What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-09-14 compared with 2021-06-11 · 69 added, 53 removed, 28 unchanged (81% of the section changed)

2 unchanged sentences

The effects of COVID - 19

The results of operations for the three-months ended April 30, 2021 have been significantly impacted by economic conditions driven by the COVID-19 pandemic.

The majority of our primary customers, the K-12 public school systems, closed school campuses and initiated remote learning on or about March 15, 2020.

Most school districts continued with remote learning for the academic year beginning August 2020, with a minority of districts attempting hybrid or on-site learning.

During the first quarter ended April 30, 2021, many school districts announced hybrid or on-site learning beginning approximately April 2021.

The Company received a large volume of orders for immediate delivery during the first quarter ended April 30, 2021.

Orders received for the quarter increased by 26.7% compared to the same period of the prior year.

Sales volume for the quarter increased by 59.2% compared to the same period of the prior year.

Backlog of orders at April 30, 2021 were approximately $2.1 million greater than the prior year.

The market for educational furniture is extremely seasonal, but there has traditionally been stability to this seasonal cycle.

In the prior year, the timing of orders did not follow the traditional seasonal trends.

Orders of educational furniture are traditionally very strong in May and June.

In the fiscal 2021, these months were uncharacteristically slow.

This reduction adversely impacted both second and third quarter sales revenue in fiscal 2021.

In the current year, the Company experienced strong orders in the first quarter.

Subsequent to April 30, 2021, the Company continued to experience strong order rates through May 2021.

Nevertheless, management is not able to predict whether and to what extent the return to full time classroom learning will result in a return to the traditional seasonal sales cycle for educational furniture.

Due to uncertainty created by COVID-19 during fiscal 2021 the Company moderated production levels to reflect the reduced order activity and maintained conservative inventory levels going into the first quarter ended April 30, 2021.

Because the first quarter of the year is a seasonally slow period, sales activity during the first quarter was not significantly affected by supply chain considerations that have impacted the economy.

The Company imports a number of key components from manufacturers in China.

The cost and timely delivery of these components has been adversely affected by difficulties at the ports and by cost increases from China.

The cost of steel and a variety of other raw materials has been extremely volatile, and the supply chain considerations have been challenging.

The severe weather experienced in significant portions of the United States in February 2021 has also interrupted the supply and increased cost for plastic and utilities.

The availability of labor, both permanent employees and temporary employees, has been adversely impacted.

In response to the labor shortage, and to reward employees who will be working substantial overtime hours during the seasonal summer peak, the Company has announced that for all factory and warehouse hourly employees, all overtime hours will be paid at double time rather than the traditional time and one-half for hours worked between June 1 and Labor Day.

The results of operations for the three-month and six-month periods ended July 31, 2021 and the comparable periods ended July 31, 2020 have been significantly impacted by economic conditions driven by the COVID-19 pandemic.

The impact of COVID-19 has been quite different during the current year compared to the prior year.

Typically, the Company has an exceptionally seasonal annual cycle where approximately 50% of sales occur in the months of June, July and August.

Orders received from customers follow a similar cycle, approximately 4-6 weeks preceding the selling season.

During the three and six-month periods ended July 31, 2020, the majority of our primary customers, the K-12 public school systems, closed school campuses and initiated remote learning on or about March 15, 2020.

Most school districts continued with remote learning for the academic year ended June 2020 and into the year beginning August 2020, with a minority of districts attempting hybrid or on-site learning.

During this period our direct sales force, one of the Company’s distinct competitive advantages, was unable to make in-person calls.

Our primary customers, educators and district business officials, were typically working remotely which complicated selling activities.

As a result, order rates during our traditionally busy summer season of June 2020 through August 2020 declined, causing a reduction in sales.

During the six months ended July 31, 2021, many school districts announced hybrid or on-site learning beginning in approximately April 2021.

The Company received a large volume of orders for immediate delivery during this period.

Orders received for the first quarter ended April 30, 2021 increased by 26.7% compared to the same period of the prior year.

The majority of school districts have planned for full time in-school teaching for the academic year beginning in August / September 2021.

Orders for the second quarter ended July 31, 2021 increased by 29.9% compared to the same period of the prior year.

Due to uncertainty created by COVID-19 during the year ended January 31, 2021, the Company moderated production levels to reflect the reduced order activity and maintained conservative inventory levels going into the current year.

The current year has been characterized by severe supply chain issues, which were exacerbated by our low levels of inventory going into the year.

The Company has significant domestic manufacturing capabilities and manufactures the large majority of finished goods domestically, but the Company imports a number of components from manufacturers in China.

The cost and timely delivery of these components have been adversely affected by difficulties at the ports and by cost increases from China.

The cost and availability of steel, plastic, and a variety of other raw materials has been extremely volatile, and the supply chain considerations have been challenging.

