Registrant’s Telephone Number, Including Area Code: (i310) i533-0474
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol
Name of each exchange on which registered
iCommon Stock, $0.01 par value per share
iVIRC
iThe
Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYesý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
☐
Accelerated filer
☐
iNon-accelerated
filer
ý
Smaller reporting company
i☒
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ý
The
number of shares outstanding for each of the registrant’s classes of common stock, as of the latest practicable date:
Common Stock, $.01 par value — i16,210,985 shares as of June 4, 2023.
See
accompanying notes to unaudited condensed consolidated financial statements.
3
Virco Mfg. Corporation
Unaudited Condensed Consolidated Balance Sheets
4/30/2023
1/31/2023
4/30/2022
(In
thousands, except share and par value data)
Liabilities
Current liabilities
Accounts payable
$
i23,628
$
i19,448
$
i19,437
Accrued
compensation and employee benefits
i9,416
i9,554
i5,055
Current
portion of long-term debt
i20,362
i7,360
i18,905
Current
portion operating lease liability
ii5,271/
i5,082
i4,769
Other
accrued liabilities
i7,868
i7,081
i6,049
Total
current liabilities
i66,545
i48,525
i54,215
Non-current
liabilities
Accrued self-insurance retention
i1,251
i1,050
i1,533
Accrued
pension expenses
i10,802
i10,676
i15,332
Income
tax payable
i85
i79
i76
Long-term
debt, less current portion
i14,323
i14,384
i14,564
Operating
lease liability, less current portion
i5,648
i6,796
i10,297
Other
long-term liabilities
i557
i555
i640
Total
non-current liabilities
i32,666
i33,540
i42,442
Commitments
and contingencies (Notes 6, 7 and 13)
i
i
i
Stockholders’
equity
Preferred stock:
Authorized iii3,000,000//
shares, $iii0.01//
par value; iiiiiinone/////
issued or outstanding
i—
i—
i—
Common
stock:
Authorized iii25,000,000//
shares, $iii0.01//
par value; issued and outstanding iiii16,210,985///
shares at 4/30/2023 and 1/31/2023, and ii16,102,023/
at 4/30/2022
i162
i162
i161
Additional
paid-in capital
i120,993
i120,890
i120,745
Accumulated
deficit
(i52,073)
(i50,631)
(i72,262)
Accumulated
other comprehensive loss
(i2,360)
(i2,360)
(i5,894)
Total
stockholders’ equity
i66,722
i68,061
i42,750
Total
liabilities and stockholders’ equity
$
i165,933
$
i150,126
$
i139,407
See
accompanying notes to unaudited condensed consolidated financial statements.
4
Virco Mfg. Corporation
Unaudited Condensed Consolidated Statements of Operations
Three
months ended
4/30/2023
4/30/2022
(In thousands, except per share data)
Net sales
$
i34,943
$
i32,084
Costs
of goods sold
i21,741
i22,377
Gross
profit
i13,202
i9,707
Selling,
general and administrative expenses
i14,514
i14,451
Operating
loss
(i1,312)
(i4,744)
Unrealized
gain on investment in trust account
(i299)
i—
Pension
expense
i161
i195
Interest
expense
i712
i427
Loss before income taxes
(i1,886)
(i5,366)
Income
tax benefit
(i444)
(i282)
Net
loss
$
(i1,442)
$
(i5,084)
Net
loss per common share:
Basic
$
(i0.09)
$
(i0.32)
Diluted
$
(i0.09)
$
(i0.32)
Weighted
average shares of common stock outstanding:
Basic
ii16,211/
i16,033
Diluted
i16,211
i16,033
See
accompanying notes to unaudited condensed consolidated financial statements.
5
Virco
Mfg. Corporation
Unaudited Condensed Consolidated Statements of Comprehensive Loss
Three months ended
4/30/2023
4/30/2022
(In thousands)
Net
loss
$
(i1,442)
$
(i5,084)
Other
comprehensive income:
Pension adjustments (net of tax expense of $i0 and $i0
at April 30, 2023 and 2022, respectively)
i—
i135
Net
comprehensive loss
$
(i1,442)
$
(i4,949)
See
accompanying notes to unaudited condensed consolidated financial statements.
