What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-12-13 compared with 2021-09-14 · 89 added, 59 removed, 38 unchanged (80% of the section changed)

2 unchanged sentences

The effects of COVID - 19

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 results of operations for the three-month and nine-month periods ended October 31, 2021 and the comparable periods ended October 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.

1 unchanged sentence

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.

During the three and nine-month periods ended October 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.

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

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.

During the nine months ended October 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.

The large majority of schools returned to on-site learning for the academic year beginning in the fall of 2021.

Compared to the same periods in the prior fiscal year, orders received in the first quarter ended April 30, 2021 increased by 26.7%, orders received in the second quarter ended July 31, 2021 increased by 29.9%, and orders received during the traditionally slow third quarter ended October 31, 2021 increased by 59.0%.

Year-to-date 2021 orders increased by 35.1% compared to 2020.

However, due to supply chain issues and a shortage of labor, production and sales levels did not keep up with the increase in orders.

The Company’s order backlog at October 31, 2021 was 195% greater than October 31, 2020, increasing to $50,955,000 compared to $17,249,000.

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.

2 unchanged sentences

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.

The cost and availability of domestically sourced steel, plastic, resin, wood, and a variety of other raw materials has been extremely challenging.

In addition to significant difficulty obtaining adequate supplies of domestically sourced materials, the cost of domestically sourced materials increased significantly, with the cost of steel more than doubling during the year, which has caused our pre-tax profit and gross margin to decline.

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

In response to a labor shortage in operations, and to reward employees who worked substantial overtime hours during the seasonal summer peak, the Company has announced that for all factory and warehouse hourly employees, all overtime hours would be paid at double time rather than the traditional time and one-half for hours worked between June 1 and continuing through December 31.

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

The Company believes that this increased cost was offset in part by the increased efficiency of using experienced Virco employees with a substantial reduction in temporary labor.

In order to improve our ability to hire direct labor, the Company increased the starting wage rate to $15 per hour on October 1, 2021.

Subsequent to October 31, 2021 the Company gave wage increases to hourly workers who did not benefit from the increased entry wage rates, to alleviate compression of wage rates in operations.

These changes enabled the Company to successfully add employees during October.

It is anticipated that the Company may hire as many as 75 permanent employees in operations prior to next year’s second quarter.

Production rates in our factories declined during the first and second quarters due to the material and labor shortages.

Production decreased by 25% in the first quarter compared to the same period last year.

Production decreased by 8% in the second quarter compared to the same period last year.

During the third quarter, production rates typically decline as the summer deliveries conclude.

During the current year, the Company continued to work significant overtime and successfully hire additional workers in October.

Production rates increased by 39% in the third quarter compared to the same period last year.

Production efficiencies during the year declined compared to the prior year.

Manufacturing employees were required to

“job shop” to utilize available materials and to prioritize production to support deliveries with critical due dates.

For the fourth quarter the Company anticipates that production rates will remain greater than the prior year and will continue to operate at increased levels until the Company works down its backlog of sales orders.

Because the first quarter of the year is a seasonally slow period, sales activity during the first fiscal quarter of 2022 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.

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

Sales for the second quarter were flat compared to the same period of the prior year despite the strong orders discussed above.

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

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 continuing through the peak deliveries.

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 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.

During the third quarter, which includes one of the three months that typically account for 50% of our annual sales, supply chain and labor shortages continued to adversely affect operations.

Sales for the third quarter ended October 31, 2021 were flat compared to the same period last year despite strong orders.

Backlog of orders at October 31, 2021 was $33,700,000 higher than the same date last year.

Inventory levels at October 31, 2021 are greater than the same date last year due to the increased material cost component, but significantly lower than the prior year in terms of unit quantity.

The Company believes that it will make material gains in shipping the order backlog during the fourth quarter ending January 31, 2022.

Raises for entry level employees have already been effective in hiring new employees in operations.

Some of the supply chain issues experienced during the year are starting to improve.

The Company anticipates that sales for the fourth quarter ending January 31, 2022 may be double what they were during the same period last year as long as no unanticipated supply chain or COVID related events occur.

Three Months Ended October 31, 2021

Order rates for the three months ended October 31, 2021 increased significantly compared to the prior year.

Orders for the third quarter, which is traditionally a slower period for orders, increased by 59.2%, but sales were flat, increasing by 0.2% compared to the same period of the prior year.

Backlog of orders at October 31, 2021 is approximately $33.7 million greater than the prior year.

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

For the three months ended October 31, 2021, the Company earned a pre-tax profit of $1,620,000 on sales of $57,331,000 compared to a pre-tax profit of $4,864,000 on sales of $57,221,000 in the prior year.

Gross Margin for the third quarter was 35.4% of sales compared to 38.9% in the prior year.

The gross margin was primarily affected by increased cost for raw materials and to a modest amount by 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 October 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.

Interest expense decreased by $92,000 for the three months ended October 31, 2021 compared to the same period last year.

