Virco Mfg. Corporation — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2021; comparisons are to the periods ended July 31, 2020 unless otherwise noted. Virco manufactures and distributes school and office furniture. Results are unaudited and its business is highly seasonal, with about half of annual sales typically occurring from June through August.
Financial performance
| Metric | Three months ended July 31, 2021 | Six months ended July 31, 2021 |
|---|---|---|
| Net sales | $59.0 million; down 0.7% | $87.4 million; up 13.1% |
| Gross profit / margin | $22.3 million / 37.8%, versus 39.0% | $30.0 million / 34.3%, versus 36.4% |
| Operating income | $6.1 million, versus $7.7 million | $1.8 million, versus $0.7 million |
| Net income (loss) | $3.8 million, versus $3.6 million | $(0.1) million, versus $(1.1) million |
| Diluted earnings (loss) per share | $0.24, versus $0.23 | $(0.01), versus $(0.07) |
Quarterly pretax income was $5.0 million, down from $6.7 million. Six-month pretax loss narrowed to $0.1 million from $1.3 million. Margin pressure reflected higher raw-material costs and factory disruption from constrained material supply; the beginning-of-year price increase partly offset these effects. SG&A increased in dollars in both comparisons, including higher freight and selling costs. Interest expense declined as average seasonal borrowings were lower.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $(8.6) million, compared with $(15.9) million; the outflow included a $24.7 million increase in receivables, partly offset by $16.6 million of increased accounts payable and accrued liabilities.
- Investing cash outflow was $0.9 million, including $1.0 million of capital expenditures. Financing provided $9.6 million; cash increased $0.2 million to $0.6 million.
- At July 31, 2021, cash was $0.6 million, receivables $34.4 million, and inventory $42.4 million. Inventory was $7.1 million below the prior-year level, while receivables were $1.7 million higher.
- Total debt was $20.3 million, versus $33.8 million at July 31, 2020; this included $14.9 million drawn on the revolving credit line. Approximately $41.2 million remained available to borrow under the PNC facility. The facility matures March 19, 2023; its stated maximum revolving advance amount is $65 million, subject to borrowing-base limits. The July 31, 2021 interest rate was 4.5%.
- Virco reported $43.7 million of current liabilities and $56.96 million of stockholders’ equity at July 31, 2021. Capital expenditures were $1.21 million on an accrual basis for the six months; the credit agreement caps them at $8 million.
Material changes, outlook and risks
- School reopening plans drove stronger orders: second-quarter orders increased 29.9%, and six-month orders increased 28.5%. Sales did not keep pace in Q2 because labor shortages and supply-chain disruptions constrained fulfillment. Backlog at July 31 was approximately $20 million above the prior year.
- Management expected a significant portion of the higher backlog to ship in Q3, with some deliveries in Q4, and anticipated a larger share of annual sales in September through November than in prior years. This is management commentary, not formal numerical guidance.
- To address labor shortages, Virco planned to pay factory and warehouse hourly employees double time for overtime during the peak delivery period. The company estimated this would add $1.5–$2.0 million of cost in Q2 and Q3, potentially partly offset by less temporary labor and greater efficiency from experienced staff. It also warned of possible expedited-shipping costs.
- COVID-related uncertainty, availability and cost of labor and materials (including steel, plastic and imported components), port delays, and volatile supply conditions remain significant risks. Severe February weather temporarily closed the Conway factory and increased utility and plastic costs.
- Virco had previously breached fixed-charge coverage covenants for the quarters ended July 31 and October 31, 2020, but obtained waivers and amendments. It was in compliance as of July 31, 2021. Management believed existing cash, projected operating cash flows and available credit would meet needs and support covenant compliance for the next 12 months; it cautioned that a covenant breach or reduced borrowing-base availability could restrict access to cash.
- A $220,000 pension settlement loss was recorded in the six-month period; a pension remeasurement gain contributed to $2.6 million of six-month other comprehensive income. Management said ordinary-course legal matters were not expected to have a material effect. No subsequent events were reported, and risk factors were described as not materially changed from the FY2021 Form 10-K.
Important facts for investors to verify
- Whether the higher backlog converted to shipments and cash collections as management expected, especially given labor and supply constraints.
- Whether higher input, freight, overtime and expediting costs continued to weigh on gross margins, and whether pricing sufficiently offset them.
- Current borrowing-base availability, debt balances, covenant headroom and compliance under the PNC agreement.
- Working-capital and operating-cash-flow trends, including collection timing and inventory replenishment.
- Potential changes in pension obligations, deferred-tax-asset realizability and the outcome of the IRS examination for FY2016.