days. Classroom delivery, which
involves carrying the furniture to the classroom and setting the desks and chairs in place, typically occurs the day the furniture
is delivered.
In accordance with ASC 605, Revenue Recognition - Multiple-Element Arrangements, revenue arrangements with multiple
deliverables are generally accounted for by the Company on a combined unit of accounting as the furniture delivery and
classroom delivery are generally provided at the same time. We recognize the consideration for the combined unit of
accounting once the final item has been delivered and installed.
Revenue includes freight charged to customers; related costs are recorded in selling and administrative expense. Rebates,
discounts and other marketing program expenses directly related to the sale are recorded as a reduction to net sales.
Delivery Costs
For the fiscal years ended January 31, 2019 and 2018, shipping and classroom delivery costs of approximately $22,150,000,
$19,299,000, respectively, were included in selling, general and administrative expenses in the accompanying consolidated
statements of operations.
Accounting for Income Taxes
The Company recognizes deferred income taxes under the asset and liability method of accounting for income taxes in
accordance with the provisions of FASB ASC Topic 740, Accounting for Income Taxes. Deferred income taxes are recognized
for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for
the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded when it is
determined to be more likely than not that the asset will not be realized.
47
2. New Accounting Pronouncements
Recently Adopted Accounting Updates:
On February 1, 2018, we adopted FASB ASC 606 as discussed in Note 1, under Revenue Recognition.
Accounting Standards Update (“ASU”) 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost - This ASU requires employers to disaggregate the
service cost from other components of net periodic benefit costs and to disclose the income statement line item in which each
component is included. This guidance requires service costs to be reported in the same line item as other compensation costs,
and the other components of net periodic benefit costs (which include interest costs, expected return on plan assets and
actuarial gains and losses) to be reported outside of operating income. We adopted this guidance on February 1, 2018.
Application was required on a retrospective basis and resulted in a reclassification of $1,257,000 and $1,181,000 of expense
from “Selling and administrative expenses” into “Pension expense” for the years ended January 31, 2019 and 2018,
respectively. Refer to Note 4 for further information.
ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
(SAB 118) - This ASU allows SEC registrants to record provisional amounts in earnings due to the complexities involved in
accounting for the enactment of the Tax Cuts and Jobs Act (TCJA). We recognized the estimated income tax effects of the
TCJA in accordance with SAB 118. Refer to Note 6 for further information.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments - We adopted
this guidance on February 1, 2018, and it did not materially impact our consolidated statements of cash flows.
ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income - This ASU provides financial statement preparers with an option to reclassify
stranded tax effects within accumulated other comprehensive income in each period in which the effect of the change in the
U.S. federal corporate income tax rate in the TCJA is recorded. We have elected not to reclassify the stranded tax effects within
accumulated other comprehensive income.
Recently Issued Accounting Updates But Not Yet Adopted:
ASU 2016-02, Leases (Topic 842) - Requires an entity to recognize both assets and liabilities arising from financing and
operating leases, along with additional qualitative and quantitative disclosures. In July 2018, the FASB issued ASU 2018-11,
which provides entities with a new transition method where comparative periods presented in financial statements in the period
of adoption will not need to be restated. Under the new transition method, an entity initially applies the provisions of Topic 842
at the adoption date, versus at the beginning of the earliest period presented, and recognizes a cumulative-effect adjustment to
the opening balance of retained earnings in the period of adoption. The new standard becomes effective for the Company at the
beginning of fiscal 2020. The Company will adopt the standard in the first quarter of fiscal 2020 using the modified
retrospective transition option of applying the new standard at the adoption date. All necessary changes required by the new
standard, including those to the Company's accounting policies, business process, systems, controls, and disclosures, have been
identified and are in process of implementation as of the beginning of fiscal 2020. The Company elected the package of
practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to
carry forward the historical lease classification. The Company is finalizing the impact of the new standard which will result in
the recording of a right of use asset and lease liability on the consolidated balance sheet derived from the present value of
future minimum lease payments which are disclosed in Note 7. The impact of the new standard will not have a material impact
upon the Company’s consolidated statements of operations, cash flows or equity.
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the incurred loss impairment
methodology in current U.S. GAAP with a methodology that reflects expected credit losses. The amended guidance is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted for
the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating
the impact of the adoption of this standard on our consolidated financial statements.
ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), addresses the impact of the U.S. Tax
Cuts and Jobs Act (the "Tax Act") on tax effects presented in other comprehensive income. The amended guidance allows a
reclassification from accumulated other comprehensive income to retained earnings for the tax effects of items within
accumulated other comprehensive income resulting from the Tax Act. The amended guidance is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any
48
interim period for which financial statements have not yet been issued. The amendments may be applied either in the period of
adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the
Tax Act is recognized. We are currently evaluating the impact of the adoption of this standard on our consolidated financial
statements.
ASU No. 2018-13, Fair Value Measurement (Topic 820)-Disclosure Framework-Changes to the Disclosure Requirements for
Fair Value Measurement, improves the effectiveness of fair value measurement disclosures and modifies the disclosure
requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this ASU are effective for
all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments
on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop
Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for
only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be
applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. We are currently
evaluating the impact of the adoption of this standard on our consolidated financial statements.
ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends
ASC 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General. The amended guidance modifies the
disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and
adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated Other
Comprehensive Income expected to be recognized in net periodic benefit costs over the next fiscal year and (b) the effects of a
one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation
for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the
benefit obligation for the period. The amended guidance is effective for fiscal years ending after December 15, 2020. The
adoption of this guidance will modify our disclosures but will not have a material effect on our consolidated financial
statements.
3. Debt
Outstanding balances (in thousands) for the Company’s long-term debt were as follows:
Revolving credit line
Other
Total debt
Less current portion
Non-current portion
January 31,
2019
2018
$
14,858
$
6,556
21,414
5,504
$
15,910
$
10,059
6,622
16,681
4,681
12,000
The Company has a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association,
as administrative agent and lender (“PNC”). The credit agreement has been amended eighteen times since it’s origination in
2011 through fiscal 2019, which, among other things, extended the maturity date of the Credit Agreement for three years until
March 19, 2023, increased the maximum availability under the Credit Agreement 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 issuances of letters of
credit, modified, eliminated or waived covenants, amended seasonal advances and established a 2,500,000 line for equipment
financing.
