Virco Mfg. Corporation — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended July 31, 2022; fiscal year ends January 31. Virco manufactures and distributes school and office furniture. Results are highly seasonal, with about half of annual sales typically shipped June through August. Amounts below are in millions unless noted.
Financial performance
| Metric | Three months ended July 31, 2022 | Prior-year quarter | Six months ended July 31, 2022 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $82.8 | $59.0 | $114.9 | $87.4 |
| Gross profit / margin | $31.8 / 38.5% | $22.3 / 37.8% | $41.6 / 36.2% | $30.0 / 34.3% |
| Operating income | $11.2 | $6.1 | $6.4 | $1.8 |
| Net income (loss) | $9.7 | $3.8 | $4.6 | $(0.1) |
| Diluted EPS | $0.60 | $0.24 | $0.29 | $(0.01) |
Quarterly sales increased 40.3%; first-half sales increased 31.5%. For the quarter, SG&A was $20.7 million, interest expense $0.7 million, and income tax expense $0.3 million. First-half SG&A was $35.1 million and interest expense $1.1 million. Effective tax rates were 3.0% for the quarter and 0.3% year to date, reflecting a valuation allowance on deferred tax assets and certain state net operating loss carryforwards.
Cash flow: First-half operating cash use was $20.0 million, versus $8.6 million used a year earlier, largely reflecting a $26.6 million increase in receivables and $13.9 million increase in inventory, partly offset by higher payables and accrued liabilities. Investing cash use was $1.5 million, including $1.5 million of capital expenditures. Financing provided $22.3 million, including $28.4 million of borrowings and $5.6 million of repayments. Cash rose by $0.8 million to $2.2 million.
Balance sheet and liquidity: At July 31, cash was $2.2 million, receivables $44.3 million, inventory $61.2 million, and current assets $110.0 million. Total debt was $37.2 million, compared with $14.5 million at January 31, 2022 and $20.3 million a year earlier; $22.7 million was classified as current. Stockholders’ equity was $52.5 million. The PNC revolving facility had approximately $37.5 million of availability; its July 31 interest rate was 7.25%. Management expects operating cash flow and unused borrowing capacity to cover debt service, capital spending, and working capital needs for the next 12 months.
Changes, operating trends, and outlook
- Management attributed improved results to a larger opening backlog, stronger orders, price increases on orders received after January 1, 2022, and a better ability to meet the normal seasonal delivery cycle. Production for the first six months rose nearly 30% year over year.
- Orders increased 27.9% in the quarter ended April 30, 2022, 4.1% in the quarter ended July 31, and 14.3% year to date. Backlog entering the traditional peak season was $85.7 million, up from $49.7 million a year earlier. Management said the usual seasonal cycle had substantially returned to normal; no formal earnings guidance was provided.
- Gross margin improved as price increases began to offset prior-year raw-material and labor cost inflation. SG&A increased with freight, service and selling costs, as well as legal expenses to enforce intellectual-property rights against a competitor. Higher seasonal borrowing and interest rates increased interest expense.
- Supply-chain disruption and elevated material, labor, freight, and energy costs remain risks. China lockdowns affected shipments; construction delays could shift deliveries to new schools. Price increases have a lag before they are reflected in sales, and commodity and input costs remain uncertain.
Debt, contingencies, and notable items
- After breaching a fixed-charge coverage covenant at January 31, 2022, Virco amended its PNC credit agreement on April 15, 2022. The amendment waived the breach, extended facility maturity to April 15, 2027, temporarily substituted an adjusted-EBITDA covenant for the first two FY2023 quarters, and raised certain seasonal borrowing limits. Virco reported covenant compliance at July 31 and expects continued compliance, but noted uncertainty around raw-material costs and supply chains.
- The facility is secured by substantially all borrower personal property and certain real property. Because receivables are swept to repay the facility, a covenant breach or reduced borrowing-base availability could constrain access to cash. The facility also includes a requirement to reduce revolving borrowings to $10 million or less for 30 consecutive days in the fourth fiscal quarter.
- An amendment permits a sale-leaseback of the Amity Road property, with proceeds intended for a proposed share repurchase; the filing does not report that the transaction or repurchase was completed. No dividends were paid in the periods presented.
- A $0.3 million unrealized loss on an investment in a trust account was recorded in the first half. Management reported ordinary-course legal proceedings are not expected to materially affect results or financial condition. No subsequent events were reported.
Important facts for investors to verify
- Whether order growth and the $85.7 million backlog convert into timely shipments and cash collections, particularly given school construction and supply-chain delays.
- Seasonal working-capital needs, receivable collections, inventory levels, borrowing-base availability, and compliance with the amended PNC covenants.
- Whether pricing can continue to offset material, labor, freight, and energy inflation, and how the July 1 price increase affects later-period revenue and margins.
- Future realization of deferred tax assets: a $9.2 million valuation allowance remained at July 31, 2022, and management said it would reassess if favorable income trends continue.
- Potential outcomes and costs of the intellectual-property dispute, and whether any proposed Amity Road sale-leaseback or share repurchase proceeds.