Virco Mfg. Corporation — Q3 FY2024 Form 10-Q
Reporting period: Three and nine months ended October 31, 2023. The filing is unaudited; Virco’s fiscal year ends January 31. Unless stated otherwise, amounts below are in millions of dollars.
Business context and results
Virco manufactures and distributes school and office furniture, primarily to resellers, educational institutions, and government entities. The business is highly seasonal: management says approximately half of annual sales typically occur from June through August, creating significant seasonal working-capital needs.
| Metric | Three months ended Oct. 31, 2023 | Prior-year quarter | Nine months ended Oct. 31, 2023 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $84.3 | $77.4 | $226.5 | $192.3 |
| Gross profit / margin | $38.2 / 45.4% | $30.8 / 39.8% | $100.0 / 44.1% | $72.3 / 37.6% |
| Operating income | $14.7 | $8.8 | $34.6 | $15.2 |
| Income before taxes | $13.5 | $8.2 | $31.9 | $12.8 |
| Net income | $10.2 | $7.9 | $24.3 | $12.5 |
| Diluted EPS | $0.62 | $0.48 | $1.48 | $0.77 |
Cash flow, debt, and liquidity
- Operating cash flow: $22.3 for the nine months, versus $1.5 a year earlier. Capital expenditures were $4.6, versus $2.6; operating cash flow less capital expenditures was $17.7.
- Cash: $4.9 at October 31, 2023, compared with $2.2 at October 31, 2022 and $1.1 at January 31, 2023.
- Debt: $8.2 total at October 31, 2023, down from $16.9 a year earlier and $21.7 at January 31, 2023. The balance included $3.7 outstanding on the revolving line and a $4.4 mortgage. Revolver availability was approximately $23.1; the quarter’s rate on outstanding balances was 10.00%.
- Working capital: Trade receivables were $33.0 and inventory was $58.9 at October 31. Receivables were about $5.0 higher and inventory about $1.5 higher than a year earlier. Management attributed the inventory increase mainly to higher cost rather than quantity.
- Virco reported compliance with debt covenants at October 31 and said operating cash flow plus unused borrowing capacity should fund debt service, capital expenditures, and working capital for the next 12 months. The credit agreement caps annual capital expenditures at $8.0.
Material changes and management commentary
- Quarterly sales increased 8.9%; nine-month sales rose 17.8%. Management attributed growth to a larger opening backlog, increased order rates, prior price increases, improved on-time deliveries, and the ability to serve the traditional summer season.
- Management reported a 25.0% year-over-year increase in orders in the seasonally light third quarter. Backlog entering the summer delivery period was $104.6, versus $85.7 a year earlier; backlog at October 31 was $42.5, down from $44.8.
- Gross margins expanded in both periods. Management cited price increases, relatively stable raw-material and labor costs, and increased full-service business. Full-service orders support margins but also raise freight and service costs recorded in SG&A.
- SG&A rose $1.5 in the quarter and $8.2 for the nine months, but declined as a percentage of sales. Interest expense increased $0.2 for the quarter and $0.9 for the nine months, reflecting higher seasonal borrowing and interest rates.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management said the traditional seasonal sales cycle had returned and expected its ability to service that cycle to continue through the remainder of the fiscal year.
- Management’s liquidity and covenant expectations depend on projections, raw-material costs, pricing, and continued access to financing. Risks cited include economic conditions, educational-institution funding, demand, competition and selling prices, material and labor availability and cost, supply-chain challenges, and capital costs.
- The effective tax rate increased to 24.5% for the quarter and 24.0% for the nine months, versus 3.9% and 2.6% in the comparable periods. The filing attributes the difference mainly to reversal of a deferred-tax valuation allowance at January 31, 2023; the 2022 rates reflected a valuation allowance.
- Under the PNC facility, substantially all receivables are swept to repay borrowings. The filing warns that covenant breaches, borrowing-base deterioration, or other conditions could restrict access to cash liquidity. The company was compliant at period-end.
- Subsequent event: On December 5, 2023, the board declared a $0.02-per-share dividend payable January 10, 2024. The board also authorized up to $5.0 of stock repurchases, with timing and amount at management’s discretion. Future dividends are not assured and are subject to board approval and lending covenants.
- Management says ordinary-course legal proceedings are not expected to materially affect the company. Risk factors were reported as not materially changed from the 2023 Form 10-K. Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting reported.
Important facts for investors to verify
- Whether order growth, delivery performance, and backlog conversion continue after the summer peak, and how the reported $42.5 backlog develops.
- Whether gross-margin gains persist as price increases, commodity and labor costs, and the mix and costs of full-service orders change.
- Seasonal borrowing needs, revolver availability and interest costs, and continued compliance with fixed-charge and other credit covenants.
- The cash-tax impact and future realizability of deferred tax assets following the valuation-allowance reversal.
- Execution and funding of the announced dividend and repurchase authorization, including the effect of credit-agreement restrictions.