6
Virco Mfg. Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
Three
months ended
4/30/2023
4/30/2022
(In thousands)
Operating activities
Net loss
$
(i1,442)
$
(i5,084)
Adjustments
to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
i1,195
i1,129
Non-cash
lease benefits
(i165)
(i126)
Provision for doubtful
accounts
i15
i15
Amortization
of debt issuance costs
i26
i43
Deferred
income taxes
(i448)
(i370)
Stock-based
compensation
i103
i253
Amortization
of net actuarial loss for pension plans
i—
i135
Non-cash
unrealized gain on investment
(i299)
i—
Changes
in operating assets and liabilities:
Trade accounts receivable
i2,896
i4,428
Other
receivables
i33
i33
Inventories
(i18,234)
(i18,924)
Income
taxes
(i296)
i22
Prepaid
expenses and other current assets
(i490)
(i180)
Accounts
payable and accrued liabilities
i5,391
(i340)
Net
cash used in operating activities
(i11,715)
(i18,966)
Investing
activities:
Capital expenditures
(i1,533)
(i609)
Net
cash used in investing activities
(i1,533)
(i609)
Financing
activities:
Borrowing from long-term debt
i15,241
i19,759
Repayment
of long-term debt
(i2,300)
(i804)
Payment
on deferred financing costs
(i125)
(i200)
Net
cash provided by financing activities
i12,816
i18,755
Net
decrease in cash
(i432)
(i820)
Cash
at beginning of period
i1,057
i1,359
Cash
at end of period
$
i625
$
i539
See
accompanying notes to unaudited condensed consolidated financial statements.
7
Virco Mfg. Corporation
Unaudited Consolidated Statements of Changes in Stockholders' Equity
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31,
2023 (“Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended April 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2024. The balance sheet at January 31, 2023 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All references to the “Company” refer to Virco Mfg. Corporation and its subsidiaries.
Note
2. iSeasonality and Management Use of Estimates
The market for educational furniture is marked by extreme seasonality, with approximately i50% of the
Company’s total sales typically occurring from June to August each year, the Company’s peak season. Hence, the Company typically builds and carries significant amounts of inventory during and in anticipation of this peak summer season to facilitate the rapid delivery requirements of customers in the educational market. This requires a large up-front investment in inventory, labor, storage and related costs as inventory is built in anticipation of peak sales during the summer months. As the capital required for this build-up generally exceeds cash available from operations, the Company has generally relied on third-party bank financing to meet cash flow requirements during the build-up period immediately preceding
the peak season. In addition, the Company typically is faced with an overall higher accounts receivable balance during the peak season. This occurs for two primary reasons. First, accounts receivable balances typically increase during the peak season as shipments of products increase. Second, many customers during this period are educational institutions and government entities, which tend to pay accounts receivable slower than commercial customers. Historically Virco ships approximately i50% of its annual revenue in the months of
June, July, and August. In fiscal 2022, the seasonal peak was distorted due to severe supply chain interruptions, labor shortages, and COVID-19 related employee absences and the Company delivered less than i40% of sales during June, July, and August. In fiscal year ended January 31, 2023, the Company started to return to the traditional seasonality and delivered approximately i47%
of annual sales in June, July, and August.
The Company’s working capital requirements during and in anticipation of the peak summer season require management to make estimates and judgments that affect assets, liabilities, revenues and expenses, and related contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to market demand, labor costs and stocking inventory. Significant estimates made by management include, but are not limited to, valuation of inventory; deferred tax assets and liabilities; useful lives of property, plant and equipment; liabilities under pension, warranty and self-insurance; and the accounts receivable allowance for doubtful accounts.
Note
3. Recently Issued Accounting Standards
iThe Company evaluates all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board ("FASB") for consideration of their applicability to our condensed consolidated financial statements. We have assessed all ASUs issued but not yet adopted and concluded that those not disclosed are not relevant tothe Company or are not expected to have a material impact.
