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 a 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 delivery season. The Company has benefited from a large series of disaster recovery orders that were received at the end of the prior fiscal year and the first quarter of the current year. Collectively, these orders resulted in approximately $9 million of additional revenue that was recognized in the first quarter of the current year compared to the same quarter in the prior year. The new orders positively affected the Company’s traditional seasonal cycle this fiscal year, with positive impacts on production, overhead absorption, accounts receivable, collections, and reductions in inventory, as well as lower borrowings to support that inventory. An additional $4 million and $6 million of disaster recovery orders were delivered in the second and third quarters of the current year, respectively, resulting in similar positive impacts. The Company believes that it will receive additional orders for this project in the fourth quarter, and that the project will be substantially complete by the end of the current fiscal year. The Company further believes that the timing and related positive impacts of this project are unusual and that more typical seasonal and financial patterns are likely to return after this project concludes. With the exception of the disaster recovery project for the nine-month period ended October 31, 2024, management believes that the traditional seasonal cycle for school furniture and equipment has largely returned to its pre-pandemic summer peak. Management further believes that the Company’s ability to service that seasonal cycle has returned to normal. During the three-month period ended October 31, 2024, the Company experienced approximately 13% decrease in orders compared to the same period last year. For the nine-month period ended October 31, 2024, the Company experienced approximately 2% 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 more timely deliveries for the first nine months resulted in a reduced sales order backlog at October 31, 2024 compared to the same period in the prior year, despite an increase in sales orders for the current year. Order backlog at October 31, 2024 declined to approximately $25.0 million compared to $42.6 million in the prior year. The combination of materially improved profitability in the last six months of the prior year and first nine months of fiscal 2025 along with muted seasonality due to the project discussed above contributed to material changes in the Company’s balance sheet at October 31, 2024 compared to the same period last year. As a result of after-tax profits earned during this period, the Company has approximately $22.1 million of additional stockholders’ equity on October 31, 2024 compared to the same date last year, including reductions in equity for cash dividends paid in each of the first three 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 October 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 and third quarters, accounts receivable decreased by approximately $4.9 million compared to the same date last year. The combination of these events resulted in the Company having $38.9 million of cash and no borrowings under its line of credit on October 31, 2024 compared to cash of $4.9 million and borrowing of approximately $3.7 million under its line of credit at October 31, 2023. 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. The Company does not typically 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 October 31, 2024, despite portions of the United States experiencing hurricanes and other severe weather conditions. As a consequence of these tragic weather conditions, the Company may benefit from future orders as the schools are rebuilt. 20 Recent elections and the shift in political power nationally may cause some uncertainty regarding future funding for school furniture, although Management estimates that more than 80% of school funding and virtually all new bond funded construction and refurbishment derive from state and local budgets, which are less dependent on federal funding sources. The two largest states for the Company’s revenue are California and Florida. In addition, because the Company has maintained and invested in its domestic factories and experienced workforce, Management believes that the Company may be less vulnerable to current and potential future tariffs and supply chain disruptions than many other suppliers of education furniture, although the Company is sensitive to the price of steel and imports a number of raw materials and components from international suppliers, primarily China. Three Months Ended October 31, 2024 For the three months ended October 31, 2024, the Company earned net income of $8.4 million on sales of $82.6 million compared to net income of $10.2 million on sales of $84.3 million in the prior year. Sales for the third quarter decreased by approximately $1.6 million or 1.9% compared to the same period prior year. The decrease 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 third quarter ended October 31, 2024 was 44.4% compared to 45.4% in the prior year. The decrease in margin was attributable to slightly increased levels of overhead expense relative to sales. Selling, general and administrative expenses for the three months ended October 31, 2024 increased by approximately $2.1 million and increased to 30.9% of sales compared to 27.9% in the same period last year. The increase was attributable to increased freight and selling expenses. Net interest income was $24,000 for the three months ended October 31, 2024 compared to net interest expense of $765,000 for 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 October 31, 2024 and 2023, the effective income tax rates were 25.5% and 24.5%, respectively. Nine Months Ended October 31, 2024 For the nine-month period ended October 31, 2024 the Company earned net income of $27.4 million on sales of $237.8 million compared to net income of $24.3 million on sales of $226.5 million in the prior year. Sales increased by approximately $11.3 million or 5.0% 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 nine months ended October 31, 2024 was 45.1% compared to 44.1% 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 nine months ended October 31, 2024 increased by approximately $5.9 million and increased to 30.0% of sales compared to 28.9% in the same period last year . The increase in selling, general and administrative expenses was attributable to increased variable selling and service expenses. Net interest expense was $506,000 and $2,560,000 for the nine months ended October 31, 2024 and 2023, respectively. The decrease was primarily attributable to a decrease in the amount borrowed in 2024 to finance seasonal working capital. For the nine months ended October 31, 2024 and 2023, the effective income tax rates were 24.4% and 24.0%, 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. 21 Accounts Receivable decreased by $4.9 million at October 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 $10.0 million at October 31, 2024 compared to October 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 October 31, 2024. Accrual basis capital expenditures for the nine months ended October 31, 2024 were $5.4 million compared to $4.1 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 October 31, 2024. On November 22, 2024, the Company executed Amendment No. 5 to the Restated Credit Agreement, with an effective date of October 31, 2024. See Note 7 . 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 October 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.