Virco Mfg. Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended January 31, 2023, compared with fiscal 2022. This is an annual report, not a standalone fourth-quarter report. Virco designs, manufactures and distributes furniture, primarily for U.S. schools; its business is highly seasonal, with approximately 47% of FY2023 sales delivered in June–August.
Financial performance and position
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $231.1 million | $184.8 million |
| Gross profit / margin | $85.3 million / 36.9% | $60.9 million / 33.0% |
| Operating income (loss) | $10.8 million | $(0.3) million |
| Income (loss) before taxes | $8.0 million | $(3.7) million |
| Income tax benefit (expense) | $8.5 million benefit | $11.4 million expense |
| Net income (loss) | $16.5 million; $1.02 diluted EPS | $(15.1) million; $(0.95) diluted EPS |
| Cash from operating activities | $(3.8) million | $(0.4) million |
| Cash at year-end | $1.1 million | $1.4 million |
| Total debt | $21.7 million | $14.5 million |
Sales increased 25%, principally from higher selling prices and a smaller increase in unit volume. Cost of sales fell to 63.1% of sales from 67.0%, as price increases helped offset material, labor and freight costs. SG&A rose to $74.5 million from $61.3 million, but declined to 32.2% of sales from 33.1%.
Reported net income includes a significant tax benefit: Virco reversed most of its deferred-tax-asset valuation allowance, reducing it by $10.5 million after returning to a three-year cumulative profit. The $8.5 million tax benefit means net income materially exceeds pre-tax income; investors should distinguish this accounting benefit from recurring operating performance.
Operating cash use reflected working-capital investment, particularly a $20.0 million increase in inventory. Inventory was $67.4 million at year-end, versus $47.4 million a year earlier. Year-end backlog rose to $58.6 million from $40.8 million; substantially all was expected to ship in FY2024.
Current assets were $89.1 million and current liabilities $48.5 million. The PNC revolving facility had $17.1 million outstanding and approximately $12.9 million available to borrow at year-end. Its interest rate was 9.25%, versus 5.00% a year earlier. The facility was extended to April 2027; Virco reported compliance with debt covenants at January 31, 2023. The facility is secured by substantially all borrower personal property and certain real property and includes seasonal borrowing limits and financial covenants.
Material changes and unusual items
- Virco returned to profitability as order rates, deliveries and margins recovered from FY2022 supply-chain disruption and labor shortages. Orders increased more than 13% in FY2023; sales orders in the fourth quarter rose 48% year over year.
- Commodity costs remained volatile but were less severe than in FY2022, when steel costs nearly tripled and plastic costs doubled. Ocean freight costs also moderated from their FY2022 peak.
- Pension expense declined to $0.8 million from $2.2 million, partly reflecting higher discount rates and actuarial changes. The pension plans remain underfunded by $9.4 million, compared with $14.2 million.
- The company incurred $2.0 million of interest expense, up from $1.2 million, amid higher borrowing and interest rates. FY2023 operating cash flow remained negative despite the return to reported profitability.
- The auditor issued an unqualified opinion on the financial statements. Inventory valuation and deferred-tax-asset realizability were identified as critical audit matters. Management reported effective internal control over financial reporting; the auditor was not engaged to provide an opinion on its effectiveness.
Outlook, risks and contingencies
Management expected continued uncertainty in FY2024, including possible commodity, freight, energy and labor-cost pressure and supply-chain disruption. Virco raised FY2024 list prices to recover costs, but noted that price competition could limit further increases or risk market share. Management planned capital spending of no more than $5 million in FY2024 and anticipated approximately $0.5 million of pension contributions. The filing does not provide a specific sales or earnings forecast.
- School furniture demand depends on public education budgets, tax receipts, school construction and replacement purchases. Budget pressure can reduce demand and intensify bid-based price competition.
- Approximately 64% of FY2023 sales were priced under one nationwide purchasing contract, down from 69% in FY2022. Virco was operating under an extension of the contract, with additional options at the purchasing organization’s discretion.
- Annual and longer-term pricing arrangements can constrain the ability to pass through cost increases on orders already received. More than 90% of freight is handled by third parties, creating exposure to freight rates and capacity constraints during the summer peak.
- Seasonal inventory and receivables require substantial borrowing. The credit agreement restricts certain borrowing, capital expenditures, dividends and other actions; covenant breaches could limit liquidity or trigger acceleration. Virco had previously breached covenants in FY2022, which were waived or amended.
- Environmental compliance, self-insured claims, product warranties and ordinary-course litigation are disclosed. Management did not expect legal proceedings or insurance claims to have a material adverse effect; no material off-balance-sheet arrangements were reported.
Investor verification priorities
- Check the sustainability of operating improvement separately from the $10.5 million valuation-allowance reversal and other pension-related accounting effects.
- Track whether the $58.6 million backlog ships as expected in FY2024, and whether orders convert to sales, cash collections and sustainable margins.
- Review inventory growth, receivables and seasonal borrowing needs against the available credit line, covenant requirements, interest costs and the required fourth-quarter clean-down.
- Monitor material, freight, labor and energy costs against announced price increases, particularly for orders priced before those increases.
- Confirm the status and terms of the nationwide purchasing contract extension and any subsequent renewal or option decisions.