Virco Mfg. Corporation — Q1 FY2024 Form 10-Q
Reporting period: Three months ended April 30, 2023. Virco manufactures and distributes school and office furniture, primarily in the United States. The quarter is seasonally preparatory: management says about half of annual sales typically ship in June through August, requiring substantial inventory and working-capital financing beforehand.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $34.943 million | $32.084 million |
| Gross profit / gross margin | $13.202 million / 37.8% | $9.707 million / 30.3% |
| SG&A / percent of sales | $14.514 million / 41.5% | $14.451 million / 45.0% |
| Operating loss | $(1.312) million | $(4.744) million |
| Net loss / loss per diluted share | $(1.442) million / $(0.09) | $(5.084) million / $(0.32) |
| Net cash used in operating activities | $(11.715) million | $(18.966) million |
Sales rose 8.9% year over year. Gross margin improved chiefly because the quarter benefited from price increases implemented in January and July 2022, while the prior-year quarter largely reflected orders placed before the January 2022 increase. SG&A dollars were nearly flat, but increased variable freight, service, and selling costs; SG&A declined as a share of sales. Interest expense increased $285,000 to $712,000, reflecting higher seasonal borrowings and rates. A $299,000 unrealized gain on investments held in a trust also benefited the quarter.
Liquidity, debt, and balance sheet
- At April 30, 2023, cash was $625,000; current assets were $104.843 million and current liabilities were $66.545 million. Working capital was $38.298 million.
- Total debt was $34.685 million, including $30.121 million drawn on the revolving credit line. Approximately $16.6 million remained available under the facility at quarter-end. The revolver’s quarterly interest rates ranged from 7.65% to 9.75%.
- Inventory was $85.640 million, up $19.343 million from April 30, 2022. The increase reflected higher quantities built for increased unshipped orders and was financed with greater revolver borrowing and vendor credit.
- Capital expenditures were $1.533 million on the cash-flow statement; MD&A reports accrual-basis capital expenditures of $1.300 million. The credit agreement limits annual capital expenditures to $8 million.
- Cash declined $432,000 during the quarter. Operating cash use was partly offset by $12.816 million of net financing cash inflow, including $15.241 million of borrowings and $2.300 million of repayments.
Changes, outlook, and risks
- Backlog of unshipped sales orders was approximately $104.6 million at April 30, 2023, versus $85.7 million a year earlier. Orders received during the quarter increased 10.4% year over year. Management expects a significant majority of backlog to ship during June–August.
- On May 19, 2023, with an effective date of May 5, Virco amended its PNC credit agreement: seasonal revolving capacity increased to $72.5 million for June–August 2023; inventory and assemble-to-ship sublimits increased for May–August; the company paid a $50,000 amendment fee; and the applicable margin rose 25 basis points.
- Virco was in compliance with debt covenants at April 30. Management expects operating cash flow and unused PNC capacity to fund debt service, capital expenditures, and working capital for the next 12 months, while noting risks from economic conditions, material costs, and supply-chain challenges.
- Management says supply-chain disruption was less severe and the traditional seasonal cycle had substantially returned. However, international sourcing disruptions, financing and credit tightening, labor and input costs, and competition could affect operations. Construction delays or delayed occupancy certificates could shift school deliveries from the quarter ending July 31 into a later quarter.
- The filing provides no specific full-year revenue or earnings guidance. Legal matters were described as ordinary-course and not expected to materially affect the company; reported risk factors were not materially changed from the FY2023 Form 10-K.
Key facts for investors to verify
- Whether the $104.6 million backlog converts to deliveries and collections during the expected summer peak, and whether school construction delays alter timing.
- Whether higher prices and improved gross margin persist after accounting for material, labor, freight, and other cost changes.
- Seasonal borrowing needs, facility availability and pricing, and continued compliance with PNC covenants.
- Inventory realization and cash conversion, given the substantial year-over-year inventory build and low quarter-end cash balance.