What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-09-09 compared with 2024-06-07 · 53 added, 49 removed, 22 unchanged (82% of the section changed)

2 unchanged sentences

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.

Typically, the Company has highly seasonal annual cycle where approximately 50% of sales occur in 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.

The Company has received and filled a large series of orders funded by the United States Department of Education that were shipped during the first quarter of 2024 rather than during the traditional peak of June through August.

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.

The Company shipped approximately $4.0 million related to this order in the second quarter.

The Company believes that it will receive and deliver additional related orders during the third and fourth quarters of the current year.

These orders materially and positively impacted first and second quarter comparisons to the same periods in the prior year.

In addition to impacting the relative portion of revenue recognized in the first and second quarters, quarterly fluctuations in inventory, accounts receivable, and operating cash flows were positively impacted.

With the exception of this one event for the six-month period ended July 31, 2024, 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, 2024, the Company experienced a 7.6% increase in orders compared to the same period last year.

During the three-month period ended July 31, 2024, the Company experienced a 5.3% increase in orders compared to the same period last year.

For the six-month period ended July 31, 2024 the Company experienced a 6.4% increase in orders compared to the same period last year.

Due to improved delivery performance in the year ended January 31, 2024 compared to the same period last year, the Company began the current year with a sales order backlog that was approximately $10 million less than the same period last year.

The combination of a smaller beginning backlog and an increase in sales for the first six months resulted in a reduced sales order backlog at July 31, 2024 compared to the same period in the prior year despite an increase in sales orders for the current year.

Order backlog at July 31, 2024 declined to approximately $61.3 million compared to $74.0 million in the prior year.

The combination of materially improved profitability in the last six months of the prior year and first six months of fiscal 2025 along with muted seasonality due to the order discussed above contributed to material changes in the Company’s balance sheet at July 31, 2024 compared to the same period last year.

As a result of after-tax profits earned during the last 12 months, the Company has approximately $25.5 million of additional stockholders’ equity on July 31, 2024 compared to the same date last year, including reductions in equity for cash dividends paid in both the first and second quarters and stock repurchases during the first quarter.

Because the Company shipped a larger than typical portion of deliveries in the first quarter, the Company shipped inventory earlier in the year and did not have as much seasonal inventory at July 31, 2024 compared to the same period last year.

Finally, because the year-to-date increase in revenue was primarily in the first quarter, and receivables were collected more efficiently in the second quarter, accounts receivable decreased by approximately $12.5 million compared to the same date last year.

The combination of these events resulted in the Company having increased cash and no borrowings under its line of credit on July 31, 2024 compared to borrowing of approximately $42.0 million under its line of credit at July 31, 2023.

Management believes that this is the first time in the 74-year history of the Company that it has had no bank debt at the end of the second quarter.

The final material change in the balance sheet relates to a 5-year lease renewal for the Company’s facility in Torrance, CA that was executed on July 23, 2024.

This facility houses the Company’s principal executive offices, and manufacturing and distribution for the western United States.

This lease renewal resulted in an increase in ROU Assets of approximately $33.0 million and a related increase in long and short term lease liabilities of a comparable amount.

Three Months Ended July 31, 2024

For the three months ended July 31, 2024, the Company earned pre-tax income of $22.1 million on sales of $108.4 million compared to a pre-tax income of $20.3 million on sales of 107.3 million in the prior year.

Sales for the second quarter increased by approximately $1.1 million or 1.0% compared to the same period prior year.

The increase was affected by the timing of shipments, as the Company delivered a larger than expected portion of sales orders in the first quarter ended April 30, 2024.

Gross margin for the second quarter ended July 31, 2024 was 46.3% compared to 45.3% in the prior year.

The increase in margin was attributable to relatively stable commodity costs, increased levels of production, and product mix.

Selling, general and administrative expenses for the three months ended July 31, 2024 increased by approximately $1.0 million and by 0.7% of sales compared to the same period last year.

The increase was attributable to increased variable selling and service expenses.

Interest expense decreased by $0.8 million for the three months ended July 31, 2024 compared to the same period last year.

The decrease was primarily attributable to a decrease in the amount borrowed in 2024 to finance seasonal working capital.

For the three months ended July 31, 2024 and 2023, the effective income tax rates were 23.7% and 23.6%, respectively.

Six Months Ended July 31, 2024

For the six-month period ended July 31, 2024 the Company earned a pre-tax profit of $24.9 million on sales of $155.2 million compared to a pre-tax profit of $18.4 million on sales of $142.3 million in the prior year.

Sales increased by approximately $12.9 million or 9.1% compared to the same period in the prior year.

The increase was attributable to an increase in volume and product mix.

Gross Margin for the first six months ended July 31, 2024 was 45.5% compared to 43.4% in the prior year.

The margin was affected by increased production levels combined with relatively stable costs for raw materials.

Selling, general and administrative expenses for the six months ended July 31, 2024 increased by approximately $3.9 million compared to the same period last year and increased by 0.1% as a percentage of sales.

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

Interest expense decreased by $1.3 million for the six months ended July 31, 2024 compared to the same period last year.

The decrease was primarily attributable to an decrease in the amount borrowed in 2024 to finance seasonal working capital.

For the six months ended July 31, 2024 and 2023, the effective income tax rates were 23.9% and 23.6%, respectively.

Liquidity and Capital Resources

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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.

Accounts Receivable decreased by $12.5 million at July 31, 2024 compared to the same period last year.

The decrease is attributable to earlier than normal shipments (as discussed above under “Overview”) and improved collections.

Inventory decreased by $13.3 million at July 31, 2024 compared to July 31, 2023.

The decrease is primarily attributable to increased shipments during the early part of the year and inventory management in response to the order backlog at July 31, 2024.

Accrual basis capital expenditures for the six months ended July 31, 2024 were $3.1 million compared to $3.2 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 $8.0 million per year by covenant.

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, 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 April 30, 2024, 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, 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").

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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