What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-06-07 compared with 2023-12-08 · 51 added, 64 removed, 20 unchanged (85% of the section changed)

1 unchanged sentence

Results of Operations

The results of operations for the three-month and nine-month periods ended October 31, 2023 and the comparable periods ended October 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.

The market for educational furniture is marked by extreme seasonality.

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 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 compared to the same quarter in 2022, 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 compared to the same quarter in 2022.

During a seasonally light third quarter ended October 31, 2023 the Company experienced a 25.0% increase in orders compared to the same quarter in 2022.

During the first nine months of fiscal 2023, the Company experienced a 10.3% increase in orders compared to the same period in 2022.

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.

The largest portion of this increased backlog was delivered during the second quarter ended July 31, 2023 with the balance delivered during the third quarter ended October 31, 2023.

The increase in sales for the third quarter ended October 31, 2023 was attributable to improved on time delivery of orders and increased order rates during the third quarter.

The Company’s backlog of unshipped sales orders at October 31, 2023 declined by $2.3 million to $42.5 million compared to $44.8 million in the prior year.

Three Months Ended October 31, 2023

For the three months ended October 31, 2023, the Company earned pre-tax income of $13.5 million on sales of $84.2 million compared to a pre-tax income of $8.2 million on sales of $77.4 million in the prior year.

Net sales for the third quarter increased by approximately $6.9 million or 8.9%, compared to the same period in 2022.

The increase was attributable to an improvement in on-time deliveries during the traditional summer season and increased order rates during the third quarter.

Gross margin for the third quarter ended October 31, 2023 was 45.4% compared to 39.8% in the prior year.

The increase in margin was attributable to the price increases, 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 October 31, 2023 increased by approximately $1.5 million but was slightly lower 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, and increased variable selling expenses.

Interest expense increased by $0.2 million for the three months ended October 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 October 31, 2023 and 2022, the effective income tax rates were 24.5% and 3.9%, 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 October 31, 2022.

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

Nine Months Ended October 31, 2023

For the nine months ended October 31, 2023 the Company earned a pre-tax profit of $31.9 million on sales of $226.5 million compared to a pre-tax profit of $12.8 million on sales of $192.3 million in the prior year.

Net sales increased by approximately $34.2 million or 17.8%.

The increase was attributable to an increase in beginning of year sales backlog, increased order rates, 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 nine months of fiscal 2024 was 44.1% compared to 37.6% 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 nine months ended October 31, 2023 increased by $8.2 million 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 an increase in orders which include Virco full service, increased variable freight and service expenses, and variable selling expenses.

Interest expense increased by $0.9 million for the nine months ended October 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 nine months ended October 31, 2023 and 2022, the effective income tax rates were 24.0% and 2.6%, 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 October 31, 2022.

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

Orders received from customers follow a similar seasonal cycle, with the bulk of orders arriving approximately 4-6 weeks preceding the selling season.

The Company has received and filled a large series of orders related to disaster relief and recovery funding.

This project is now partially complete.

Approximately $9 million of the first quarter's increase in sales compared to the same quarter in the prior year were attributable to these orders.

These orders materially impacted traditional first quarter comparisons.

With the exception of this one event, for the three-month period ended April 30, 2024, management believes that the traditional seasonal cycle and the Company’s ability to service that seasonal cycle has returned to normal.

Overall order intake, including the initial portion of this one large project previously mentioned, is up approximately 7% compared to the same period last year.

At April 30, 2024, the Company’s backlog of unshipped sales orders was approximately $90.2 million compared to $104.6 million on April 30, 2023.

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 further in the Risk Factors section of the Company’s Form 10-K for the fiscal year ended January 31, 2024, 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 1 price increase.

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

Although conditions are stable 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, 2024, 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, 2024 to occur in the subsequent quarter.

Three Months Ended April 30, 2024

For the three months ended April 30, 2024, the Company earned a pre-tax profit of $2.9 million on sales of $46.7 million compared to a pre-tax loss of $1.9 million on sales of $34.9 million in the prior year.