Note 4. iRevenue Recognition
The Company manufactures, markets and distributes
a wide variety of school and office furniture to wholesalers, distributors, educational institutions and governmental entities. Revenue is recorded for promised goods or services when control is transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
9
The Company's sales generally involve a single performance obligation to deliver goods pursuant to customer purchase orders. Prices for our products are based on published price lists and customer agreements. The Company has determined that
the performance obligations are satisfied at a point in time when the Company completes delivery per the customer contract. The majority of sales are free on board ("FOB") destination where the destination is specified per the customer contract and may include delivering the furniture into the classroom, school site or warehouse. Sales of furniture that are sold FOB factory are typically made to resellers of our product who in turn provide logistics to the ultimate customer. Once a product has been delivered per the shipping terms, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from the asset. The
Company considers control to have transferred upon shipment or delivery in accordance with shipping terms because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. The Company offers sales incentives and discounts through various regional and national programs to our customers. These programs include product rebates, product returns allowances and trade
promotions. Variable consideration for these programs is estimated in the transaction price at contract inception based on current sales levels and historical experience using the expected value method, subject to constraint.
The Company generates revenue primarily by manufacturing and distributing products through resellers and direct-to-customers. Control transfers to both resellers and direct customers at a point in time when the delivery process is complete as determined by the corresponding shipping terms. Therefore, we do not consider them to be meaningfully different revenue streams given similarities in the nature of the products, performance obligation and distribution processes. Sales are predominately in the United States
and to a similar class of customer. We do not manage or evaluate the business based on product line or any other discernable category.
Note 5. iInventories
Inventory is valued at the lower of cost or net realizable value (determined on a first-in, first-out basis) and includes material, labor, and factory overhead. The
Company records valuation adjustments for the excess cost of the inventory over its estimated net realizable value. Valuation adjustments for slow-moving and obsolete inventory are calculated using an estimated percentage applied to inventories based on a physical inspection of the product in connection with a physical inventory, a review of slow-moving products and component stage, inventory category, historical and forecasted consumption of sales, and consideration of active marketing programs. The market for education furniture is traditionally driven by value, not style, and the Company has not typically incurred material obsolescence expenses. If market conditions are less favorable than those anticipated by management, additional valuation adjustments may be required. The Company records
the cost of excess capacity as a period expense, not as a component of capitalized inventory valuation.
Inventory increased by $i19,343,000 at April 30, 2023 compared to April 30, 2022. The entire increase in inventory was attributable to increased quantity. The cost and valuation of inventory was stable. The quantity of inventory was increased in response to a material increase in unshipped sales orders (backlog). The majority
of the backlog is scheduled for delivery during the traditional seasonal peak from June through August. The increase in inventory was financed by increased borrowing under the Company’s line of credit with PNC Bank and increased vendor credit, which traditionally increases with increased purchases of materials.
The Company has operating leases on real property, equipment, and automobiles, expiring at various dates through 2026. The Company determines if an arrangement is a lease at inception
and assesses classification of the lease at commencement. All of the Company’s leases are classified as operating leases. Pursuant to ASC 842 - Leases, the Company uses the implicit rate when readily determinable, or the incremental borrowing rate. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments using Company specific credit spreads. The Company’s lease terms include options to extend or terminate the lease only when it is reasonably certain that we will exercise that option. Lease expense for our operating leases is recognized on a straight-line basis over the lease term.
