Virco Mfg. Corporation — Q3 FY2022 Form 10-Q
Reporting period: Third quarter ended October 31, 2021; year-to-date covers the nine months ended October 31, 2021. Virco manufactures and distributes school and office furniture, with highly seasonal sales and typically about half of annual sales shipped June–August. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $57.331 | $57.221 | $144.720 | $134.494 |
| Gross profit | $20.299 | $22.275 | $50.306 | $50.382 |
| Gross margin | 35.4% | 38.9% | 34.8% | 37.5% |
| Operating income | $2.517 | $5.825 | $4.290 | $6.513 |
| Net income | $1.325 | $4.480 | $1.176 | $3.335 |
| Diluted EPS | $0.08 | $0.28 | $0.07 | $0.21 |
| Operating cash flow | Not presented by quarter | $0.820 | $12.652 |
Q3 sales were essentially flat year over year, while net income fell about 70%. Nine-month sales rose about 8%, but gross profit was nearly unchanged and net income declined about 65%. Management attributed margin pressure chiefly to higher raw-material costs and disruption-related factory inefficiencies; beginning-of-year price increases partly offset those pressures. SG&A increased year over year, including higher freight and selling costs. Nine-month interest expense declined to $0.979 million from $1.317 million.
Financial position and liquidity
At October 31, 2021, cash was $1.742 million, trade receivables $24.824 million, inventory $40.483 million, and current assets $69.056 million. Total debt was $13.051 million, including $7.866 million drawn on the revolving facility; total liabilities were $78.985 million. Revolver availability was approximately $13.741 million. Operating cash flow of $0.820 million was sharply below the prior-year $12.652 million, reflecting a $15.134 million increase in receivables, partly offset by higher payables and accrued liabilities. Capital expenditures were $2.280 million on the cash-flow statement; MD&A reports accrual-basis expenditures of $2.552 million.
The company breached its fixed-charge coverage covenant as of October 31. A December 7, 2021 amendment waived the breach for the four-quarter period ended October 31 and reset the minimum ratio to 1.00:1.00 for periods ending January 31 and April 30, 2022, returning to 1.10:1.00 thereafter. The credit agreement matures March 19, 2023. Management said cash, projected operating cash flows, and available credit should meet needs for the next 12 months, assuming no unanticipated supply-chain or COVID-related events.
Operations, outlook, and risks
Orders increased 59.2% in Q3 and 35.1% year to date; backlog reached $50.955 million at October 31, up from $17.249 million a year earlier. Shipments did not keep pace because of supply shortages and labor constraints. Management said steel costs had more than doubled during the year, and the company incurred an additional $1.5–$2.0 million of overtime costs in Q2 and Q3 after paying factory and warehouse hourly employees double time for overtime. Entry-level wages were raised to $15 per hour effective October 1, with additional wage adjustments afterward.
Management expected increased production and backlog shipments in Q4, and said Q4 sales could be double the prior-year period if supply-chain and COVID conditions did not worsen. It anticipated a larger share of annual sales in Q4 than usual. These are forward-looking expectations, not guarantees; demand, materials availability and cost, labor, freight, and school funding remain risks.
Unusual item: a $0.285 million pension settlement loss was recorded in nine-month pension expense, while a pension remeasurement gain contributed to other comprehensive income. Management reported no material impact expected from ordinary-course legal proceedings. Disclosure controls were concluded effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether production and shipments convert the unusually large backlog into revenue and cash, and whether the stated Q4 sales outlook is achieved.
- Progress on labor hiring and supply availability, and whether material, freight, and overtime costs continue to pressure margins.
- Compliance with amended lender covenants, borrowing-base availability, and liquidity through the March 2023 credit maturity.
- Receivables collection and working-capital cash needs as seasonal shipments and customer payments fluctuate.