What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-09-11 compared with 2023-06-12 · 57 added, 55 removed, 26 unchanged (81% of the section changed)

1 unchanged sentence

Results of Operations

The results of operations for the three-month period ended April 30, 2023 and the comparable period ended April 30, 2022 have been impacted by economic conditions driven by the COVID-19 pandemic, global supply chain disruptions and global conflict.

The impact of the supply chain disruptions were much less severe during the current year compared to the prior year.

The results of operations for the three-month and six-month periods ended July 31, 2023 and the comparable periods ended July 31, 2022 have been impacted by economic conditions driven by the COVID-19 pandemic and global supply chain disruptions.

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

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 seasonal cycle, with the bulk of orders arriving approximately 4-6 weeks preceding the selling season.

For the three-month period ended April 30, 2023, management believes that the traditional seasonal cycle and the Company’s ability to service that seasonal cycle has returned to normal.

During the three-month period ended April 30, 2023 the Company experienced a 10.4% increase in orders compared to the same period last year.

In addition, the Company started the year with a backlog of unshipped sales orders that was nearly $18 million higher than the prior year.

On April 30, 2023 the Company’s backlog of unshipped sales orders was approximately $104.6 million compared to $85.7 million on April 30, 2022.

The Company believes that a significant majority of the sales order backlog will be delivered during June, July, and August of the current year.

As discussed in the Risk Factors section of the Company’s Form 10-K for the fiscal year ended January 31, 2023, the Company utilizes one nationwide contract to price a significant portion of our orders.

This contract/price list determines selling prices for goods and services for periods of one year and occasionally longer.

Due to the current volatile nature of commodity and energy prices in addition to general inflation, the Company has negotiated the ability to increase prices for orders received after July 1 of each contract year in addition to the annual January 1price increase.

There is typically a several months' time lag between raising prices on orders and realizing the increase in sales revenue.

Sales for the first quarter ended April 30, 2022 consisted substantially of orders received prior to the January 1, 2022 price increase, causing gross margin of sales during that quarter to be lower than desirable.

Sales of the quarter ended April 30, 2023 benefited from the effect of two price increases, one each at January 1, 2022 and July 1, 2022.

The cumulative impact of the two price increases favorably impacted operating results for the three months ended April 30, 2023.

Although conditions have improved compared to the prior year, financing challenges resulting from the recent bank failures and credit tightening and supply chain disruptions from international sources – primarily China – continue to adversely affect operations and the competitive landscape.

Because the Company has maintained its domestic factories, management believes that the Company will be less vulnerable to international supply chain disruption compared to competitors that source finished goods overseas, but the Company will still be affected by these international events.

Virco does not deliver furniture to new schools until the customer has an occupancy certificate.

Supply chain disruptions in the construction industry which may delay the completion of new schools did not significantly impact sales volume during the quarter ended April 30, 2023, but may impact the timing of sales during the balance of the year, possibly causing deliveries of furniture scheduled for the second quarter ending July 31, 2023 to occur in the subsequent quarter.

Three Months Ended April 30, 2023

For the three months ended April 30, 2023, the Company incurred a pre-tax loss of $1,886,000 on sales of $34,943,000 compared to a pre-tax loss of $5,366,000 on sales of $32,084,000 in the prior year.

Sales increased by approximately $2,859,000 or 8.9%, compared to the same prior year period.

The increase was attributable to an increase in beginning of year sales backlog, increased first quarter orders, and increased selling prices.

Gross margin for the quarter ended April 30, 2023 was 37.8% of sales compared to 30.3% in the prior year.

In order to recover the increased cost of materials and labor incurred in the fiscal year ended January 31, 2022, the Company raised prices for all orders received after January 1, 2022.

The impact of the price increase did not fully affect sales for the quarter ended April 30, 2022.

The three-month period ended April 30, 2023 benefited from the cumulative effect of price increases implemented January 1, 2022 and July 1, 2022, returning margins to profitable full year levels.

Selling, general and administrative expenses (SG&A) for the three months ended April 30, 2023 increased by approximately $63,000 compared to the same period last year, but decreased as a percentage of sales to 41.5% compared to 45.0% in the prior year.

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

service expense and by increased variable selling expenses.

Because a significant portion of general and administrative expenses do not fluctuate with sales volume, SG&A declined as a percentage of sales.

During the fiscal year ended January 31, 2023 the Company purchased equity securities held in a Rabbi Trust to fund benefits under the VIP Pension Plan.

The Company benefited from $299,000 of unrealized gains during the three months ended April 30, 2023.

The primary component of pension expense relates to the amortization of AOCI.

In the year ended January 31, 2022, the Company benefited from favorable investment returns on Plan assets and reduced measurement of benefit obligations due to increased discount rates, both of which favorably impacted AOCI.

