Virco Mfg. Corporation — Q1 FY2022 Form 10-Q
Reporting period: Three months ended April 30, 2021. Virco manufactures and sells school and office furniture, primarily to educational and government customers. The quarter is seasonally slow; the company typically ships about half of annual sales from June through August.
Financial results
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $28.367 million | $17.817 million |
| Gross profit / gross margin | $7.688 million / 27.1% | $4.904 million / 27.5% |
| Operating loss | $(4.295) million | $(7.027) million |
| Net loss | $(3.909) million | $(4.698) million |
| Net loss per share, diluted | $(0.25) | $(0.30) |
| Net cash used in operations | $(6.958) million | $(9.887) million |
SG&A was $11.983 million, up less than 1% year over year, but fell to 42.2% of sales from 67.0%. Interest expense declined to $293,000 from $404,000. The effective tax benefit rate was 23.3%, versus 41.1% in the prior-year quarter.
Cash was $556,000 at April 30, 2021. Total debt was $17.785 million, including $12.157 million outstanding on the revolving credit line; total debt was $10.440 million at January 31, 2021 and $26.248 million a year earlier. Approximately $22.121 million was available to borrow under the PNC facility at quarter-end. Current assets were $59.988 million and current liabilities were $29.642 million. Operating cash use reflected seasonal working-capital investment, including increases in receivables and inventory during the quarter.
Changes and operating developments
- Sales volume increased 59.2% and orders increased 26.7% versus the prior-year quarter; backlog at April 30 was about $2.1 million higher year over year.
- Gross margin edged down from 27.5%. Price increases, product mix and a higher share of full-service deliveries helped, but commodity inflation, lower production levels and severe-weather-related factory disruption offset those gains.
- Receivables were $14.334 million, up from $7.564 million a year earlier; management attributed the increase to higher sales and timing. Inventory was $42.875 million, down from $58.190 million a year earlier, reflecting cautious stocking and increased sales.
- Capital expenditures were $233,000 on the cash flow statement; MD&A reports accrual-basis capital expenditures of $428,000, compared with $922,000 in the prior-year period.
Outlook, risks and contingencies
Management said orders remained strong through May 2021, but it could not predict whether full-time classroom reopening would restore traditional seasonal demand patterns. The company anticipated $1.5 million of additional overtime costs in Q2 and Q3 to address labor shortages, with possible offsets from improved efficiency and reduced temporary labor. Lower inventory could also require expedited shipping to meet orders.
Supply-chain risks include higher and volatile steel and other material costs, delays and costs for components imported from China, and labor availability. COVID-19 effects and the duration of related economic disruption remain uncertain. Management expects cash, operating cash flows and available credit to meet needs over the next 12 months and said it expects covenant compliance based on forecasts and permitted COVID-related add-backs.
The company had previously breached its fixed-charge coverage covenant in the quarters ended July 31 and October 31, 2020, and obtained lender waivers and amendments. The amended agreement permits up to $2 million of specified COVID-related costs to be added back through April 30, 2021; the company reported compliance at April 30, 2021. The facility matures March 19, 2023 and is secured by substantially all personal property and certain real estate. Management stated that a covenant breach or borrowing-base deterioration could restrict access to cash liquidity. Ordinary-course legal proceedings were not expected by management to have a material effect; no material change to previously disclosed risk factors was reported.
Investor facts to verify
- Whether the stronger order and shipment trends continued into the summer peak season and converted into sales and collections.
- Whether material, freight, utility and labor-cost pressures—including planned overtime costs—affected margins as expected.
- Whether seasonal working-capital needs remained within the borrowing base and the company maintained covenant compliance and adequate liquidity.
- Whether the reduced inventory position required significant expediting or constrained delivery performance.