Virco Mfg. Corporation — Q3 FY2021 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2020. Virco manufactures and sells school and office furniture; its sales are highly seasonal, with about half typically shipped in June–August. Results were significantly affected by COVID-19 disruption to schools and customers.
Financial performance
| Metric | Three months ended Oct. 31, 2020 | Year-over-year | Nine months ended Oct. 31, 2020 | Year-over-year |
|---|---|---|---|---|
| Net sales | $56.741 million | Down 15.3% | $133.625 million | Down 18.6% |
| Gross profit / margin | $22.275 million / 39.3% | Margin down from 40.1% | $50.382 million / 37.7% | Margin down from 39.4% |
| Operating income | $5.825 million | Down from $6.369 million | $6.513 million | Down from $12.951 million |
| Net income | $4.480 million; $0.28 diluted EPS | Up from $3.892 million; $0.25 EPS | $3.335 million; $0.21 diluted EPS | Down from $6.692 million; $0.43 EPS |
Q3 SG&A declined $4.025 million to $16.457 million, or 29.0% of sales versus 30.6%. Nine-month SG&A declined $7.838 million to $43.876 million, but rose as a share of sales to approximately 32.8% from 31.5%. Interest expense was $0.419 million for the quarter and $1.317 million for nine months, both below prior-year periods. Pension expense increased to $0.542 million for Q3 and $1.626 million for nine months.
Cash flow: Nine-month operating cash flow was $12.652 million, compared with $10.223 million a year earlier. Capital expenditures were $1.900 million versus $2.963 million. Cash increased $0.052 million to $1.202 million.
Balance sheet and liquidity: At October 31, cash was $1.202 million, receivables $16.877 million, inventory $36.872 million, and current assets $56.941 million. Total debt was $6.070 million, down from $16.696 million at January 31, 2020; the revolving balance was zero, and approximately $14 million was available to borrow. Operating lease liabilities totaled $21.407 million. Stockholders’ equity was $59.806 million.
Material changes and management commentary
- COVID-19 restrictions, remote schooling, limited customer access, and deferred or slower orders reduced sales. Year-to-date orders fell approximately 19.5%; Q3 orders declined 22.5% and backlog at October 31 was slightly below the prior year.
- Management attributed lower nine-month sales primarily to reduced unit volume, partly offset by a modest price increase. Reduced production rates and inventory lowered manufacturing efficiency and pressured gross margin; lower freight, service, and selling costs reduced SG&A.
- Inventory was $6.035 million below the prior-year level, helping reduce seasonal borrowing. Management also moderated capital spending and planned further expense controls to preserve cash. No numerical revenue or earnings guidance was provided.
- Arkansas facilities remained operational; Torrance operated at an estimated 50% of normal staffing. Management reported supply-chain challenges but no significant Q3 production disruption, and no employee layoffs or furloughs through October 31.
Debt covenant, risks, and contingencies
- Virco failed its fixed-charge coverage covenant for the four-quarter periods ended July 31 and October 31, 2020. PNC granted waivers and amendments. A December 11, 2020 amendment waived the October breach, permits up to $2 million of specified COVID-19 costs to be added back to adjusted EBITDA, and retains a 1.10:1.00 minimum ratio beginning with the period ending January 31, 2021. The amendment required a $40,000 fee.
- Management said its forecasts, cost controls, available cash, operating cash flow, and credit availability were expected to support covenant compliance and liquidity for the next 12 months. It also disclosed that covenant breaches or reduced borrowing-base availability could restrict access to cash under the credit agreement.
- Management expects COVID-19 and related economic uncertainty to continue affecting demand, including school budgets. Other cited risks include funding for educational institutions, materials and labor costs, competition, selling prices, and general economic conditions.
- Routine legal proceedings were not considered material by management. The filing reports no off-balance-sheet arrangements and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether post-quarter orders, backlog, school reopening patterns, and public education funding support a recovery in sales.
- Actual compliance with the amended fixed-charge coverage covenant, including treatment of eligible COVID-19 costs and borrowing-base availability.
- Whether cash flow and cost controls can sustain liquidity and planned capital spending without renewed seasonal borrowing pressure.
- Whether reduced production volumes, inventory levels, and manufacturing overhead continue to weigh on gross margins.
- The effects of pension obligations, including the increase in accrued pension expenses to $21.445 million from $13.426 million a year earlier.