The
Company has an operating lease for its corporate office, manufacturing and distribution facility located in Torrance, CA, currently with a remaining lease term through April 2025. The Company's lease terms include options to extend or terminate the lease only when it is reasonably certain that we exercise that option. The Company leases equipment under a 5-year operating lease arrangement. The Company has the option of buying the assets at the end of the lease period at a price that does not result in the Company being reasonably certain of exercising the option. In addition, the
Company leases trucks and automobiles under operating leases that include certain fleet management and maintenance services. Certain of the leases contain renewal or purchase options and require payment for property taxes and insurance. The Company records lease expense on a straight-line basis based on the contractual lease payments. In accordance with ASC 842, the Company recognizes the present value of the future lease commitments as an operating lease liability, and a corresponding right-of-use asset (“ROU asset”), net of tenant allowances. Tenant improvements and related tenant allowances are recorded as a reduction to the ROU asset. The Company elected to account for leases with an original term of
12 months or less that do not contain a purchase option as short-term leases. Additionally, certain of the leases provide for variable payment for property taxes, insurance, and common area maintenance payments among others. The Company recognizes variable lease expenses for these leases in the period incurred. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
i
The
quantitative information regarding our leases is as follows:
Three Months Ended
4/30/2023
4/30/2022
(in
thousands, except lease term and discount rate)
Operating lease cost
$
i1,269
$
i1,327
Short-term
lease cost
i108
i97
Sublease
income
(i10)
(i10)
Variable
lease cost
i261
i253
Total
lease cost
$
i1,628
$
i1,667
Other
operating leases information:
Cash paid for amounts included in the measurement of lease liabilities
$
i1,433
$
i1,454
Right-of-use
assets obtained in exchange for new lease liabilities
$
i292
$
i98
Weighted-average
remaining lease term (years)
i2.2
i2.9
Weighted-average
discount rate
i6.33
%
i6.38
%
/
iMinimum
future lease payments for operating leases in effect as of April 30, 2023, are as follows:
11
Operating Lease
For the year ending January 31,
(in thousands)
Remaining of 2024
$
i4,344
2025
i5,794
2026
i1,536
2027
i2
2028
i—
Thereafter
i—
Remaining
balance of lease payments
$
i11,676
Short-term lease liabilities
$
ii5,271/
Long-term
lease liabilities
i5,648
Total lease liabilities
$
i10,919
Difference
between undiscounted cash flows and discounted cash flows
$
i757
Note 7. iDebt
i
Outstanding
balances for the Company’s long-term debt were as follows:
4/30/2023
1/31/2023
4/30/2022
(in thousands)
Revolving
credit line
$
i30,121
$
i17,122
$
i28,674
Other
i4,564
i4,622
i4,795
Total
debt
i34,685
i21,744
i33,469
Less
current portion
i20,362
i7,360
i18,905
Non-current
portion
$
i14,323
$
i14,384
$
i14,564
/
The
Company and Virco Inc., its wholly-owned subsidiary (the “Borrowers”) have a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”). The Credit Agreement was amended numerous times since its origination in December 2011. On September 28, 2021, the Borrowers entered into an Amended and Restated Revolving Credit and Security Agreement (the “Restated Credit Agreement”) with PNC Bank, which amended and restated the prior Credit Agreement and effectively incorporated all of the prior amendments into an amended and restated form of agreement.
The Restated Credit Agreement permits the Company to issue dividends or make payments with respect to the
Company’s capital stock in an aggregate amount up to $i3.0 million during any fiscal year, provided that no default shall have occurred or is continuing or would result from any such payment, and the Company must demonstrate pro forma compliance with a 12-month trailing fixed charge coverage ratio of not less than i1.20:1.00
as of the fiscal quarter immediately preceding the date of any such dividend or payment. The Restated Credit Agreement also requires the Company to maintain a minimum fixed charge coverage ratio, and contains numerous other covenants that limit under certain circumstances the ability of the Borrowers and their subsidiaries to, among other things, merge with or acquire other entities, incur new liens, incur additional indebtedness, sell assets outside of the ordinary course of business, enter into transactions with affiliates, or substantially change the general nature of the business of the Borrowers. In connection with the Restated Credit Agreement, the Company also agreed to pay to PNC Bank a non-refundable
fee of $i50,000.
In addition to the financial covenants, the Restated Credit Agreement provides for customary events of default, subject to certain cure periods and other limitations. Substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Restated Credit Agreement upon receipt by the Borrowers. Due to this automatic liquidating nature of the Restated Credit Agreement, if the Borrowers breach any covenant, violate any representation
12
or
warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing base calculation, the Borrowers may not have access to cash liquidity unless provided by PNC at its discretion.
