Virco Mfg. Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended January 31, 2022; comparisons are with the fiscal year ended January 31, 2021. The filing was signed April 28, 2022. Virco designs, manufactures and distributes furniture, principally for U.S. schools. Its business is highly seasonal, and the fiscal-year results were affected by school reopenings, supply constraints and labor shortages.
Key financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $184.8 million | $152.8 million |
| Gross profit / gross margin | $60.9 million / 33.0% | $54.9 million / 35.9% |
| Operating income (loss) | ($0.3 million) | $0.7 million |
| Loss before income taxes | ($3.7 million) | ($3.0 million) |
| Income tax expense (benefit) | $11.4 million | ($0.7 million) |
| Net loss | ($15.1 million) | ($2.2 million) |
| Diluted loss per share | ($0.95) | ($0.14) |
| Cash from (used in) operations | ($0.4 million) | $7.8 million |
- Sales increased 21%, while orders increased nearly 40%; delivery growth lagged orders amid supply and labor constraints. List prices rose 5% during FY2022.
- Cost of sales rose to 67.0% of sales from 64.1%, reducing gross margin. The company reported steel costs nearly tripled and plastic costs doubled; imported container freight costs from China rose nearly eightfold.
- The $11.4 million tax expense chiefly reflects a $12.3 million increase in the valuation allowance, after the company concluded that a majority of deferred tax assets were no longer more likely than not to be realized. The valuation allowance at year-end was $11.4 million.
- Cash was $1.4 million at year-end. Current assets were $68.8 million and current liabilities $36.3 million, for working capital of approximately $32.6 million. Operating cash use reflected higher year-end receivables and inventory, which rose approximately $8 million and $9 million, respectively.
- Total debt was $14.5 million, including $9.6 million drawn on the PNC revolving facility; reported availability at January 31, 2022 was approximately $20.4 million. Interest expense was $1.2 million, down from $1.5 million.
- Assets totaled $126.4 million and stockholders’ equity $47.4 million. The pension plans’ reported unfunded status was $14.2 million.
Material changes versus FY2021
- School reopenings drove a sharp order rebound after FY2021 orders fell approximately 20%; sales rose from $152.8 million to $184.8 million. Backlog at January 31, 2022 increased to $40.8 million from $20.9 million, with substantially all expected to ship in FY2023.
- Despite higher sales, material shortages, commodity and freight inflation, labor scarcity, COVID-related absences and less efficient production runs pushed gross margin lower and worsened the pretax loss.
- Operating cash flow swung from $7.8 million provided to $0.4 million used, largely due to delayed shipments and the year-end increase in receivables and inventory.
- The company recorded $11.4 million of income tax expense, primarily from the deferred-tax valuation allowance; FY2021 had a $0.7 million tax benefit.
- FY2022 deliveries in June, July and August were less than 40% of annual sales, compared with approximately 52% in FY2021 and a historical pattern of about 50%, reflecting supply and labor disruptions.
Outlook, risks and unusual items
- Outlook: Management expected continued uncertainty and volatility in FY2023 commodity, freight, energy and labor costs, along with ongoing supply-chain disruption. It raised published list prices for FY2023 and said the increases were intended to recover higher costs, while acknowledging price competition could limit further increases. Management anticipated stable project demand relative to pre-pandemic levels and continuation of higher short-term transactional business; it provided no numerical sales or earnings guidance.
- Financing and covenant risk: Virco was in violation of a financial covenant at January 31, 2022. An April 15, 2022 PNC amendment waived the violation, extended facility maturity to April 15, 2027, raised certain seasonal borrowing limits, and temporarily substituted an adjusted-EBITDA covenant for fixed-charge coverage tests in FY2023’s first two quarters. Management expected compliance but cited raw-material and supply-chain uncertainty. The facility is secured by substantially all borrower personal property and certain real property; receivables are swept to repay borrowings.
- Customer and seasonal concentration: Approximately 69% of FY2022 sales were priced under one nationwide purchasing contract, exclusive through December 2022 with possible extensions. The company depends on substantial seasonal inventory, working capital and third-party freight, which accounts for more than 90% of deliveries.
- Operational risks: A shortfall of temporary and full-time workers, including COVID-related absences of up to 15% of the workforce at times, disrupted production. Double-time overtime incentives cost approximately $2 million. Management raised hourly wages and said staffing had become adequate by the filing date.
- Other notable items: The company incurred pension settlement costs during FY2022; the filing reports no material off-balance-sheet arrangements. Management stated it did not intend to pay cash dividends. Planned FY2023 capital spending was no more than $5 million.
- Contingencies and controls: Legal proceedings were described as ordinary-course and not expected to be material. Environmental compliance and remediation costs remain potential exposures. Management reported effective disclosure controls and internal control over financial reporting, with no material weakness identified; the auditor issued an unqualified opinion on the financial statements and did not audit internal-control effectiveness.
Important facts for investors to verify
- Whether the $40.8 million backlog converted to shipments and cash in FY2023, and whether the traditional summer delivery pattern resumed.
- Whether price increases offset materials, freight and wage inflation without materially harming demand or margins.
- Actual PNC facility availability, covenant compliance, borrowing-base capacity and compliance with the required fourth-quarter clean-down.
- Whether the deferred-tax valuation allowance can be reduced if Virco returns to sustained taxable profitability.
- Inventory quality and recoverability: inventory was $47.4 million at year-end, and inventory valuation was identified as the audit’s critical audit matter.
- The extension status of the nationwide purchasing contract after December 2022 and any changes to its exclusivity or pricing terms.