What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-06-06 compared with 2024-12-09 · 58 added, 63 removed, 19 unchanged (86% of the section changed)

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Results of Operations

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.

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.

The Company’s core market for education furniture, fixtures, and equipment (FF&E) is marked by extreme seasonality.

Typically, the Company recognizes approximately 50% of its total annual revenue in the months of June, July, and August.

Incoming orders follow a similar cycle, with the bulk of orders arriving approximately 4-6 weeks preceding the summer delivery season.

During the three-month period ended April 30, 2025, the Company experienced approximately a 27.8% decrease in net revenue compared to the same period last year.

In the same period last year, the Company benefited from a large series of one-time, disaster recovery orders that resulted in approximately $9 million of additional counter-seasonal shipments.

These deliveries positively affected the Company’s traditional cycle in the prior year, with positive impacts on production, overhead absorption, accounts receivable, collections, and reductions in inventory, as well as lower borrowings to support that inventory.

Reflecting the absence of these unusual orders, as of April 30, 2025 the Company’s backlog was $70.4 million compared to $88.5 million on April 30, 2024.

Management has moderated production levels and will continue to monitor incoming order rates in pursuit of an appropriate balance between on-time summer deliveries and inventory investment.

The Company believes that the majority of the current backlog will be delivered and recognized as revenue during June, July and August of the current fiscal year.

As discussed in the Risk Factors section of the Company’s Form 10-K for the fiscal year ended January 31, 2025, the Company’s recent revenue growth in fiscal 2025 and 2024 was partly a result of the delayed recovery from Covid-related school closures and subsequent supply-chain disruptions.

Management cautions that future growth rates are unlikely to match those of the past several years.

As with the unpredictable outcomes of school closures and supply chain disruptions, future events beyond the Company’s control—such as tariffs and trade realignments—may have both negative and positive impacts on the Company’s revenue and operating margins.

Management intends to position the Company to respond to these uncertainties by continuing to reinvest in operating systems, employee training, and customer development and retention.

The recent shift in political direction nationally may also cause uncertainty regarding specific funding for school furniture, although Management estimates that more than 85% of public school funding and virtually all bond-funded new-school construction derives from state and local sources, which are less dependent on federal funding.

For example, the Company’s two largest states by revenue are California and Florida, which occupy opposite ends of the political spectrum, but both states continue to invest heavily in public education.

In recent months there have been significant changes and proposed changes to U.S.

trade policies, including significant tariffs on imports from China, Canada, and other countries.

These actions, and potential retaliatory responses, could result in revenue reduction, cost increases, and disruptions to supply chains and Company logistics.

The Company is responding to these uncertainties in a similar way as it did with Covid-related school closures and supply chain disruptions.

The Company is reinforcing its domestic capabilities and relationships in the belief that strong domestic suppliers to robustly funded, essential domestic institutions like schools, will ultimately benefit as these macro-level forces move toward a new equilibrium.

This was the pattern of the post-Covid recovery, which lagged the triggering events by about two years.

Management is not predicting this result but noting that global uncertainties can offer opportunities as well as challenges for domestically-focused suppliers like Virco.

The short- and mid-term impacts of trade uncertainties could adversely affect the Company’s operating results and financial condition.

For more information on risks to the Company’s business caused by the recent changes in macro-economic conditions, please see Part 1, Item 1A.

“Risk Factors—Industry and Economic Risks” included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2025.

Three Months Ended April 30, 2025

For the three months ended April 30, 2025, the Company earned a net income of $0.7 million on sales of $33.8 million, compared to net income of $2.1 million on sales of $46.7 million in the same period of the prior year.

Sales for the first quarter decreased by approximately $13.0 million or 27.8%, compared to the prior year.

First quarter revenue in the prior year was boosted by the previously-noted disaster recovery order, which contributed approximately $9 million in counter-seasonal shipments to the seasonally light quarter in the prior year.

Cost of sales was 52.5% for the quarter ended April 30, 2025, compared to 56.5% for the period ended April 30, 2024.

Gross margin for first quarter was 47.5% compared to 43.5% in the prior year.

The increase in gross margin was attributable to an increase in the proportion of orders delivered with full service.

These orders carry higher margins than orders with simple delivery.

Selling, general and administrative expenses for the three months ended April 30, 2025 decreased slightly by approximately $1.3 million compared to the same period last year.

The decrease in SG&A was primarily due to lower variable selling expenses related to overall lower revenue.

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

The Company benefited from $1.2 and $0.2 million of unrealized gains during the three months ended April 30, 2025 and 2024, respectively.

These non-operating gains provided a partial offset to the operating impacts of the overall lower revenue in the first quarter.

Net interest expense was $60,000 for the three months ended April 30, 2025, compared to net interest expense of $208,000 for the same period last year.

The decrease was attributable to less demand for seasonal working capital and related lower borrowings under the Company’s credit facility with PNC National Bank.

For the three months ended April 30, 2025 and 2024, the effective income tax rates were 26.4% and 25.5%, respectively.

The change in effective tax rates was due to a change in the forecasted mix of income before actual federal and state income taxes and estimated permanent differences.

Liquidity and Capital Resources

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In addition, the Company finances a large balance of accounts receivable during the peak season.

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.

Accounts Receivable decreased by $7.5 million at April 30, 2025 compared to the same period last year.

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

Inventory increased by $2.7 million at April 30, 2025 compared to April 30, 2024.

The slight increase is primarily attributable to increased material costs during the quarter.

Accrual basis capital expenditures for the three months ended April 30, 2025 were $1.6 million compared to $0.8 million for the same period last year.

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

On April 9, 2025, the Company entered into Amendment No.

6 to the Credit Agreement with PNC Bank, which established a new category of permitted share repurchases in an amount up to $7.5 million, which is in addition to the dollar limits on permitted share repurchases under the Credit Agreement discussed above.

The share repurchases under the new category must occur during the fiscal year ending January 31, 2026, may not occur while any Default or Event of Default exists or would result from such repurchases, and must be made solely from cash on hand and not from the proceeds of advances under the Credit Facility.

The permitted share repurchases under this new category are also not counted as “Restricted Payments” when calculating the Company’s compliance with the Fixed Charge Coverage Ratio covenants in the Credit Agreement.

For the three months ended April 30, 2025, the Company spent $4.0 million to repurchase 348,944 shares of its common stock.

As of April 30, 2025, $7.2 million was authorized by the Board and available for repurchase of shares by the Company, subject to the restrictions on repurchases under its Credit Agreement with PNC Bank.

The Company may elect to opportunistically purchase shares based on excess cash generation and share price considerations.

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.

The Company was in compliance with its debt covenants as of April 30, 2025.

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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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.

The Company's critical accounting policies and estimates are outlined in its Annual Report on Form 10-K for the fiscal year ended January 31, 2025.

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.

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2025, 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

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