The severe weather experienced in significant portions of the United States in February 2021 interrupted the supply and increased cost for plastic and utilities.

The availability of labor, both permanent employees and temporary employees, has been severely impacted.

Because the first quarter of the year is a seasonally slow period, sales activity during the first quarter was not significantly affected by the supply chain considerations.

Sales volume for the first quarter ended April 30, 2021 increased by 59.2% compared to the same period of the prior year.

During the second quarter, which includes two of the three months that typically account for 50% of our annual sales, the supply chain issues have been challenging.

Sales for the second quarter were flat compared to the same period of the prior year.

Backlog of orders at July 31, 2021 was approximately $20 million greater than the prior year.

This is anticipated to cost the Company an additional $1.5 - $2.0 million during the second and third quarters.

The Company anticipates that this increased cost will be offset, in whole or in part, by the increased efficiency of using experienced Virco employees with a substantial reduction in temporary labor.

Inventory levels at April 30, 2021 are significantly lower than the prior year, and the Company may incur additional costs for expediting to satisfy customer orders.

While these challenges are substantial, the Company believes that the benefits of domestic manufacturing compared to an import model will be realized during the current fiscal year.

Three Months Ended April 30, 2021

Order rates and sales for the first three months of 2021 increased significantly compared to the prior year, as schools reopen and effects of COVID-19 are moderating.

Orders for the first quarter increased by 26.7%, and sales increased by 59.2% compared to the same period of the prior year.

Backlog of orders at April 30, 2021 is approximately $2.1 million greater than the prior year.

For the three months ended April 30, 2021, the Company incurred a pre-tax loss of $5,094,000 on sales of $28,367,000 compared to a pre-tax loss of $7,973,000 on sales of $17,817,000 in the prior year.

Gross Margin for the first quarter was 27.1% of sales compared to 27.5% in the prior year.

The gross margin was favorably affected by a modest price increase at the beginning of the year, a favorable change in product mix, and an increase in the proportion of product sold with full service relative to sold FOB factory.

These improvements were offset by an increase in the cost of commodities used to manufacture product and reduced levels of production.

Inventory levels at July 31, 2021 are significantly lower than the prior year, and the Company may incur additional costs for expediting to satisfy customer orders.

While these challenges are substantial, the Company believes that the benefits of domestic manufacturing compared to an import model with an extended supply chain to China will be realized during the current fiscal year.

Three Months Ended July 31, 2021

Order rates for the three-months ended July 31, 2021 increased significantly compared to the prior year, as schools reopened.

Orders for the second quarter increased by 29.9%, but sales were flat, decreasing by 0.7% compared to the same period of the

Backlog of orders at July 31, 2021 is approximately $20.0 million greater than the prior year.

The Company anticipates that a significant portion of the increased backlog will ship during the third quarter, with a portion delivered in the fourth quarter.

For the three months ended July 31, 2021, the Company earned a pre-tax profit of $4,985,000 on sales of $59,022,000 compared to a pre-tax profit of $6,679,000 on sales of $59,456,000 in the prior year.

Gross Margin for the second quarter was 37.8% of sales compared to 39.0% in the prior year.

The gross margin was affected by increased cost for raw materials and costs relating to operating the factories with a reduced and interrupted supply of materials, partially offset by a price increase at the beginning of the year.

Selling, general and administrative expenses for the three months ended July 31, 2021 increased compared to the same period last year.

The increase in selling, general and administrative expenses was attributable to increased variable freight expense and by increased selling expenses as our sales force is now actively calling on customers.

Interest expense decreased by $135,000 for the three months ended July 31, 2021 compared to the same period last year.

The Company has borrowed less money to finance seasonal working capital in the second quarter.

For the three months ended July 31, 2021 and 2020, the effective tax rates were 24.6 % and 46.8 %, respectively.

Effective tax rates for the three months ended July 31, 2021 and 2020 were primarily due to the change in forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a partial valuation allowance on net deferred tax assets.

Six Months Ended July 31, 2021

Order rates for the six-months ended July 31, 2021 increased by 28.5% compared to the prior year.

For the six-month period ended July 31, 2021 the Company earned a pre-tax loss of $109,000 on sales of $87,389,000 compared to a pre-tax loss of $1,294,000 on sales of $77,273,000.

Gross Margin for the first six months was 34.3% of sales compared to 36.4% in the prior year.

The Company was required to close the Conway, Arkansas factory for more than one week in February due to severe weather and increased utility bills related to the same severe weather.

Selling, general and administrative expenses for the three months ended April 30, 2021 increased by less than 1% compared to the same period last year and decreased as a percentage of sales to 42.2% from 67.0%.

The increase in selling, general and administrative expenses was primarily attributable to increased variable freight expense.