The other material terms of the Restated Credit Agreement are substantially the same as those of the original Credit Agreement, consisting of (i) a revolving line of credit with a Maximum Revolving Advance Amount of $i65.0 million that is subject to a borrowing base limitation and generally provides for advances
of up to i85% of eligible accounts receivable, plus a percentage equal to the lesser of i60% of the value of eligible inventory or i85%
of the liquidation value of eligible inventory, plus $i15.0 million from January through July of each year, minus undrawn amounts of letters of credit and reserves and (ii) an equipment loan of $i2.0 million. The
Restated Credit Agreement is secured by substantially all of the Borrowers’ personal property and certain of the Borrowers’ real property. The Restated Credit Agreement is subject to certain prepayment penalties upon early termination of the Restated Credit Agreement. Prior to the maturity date, principal amounts outstanding under the Restated Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions, including reduced borrowings under the revolving line to less than or equal $i10.0
million for a period of i30 consecutive days during the fourth quarter of each fiscal year. The Restated Credit Agreement also contains certain financial covenants, including covenants requiring a minimum fixed charge coverage ratio and limits on capital expenditures. The Company was in compliance with its debt covenants as of April 30, 2023.
The
Company's revolving line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season. Approximately $i16.6 million was available for borrowing as of April 30, 2023. The interest rate range for outstanding loan balances during the quarter ended April 30, 2023 was i7.65%
to i9.75%. The Company also incurs a fee on the unused portion of the revolving line of credit at a rate of i0.375%.
In addition to the outstanding debt balance of $i30.1 million on the Company's revolving credit line, the Company also carries a mortgage on a manufacturing building in Conway Arkansas. The original note was dated August 2017 for $i5.8 million,
at a fixed rate of i4% per year and i20 years term. The outstanding amount under this note was $i4.6
million as of April 30, 2023.
On May 19, 2023, the Company entered into Amendment No. 3 to Amended and Restated Revolving Credit and Security Agreement (“Amendment No. 3”) with PNC, with an effective date of May 5, 2023. Amendment No. 3 amended the Restated Credit Agreement and the secured revolving line of credit provided to the Company under the revolving credit facility to reflect the following material changes:
i.Maximum size of the PNC line of credit has been increased to $i72.5 million
during the months of June through August of 2023, to provide additional availability for the Company’s forecast through the 2023 peak borrowing period;
ii.Increase in the total inventory sublimit under the Credit Agreement to $i35.0 million and increase in the Assemble-to-ship (ATS) inventory sublimit to $i15.0 million
during the months of May through August of 2023;
iii.The Company agreed to pay an amendment fee of $i50,000, which is i0.67%
on the incremental line increase of $i7.5 million; and
iv.Increase in the Applicable Margin (as defined in the Credit Agreement) of i25
basis points.
Management believes that the carrying value of debt approximated fair value at April 30, 2023, as all of the long-term debt bears interest at variable rates based on prevailing market conditions.
Note 8. iIncome Taxes
In assessing the realizability
of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. As a part of this evaluation, the Company assesses all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, the availability of tax carry backs, tax-planning strategies, and results of recent operations, to determine whether sufficient future taxable income will be generated to realize existing deferred tax assets. Valuation allowances of
$i575,000, $i864,000 and $i10,099,000
as of April 30, 2023, January 31, 2023 and April 30, 2022, respectively, are needed for federal deferred tax assets and certain state net operating loss carryforwards to reduce the carrying amount of deferred tax assets to an amount that is more likely than not to be realized.
For the three months ended April 30, 2023 and 2022, the effective income tax rates were i23.5%
and i5.3%, respectively. The change in effective tax rates for the three months ended April 30, 2023 was primarily due to the change in forecasted mix of income before federal and state income taxes and estimated permanent differences. The effective tax rate for the three months
13
ended April 30,
2022 was primarily due to the recording of a valuation allowance needed for federal deferred tax assets and certain state net operating loss carryforwards.
