Virco Mfg. Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended January 31, 2021; comparison is fiscal year ended January 31, 2020. This is an annual filing, not a standalone fourth-quarter report. The filing text does not provide clear standalone Q4 financial results.
Business context
Virco designs, manufactures and distributes furniture, principally for U.S. schools and other education customers. Sales are highly seasonal, with approximately 52% of FY2021 sales delivered in June through August. The COVID-19 pandemic disrupted school operations and materially reduced demand during the year.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $152.8 million | $193.0 million |
| Gross profit | $54.9 million; 35.9% margin | $71.7 million; 37.1% margin |
| Operating income | $0.7 million; 0.5% margin | $5.9 million; 3.1% margin |
| Pre-tax income (loss) | $(3.0) million | $2.7 million |
| Net income (loss) | $(2.2) million; $(0.14) diluted EPS | $2.4 million; $0.15 diluted EPS |
| Cash from operations | $7.8 million | $9.8 million |
Sales fell 20.8%, primarily from lower volume; approximately 5% list-price increases partly offset the decline. Gross margin decreased as lower production increased manufacturing overhead variances. SG&A declined $11.5 million to $54.2 million, but increased to 35.5% of sales from 34.1%. Interest expense declined by $0.9 million. Pension expense rose to $2.2 million from $0.7 million.
At January 31, 2021, cash was $0.4 million, working capital was $28.9 million (current assets of $51.0 million less current liabilities of $22.1 million), and total debt was $10.4 million versus $16.7 million a year earlier. Net cash used in investing was $2.1 million, mainly capital expenditures; financing activities used $6.4 million. Inventory was $38.3 million, down from $43.3 million. The company reported $21.9 million of borrowing availability under its seasonal PNC facility; the facility matures March 19, 2023, with a 5.0% interest rate at year-end.
Material changes and outlook
- COVID-19 school closures and remote learning reduced furniture demand; customer requests shifted toward individual desks and away from collaborative classroom furniture.
- Management expected continuing uncertainty in FY2022, including school funding and reopening, supply-chain disruptions, and higher steel, component, freight and energy costs. It raised FY2022 list prices to address anticipated cost inflation, while noting price competition could limit increases or threaten market share.
- Management anticipated demand for project business to be stable relative to pre-pandemic levels and possible increases in transactional orders as schools reopened, but stated the timing and scale of recovery were uncertain. No numerical sales or earnings guidance was provided.
- FY2022 capital expenditures were expected to be no more than $5 million. Pension contributions were expected to be approximately $428,000, subject to investment results and benefit payments.
- Backlog was $20.9 million at year-end, versus $20.7 million, and substantially all was expected to ship in FY2022.
Risks, contingencies and unusual items
- The company breached fixed-charge coverage covenants in July and October 2020. PNC waived the violations through amendments; the company reported compliance at January 31, 2021, including a permitted COVID-related addback. Continued covenant compliance and lender waivers are not assured.
- The business depends on seasonal borrowing to build inventory and finance receivables. Receivables are swept to repay the credit line, and substantially all relevant assets secure the facility; a default could restrict liquidity. The facility also requires a fourth-quarter borrowing clean-down.
- Approximately 67% of FY2021 sales were priced under one nationwide purchasing contract, currently extending through December 2022, with two optional two-year extensions. Loss of the contract or inability to pass through cost increases could materially affect results.
- Steel and other costs rose significantly after year-end, while freight availability and costs and domestic and China-linked supply chains remained risks. Fixed-price contracts may delay recovery of cost increases.
- Defined-benefit pension plans were frozen in 2003 but remain underfunded: reported plan obligations were $44.2 million and plan assets $24.0 million. A 1% lower discount rate was estimated to increase obligations by about $6.7 million and pension expense by about $0.8 million.
- The company recorded a $1.064 million valuation allowance against certain state deferred tax assets. Management identified cumulative losses and pandemic-related sales declines as negative evidence; realization depends on future taxable income.
- Legal proceedings were described as ordinary-course and not expected by management to be material. Environmental, self-insurance and product-warranty exposures remain; no material off-balance-sheet arrangements were reported.
- The independent auditor issued an unqualified opinion on the financial statements. Inventory valuation and deferred-tax-asset realizability were identified as critical audit matters. The auditor was not engaged to opine on internal control; management reported effective controls and no material weakness.
Investor verification priorities
- Check subsequent results for recovery in school orders, backlog conversion and the return of normal seasonal shipment patterns.
- Monitor gross margins and the effectiveness of FY2022 price increases against steel, freight, energy and component-cost inflation.
- Review PNC covenant compliance, seasonal borrowing availability, the clean-down requirement and the March 2023 facility maturity.
- Assess pension funding, discount-rate sensitivity and whether the state deferred-tax valuation allowance changes.
- Verify concentration and renewal status of the nationwide purchasing contract, which priced about 67% of FY2021 sales.