Because beginning of the year AOCI was low for the three-month periods ended April 30, 2023 and 2022, the quarterly amortization of AOCI was reduced compared to prior years.

Interest expense increased by $285,000 for the three months ended April 30, 2023 compared to the same period last year.

The increase was primarily attributable to an increase in the amount borrowed to finance seasonal working capital and an increase in the interest rate.

For the three months ended April 30, 2023 and 2022, the effective income tax rates were 23.5% and 5.3%, respectively.

The change in effective tax rates for the three months ended April 30, 2023 was primarily due to the change in forecasted mix of income before federal and state income taxes and estimated permanent differences.

The lower effective tax rate in prior year was due primarily to the recording of a valuation allowance needed for federal deferred tax assets and certain state net operating loss carryforwards.

Orders received from customers follow a similar but less pronounced cycle.

The Company typically receives orders for projects several months in advance of delivery, while smaller orders for fill in or replacements are typically received 4-6 weeks prior to delivery.

During the months of June, July, and August of 2021, the Company was severely impacted by shortages of labor and materials.

The Company delivered less than 40% of annual shipments during the traditional summer season.

During the months of June, July, and August of 2022 the Company substantially returned to the traditional seasonal cycle and delivered approximately 47% of sales.

For the three months of June, July, and August 2023 the Company believes that there has been a full return to the traditional seasonal summer peak.

The Company began the three-month period of June, July, and August of 2023 with a larger backlog of orders for summer delivery, nearly $20 million of increased inventory (as of April 30, 2023) and adequate availability of both full time and temporary labor to service the summer delivery season.

During the quarter ended April 30, 2023, the Company had experienced a 10.4% increase in orders, most of which were for summer of 2023 delivery.

During the quarter ended July 31, 2023 the Company experienced a 3.3% increase in orders.

Year-to-date the Company experienced a 6.7% increase in orders.

In addition, the Company started the current fiscal year with an order backlog that was approximately $18 million greater than the prior year.

This caused the Company’s backlog of unshipped orders when entering the traditional seasonal period at April 30, 2023 compared to April 30, 2022 to increase by nearly $19 million to $104.6 million compared to $85.7 million.

A significant portion of this order backlog is anticipated to be delivered during the months of June, July, and August 2023.

The significant increase in sales for the second quarter ended July 31, 2023 was attributable to the increase is order backlog going into the quarter, an $19 million increase in inventory at the beginning of the second quarter, and to the Company’s ability to service the increase in orders during the summer delivery window.

The Company’s backlog of unshipped sales orders at July 31, 2023 declined by $7.2 million to $74.0 million compared to $81.2 million in the prior year.

Three Months Ended July 31, 2023

For the three months ended July 31, 2023, the Company earned pre-tax income of $20,335,000 on sales of $107,321,000 compared to a pre-tax income of $9,975,000 on sales of $82,797,000 in the prior year.

Sales for the second quarter increased by approximately $24,524,000 or 29.6%, compared to the same period in 2022.

The increase was attributable to an increase in beginning of year sales backlog, increased first quarter orders, a price increase for orders received after July 1, 2022 and January 1, 2023, and by the Company’s ability to service the traditional seasonal cycle.

Gross margin for the second quarter ended July 31, 2023 was 45.3% compared to 38.5% in the prior year.

The increase in margin was attributable to the price increases discussed above, relatively stable commodity costs, and an increase in sales which include Virco full service.

The increase in full service orders improves gross margin, but does require increased freight and service costs, which are included in selling, general and administrative expenses.

Selling, general and administrative expenses for the three months ended July 31, 2023 increased by approximately $6,653,000 and was slightly higher as a percentage of sales compared to the same period last year.

The increase in selling, general and administrative expenses was attributable in part to increased variable freight and service expense attributable to a larger portion of full service orders, increased variable selling expenses, and a provision for a management bonus based upon profitability.

Interest expense increased by $385,000 for the three months ended July 31, 2023 compared to the same period last year.

The increase was primarily attributable to an increase in the amount borrowed in 2023 to finance seasonal working capital and an increase in interest rates.

For the three months ended July 31, 2023 and 2022, the effective income tax rates were 23.6% and 3.0%, respectively.

The lower effective tax rate in 2022 was due primarily to the recording of a valuation allowance needed for federal deferred tax assets and certain state net operating loss carryforwards, which commenced in the fourth quarter of fiscal year ended January 31, 2022 and continued through the period ended July 31, 2022.

The increase in the effective tax rate for the second quarter ended July 31, 2023 was primarily due to the reversal of the valuation allowance at January 31, 2023.

Six Months Ended July 31, 2023

For the six-month period ended July 31, 2023 the Company earned a pre-tax profit of $18,449,000 on sales of $142,264,000 compared to a pre-tax profit of $4,609,000 on sales of $114,881,000 in the prior year.

