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Summary of Business and Significant Accounting Policies
 12 Months Ended
Jan. 31, 2012
Summary of Business and Significant Accounting Policies [Abstract]  
Summary of Business and Significant Accounting Policies

1. Summary of Business and Significant Accounting Policies

Business

Virco Mfg. Corporation (the “Company”), which operates in one business segment, is engaged in the design, production and distribution of quality furniture for the commercial and education markets. Over 62 years of manufacturing operations have resulted in a wide product assortment. Major products include mobile tables, mobile storage equipment, desks, computer furniture, chairs, activity tables, folding chairs and folding tables. The Company manufactures its products in Torrance, California, and Conway, Arkansas, for sale primarily in the United States.

The Company operates in a seasonal business, and requires significant amounts of working capital under its credit facility to fund acquisitions of inventory and finance receivables during the summer delivery season. Restrictions imposed by the terms of the Company’s credit facility may limit the Company’s operating and financial flexibility. However, management believes that its existing cash and available borrowings under its credit facility, and any cash generated from operations will be sufficient to fund its working capital requirements, capital expenditures and other obligations through the next 12 months.

Principles of Consolidation

The consolidated financial statements include the accounts of Virco Mfg. Corporation and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Management Use of Estimates

Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities — and disclosure of contingent assets and liabilities — at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, but are not limited to, valuation of inventory; deferred tax assets and liabilities; useful lives of property, plant, and equipment; liabilities under pension, warranty, self-insurance, and environmental claims; and the ultimate collection of accounts receivable. Actual results could differ from these estimates.

Fiscal Year End

Fiscal years 2011, 2010 and 2009, refer to the fiscal years ended January 31, 2012, 2011 and 2010, respectively.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. Sales to the Company’s recurring customers are generally made on open account with terms consistent with the industry. Credit is extended based on an evaluation of the customer’s financial condition and payment history. Past due accounts are determined based on how recently payments have been made in relation to the terms granted. Amounts are written off against the allowance in the period that the Company determines that the receivable is not collectable. The Company purchases insurance on receivables from certain commercial customers to minimize the Company’s credit risk. The Company does not typically obtain collateral to secure credit risk. Customers with inadequate credit are required to provide cash in advance or letters of credit. The Company does not assess interest on receivable balances. A substantial percentage of the Company’s receivables come from low-risk government entities. No customer exceeded 10% of the Company’s sales for each of the three years ended January 31, 2012. Foreign sales were approximately 7%, 6% and 7% of the Company’s sales for fiscal years 2011, 2010 and 2009, respectively.

No single customer accounted for more than 10% of the Company’s accounts receivable at January 31, 2012 or 2011. Because of the short time between shipment and collection, the net carrying value of receivables approximates the fair value for these assets.

Fair Values of Financial Instruments

The fair values of the Company’s cash, accounts receivable, and accounts payable approximate their carrying amounts due to their short-term nature.

Financial assets measured at fair value on a recurring basis are classified in one of the three following categories, which are described below:

Level 1 — Valuations based on unadjusted quoted prices for identical assets in an active market.

Level 2 — Valuations based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.

 

Level 3 — Valuations based on inputs that are unobservable and involve management judgment and our own assumptions about market participants and pricing.

Inventories

Inventory is valued at the lower of cost or market (determined on a first-in, first-out basis) and includes material, labor, and factory overhead. The Company maintains allowances for estimated slow moving and obsolete inventory to reflect the difference between the cost of inventory and the estimated market value. Allowances for slow moving and obsolete inventory are determined through a physical inspection of the product in connection with a physical inventory, a review of slow-moving product, and consideration of active marketing programs. The market for education furniture is traditionally driven by value, not style, and the Company has not typically incurred significant obsolescence expenses. If market conditions are less favorable than those anticipated by management, additional allowances may be required. Due to reductions in sales volume in the past years, the Company’s manufacturing facilities are operating at reduced levels of capacity. The Company records the cost of excess capacity as a period expense, not as a component of capitalized inventory valuation.