Sales increased by approximately $11.8 million or 33.7%, compared to the same prior year period.

The increase in sales was primarily attributable to the shipment of a large project (discussed above), combined with a slight increase in selling prices.

Gross margin for the quarter ended April 30, 2024 was 43.5% of sales compared to 37.8% in the prior year.

The improvement in margin was attributable to a slight increase in selling prices, stable commodity costs, and improved factory efficiency.

The improvement in factory efficiency resulted from approximately 20% increase in production hours to support increased first quarter sales.

Selling, general and administrative expenses ("SG&A") for the three months ended April 30, 2024 increased by approximately $2.9 million compared to the same period last year, but decreased as a percentage of sales to 37.2% compared to 41.5% in the prior year.

The increase in selling, general and administrative expenses was attributable to increased variable selling expenses offset slightly due to a change in service level where a smaller portion of sales included full service.

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

The Company holds equity securities in a Rabbi Trust to fund benefits under the VIP Pension Plan.

The Company benefited from $215,000 and $299,000 of unrealized gains during the three months ended April 30, 2024 and April 30, 2023.

The primary components of pension expense relate to interest cost for the VIP plan (presented gross of the investment income described above and the amortization of AOCI for both the VIP and Qualified Pensions).

Interest cost and amortization of AOCI decreased compared to the prior year.

Interest expense decreased by $504,000 for the three months ended April 30, 2024 compared to the same period last year.

The decrease was primarily attributable to a significant decrease in the amount borrowed to finance seasonal working capital offset slightly by an increase in the interest rate.

For the three months ended April 30, 2024 and 2023, the effective income tax rates were 25.5% and 23.5%, respectively.

The change in effective tax rates for the three months ended April 30, 2024 was primarily due to the change in forecasted mix of income before federal and state income taxes and estimated permanent differences.

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, 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 $5.0 million at October 31, 2023 compared to the same period last year.

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

Inventory increased by $1.5 million at October 31, 2023 compared to October 31, 2022.

The increase is primarily attributable to increased cost, not increased quantity.

The increase in inventory was financed by cash flow from operations.

Traditional sources of financing, including borrowing under the Company’s line of credit with PNC Bank and vendor credit declined.

Accrual basis capital expenditures for the nine months ended October 31, 2023 were $4.1 million compared to $2.7 million 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 million per year by covenant.

The Company was in violation of its financial covenants under the Restated Credit Agreement as of January 31, 2022, due to an increase in the Company’s net loss primarily attributable to the effects of supply chain disruptions and labor shortages.

On April 15, 2022, the Company entered into Amendment No.

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.

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 changes in economic conditions, changing raw material costs and supply chain challenges.

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

While the Company experienced a significant increase in first quarter sales in the current year, the Company believes that the traditional seasonal nature of our business will continue.

Inventory decreased by $14.3 million at April 30, 2024, compared to April 30, 2023.

The decrease in inventory was attributable to reduced quantity offset in part by increased inventory valuation.

The quantity of inventory was decreased in response to a material increase in first quarter sales orders and a related reduction in order backlog at quarter end.

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

The decrease in inventory enabled the Company to reduce borrowing under the Company’s line of credit with PNC Bank.

Accrual basis capital expenditures for the three months ended April 30, 2024 were $0.8 million compared to $1.3 million for the same period last year.

Capital expenditures are being financed through the Company's Credit Agreement with PNC Bank and operating cash flow and restricted to not exceed $8.0 million per year by covenant.

Subsequent to the period ended April 30, 2024, the Company entered into Amendment No.

4 to its Credit Agreement with PNC Bank, which decreased the borrowing limit from $72.5 million to $70.0 million during the peak seasonal period from June through August 2024.

See " Note 7 .

Debt" in 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 PNC 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, 2024.

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 October 31, 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 April 30, 2024, 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

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What changed 10-Q

Item 2. Management’s Discussion and Analysis