VIRCO MFG CORPORATION 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Overview 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 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. 17 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 The market for education furniture is extremely seasonal and 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. 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. Off Balance Sheet Arrangements None. Critical Accounting Policies and Estimates The Company's critical accounting policies are outlined in its Annual Report on Form 10-K for the fiscal year ended January 31, 2024. Forward-Looking Statements 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"). 18 The words or phrases “anticipates,” “expects,” “will continue,” “believes,” “estimates,” “projects,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company's forward-looking statements are subject to certain risks and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, availability of funding for educational institutions, availability and cost of materials, availability and cost of labor, demand for the Company's products, competitive conditions affecting selling prices and margins, capital costs and general economic conditions. Such risks and uncertainties are discussed in more detail in the Company's Form 10-K for the fiscal year ended January 31, 2024, including under the caption "Risk Factors". The Company's forward-looking statements represent its judgment only on the dates such statements were made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and is therefore not required to provide the information under this item.