The Revolving Credit Facility is an asset-based line of credit that is subject to a borrowing base limitation and generally
provides for advances of up to 85% of eligible accounts receivable, plus a percentage equal to the lesser of 60% of the value of
eligible inventory or 85% of the liquidation value of eligible inventory, plus an amount ranging from $8,000,000 to
$14,000,000 from December 1 through August 31 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 March 19, 2023, 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.
49
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 1.25%, and the applicable margin
for Eurodollar Currency Rate loans is a percentage within a range of 1.75% to 2.25%, 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 interest rate at January 31, 2019 was 6.25%.
On March 13, 2017 the Company entered into Amendment No. 14 which established an equipment line to facilitate the capital
expenditure plan for fiscal 2018 and to establish covenants for fiscal 2018. On June 8, 2017, the Company entered into
Amendment No. 15 to the Credit Agreement which, among other things, will allow the restatement of the amount of revolving
advances to $14,000,000 for June 2017 and $11,000,000 for July 2017 and extend the time to borrow under the $2,500,000
Equipment Line until March 12, 2018. In August 2017, the Company purchased a manufacturing building in Conway Arkansas
for $7,200,000 with Virco making a 20% down payment and the seller providing financing for the remaining balance of
$5,760,000 for 20 years at a fixed rate of 4% per year. In connection to this purchase, the Company entered into Amendment
No. 16 to the Credit Agreement with PNC Bank which, among other things, will (a) consent to the acquisition of the building,
(b) permit the Company to incur the additional indebtedness and (c) amend the Credit Agreement in certain respects, which
Lenders and Agent are willing to do on the terms and subject to the conditions contained in this Amendment. On March 19,
2018, the Company entered into Amendment No. 17, which amended the Credit Agreement by (i) extending the maturity date
of the Credit Agreement for three years until March 19, 2023, (ii) allowing dividends and stock buyback up to $2,000,000 in
aggregate for any fiscal year, (iii) setting forth the minimum EBITDA financial covenant for fiscal quarter ending April 30,
2018 at ($3,767,000) and two consecutive fiscal quarters ending July 31, 2018 at $6,402,000, (iv) increasing the Maximum
Revolving Advance Amount from $50,000,000 to $60,000,000, and (v) setting forth the minimum fixed charge coverage ratio
of not less than 1.10 to 1.00 commencing with the consecutive four fiscal quarter period ending October 31, 2018 and measured
as of the end of each fiscal quarter until the maturity date of the Credit Agreement. In connection with the Seventeenth
Amendment, the Borrowers also agreed to pay to PNC Bank a non-refundable extension fee of $250,000.
In March 2019, the Company entered into Amendment No. 19 which, among other things, (i) increased the Maximum
Revolving Advance Amount to $65,000,000 with seasonal adjustments to the credit limit and subject to borrowing base
limitations, (ii) increased seasonal advance to $15,000,000 from January to July of each year, (iii) increased equipment loan to
$2,000,000, (iv) to reduce borrowings under the line to less than or equal to $10,000,000 for a period of 30 consecutive days
during the fourth quarter of each fiscal year. In connection with Amendment No. 19, the Borrowers also agreed to pay to PNC
Bank a non-refundable fee of $24,000. The clean down provision allows the Company to maintain a minimum outstanding
balance to be carried on an uninterrupted period extending beyond one year and ultimately due at the schedule maturity date in
March 2023. As a result of Amendment No. 19, the clean down limit was increased to $10,000,000, thereby allowing the
Company to refinance an additional $2,000,000 of its short-term borrowings under the line of credit on a long-term basis at
January 31, 2019. 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.
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. For the year ended January 31, 2019, the Company was
in violation of the minimum fixed charge coverage ratio resulting in an Event of Default.
In April 2019, the Company entered into Amendment No. 20 which, among other things, waived the covenant violation for the
fourth quarter of fiscal 2019, amended the minimum EBITDA covenant and the fixed charge coverage ratio for fiscal 2020, and
eliminated the Company’s ability to pay dividends or repurchase stock commencing on February 1, 2019 and ending on
January 31, 2020. The fixed charge coverage ratio is as follows: (i) for the consecutive two fiscal quarter period ending July 31,
2019, 2.25 to 1.00, and (ii) for each consecutive four fiscal quarter period of Borrowers ending thereafter, 1.10 to 1.00.
Minimum EBITDA for the three consecutive fiscal month period ending on April 30, 2019, may not be less than (negative)
$5,000,000. In addition, certain restrictions were placed upon the Company’s capital expenditures limiting the amount: (a) in
the first fiscal quarter ending April 30, 2019 in an aggregate amount in excess of $900,000, (b) in the consecutive two fiscal
50
quarter periods ending July 31, 2019 in an aggregate amount in excess of $1,900,000, (c) in the consecutive three fiscal quarter
period ended October 31, 2019 in an aggregate amount in excess of (i) $3,900,000, if an only if, the Borrowers’ EBITDA for
the consecutive two fiscal quarter period ending July 31, 2019 exceeds $8,500,000 or (ii) $2,900,000 if Borrowers’ EBITDA
for such period is less than or equal to $8,500,000 and (d) in the consecutive four fiscal quarter period ending January 31, 2020
or any fiscal year thereafter, in an aggregate amount for all Borrowers in excess of $8,000,000. In connection with Amendment
No. 20 the Borrowers also agreed to pay to PNC Bank a non-refundable fee of $125,000. 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.
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 at its discretion. In addition, certain of the covenants and representations
and warranties set forth in the Credit Agreement contain limited or no materiality thresholds, and many of the representations
and warranties must be true and correct in all material respects upon each borrowing, which the Borrowers expect to occur on
an ongoing basis. There can be no assurance that the Borrowers will be able to comply with all such covenants and be able to
continue to make such representations and warranties on an ongoing basis.
The Company's line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer
season. Approximately $11,231,000 was available for borrowing as of January 31, 2019.