The January 31, 2018 and subsequent fiscal years remain open for examination by the IRS and state tax authorities. The Company is not currently under any state examination.
Note 9. iNet
Loss per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding. The following table sets forth the computation of basic net loss per share:
i
Three
Months Ended
4/30/2023
4/30/2022
(In thousands, except per share data)
Net loss
$
(i1,442)
$
(i5,084)
Weighted
average shares of common stock outstanding
ii16,211/
i16,033
Dilutive
effect of common stock equivalents from equity incentive plans (a)
i—
i—
Totals
i16,211
i16,033
Net
loss per share - basic
$
(i0.09)
$
(i0.32)
Net
loss per share - diluted
$
(i0.09)
$
(i0.32)
(a) At
April 30, 2023 and 2022, approximately i85,000 and i169,000
shares of common stock equivalents were excluded from the computation of diluted net loss per share, as the effect would be anti-dilutive since the Company reported a net loss.
/
Note 10. iStock-Based
Compensation
Stock Incentive Plan
The Company's two stock incentive plans are the 2019 Omnibus Equity Incentive Plan (the “2019 Plan”) and the 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan expired in 2021 and no new award may be made under the 2011 Plan.
Under the 2019 Plan, the Company may grant an aggregate of up to i1,000,000
shares to its employees in the form of restricted stock units and non-employee directors in the form of restricted stock awards. Restricted stock units and awards granted under the 2019 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its restricted stock units or awards and related compensation expense as the difference between the market value of the units or awards on the date of grant less the exercise price of the units or awards granted. During the three-month period ended April 30, 2023, the Company granted i0
awards, vested i0 shares according to their terms and forfeited i0
shares under the 2019 Plan. As of April 30, 2023, there were approximately i608,435 shares available for future issuance under the 2019 Plan.
i
The
following table summarizes the stock-based compensation expense related to restricted stock awards recognized in the Company's statement of operations for the three months ended April 30, 2023 and 2022:
Three Months Ended
4/30/2023
4/30/2022
(in
thousands)
Cost of goods sold
$
i28
$
i55
Selling,
general and administrative expenses
i75
i198
Total
stock-based compensation expense
$
i103
$
i253
/
14
As
of April 30, 2023, there was $i446,000 of unrecognized compensation expense related to unvested restricted stock units and/or awards, which is expected to be recognized over a weighted average period of approximately i1
year.
Note 11. iRetirement Plans
The Company and its subsidiaries cover certain employees under a noncontributory defined benefit retirement plan, entitled
the Virco Employees’ Retirement Plan (the “Pension Plan”). As more fully described in the Annual Report on Form 10-K, benefit accruals under the Employees Retirement Plan were frozen effective December 31, 2003. There is no service cost incurred under this plan.
The Company also provides a supplementary retirement plan for certain key employees, the VIP Retirement Plan (the “VIP Plan”). As more fully described in the Annual Report on Form 10-K for the year ended January 31, 2023, benefit accruals under the VIP Plan were frozen since December 31, 2003. There is no service cost incurred under the VIP Plan.
The following table summarizes tihe
net periodic pension cost for the Pension Plan and the VIP Plan for the three months ended April 30, 2023 and 2022:
Three Months Ended
4/30/2023
4/30/2022
(in
thousands)
Service cost
$
i—
$
i—
Interest
cost
i360
i298
Expected
return on plan assets
(i199)
(i237)
Plan
settlement
i—
i—
Amortization
of prior service cost
i—
i—
Recognized
net actuarial loss
i—
i134
Benefit
cost
$
i161
$
i195
401(k)
Retirement Plan
The Company’s retirement plan, which covers all U.S. employees, allows participants to defer from i1% to i75%
of their eligible compensation through a 401(k)-retirement program. The plan includes Virco stock as one of the investment options. At April 30, 2023 and 2022, the plan held i1,320,482 shares and i1,165,985
shares of Virco stock, respectively. For the three months ended April 30, 2023 and 2022, the compensation costs incurred for employer match, which is paid in the form of Company stock, was $i403,000 and $i330,000
respectively.