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

For the three months ended October 31, 2021 and 2020, the effective tax rates were 18.2% and 7.9%, respectively.

Effective tax rates for the three months ended October 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.

Nine Months Ended October 31, 2021

Order rates for the nine months ended October 31, 2021 increased by 35.1% compared to the prior year.

For the nine-month period ended October 31, 2021 the Company earned a pre-tax profit of $1,511,000 on sales of $144,720,000 compared to a pre-tax income of $3,570,000 on sales of $134,494,000 in the prior year.

Gross Margin for the first nine months was 34.8% of sales compared to 37.5% 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 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.

Selling, general and administrative expenses for the nine months ended October 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 installation expenses.

Interest expense decreased by $338,000 for the nine months ended October 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.

For the nine months ended October 31, 2021 and 2020, the effective tax rates were 22.2% and 6.6%, respectively.

Effective tax rates for the nine months ended October 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

2 unchanged sentences

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

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.

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 when measured by unit quantity.

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.

Accounts receivable increased by $7,947,000 at October 31, 2021 compared to the same date in the prior year.

In the prior year the majority of third quarter sales were in August and had been collected by quarter end.

In the current third quarter, October was the largest month of sales revenue, and the October shipments increased receivables at October 31, 2021.

Inventory increased by $3,611,000 at October 31, 2021 compared to the prior year.

The decrease in units was more than offset by the increase 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 October 31, 2021.

Outstanding debt at October 31, 2021 includes an equipment loan from PNC in the amount of $278,000 and a seller financed mortgage on a manufacturing facility in Conway, Arkansas.

Interest expense for the nine months ended October 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 nine months ended October 31, 2021 was $2,552,000 compared to $1,768,000 for the same period last year.

Capital expenditures are being financed through the Company's credit facility with PNC Bank and operating cash flow and restricted to not exceed $8,000,000 by covenant.

Due to the adverse impact of the COVID-19 pandemic upon the Company’s operations, the Company violated its fixed-charge coverage ratio contained in the credit agreement with PNC Bank for the quarterly periods ended July 31, 2020 and October 31, 2020.

The Company obtained limited waivers and amendments from PNC Bank for both events of default, Amendment No.

21 and 22 (see Note 7 to the condensed consolidated financial statements).

On September 28, 2021, the Company and Virco Inc., its wholly-owned subsidiary (the “Borrowers”), entered into an Amended and Restated Revolving Credit and Security Agreement (the “Restated Credit Agreement”) with PNC Bank, which amended and restated the prior Revolving Credit and Security Agreement, dated as of December 22, 2011, between the Borrowers and PNC Bank.

The material terms of the Restated Credit Agreement are substantially the same as those of the prior agreement.

The Restated Credit Agreement permits the Company to issue dividends or make payments with respect to the Company’s capital stock in an aggregate amount up to $3,000,000 during any fiscal year, provided that no default shall have occurred or is continuing or would result from any such payment, and the Company must demonstrate pro forma compliance with a 12-month trailing fixed charge coverage ratio of not less than 1.20:1.00 as of the fiscal quarter immediately preceding the date of any such dividend or payment.

The Restated Credit Agreement also requires the Company to maintain a minimum fixed charge coverage ratio, and contains numerous other covenants that limit under certain circumstances the ability of the Borrowers and their subsidiaries to, among other things, merge with or acquire other entities, incur new liens, incur additional indebtedness, 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.

In connection with the Restated Credit Agreement, the Company also agreed to pay to PNC Bank a non-refundable fee of $50,000.

The maturity date of the Restated Credit Agreement is March 19, 2023.

As a result of severe supply chain disruptions and labor shortages, the Borrowers were not in compliance with the fixed-charge coverage ratio requirement under the Restated Credit Agreement as of October 31, 2021.

On December 7, 2021, the Company successfully negotiated and entered into Amendment No.

1 to the Restated Credit Agreement (“Amendment No.

1”) with PNC Bank.

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 fourth quarter period ended January 31, 2021.

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.

1 provided a limited waiver of the Company’s violation of the covenant to maintain a fixed charge coverage ratio of at least 1.10 to 1.00 for the four fiscal quarter periods ended October 31, 2021, and amended the fixed charge coverage ratio as follows:

(i) 1.00 to 1.00 for each of the consecutive four fiscal quarter periods of Borrowers ending January 31, 2022 and April 30, 2022, and (ii) 1.10 to 1.00 for each consecutive four fiscal quarter periods of Borrowers ending thereafter.

In connection with Amendment No.

1, the Company also agreed to pay to PNC Bank a non-refundable fee of $50,000.

Off Balance Sheet Arrangements

2 unchanged sentences

Forward-Looking Statements

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.

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended October 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").

5 unchanged sentences

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 2021 and are not required to provide the information under this item.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act as of our third quarter of fiscal 2022 and are not required to provide the information under this item.

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