As of January 31, 2019, long-term debt repayments are approximately as follows (in thousands):
Year ending January 31,
2020
2021
2022
2023
2024
Thereafter
$
5,504
10,654
405
229
238
4,384
Management believes that the carrying value of debt approximated fair value at January 31, 2019 and 2018, as all of the long-
term debt bears interest at variable rates based on prevailing market conditions.
4. Retirement Plans
Pension Plans
The Company maintains two defined benefit pension plans, the Virco Employees Retirement Plan (“Employee Plan”), and the
Virco Important Performers Retirement Plan (“VIP Plan”). The annual measurement date for both plans is January 31. The
Company and its subsidiaries cover all employees hired prior to December 31, 2003 under the Employee Plan, which is a
qualified noncontributory defined benefit retirement plan. Benefits under the Employee Plan are based on years of service and
career average earnings. Benefit accruals under the Employee Plan were frozen effective December 31, 2003. All benefits were
fully vested on January 31, 2019 and 2018.
The Company also provides a supplementary retirement plan for certain key employees, the VIP Plan. The VIP Plan provides a
benefit up to 50% of average compensation for the last five years in the VIP Plan offset by benefits earned under the Employee
Plan. Benefit accruals under the VIP Plan were frozen effective December 31, 2003. Substantially all assets, consisting of life
insurance contracts, securing the VIP Plan are held in a rabbi trust. The cash surrender values of the life insurance policies are
included in other assets in the accompanying consolidated balance sheets. The cash surrender values of the life insurance
policies securing the VIP Plan were $3,469,000 and $3,411,000 at January 31, 2019 and 2018, respectively. Death benefits
payable under life insurance policies held by the Plan were approximately $9,102,000 and $9,095,000 at January 31, 2019 and
2018, respectively.
Accounting policy regarding pensions requires management to make complex and subjective estimates and assumptions
relating to amounts which are inherently uncertain. Three primary economic assumptions influence the reported values of plan
liabilities and pension costs. The Company takes the following factors into consideration: discount rate, assumed rate of return
and rate of increase in compensation.
51
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’s future benefit accruals for both benefit plans were frozen in 2013, the compensation increase
assumption had no impact on pension expense, accumulated benefit obligation or projected benefit obligation for the period
ended January 31, 2019 or 2018.
The assumed rate of return on plan assets represents an estimate of long-term returns available to investors who hold a mixture
of stocks, bonds and cash equivalent securities. When setting its expected return on plan asset assumptions, the Company
considers long-term rates of return on various asset classes (both historical and forecasted, using data collected from various
sources generally regarded as authoritative) in the context of expected long-term average asset allocations for its defined
benefit pension plan.
The Company maintains a trust for and funds the pension obligations for the Employee Plan. The Board of Directors appoints a
Retirement Plan Committee that establishes a policy for investment and funding strategies. Approximately 55% of the trust
assets are managed by investment advisors and held in common trust funds with the balance managed by the Retirement Plan
Committee. The Retirement Plan Committee has established target asset allocations for its investment advisors, who invest the
trust assets in a variety of institutional collective trust funds. The Company’s investment advisors have developed a funding
strategy that moves fund asset allocation from equity and other investments to fixed income instruments designed to mirror the
changes in discount rates as the Plan becomes more fully funded. At January 31, 2019, approximately 14% of the trust assets
were held in these investments. The Retirement Plan Committee receives quarterly reports addressing investment returns,
funded status of the plan and progress on the glidepath to fully funded status from the investment advisors and meets
periodically with them to discuss investment performance. At January 31, 2019 and 2018, the amount of the plan assets
invested in bond or short-term investment funds was 16% and 15%, respectively, and the balance of the trust was held in equity
funds or other investments. The trust does not hold any Company stock.
It is the Company's policy to contribute adequate funds to the trust accounts to 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 $0.8 million and $1.4 million, to the trust in 2019 and 2018, respectively. Contributions during
fiscal year 2020 will depend upon actual investment results and benefit payments but are anticipated to be approximately $4.5
million for the Employee Plan. During fiscal 2019 and 2018, the Company paid approximately $281,000 and $345,000,
respectively, in benefits per year under the non-qualified plans. It is anticipated that contributions to non-qualified plans will be
approximately $281,000 for fiscal 2020. At January 31, 2019, accumulated other comprehensive loss of approximately $9
million, net of tax, is attributable to the pension plans.