Sales increased by approximately $27,383,000 or 23.8%.

The increase was attributable to an increase in beginning of year sales backlog, increased first quarter orders, a price increase for orders received after January 1, 2023 and July 1, 2022, and by the Company’s ability to service the traditional seasonal cycle.

Gross Margin for the first six months of fiscal 2024 was 43.4% compared to 36.2% in the prior year.

The margin was affected by price increases on July 1, 2022 and January 1, 2023, combined with relatively stable costs for raw materials and labor expenses, and an increase in business which included Virco full service.

Selling, general and administrative expenses for the six months ended July 31, 2023 increased compared to the same period last year and decreased as a percentage of sales.

The increase in selling, general and administrative expenses was attributable to an increase in orders which include Virco full service, increased variable freight and service expenses, variable selling expenses, and a provision for management bonus based upon profitability.

Interest expense increased by $670,000 for the six months ended July 31, 2023 compared to the same period last year.

The increase was primarily attributable to an increase in the amount borrowed in 2023 to finance seasonal working capital and an increase in interest rates.

For the six months ended July 31, 2023 and 2022, the effective income tax rates were 23.6% and 0.3%, respectively.

The lower effective tax rate in 2022 was due primarily to the recording of a valuation allowance needed for federal deferred tax assets and certain state net operating loss carryforwards which commenced in the fourth quarter of fiscal year ended January 31, 2022 and continued through the period ended July 31, 2022.

The increase in the effective tax rate for the six months ended July 31, 2023 was primarily due to the reversal of the valuation allowance at January 31, 2023.

Liquidity and Capital Resources

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

As discussed above, during the fiscal year ended January 31, 2022, the Company experienced severe supply chain disruptions and labor availability and delivered orders later in the year.

In the fiscal year ended January 31, 2023, the supply chain disruptions abated and the Company started to return to the more traditional seasonal cycle.

The Company believes that traditional seasonal sales cycle has substantially returned for the quarter ended April 30, 2023, and will continue through the fourth quarter ending January 31, 2024.

Inventory increased by $19,343,000 at April 30, 2023, compared to April 30, 2022.

The entire increase in inventory was attributable to increased quantity.

The cost and valuation of inventory was stable.

The quantity of inventory was increased in response to a material increase in unshipped sales orders (backlog).

The majority of the backlog is scheduled for delivery during the traditional seasonal peak from June through August.

As discussed above, due to COVID-19, during fiscal 2021 and 2022 the Company incurred supply chain disruptions and labor shortages which adversely affected the Company’s ability to service the traditional summer delivery window.

The Company believes that the Company’s ability to service the traditional seasonal sales cycle has returned and will continue through the remainder of this fiscal year.

Accounts Receivable increased by $24,306,000 at July 31, 2023 compared to the same period last year.

The increase is attributable to increased sales in the quarter ended July 31, 2023.

Inventory increased by $10,625,000 at July 31, 2023 compared to July 31, 2022.

The increase is primarily attributable to increased quantity.

The increase in inventory was financed by increased borrowing under the Company’s line of credit with PNC Bank and increased vendor credit, which traditionally increases with increased purchases of materials.

Accrual basis capital expenditures for the three months ended April 30, 2023 were $1,300,000 compared to $627,000 for the same period last year.

Accrual basis capital expenditures for the six months ended July 31, 2023 were $3,235,000 compared to $1,839,000 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 per year by covenant.

2 unchanged sentences

2 to the Revolving Credit and Security Agreement with PNC Bank, which implemented certain changes to the Company’s credit facility with PNC Bank, including the extension of the final maturity date of the facility to April 15, 2027.

Subsequent to the period ended April 30, 2023, the Company entered into Amendment No.

3 which increased the borrowing limit to $72.5 million during the peak seasonal period from June through August 2023.

On May 19, 2023, the Company entered into Amendment No.

3 which increased

the borrowing limit to $72.5 million during the peak seasonal period from June through August 2023.

Debt of Notes to Unaudited Consolidated Financial Statements under Item 1 of this Quarterly Report on Form 10-Q.

Based on the Company’s current projections, raw material costs and its ability to introduce price increases, management believes it will maintain compliance with its financial covenants under the Credit Agreement, although risks and uncertainties remain, such as economic conditions, changing raw material costs and supply chain challenges.

The Company was in compliance with its debt covenants as of April 30, 2023.

Based on the Company’s current projections, raw material costs and its ability to introduce price increases, management believes it will maintain compliance with its financial covenants under the Credit Agreement, although risks and uncertainties remain, such as changes in economic conditions, changing raw material costs and supply chain challenges.

The Company was in compliance with its debt covenants as of July 31, 2023.

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, 2023, 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, 2023, 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