Note 12. iWarranty Accrual
The Company provides a warranty against all substantial defects in material and workmanship. The standard warranty offered on products sold through January 31, 2013 is iten
years. Effective February 1, 2014the Company modified its warranty to a limited lifetime warranty. The warranty effective February 1, 2014, is not anticipated to have a significant effect on warranty expense. Effective January 1, 2017, the Company modified the standard warranty offered on products sold after January 1, 2017 to provide specific warranty periods by product component, with no warranty period longer than iten
years. The Company’s warranty is not a guarantee of service life, which depends upon events outside the Company’s control and may be different from the warranty period. The Company accrues an estimate of its exposure to warranty claims based upon both product sales data and an analysis of actual warranty claims incurred.
i
The
following is a summary of the Company’s warranty-claim activity for the three months ended April 30, 2023 and 2022:
Three Months Ended
4/30/2023
4/30/2022
(in
thousands)
Beginning balance
$
i600
$
i600
Provision
i41
i34
Costs
incurred
(i41)
(i34)
Ending
balance
$
i600
$
i600
/
15
Note
13. iContingencies
The Company has a self-insured retention for product losses up to $i250,000
per occurrence, workers’ compensation liability losses up to $i250,000 per occurrence, general liability losses up to $i50,000 per occurrence and automobile liability losses up to $i50,000
per occurrence. The Company has purchased insurance to cover losses in excess of the self-insurance retention or deductible up to a limit of $i30,000,000. The Company has obtained an actuarial estimate of its total expected future losses for liability claims and recorded a liability equal to the net present value.
The
Company and its subsidiaries are defendants in various legal proceedings resulting from operations in the normal course of business. It is the opinion of management, in consultation with legal counsel, that the ultimate outcome of all such matters will not materially affect the Company’s financial position, results of operations or cash flows.
Note 14. iDelivery
Costs
For the three months ended April 30, 2023 and 2022, shipping and classroom delivery costs of approximately $i3,343,000 and $i3,254,000,
respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.
Note 15. iSubsequent Events
On May 19, 2023, the Company
executed Amendment No. 3 to the Restated Credit Agreement, with an effective date of May 5, 2023. See Note 7.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Overview
The results
of operations for the three-month period ended April 30, 2023 and the comparable period ended April 30, 2022 have been impacted by economic conditions driven by the COVID-19 pandemic, global supply chain disruptions and global conflict. The impact of the supply chain disruptions were much less severe during the current year compared to the prior year. Typically, the Company has an exceptionally seasonal annual cycle where approximately 50% of sales occur in the months of June, July and August. Orders received from customers follow a similar seasonal cycle, with the bulk of orders arriving approximately 4-6 weeks preceding the selling season.
For the three-month period ended April
30, 2023, management believes that the traditional seasonal cycle and the Company’s ability to service that seasonal cycle has returned to normal. During the three-month period ended April 30, 2023the Company experienced a 10.4% increase in orders compared to the same period last year. In addition, the Company started the year with a backlog of unshipped sales orders that was nearly $18 million higher than the prior year. On April 30, 2023the Company’s backlog of unshipped sales orders was approximately $104.6 million compared
to $85.7 million on April 30, 2022. The Company believes that a significant majority of the sales order backlog will be delivered during June, July, and August of the current year.
As discussed in the Risk Factors section of the Company’s Form 10-K for the fiscal year ended January 31, 2023, the Company utilizes one nationwide contract to price a significant portion of our orders. This contract/price
list determines selling prices for goods and services for periods of one year and occasionally longer. Due to the current volatile nature of commodity and energy prices in addition to general inflation, the Company has negotiated the ability to increase prices for orders received after July 1 of each contract year in addition to the annual January 1price increase. There is typically a several months' time lag between raising prices on orders and realizing the increase in sales revenue.