Interest expense decreased by $111,000 for the three months ended April 30, 2021 compared to the same period last year.

The Company has borrowed less money to finance seasonal working capital in the first quarter.

Income Taxes for the three-months ended April 30, 2021

Income tax benefit for the first quarter ended April 30, 2021 is less than the prior year, primarily due to the decrease in pre-tax loss.

Selling, general and administrative expenses for the six months ended July 31, 2021 increased compared to the same period last year but decreased as a percentage of sales.

The increase in selling, general and administrative expenses was attributable to increased variable freight and service expenses.

Interest expense decreased by $246,000 for the six months ended July 31, 2021 compared to the same period last year.

The Company has borrowed less money to finance seasonal working capital during the year.

For the six months ended July 31, 2021 and 2020, the effective tax rates were ( 36.7 )% and 11.5 %, respectively.

Effective tax rates for the six months ended July 31, 2021 and 2020 were primarily due to the change in forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a partial valuation allowance on net deferred tax assets.

Liquidity and Capital Resources

Approximately 50% of the Company's annual sales volume is shipped in the months of June through August of each year.

In years not impacted by COVID, approximately 50% of the Company's annual sales volume is shipped in the months of June through August of each year.

The Company traditionally manufactures large quantities of inventory during the first and second quarters of each fiscal year in anticipation of seasonally high summer shipments.

In addition, the Company finances a large balance of accounts receivable during the peak season.

Accounts receivable increased by $6,770,000 at April 30, 2021 compared to the same date in the prior year.

A portion of the increase was attributable to increased volume of sales, and a portion due to the timing of sales.

Sales in the month of April 2021 were more than double sales in April 2020 due to the timing of school closures.

Inventory decreased by $15,315,000 at April 30, 2021 compared to the prior year.

The reduction was due to cautious inventory management combined with a significant increase in first quarter sales activity.

The net reduction in working capital enabled the Company to reduce its borrowing under its revolving line of credit with PNC Bank as of April 30, 2021.

Outstanding debt at April 30, 2021 includes an equipment loan from PNC in the amount of $611,000 and a seller financed mortgage on a manufacturing facility in Conway, Arkansas.

Interest expense for the three months ended April 30, 2021 is less than the same period last year due to lower average outstanding borrowings under the Company's revolving line of credit with PNC Bank.

Accrual basis capital expenditures for the three months ended April 30, 2021 was $428,000 compared to $922,000 for the same period last year.

As discussed above, the current year impact of COVID has moderated the summer peak deliveries, and the Company has operated with reduced levels of inventory.

This has reduced the need for seasonal borrowing under our line of credit.

Accounts receivable increased by $1,712,000 at July 31, 2021 compared to the same date in the prior year.

The increase was primarily due to the timing of sales during the second quarter.

Inventory decreased by $7,051,000 at July 31, 2021 compared to the prior year.

The decrease in units was more significant than the decrease in dollars due to the increased material cost of

the inventory.

The net reduction in working capital enabled the Company to reduce its borrowing under its revolving line of credit with PNC Bank as of July 31, 2021.

Outstanding debt at July 31, 2021 includes an equipment loan from PNC in the amount of $444,000 and a seller financed mortgage on a manufacturing facility in Conway, Arkansas.

Interest expense for the six months ended July 31, 2021 is less than the same period last year due to lower average outstanding borrowings under the Company's revolving line of credit with PNC Bank.

Accrual basis capital expenditures for the six months ended July 31, 2021 was $1,210,000 compared to $1,625,000 for the same period last year.

The reduction in capital spending was a direct result of management controlling the expenditures to preserve cash due to the adverse impact that the COVID-19 pandemic had on the Company’s operations.

4 unchanged sentences

Amendment No.

22 amended the ongoing fixed-charge coverage calculation to allow for the add back of certain COVID-19 related costs incurred from May 1, 2020 through April 30, 2021, not to exceed $2,000,000, to adjusted EBITDA and retained the minimum fixed-charge coverage ratio of 1.10:1.00 beginning with the four quarter period ending January 31, 2021.

Based on the add back allowance for certain COVID-19 related costs, and the current forecasts through April 30, 2022, management believes the Company will maintain compliance with its financial covenants.

Based on the add back allowance for certain COVID-19 related costs, and the current forecasts through September 2022, management believes the Company will maintain compliance with its financial covenants.

The Company believes that cash flows from operations, together with the Company's unused borrowing capacity with PNC Bank will be sufficient to fund the Company's debt service requirements, capital expenditures and working capital needs for the next twelve months.

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Forward-Looking Statements

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2021, the Company or its representatives have made and may make forward-looking statements, orally or in writing.

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2021, the Company or its representatives have made and may make forward-looking statements, orally or in writing.

Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission ("SEC").

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis