Business context and reporting period
Virco Mfg. Corporation manufactures and distributes school and office furniture. This unaudited Form 10-Q covers the second quarter and first six months of fiscal 2024, ended July 31, 2023, compared with the same periods in 2022. The business is highly seasonal: approximately half of annual sales typically occur from June through August, requiring inventory buildup and seasonal borrowing.
Financial performance
Amounts below are in millions of dollars except per-share data. Q2 refers to the three months ended July 31; YTD refers to the six months ended July 31.
| Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Net sales | $107.3 | $82.8 | $142.3 | $114.9 |
| Gross profit / margin | $48.6 / 45.3% | $31.8 / 38.5% | $61.8 / 43.4% | $41.6 / 36.2% |
| Operating income | $21.3 | $11.2 | $19.9 | $6.4 |
| Income before taxes | $20.3 | $10.0 | $18.4 | $4.6 |
| Net income | $15.5 | $9.7 | $14.1 | $4.6 |
| Diluted EPS | $0.95 | $0.60 | $0.87 | $0.29 |
| Interest expense | $1.1 | $0.7 | $1.8 | $1.1 |
For the six months, operating activities used $21.2 million of cash, versus $20.0 million used a year earlier. The principal use was a $50.2 million increase in trade receivables, partly offset by higher payables and accrued liabilities. Investing activities used $2.8 million, primarily for capital expenditures; financing activities provided $24.5 million. Cash rose $0.5 million from the fiscal year-end to $1.6 million.
At July 31, 2023, total debt was $46.5 million, including $42.0 million drawn on the revolving line and a $4.5 million mortgage. Approximately $30.5 million remained available to borrow. Current assets were $144.3 million and current liabilities were $91.1 million; receivables were $68.6 million and inventory was $71.9 million. Stockholders’ equity was $82.3 million.
Material changes and management commentary
- Q2 sales increased 29.6% year over year; YTD sales increased 23.8%. Management attributed growth to a larger opening backlog, increased orders, price increases effective July 2022 and January 2023, and improved ability to meet the seasonal delivery cycle.
- Gross margin rose to 45.3% in Q2 and 43.4% YTD. Management cited pricing, relatively stable commodity costs, and a greater share of full-service business. Full-service orders also raise freight and service costs.
- Q2 SG&A increased $6.7 million and was slightly higher as a share of sales; YTD SG&A increased but declined as a share of sales. Drivers included delivery and service costs, variable selling expenses, and management bonuses tied to profitability.
- Q2 orders rose 3.3%; orders increased 6.7% YTD. Backlog entering the seasonal period was $104.6 million, up from $85.7 million a year earlier. July 31 unshipped orders were $74.0 million, versus $81.2 million a year earlier.
- YTD interest expense increased $0.7 million, reflecting higher seasonal borrowing and interest rates. The Q2 and YTD effective tax rate was 23.6%, compared with 3.0% and 0.3%, respectively, in 2022; management attributed the change primarily to reversal of a deferred-tax valuation allowance at January 31, 2023.
Outlook, risks and contingencies
Management said the traditional seasonal sales cycle had returned and expected it to continue through the remainder of fiscal 2024. It believes operating cash flow and unused PNC borrowing capacity will be sufficient for debt service, capital expenditures, and working-capital needs over the next 12 months. The filing provides no specific full-year revenue or earnings guidance.
A May 2023 credit amendment temporarily increased the PNC facility limit to $72.5 million for June through August 2023, raised certain inventory sublimits, and increased the applicable margin by 25 basis points. The line is subject to a borrowing base, covenants, and seasonal conditions; substantially all receivables are swept to repay borrowings. The company was in compliance with debt covenants at July 31, 2023, but management noted risks from economic conditions, raw-material costs, and supply-chain challenges. The company had been in covenant violation at January 31, 2022.
Other risks include educational-institution funding, labor and material availability and costs, product demand, competition and pricing, and general economic conditions. Management expects ordinary-course legal proceedings not to materially affect the company. No subsequent events were reported; no off-balance-sheet arrangements were disclosed. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether seasonal shipments and collections convert the elevated receivables and inventory into cash as expected.
- Whether margins remain supported by pricing, stable input costs, and full-service mix while freight, labor, and service expenses rise.
- Revolver availability, borrowing-base capacity, covenant compliance, interest rates, and the post-August seasonal borrowing profile.
- Whether backlog, order trends, and management’s expectation of continued seasonal normalization support results for the rest of fiscal 2024.
- The sustainability of profitability given the higher tax rate and the sensitivity of costs and demand to economic and supply-chain conditions.