52
The following tables set forth (in thousands) the combined funded status of the Company’s pension plans at January 31, 2019
and 2018:
Combined Employee Retirement Plans
1/31/2019
1/31/2018
Change in Benefit Obligation
Benefit obligation at beg. of year
Service cost
Interest cost
Participant contributions
Amendments
Actuarial (gains) losses
Plan settlement
Benefits paid
Benefit obligation at end of year
Change in Plan Assets
Fair value at beg. of year
Actual return on plan assets
Company contributions
Settlements
Benefits paid
Fair value at end of year
Funded Status
Unfunded status of the plan
Amounts Recognized in Statement of Financial Position
Current liabilities
Non-current liabilities
Accrued benefit cost
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
$
$
$
$
$
$
$
$
$
$
40,181
$
—
1,459
—
—
(2,044)
(2,176)
(1,121)
36,299
27,259
(1,557)
1,122
(2,176)
(1,121)
$
$
23,527
$
39,761
—
1,593
—
—
930
—
(2,103)
40,181
22,911
4,726
1,725
—
(2,103)
27,259
(12,772) $
(12,922)
(322) $
(12,450)
(12,772) $
(12,772)
8,319
(4,453) $
8,319
$
—
—
8,319
$
(346)
(12,576)
(12,922)
(12,922)
8,612
(4,310)
8,612
—
—
8,612
53
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
Combined Employee Retirement Plans
1/31/2019
1/31/2018
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 (loss) income
Items to be Recognized as a Component of Periodic Pension Cost for next fiscal year
Prior service cost
Net actuarial loss (gain)
Supplemental Data
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Components of Net Cost
Service cost
Interest cost
Expected return on plan assets
Amortization of transition amount
Recognized (gain) loss due to settlement
Amortization of prior service cost
Recognized net actuarial loss
Benefit cost
Estimated Future Benefit Payments
FYE 01-31-2020
FYE 01-31-2021
FYE 01-31-2022
FYE 01-31-2023
FYE 01-31-2024
FYE 01-31-2025 to 2029
Total
(2,447)
—
(955)
—
—
(3,402)
—
692
692
40,181
40,181
27,259
—
1,593
(1,367)
—
—
—
955
1,181
$
$
$
$
$
$
$
$
$
1,039
$
—
(1,333)
—
—
(294) $
— $
$
$
706
706
36,299
36,299
23,527
— $
1,459
(1,535)
—
—
—
1,333
1,257
$
6,022
2,171
2,151
2,087
2,085
10,524
25,040
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
3.75% - 4.10%
3.75% - 4.0%
N/A
4.25%
6.50%
N/A
N/A
4.25%
6.50%
N/A
54
The Employee Plan held no Level 2 or 3 investments at January 31, 2019 and 2018. The following table sets for the fair value
of the Level 1 investments for the Employee Plan as of January 31, 2019 and 2018:
Fair Value Measurements of Plan Assets
Employee Plan
Level 1 Measurement
Cash & Cash Equivalents
Common Stock
PNC Govt Money Fund
Vanguard Total Bond
Ishares Credit Bond ETF
Vanguard INTM Term Investment
Vanguard LT Investment
Ishares Russell 2000
Ishares Russell MID-CAP
Ishares Emerging Markets
Ishares MCSI RAFE
Ishares S&P Index
Vanguard INTM Term Treasury
Vanguard LT Treasury
Total Level 1 Investments
1/31/2019
1/31/2018
$
— $
9,345
630
—
—
283
1,304
1,672
1,890
1,130
1,534
2,895
281
1,279
—
9,701
1,030
—
340
702
1,973
2,047
2,129
1,338
1,838
4,825
—
—
$
22,243
$
25,923
At January 31, 2018, the Level 1 investments presented in the table above, excluding cash & cash equivalents and common
stock, were reclassified from previously reported as Level 2 investments in the Company’s previously issued fiscal 2018
consolidated financial statements to conform to the current policy.
In addition, the Managed Investment Fund, was previously presented as a Level 2 investments at January 31, 2018, but has
been reclassified to present as a net asset value per share investment not subject to the fair value hierarchy.
The mutual fund investment is valued using the net asset value (“NAV”) as a practical expedient and is not required to be
categorized in the fair value hierarchy table. The total fair value of this investment was $1,284,000 and $1,336,000 as of
January 31, 2019 and January 31, 2018, respectively, and is not included in the table above. In relation to this investment, there
is no unfunded commitments and the shares can be redeemed on a daily basis with minimal restrictions. Events that may lead to
a restriction to transact with the fund is not considered probable.
401(k) Retirement Plan
The Company’s retirement plan, which covers all U.S. employees, allows participants to defer from 1% to 75% of their eligible
compensation through a 401(k)-retirement program. Through December 31, 2001, the plan included an employee stock
ownership component. The plan continues to include Virco stock as one of the investment options. At January 31, 2019 and
2018, the plan held 648,565 shares and 564,375 shares of the Company’s common stock, respectively. Effective January 1,
2018, the Company initiated an employer match. For the fiscal years ended January 31, 2019 and 2018, the compensation costs
incurred for employer match was $738,000 and $44,000, respectively.
Life Insurance
The Company provided post-retirement life insurance to certain retired employees under the Dual Option Life Insurance Plan
(the "Plan"). Effective January 2004, the Company terminated this plan for active employees. The Company has purchased
55
split-dollar life insurance on the lives of the remaining covered participants. Death benefits due to participants are
approximately $2,350,000. Cash surrender values of these policies, which are included in other assets in the accompanying
consolidated balance sheets, were $2,098,000 and $2,092,000 at January 31, 2019 and 2018, respectively. Death benefits
payable under the policies were approximately $4,256,000 and $4,486,000 at January 31, 2019 and 2018, respectively. Death
benefits received under the Plan in excess of the benefit obligation will be retained in the trust and used to secure and fund
benefits payable under the VIP Pension Plan. The Company maintains a rabbi trust to hold assets related to the Dual Option
Life Insurance Plan. All assets securing this plan are held in the rabbi trust.
The following sets forth the Company's change in death benefits payable during the years ended January 31, 2019 and 2018:
Liability beginning of year
Accretion expense
Death benefits paid
Liability end of year
5. Stock-Based Compensation
Stock Incentive Plans
1/31/2019
1/31/2018
$
$
2,088,000
49,000
(100,000)
2,037,000
$
$
2,184,000
54,000
(150,000)
2,088,000
The Company's has one stock plan, the 2011 Employee Stock Incentive Plan (the “2011 Plan”). Under the 2011 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 awards granted under the 2011 Plan are expensed ratably over the vesting period of the awards.
The Company determines the fair value of its restricted stock 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. There were 55,555
awards granted and 226,804 awards were vested during fiscal 2019. As of January 31, 2019, there were approximately 268,277
awards available for future issuance under the 2011 Plan.
Accounting for the Plans
A summary of the Company’s restricted stock unit awards activity, and related information for the following years ended
January 31, is as follows:
2019
2018
Restricted stock
units
Weighted-
Average Exercise
Price
Restricted stock
units
Weighted- Average
Exercise Price
Outstanding at beginning of year
692,404
$
Granted
Exercised
Forfeited
Outstanding at end of year
Weighted-average fair value of restricted
stock units granted during the year
55,555
(226,804)
(20,000)
501,155
—
4.25
4.49
4.63
4.01
4.44
4.49
491,284
$
504,404
(259,284)
(44,000)
692,404
—
2.46
4.95
4.86
4.42
4.25
4.95
The aggregate fair value of restricted stock awards vested during fiscal years 2019 and 2018 was $1,050,103 and $1,260,120,
respectively. The Company recognized compensation expense, net of forfeitures, for the restricted stock awards of $907,000
and $830,000 for fiscal 2019 and 2018, respectively. The Company records forfeitures as incurred.