On January 31, 2011, the Company elected to change its costing method for the material component of raw materials, work in process, and finished goods inventory to the lower of cost or market using the first-in, first-out (“FIFO”) method, from the lower of cost or market using the last-in, first out (“LIFO”) method. The labor and overhead components of inventory have historically been valued on a FIFO basis. The Company believes that the FIFO method for the material component of inventory is preferable as it conforms the inventory costing methods for all components of inventory into a single costing method and better reflects current acquisition costs of those inventories on our consolidated balance sheets. Additionally, presentation of inventory at FIFO aligns the financial reporting with the Company’s borrowing base under its line of credit (see Note 3 for further discussion of the line of credit). Further, this change will promote greater comparability with companies that have adopted International Financial Reporting Standards, which does not recognize LIFO as an acceptable accounting method. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections, all prior periods presented have been adjusted to apply the new accounting method retrospectively. In addition, as an indirect effect of the change in our inventory costing method from LIFO to FIFO, the Company recorded additional inventory lower of cost or market expenses and changes in deferred tax assets and income tax expense.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization are computed on the straight-line method for financial reporting purposes based upon the following estimated useful lives:

 

     
Land improvements   5 to 25 years
Buildings and building improvements   5 to 40 years
Machinery and equipment   3 to 10 years
Leasehold improvements   shorter of lease or useful life

The Company did not capitalize interest costs as part of the acquisition cost of property, plant and equipment for the years ended January 31, 2012, 2011 and 2010. The Company capitalizes the cost of significant repairs that extend the life of an asset. Repairs and maintenance that do not extend the life of an asset are expensed as incurred. Depreciation and amortization expense was $5,021,000, $5,352,000 and $5,387,000 for the fiscal years ended January 31, 2012, 2011 and 2010, respectively.

The Company capitalizes costs associated with software developed for its own use. Such costs are amortized over three to seven years from the date the software becomes operational. At January 31, 2012 and 2011, the Company had no capitalized software.

The Company subleased space at one of its facilities on a month-to-month basis during 2011, 2010 and 2009. Rental income was $40,000 for fiscal 2011, 2010, and 2009.

The Company has established asset retirement obligations related to leased manufacturing facilities in accordance with FASB ASC Topic 410, “Asset Retirement and Environmental Obligations.” Accrued asset retirement obligations are recorded at net present value and discounted over the life of the lease. Asset retirement obligations, included in other non-current liabilities were $545,000 and $636,000 at January 31, 2012 and 2011, respectively.

 

                 
    January 31,  
    2012     2011  

Balance at beginning of period

   $ (636,000 )    $ (627,000 ) 

Decrease in obligation

     100,000       —    

Accretion expense

     (9,000 )      (9,000 ) 
   

 

 

    

 

 

  

Balance at end of period

   $ (545,000 )    $ (636,000 ) 
   

 

 

    

 

 

  

Impairment of Long-Lived Assets

An impairment loss is recognized in the event facts and circumstances indicate the carrying amount of an intangible asset may not be recoverable, and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Impairment is recorded based on the excess of the carrying amount of the impaired asset over the fair value. Generally, fair value represents the Company’s expected future cash flows from the use of an asset or group of assets, discounted at a rate commensurate with the risks involved.

 

Net Loss per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding plus the dilution effect of convertible securities. The following table sets forth the computation of basic and diluted loss per share:

 

                         

In thousands, except per share data

   2011     2010     As Adjusted
2009		  

Numerator

                        

Net loss

   $ (13,803 )    $ (17,594 )    $ (725 ) 

Denominator

                        

Weighted-average shares — basic

     14,235       14,130       14,155  

Common equivalent shares from common stock options and warrants

     —         —         —    
   

 

 

    

 

 

    

 

 

  

Weighted-average shares — diluted (1)

     14,235       14,130       14,155  

Net loss per common share

                        

Basic

   $ (0.97 )    $ (1.25 )    $ (0.05 ) 

Diluted

     (0.97 )      (1.25 )      (0.05 ) 

 

(1) For the period ended January 31, 2012, approximately 56,000 shares of common stock equivalents were excluded in the computation of diluted net income per share, as the effect would be anti-dilutive. For the period ended January 31, 2011, approximately 59,000 common stock equivalents were excluded in the computation of diluted net income per share, as the effect would be anti-dilutive. Effective June 6, 2006, in connection with a stock purchase agreement, the Company issued warrants to purchase 268,010 shares of common stock at an exercise price of $6.06. Effective September 30, 2006, in connection with a stock purchase agreement, the Company issued warrants to purchase 14,364 shares of common stock at an exercise price of $6.53. All warrants expired during fiscal 2011.

Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with FASB ASC Topic 805, “Business Combinations,” and FASB ASC Topic 350, “Intangibles — Goodwill and Other Assets”. Under FASB ASC Topic 350, goodwill and intangible assets deemed to have an indefinite life are not amortized but are subject to annual impairment tests. Impairment tests are prepared in the fourth quarter of each fiscal year or more frequently if events or circumstances occur that would indicate a reduction in the fair value. Other intangible assets are amortized on a straight line basis over their useful lives (3-17 years).

Environmental Costs

The Company is subject to numerous environmental laws and regulations in the various jurisdictions in which it operates that (a) govern operations that may have adverse environmental effects, such as the discharge of materials into the environment, as well as handling, storage, transportation and disposal practices for solid and hazardous wastes, and (b) impose liability for response costs and certain damages resulting from past and current spills, disposals or other releases of hazardous materials. Normal, recurring expenses related to operating the factories in a manner that meets or exceeds environmental laws and regulations are matched to the cost of producing inventory.

Despite our efforts to comply with existing laws and regulations, compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures by us, some of which may be material. We reserve amounts for such matters when expenditures are probable and reasonably estimable.

Costs incurred to investigate and remediate environmental waste are expensed, unless the remediation extends the useful life of the assets employed at the site. At January 31, 2012 and 2011, the Company had not capitalized any remediation costs and had not recorded any amortization expense in fiscal years 2011, 2010 and 2009.

Advertising Costs

Advertising costs are expensed in the period during which the advertising space is run. Selling, general and administrative expenses include advertising costs of $1,395,000 in 2011, $1,118,000 in 2010, and $1,726,000 in 2009. Prepaid advertising costs reported as an asset on the balance sheet at January 31, 2012 and 2011, were $208,000 and $298,000, respectively.

 

Product Warranty Expense

The Company provides a product warranty on most products. The standard warranty offered on products sold through January 31, 2005 is five years. Effective February 1, 2005, the standard warranty was increased to 10 years on products sold after February 1, 2005. The Company generally provides that customers can return a defective product during the specified warranty period following purchase in exchange for a replacement product or that the Company can repair the product at no charge to the customer. The Company determines whether replacement or repair is appropriate in each circumstance. The Company uses historic data to estimate appropriate levels of warranty reserves. Because product mix, production methods, and raw material sources change over time, historic data may not always provide precise estimates for future warranty expense. The Company recorded warranty reserves of $1,400,000 and $2,300,000 as of January 31, 2012 and 2011, respectively.

Self-Insurance

In 2011 and 2010, the Company was self-insured for product and general liability losses up to $250,000 per occurrence, for workers’ compensation losses up to $250,000 per occurrence, and for auto liability up to $50,000 per occurrence. In prior years the Company had been self-insured for workers’ compensation, automobile, product, and general liability losses. Actuaries assist the Company in determining its liability for the self-insured component of claims, which have been discounted to their net present value utilizing a discount rate of 4.50% in 2011 and 5.50% in 2010.

Stock-Based Compensation Plans

The Company recognizes stock-based compensation cost for shares that are expected to vest, on a straight-line basis, over the requisite service period of the award.

Reclassifications

Certain reclassifications have been made to the prior year balance sheet to conform to the current year presentation. Reclassifications did not have a material impact to the balance sheet or results of operations.

Revenue Recognition

The Company recognizes all sales when title passes under its various shipping terms, when installation services are performed and when collectability is reasonably assured. The Company reports sales net of sales returns and allowances and sales tax imposed by various government authorities.

Shipping and Installation Fees

Revenues related to shipping and installation are included as revenue in net sales. Costs related to shipping and installations are included in operating expenses. For the fiscal years ended January 31, 2012, 2011 and 2010, shipping and installation costs of approximately $15,804,000, $16,884,000 and $16,380,000, respectively, were included in selling, general and administrative expenses.

Accounting for Income Taxes

The Company recognizes deferred income taxes under the asset and liability method of accounting for income taxes in accordance with the provisions of FASB ASC Topic 740, “Accounting for Income Taxes.” Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded when it is determined to be more likely than not that the asset will not be realized.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) now codified as FASB ASC Topic 740. FASB ASC Topic 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FASB ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FASB ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods and requires increased disclosures.