Virco Mfg. Corporation — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended October 31, 2022. Virco manufactures and distributes school and office furniture, with approximately half of annual sales typically shipped from June through August. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $77.4 | $57.3 | $192.3 | $144.7 |
| Gross profit | $30.8 | $20.3 | $72.3 | $50.3 |
| Gross margin | 39.8% | 35.4% | 37.6% | 34.8% |
| Operating income | $8.8 | $2.5 | $15.2 | $4.3 |
| Net income | $7.9 | $1.3 | $12.5 | $1.2 |
| Diluted EPS | $0.48 | $0.08 | $0.77 | $0.07 |
Q3 sales rose 35.0% year over year; nine-month sales rose 32.9%. SG&A increased in dollars, but declined as a share of sales: 28.4% versus 31.0% in Q3 and 29.7% versus 31.8% year to date. Nine-month interest expense increased to $1.7 million from $1.0 million, principally due to higher seasonal borrowings and interest rates. Effective tax rates were 3.9% for Q3 and 2.6% year to date, versus 18.2% and 22.2%, respectively, largely reflecting a valuation allowance on deferred tax assets.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1.5 million, compared with $0.8 million a year earlier, despite $12.5 million of net income. Receivables and inventory used $10.3 million and $10.1 million of cash, respectively.
- Capital expenditures were $2.6 million on a cash-flow basis. Cash increased to $2.2 million from $1.7 million at October 31, 2021.
- Total debt was $16.9 million, up from $13.1 million a year earlier; this included $12.2 million drawn on the revolving line. The revolver rate was 7.50%, and approximately $14.5 million was available to borrow at quarter-end.
- Inventory was $57.5 million, up $17.0 million year over year. Management attributed the increase mainly to higher quantities after prior-year supply constraints, with about 11% of the increase attributable to higher material and labor costs.
- Current assets were $89.5 million and current liabilities $43.2 million at October 31, 2022. Management said cash from operations and unused borrowing capacity should cover debt service, capital spending and working-capital needs for the next 12 months.
Material changes and management commentary
- Management attributed higher sales to a larger opening backlog, stronger first-quarter orders, January pricing increases and improved ability to meet the seasonal delivery cycle. The backlog at the start of the fiscal year was approximately $20 million above a typical level.
- Year-to-date orders increased 6.7%, but Q3 orders declined 15.9% year over year as ordering returned toward a more traditional seasonal pattern.
- Pricing and more stable input costs improved gross margin compared with the prior year, when material inflation, labor shortages and delayed shipments were more severe. Labor costs remain higher following factory wage increases; production was up 18% year to date, with the increase concentrated in the first six months.
- Management expected the July 2022 price increase to benefit Q4 results to the extent related orders shipped during that quarter. The filing does not provide numerical earnings or revenue guidance.
Risks, contingencies and unusual items
- Supply-chain disruption, raw-material and labor costs, COVID-related impacts, China lockdowns, energy and freight costs, and delays in school construction may affect production, demand or shipment timing. Management said supply constraints continued, although some freight and port conditions improved.
- The company breached a financial covenant at January 31, 2022. A lender amendment waived that breach, extended facility maturity to April 15, 2027, and modified borrowing limits and covenant testing. Virco reported covenant compliance at October 31, 2022, but noted that a breach or borrowing-base deterioration could restrict access to liquidity. The facility is secured by substantially all borrower personal property and certain real property.
- A valuation allowance of $8.9 million remained against federal deferred tax assets and certain state tax-loss carryforwards. Despite improved results, Virco reported cumulative operating losses over the preceding twelve quarters and said it would reassess the allowance quarterly.
- Q3 included a $0.2 million unrealized gain on an investment in a trust account; the nine-month period included an $0.1 million unrealized loss. Pension adjustments increased other comprehensive income by $3.8 million year to date. Management said a legal settlement involving intellectual-property rights effectively offset related legal expenses for the nine-month period.
- Management said ordinary-course legal matters were not expected to materially affect the company. No subsequent events were reported, and management reported effective disclosure controls with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Q4 shipments capture the expected benefit from the July price increase and whether order trends remain consistent with the seasonal pattern.
- Whether margins hold as labor, material, freight and energy costs evolve, and whether elevated inventory converts to sales and cash without material write-downs.
- Revolver availability, interest costs and covenant compliance under the amended credit agreement, especially through seasonal working-capital demands.
- Whether continued profitability supports a reduction in the deferred-tax-asset valuation allowance.
- The filing describes a permitted property sale-and-leaseback and proposed share repurchase under the credit amendment; verify any completion or use of proceeds in subsequent filings.