The weighted-average grant-date fair value of restricted stock awards is the quoted market price of the Company’s common
stock on the date of grant, as shown in the table above. The weighted-average grant-date fair value of restricted stock awards
granted in fiscal 2019 and 2018 was $4.49 per share and $4.95 per share, respectively.
As of January 31, 2019, there was $1.6 million of total unrecognized compensation expense related to restricted stock awards.
That expense is expected to be recognized over a weighted-average period of 2.84 years.
To satisfy employee minimum statutory tax withholding requirements for restricted stock awards that vest, the Company
withholds and retires a portion of the vesting common shares, unless an employee elects to pay cash. In fiscal 2019 and 2018,
56
the Company withheld 57,456 and 73,749 common shares, respectively, with a total value of $0.3 million each year. These
amounts are presented as a cash outflow from financing activities in the accompanying consolidated statement of cash flows.
6. Income Taxes
The income tax expense for the last two years is reconciled to the statutory federal income tax rates of 21% and 35% for the tax
years ended January 31, 2019 and 2018, respectively, as follows (in thousands):
Statutory
State taxes (net of federal tax)
Change in valuation allowance
State rate adjustment
Change in unrecognized tax benefits
Stock Compensation
Tax cuts and jobs act
Expirations of attributes
Other
Income tax expense
2019
2018
(235) $
186
831
(222)
1
(46)
(15)
28
(31)
497
$
794
341
410
(260)
6
(200)
4,438
143
(49)
5,623
$
$
Significant components of the expense (benefit) for income taxes (in thousands) attributed to continuing operations are as
follows for the years ended January 31 (in thousands):
Current
Federal
State
Deferred
Federal
State
Change in Valuation Allowance
Income tax expense
2019
2018
(24) $
102
78
(247)
(165)
(412)
831
419
497
$
(296)
98
(198)
5,270
141
5,411
410
5,821
5,623
$
$
57
Deferred tax assets and liabilities are comprised of the following as of January 31 (in thousands):
Deferred tax assets
Accrued vacation and sick leave
Retirement plans
Insurance reserves
Warranty
Net operating loss carryforwards
Inventory
§ 163 (j) Limitation
Other
Deferred tax liabilities
Tax in excess of book depreciation
Other
Valuation allowance
Net long term deferred tax asset
2019
2018
892
2,748
381
182
5,303
1,320
540
765
12,131
$
$
(720) $
(57)
(777) $
(1,756)
9,598
$
1,015
3,756
451
242
4,722
1,085
—
624
11,895
(811)
(66)
(877)
(925)
10,093
$
$
$
$
$
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 has a valuation allowance of $1,756,000
against certain state deferred tax assets that the Company does not believe it is more-likely-than-not to realize. At January 31,
2019, the Company has net operating loss carryforwards of approximately $15,299,000 for federal and $33,429,000 for state
income tax purposes, expiring at various dates through January 31, 2039.
The following table summarizes the activity related to our gross unrecognized tax benefits for the years ended January 31 (in
thousands):
Balances 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 relating to settlements with taxing authorities
Decreases related to lapsing of statute of limitations
Balance as of January 31,
2019
2018
38
—
(2)
8
—
(6)
38
$
$
29
2
—
16
—
(9)
38
$
$
At January 31, 2019, the Company’s unrecognized tax benefits associated with uncertain tax positions were $38,000, of which
$30,000 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 $6,000 at January 31, 2019, and $5,000 at January 31, 2018. The years ended
January 31, 2015 and subsequent years remain open for examination by the IRS and state tax authorities. The Company is
currently under IRS examination for fiscal year ended January 31, 2016. The Company is not currently under state
examinations.
The specific timing of when the resolution of each tax position will be reached is uncertain. As of January 31, 2019, it is
reasonably possible that unrecognized tax benefits will decrease by $4,000 within the next 12 months due to the expiration of
the statute of limitations.
58
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting (''ASU
2016-09''). ASU 2016-09 simplifies how several aspects of share-based payments are accounted for and presented in the
financial statements. ASU 2016-09 is effective for public companies for annual reporting periods beginning after December
15, 2016. The Company adopted this ASU in the first quarter of fiscal 2018, resulting in an adjustment to beginning retained
earnings on February 1, 2017 for the excess tax benefits for which a benefit could not be previously recognized of
approximately $171,000. The balance of the unrecognized excess tax benefits was reversed with the impact recorded to
retained earnings.
The Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate to
21%.
On December 22, 2017, Staff Accounting Bulletin No. 118 was issued to address the application of US GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, we have
determined that $4,438,000 of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax
assets and liabilities was provisional amount and reasonable estimate at January 31, 2018. We finalized our accounting for the
impact of the TCJA during fiscal 2019 with no material adjustments to the previous provisional amounts recognized.
7. Commitments
The Company has operating leases on real property and equipment that expire at various dates. The Torrance, CA office,
manufacturing and distribution facility is leased under a series of 5-year operating lease terms that would have expired on
February 28, 2020. On November 14, 2017, the Company entered into a fourth amendment which extends the term of the lease
for an additional 62 months through April 30, 2025 and provides for monthly base lease payments that increase after each 12-
month period. The monthly base lease payments range from approximately $397,000 per month (which applies for the period
from May 1, 2020 to February 28, 2021) to $447,000 per month (which applies for the period from March 1, 2024 to April 30,
2025). 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 for real estate 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, 2019, are as follows:
Year ending January 31,
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Rent expense relating to operating leases was as follows (in thousands):
Year ended January 31,
2019
2018
$
$
$
5,045
4,405
5,041
5,040
5,192
6,687
31,410
6,006
5,644
The Company subleased space at one of its facilities on a month-to-month basis during 2019 and 2018. Rental income was
$40,000 for fiscal years ended January 31, 2019 and 2018.
The Company has issued purchase commitments for raw materials at January 31, 2019, of approximately $11,296,000. There
were no commitments in excess of normal operating requirements.
