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 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 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. 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. 20 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 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. 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. 21 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 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"). 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.