Virco Mfg. Corporation — Q1 FY2023 Form 10-Q
Reporting period: The unaudited quarter ended April 30, 2022, compared with the three months ended April 30, 2021. Virco manufactures and distributes school and office furniture. Results are highly seasonal: the company typically ships about half of annual sales in June through August.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $32.084 | $28.367 |
| Gross profit / gross margin | $9.707 / 30.3% | $7.688 / 27.1% |
| Operating loss | $(4.744) | $(4.295) |
| Loss before income taxes | $(5.366) | $(5.094) |
| Income tax benefit | $0.282 | $1.185 |
| Net loss / diluted loss per share | $(5.084) / $(0.32) | $(3.909) / $(0.25) |
| Cash used in operating activities | $(18.966) | $(6.958) |
- SG&A was $14.451 million, up $2.468 million year over year. Interest expense rose $0.134 million to $0.427 million.
- At April 30, cash was $0.539 million; inventory was $66.297 million; and total current assets and current liabilities were $82.538 million and $54.215 million, respectively.
- Total debt was $33.469 million, including $28.674 million drawn on the revolving line. About $11.699 million remained available to borrow; the reported revolving rate was 5.25%. Operating lease liabilities totaled $15.066 million.
- Capital expenditures were $0.609 million on the cash flow statement; MD&A reports accrual-basis capital expenditures of $0.627 million.
Changes and business drivers
- Sales increased about 13% and gross margin improved 3.2 percentage points, but the net loss widened. Higher production—up nearly 45% year over year—improved overhead absorption and helped offset higher material and labor costs.
- Raw-material costs remained elevated; materials increased by more than 5% of sales, according to management. January 2022 price increases had not fully flowed through because much of the opening backlog was booked at older prices.
- Orders increased 27.9% year over year, primarily for summer delivery. Backlog of unshipped orders reached $85.7 million versus $49.7 million a year earlier.
- Inventory increased $23.422 million year over year: management attributed approximately 40% to higher material and labor costs and 60% to increased quantities. The seasonal inventory build contributed to operating cash use and was financed with additional revolver borrowing and vendor credit.
Liquidity, outlook and risks
- Virco breached its fixed-charge-coverage covenant at January 31, 2022. An April 15, 2022 credit amendment waived that breach, extended the facility maturity to April 15, 2027, and temporarily substituted a year-to-date adjusted EBITDA covenant for fixed-charge-coverage testing in Q1 and Q2 FY2023. The company reported covenant compliance at April 30, 2022.
- The amendment raised borrowing limits in specified periods, permitted a sale-leaseback of the Amity Road property with net proceeds intended for a proposed share repurchase, and required $325,000 in extension and amendment fees. The filing does not report that the sale-leaseback or repurchase occurred.
- Management believes operating cash flow and unused PNC borrowing capacity will cover debt service, capital expenditures and working capital needs for the next 12 months. It expects to maintain covenant compliance, but notes uncertainty around raw-material costs and supply-chain conditions.
- Management expects continued effects from COVID-19 and supply-chain disruption. Risks include material and labor availability and costs, Chinese lockdowns and shipping, energy and freight inflation linked to the war in Ukraine, and possible school-construction delays that could shift deliveries between quarters. Management said freight costs could be more impactful during the summer season.
- Management negotiated the ability to raise prices on orders received after July 1, in addition to January 1 price increases. No quantified full-year revenue or earnings guidance is provided.
- A valuation allowance against most deferred tax assets continued; the federal and certain state allowance was $10.099 million at April 30, 2022. The lower effective tax benefit in the quarter contributed to the year-over-year change in net loss.
Other notable items
- SG&A included increased freight and service, selling and legal expenses. Legal spending included intellectual-property enforcement against a competitor and advice to a board special committee. The committee, formed to review an unsolicited acquisition proposal, was terminated in May 2022 after the proposal was rejected as inadequate and not in shareholders’ best interests.
- Management stated that ordinary-course legal proceedings are not expected to materially affect the company. The company was under IRS examination for its fiscal year ended January 31, 2016.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether summer shipments convert the elevated order backlog into sales and cash collections, including any construction-related delivery delays.
- Whether price increases offset continuing materials, labor, freight and energy costs, and whether production levels can be sustained.
- Seasonal borrowing needs, remaining borrowing-base availability, and continued compliance with the amended credit covenants.
- Progress and terms, if any, of the proposed Amity Road sale-leaseback and share repurchase; neither is reported as completed.
- Future realization of deferred tax assets and any changes to the valuation allowance.