8. Contingencies
59
The Company and other furniture manufacturers are subject to federal, state and local laws and regulations relating to the
discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and
hazardous materials. The Company has expended, and expects to continue to spend, significant amounts in the future to comply
with environmental laws. Normal recurring expenses relating to operating the Company factories in a manner that meets or
exceeds environmental laws are matched to the cost of producing inventory. Despite the Company’s significant dedication to
operating in compliance with applicable laws, there is a risk that the Company could fail to comply with a regulation or that
applicable laws and regulations change. On these occasions, the Company records liabilities for remediation costs when
remediation costs are probable and can be reasonably estimated.
The Company is subject to contingencies pursuant to environmental laws and regulations that in the future may require the
Company to take action to correct the effects on the environment of prior disposal practices or releases of chemical or
petroleum substances by the Company or other parties.
The Company has a self-insured retention for product and general liability losses up to $250,000 per occurrence, workers’
compensation liability losses up to $250,000 per occurrence and automobile liability losses up to $50,000 per occurrence. The
Company has purchased insurance to cover losses in excess of the retention up to a limit of $30,000,000. The Company has
obtained an actuarial estimate of its total expected future losses for liability claims and recorded a liability equal to the net
present value of $1,265,000 and $1,375,000 at January 31, 2019 and 2018, respectively, based upon the Company’s estimated
payout period of five years using a 4.0% and 2.0% discount rate, respectively.
Workers’ compensation, automobile, general and product liability claims may be asserted in the future for events not currently
known by management. Management does not anticipate that any related settlement, after consideration of the existing reserve
for claims incurred and potential insurance recovery, would have a material adverse effect on the Company’s financial position,
results of operations or cash flows. Estimated payments under the self-insurance programs are as follows (in thousands):
Year ending January 31,
2020
2021
2022
2023
2024
Thereafter
Total
Discount to net present value
$
$
$
265
265
265
270
275
—
1,340
(75)
1,265
The Company and its subsidiaries are defendants in various legal proceedings resulting from operations in the normal course of
business. It is the opinion of management, in consultation with legal counsel, that the ultimate outcome of all such matters will
not materially affect the Company’s financial position, results of operations or cash flows.
9. Warranty
The Company provides a warranty against all substantial defects in material and workmanship. The standard warranty offered
on products sold through January 31, 2013 is 10 years. Effective February 1, 2014 the Company modified its warranty to a
limited lifetime warranty. The warranty effective February 1, 2014 is not anticipated to have a significant effect on warranty
expense. Effective January 1, 2017, the Company modified the warranty offered to provide specific warranty periods by
product component, with no warranty period longer than ten years. The Company’s warranty is not a guarantee of service life,
which depends upon events outside the Company’s control and may be different from the warranty period. The Company
accrues an estimate of its exposure to warranty claims based upon both product sales data and an analysis of actual warranty
claims incurred. The following is a summary of the Company’s warranty-claim activity during for the years ended January 31
(in thousands):
60
Beginning balance
Provision for current year
Provision for (benefits from) prior year
Costs incurred
Ending balance
10. Subsequent Events
2019
2018
925
$
1,000
600
(555)
(270)
700
$
760
(380)
(455)
925
$
$
The Company has evaluated events subsequent to January 31, 2019 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 subsequent events occurred that require recognition or additional disclosure in the financial statements
except for Amendments No. 19 and 20, dated March 12, 2019 and April 29, 2019 to the Revolving Credit and Security
Agreement, dated as of December 22, 2011, which is disclosed in Note 3 to the consolidated financial statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
On April 27, 2018, the Company appointed Deloitte & Touche LLP (“D&T”) as its independent registered public accounting
firm for the fiscal year ending January 31, 2019 and dismissed Ernst & Young LLP (“E&Y”) from that role effective April 27,
2018. The reports of E&Y on the Company’s consolidated financial statements as of and for the fiscal year ended January 31,
2018 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. During the fiscal year ended January 31, 2018 and the subsequent interim period through April
27, 2018, there were (i) no disagreements between the Company and E&Y on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of E&Y,
would have caused E&Y to make reference to the subject matter of the disagreement in their reports on the Company’s
consolidated financial statements for such year, and (ii) no “reportable events” as that term is defined in Item 304(a)(1)(v) of
Regulation S-K.
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 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.
Management of the Company, including its President and Chief Executive Officer along with its Chief Financial Officer,
carried out an evaluation 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.
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
61
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 (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
Company’s assets; (ii) 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 (iii) 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, 2019, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). 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, 2019.
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 ending January
31, 2019 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.
62
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, 2019.
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, 2019.
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, 2019.
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, 2019.
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, 2019.
63
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 Annual Report on
Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - January 31, 2019 and 2018
Consolidated Statements of Operation - Years Ended January 31, 2019 and 2018(cid:3)
Consolidated Statements of Comprehensive Loss - Years Ended January 31, 2019 and 2018(cid:3)
Consolidated Statements of Stockholders' Equity - Years Ended January 31, 2019 and 2018(cid:3)
Consolidated Statements of Cash Flows - Years Ended January 31, 2019 and 2018
Notes to Consolidated Financial Statements - January 31, 2019
Page numbers
34
36
38
39
40
41
42
64
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, 2019 and 2018
(In Thousands)
Col. A
Col. B
Beginning Balance
Col. C
Charged to
(Reduced from)
Expenses
Col. E
Deductions from
Reserves
Col. F
Ending Balance
Allowance for doubtful accounts for the
period ended:
January 31, 2019
January 31, 2018
Product, general, workers’ compensation and
automobile liability reserves for the period
ended:
January 31, 2019
January 31, 2018
Deferred tax valuation allowance for the
period ended:
January 31, 2019
January 31, 2018
$
$
$
$
$
$
200
200
$
$
3
55
$
$
3
55
$
$
200
200
1,347
1,650
925
515
$
$
$
$
1,357
1,101
831
410
$
$
$
$
1,439
1,404
$
$
— $
— $
1,265
1,347
1,756
925
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.
65
Item 16. Form 10-K Summary
Not applicable.
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: May 1, 2019
VIRCO MFG. CORPORATION
By:
/s/ Robert A. Virtue
Robert A. Virtue
Chairman of the Board and Chief Executive Officer
By:
/s/ Robert E. Dose
Robert E. Dose
Sr. Vice President, Finance, Secretary and Treasurer
(Principal Financial Officer)
By:
/s/ Bassey Yau
Bassey Yau
Vice President, Accounting, Corporate Controller, Assistant
Secretary and Assistant Treasurer (Principal Accounting
Officer)
66
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.
DATE
May 1, 2019
May 1, 2019
May 1, 2019
May 1, 2019
May 1, 2019
May 1, 2019
May 1, 2019
May 1, 2019
May 1, 2019
May 1, 2019
SIGNATURE
TITLE
/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/ Alexander L. Cappello
Alexander L. Cappello
/s/ Craig Levra
Craig Levra
/s/ Don Rudkin
Don Rudkin
/s/ Robert Lind
Robert Lind
/s/ Kathy Virtue Young
Kathy Virtue Young
/s/ Agnieszka Winkler
Agnieszka Winkler
Chairman of the Board, Chief Executive Officer,
Director (Principal Executive Officer)
President, Director
Sr. Vice President, Finance, Secretary and Treasurer
(Principal Financial Officer)
Vice President, Accounting, Corporate Controller,
Assistant Secretary and Assistant Treasurer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
67
VIRCO MFG. CORPORATION
EXHIBITS TO FORM 10-K ANNUAL REPORT
for the Year Ended January 31, 2019
Exhibit
Number
3.1
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).
3.2
10.1
10.2
10.3
10.4
10.41
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Second 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 12, 2014).
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).
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).
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).
Third Amendment to Lease Agreement, entered into as of December 20, 2013, by and between Starboard Distribution
Center, LLC, a Delaware limited liability company, successor in interest to AMB Property, L.P., a Delaware limited
Partnership and Virco Mfg. Corporation (incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed with the Commission on December 23, 2013.
Fourth Amendment to Lease Agreement, entered into as of November 4, 2017, by and between Starboard Distribution
Center, LLC, a Delaware limited liability company, successor in interest to AMB Property, L.P., a Delaware limited
Partnership and Virco Mfg. Corporation (incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed with the Commission on November 15, 2017).
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).
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).
First Amendment to Revolving Credit and Securities Agreement, dated as of June 15, 2012, 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 Quarterly Report on Form 10-Q filed with the Commission on
September 14, 2012).
Second Amendment to Revolving Credit and Security Agreement, dated as of July 27, 2012, 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 8-K filed with the Commission on
July 31, 2012).
Third Amendment to Revolving Credit and Security Agreement, dated as of September 12, 2012, 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 Quarterly Report on Form 10-Q filed with the
Commission on September 14, 2012).
Fourth Amendment to Revolving Credit and Security Agreement, dated as of December 6, 2012, by and among Virco
Mfg. Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative
agent (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed with the
Commission on December 7, 2012).
Fifth Amendment to Revolving Credit and Security Agreement, dated as of March 1, 2013, 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 8-K filed with the Commission on
March 1, 2013).
10.12
Sixth Amendment to Revolving Credit and Security Agreement, dated as of January 9, 2014, by and among Virco Mfg.
Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent.
68
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25*
10.26*
Seventh Amendment to Revolving Credit and Security Agreement, dated as of April 15, 2014, 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 8-K filed with the
Commission on April 16, 2014).
Eighth Amendment to Revolving Credit and Security Agreement, dated as of August 18, 2014, by and among Virco
Mfg. Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative
agent.
First Amendment to the Virco Mfg. Corporation 2011 Stock Incentive Plan (incorporated by reference to the
Company’s Proxy Statement on Form DEF 14A filed with the Commission on May 23, 2014).
Ninth Amendment to Revolving Credit and Security Agreement, dated as of March 31, 2015, 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 10.20 to the Company's Annual Report on Form 10-K filed with the Commission on
April 24, 2015).
Tenth Amendment to Revolving Credit and Security Agreement, dated as of June 18, 2015, 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 Annual Report on Form 10-K filed with the Commission on
September 11, 2015).
Eleventh Amendment to Revolving Credit and Security Agreement, dated as of December 2, 2015, 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 Annual Report on Form 10-K filed with the Commission
on December 15, 2015).
Twelfth Amendment to Revolving Credit and Security Agreement, dated as of April 4, 2016, 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 10.23 to the Company's Annual Report on Form 10-K filed with the Commission on
April 26, 2016).
Thirteenth Amendment to Revolving Credit and Security Agreement, dated as of October 27, 2016, 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 10.23 to the Company's Annual Report on Form 10-K filed with the
Commission on April 26, 2016).
Fourteenth Amendment to Revolving Credit and Security Agreement, dated as of March 13, 2017, 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 10.21 to the Company's Quarterly Report on Form 10-Q filed with the
Commission on June 12, 2017).
Fifteenth Amendment to Revolving Credit and Security Agreement, dated as of June 8, 2017, 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 10.22 to the Company's Quarterly Report on Form 10-Q filed with the Commission on
June 12, 2017).
Sixteenth Amendment to Revolving Credit and Security Agreement, dated as of August 7, 2017, 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 10.21 to the Company's Current Report on Form 8-K filed with the
Commission on September 14, 2017).
Seventeenth Amendment to Revolving Credit and Security Agreement, dated as of March 19, 2018, by and among Virco(cid:3)
Mfg. Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent(cid:3)
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on(cid:3)
March 22, 2018).
Nineteenth Amendment to Revolving Credit and Security Agreement, dated as of March 12, 2019, by and among
Virco Mfg. Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and
administrative agent.
Twentieth Amendment to Revolving Credit and Security Agreement, dated as of April 29, 2019, by and among Virco
Mfg. Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative
agent.
21.1*
List of All Subsidiaries of Virco Mfg. Corporation.(cid:3)Consent
23.1*
of Independent Registered Public Accounting Firm.
69
23.2*
31.1*
31.2*
Consent of Independent Registered Public Accounting Firm.
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.
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.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.(cid:3)
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
______________________
Filed herewith.
*
70
Exhibit 21.1
LIST OF SUBSIDIARIES
Virco Inc.
2027 Harpers Way
Torrance, CA 90501
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-135618 on Form S-3 and Registration
Statement Nos. 333-32539, 333-51717, 333-74832, 333-143874, 333-175638, 333-198723 on Form S-8, of our report dated
May 1, 2019, relating to the consolidated financial statements and financial statement schedule of Virco Mfg. Corporation and
its subsidiary (the “Company”), appearing in this Annual Report on Form 10-K of the Company for the fiscal year ended
January 31, 2019.
/s/ Deloitte & Touche LLP
Los Angeles, California
May 1, 2019
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.2
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-51717) pertaining to the Virco Mfg. Corporation Employee Stock Ownership
Plan,
(2) Registration Statement (Form S-8 No. 333-74832) pertaining to the Virco Mfg. Corporation 401(K) Savings Plan,
(3) Registration Statement (Form S-8 No. 333-175638) pertaining to the Virco Mfg. Corporation 2011 Stock Incentive Plan,
(4) Registration Statement (Form S-8 No. 333-198723) pertaining to the Virco Mfg. Corporation 2011 Stock Incentive Plan,
and
(5) Registration Statement (Form S-3 No. 333-135618) of Virco Mfg. Corporation pertaining to the resale of Virco Mfg.
Corporation’s common stock by certain selling security holders;
of our report dated April 27, 2018, except for the adoption of Accounting Standards Update 2017-07 in Note 2, as to which the
date is May 1, 2019, with respect to the consolidated financial statements and schedule of Virco Mfg. Corporation included in
this Annual Report (Form 10-K) of Virco Mfg. Corporation for the year ended January 31, 2019.
/s/ Ernst & Young LLP
Los Angeles, California
May 1, 2019
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: May 1, 2019
/s/ Robert A. Virtue
Robert A. Virtue
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
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: May 1, 2019
/s/ Robert E. Dose
Robert E. Dose
Vice President — Finance, Secretary and Treasurer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
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, 2019, 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: May 1, 2019
/s/ Robert A. Virtue
Robert A. Virtue
Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
/s/ Robert E. Dose
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.
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Annual Meeting
Supplemental Stockholders’ Information
The Annual Meeting of Virco stockholders will be held on Tuesday, June 18, 2019, at 10:00 a.m., at 2027 Harpers Way, Torrance, CA
90501. The record date for this meeting is May 3, 2019. The Proxy Statement and Proxy pertaining to this meeting will be mailed on or
about May 17, 2019.
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 17, 2019, there were approximately 161
registered stockholders according to the Company's transfer agent records. As of such date, there were approximately 1,135 beneficial stockholders.
Stockholder Records
Records pertaining to stockholdings and dividends are maintained by Computershare. Inquiries with respect to these matters, as well
as notices of address changes, should be directed to:
Computershare Phone #: (877) 261-9278
Address:
Computershare Trust Company, N.A.
P.O. BOX 505000
Louisville, KY, 40233-5000
Private Couriers/Registered Mail:
Computershare Trust Company, N.A.
462 South 4th Street, Suite 1600
Louisville, KY, 40202
Questions & Inquiries via our Website: http://www.computershare.com
Hearing Impaired #: TDD: 1-800-952-9245
If a stock certificate is lost or mutilated, immediately communicate with Computershare 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.
Stock Market Information
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Common Stock Range
$
FYE 01/31/2019
High
Low
FYE 01/31/2018
High
Low
$
4.70
5.20
5.35
4.53
$
3.95
4.06
3.70
3.75
$
4.70
5.95
6.05
5.88
3.55
3.92
4.85
4.50
Continued from page 2
workforce has more than 20 years of service. Next,
we offer a thoughtful analysis of commitment:
Skin in the Game by Nassim Nicholas Taleb.
Finally, we offer a cautionary tale of the future
towards which we might be headed: The Age of
Surveillance Capitalism by Shoshana Zuboff. We
are also offering shareholders a choice of either a
Zuma Floor Rocker or a Zuma Rocking Chair, both
of which make for supportive and comfortable
reading of these titles.
Sincerely,
Robert A. Virtue
Chairman of the Board and CEO
Officers
Corporate Headquarters
Robert A. Virtue
Chairman of the Board and CEO
Douglas A. Virtue
President
J. Scott Bell
Senior Vice President and COO
Robert E. Dose
Senior Vice President and CFO
Patricia Quinones
Senior Vice President and CAO
Bassey Yau
Vice President – Corporate
Controller, Assistant Secretary
and Assistant Treasurer
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
1655 South Amity Road
Conway, Arkansas 72032
1975 Sturgis Road
Conway, Arkansas 72032
Special Promotional Offer to Registered Virco Shareholders:
As with prior promotions, please contact AnnieRudkin@virco.com with your shareholder information, item choices, and
shipping information. One book and one rocker model per registered shareholder, please.
Whitman: Poetry and Prose
Taleb: Skin In The Game: Hidden Asymmetries in Daily Life
Zuboff: The Age of Surveillance Capitalism: The Fight for a Human Future
at the New Frontier of Power
Zuma Floor Rocker
Zuma Rocking Chair
ZUMA® Seat Colors
Green Apple
Willow
Moss
Cucumber
Kelly Green
Forest Green
Sea Mist
Teal
Turquoise
Horizon
Sky Blue
Cobalt Blue
Navy
Hyacinth
Lavender
Purple Iris
Wisteria
Wine
Fuchsia
Pink
Coral
Paprika
Red
Guava
Sunset
Papaya
Lemon Yellow
Squash
Gold Finch
Arctic White
Moonstone
Vapor
Driftwood
Adobe
Dusk
Chocolate
Eclipse
Graphite
Black
This special promotion is only available to Shareholders of Record as of May 3, 2019 with shares registered in your name. Shares held in “street
name” are not eligible. You must vote or have voted your proxy on or before the 2019 Annual Meeting on June 18, 2019. This offer is not
transferable and expires on June 18, 2019.
Hamlin Middle School, Media Center
REF #19100
V I R C O A N N U A L R E P O R T
FISCAL YEAR ENDED JANUARY 31, 2019
800-448-4726
VIRCO MFG. CORPORATION
V IR CO . COM