Sales for the first quarter ended April 30, 2022 consisted substantially of orders received prior to the January 1, 2022 price increase, causing gross
margin of sales during that quarter to be lower than desirable. Sales of the quarter ended April 30, 2023 benefited from the effect of two price increases, one each at January 1, 2022 and July 1, 2022. The cumulative impact of the two price increases favorably impacted operating results for the three months ended April 30, 2023.
Although conditions have improved compared to the prior year, financing challenges resulting from the recent bank failures and credit tightening and supply chain disruptions from international sources – primarily China – continue to adversely affect operations and the competitive landscape. Because the
Company has maintained its domestic factories, management believes that the Company will be less vulnerable to international supply chain disruption compared to competitors that source finished goods overseas, but the Company will still be affected by these international events.
Virco does not deliver furniture to new schools until the customer has an occupancy certificate. Supply chain disruptions in the construction industry which may delay the completion of new schools did not significantly impact sales volume during the quarter ended April 30, 2023, but may impact the timing of sales during the balance of the year, possibly causing deliveries of furniture scheduled for the second
quarter ending July 31, 2023 to occur in the subsequent quarter.
For the three months ended April 30, 2023, the Company incurred a pre-tax loss of $1,886,000 on sales of $34,943,000 compared to a pre-tax loss of $5,366,000 on sales of $32,084,000 in the prior year.
Sales increased by approximately $2,859,000 or 8.9%, compared to the same prior year period. The increase was attributable to an increase in beginning of year sales backlog, increased first quarter orders, and increased selling prices.
Gross
margin for the quarter ended April 30, 2023 was 37.8% of sales compared to 30.3% in the prior year. In order to recover the increased cost of materials and labor incurred in the fiscal year ended January 31, 2022, the Company raised prices for all orders received after January 1, 2022. The impact of the price increase did not fully affect sales for the quarter ended April 30, 2022. The three-month period ended April 30, 2023 benefited from the cumulative effect of price increases implemented January 1, 2022 and July 1, 2022, returning margins
to profitable full year levels.
Selling, general and administrative expenses (SG&A) for the three months ended April 30, 2023 increased by approximately $63,000 compared to the same period last year, but decreased as a percentage of sales to 41.5% compared to 45.0% in the prior year. The increase in selling, general and administrative expenses was attributable in part to increased variable freight and
17
service expense and by increased variable selling expenses. Because a significant portion of general and administrative expenses do not fluctuate with sales volume, SG&A declined as a percentage of sales.
During
the fiscal year ended January 31, 2023the Company purchased equity securities held in a Rabbi Trust to fund benefits under the VIP Pension Plan. The Company benefited from $299,000 of unrealized gains during the three months ended April 30, 2023.
The primary component of pension expense relates to the amortization of AOCI. In the year ended January 31, 2022, the Company benefited from favorable investment returns on Plan assets and reduced measurement of benefit obligations due to increased discount rates,
both of which favorably impacted AOCI. Because beginning of the year AOCI was low for the three-month periods ended April 30, 2023 and 2022, the quarterly amortization of AOCI was reduced compared to prior years.
Interest expense increased by $285,000 for the three months ended April 30, 2023 compared to the same period last year. The increase was primarily attributable to an increase in the amount borrowed to finance seasonal working capital and an increase in the interest rate.
For the three months ended April 30, 2023 and 2022, the effective income tax rates were 23.5% and 5.3%, respectively.
The change in effective tax rates for the three months ended April 30, 2023 was primarily due to the change in forecasted mix of income before federal and state income taxes and estimated permanent differences. The lower effective tax rate in prior year was due primarily to the recording of a valuation allowance needed for federal deferred tax assets and certain state net operating loss carryforwards.
Liquidity and Capital Resources
The market for education furniture is extremely seasonal and approximately 50% of the Company's annual sales volume is shipped in the months of June through
August of each year. The Company traditionally manufactures large quantities of inventory during the first and second quarters of each fiscal year in anticipation of seasonally high summer shipments. In addition, the Company finances a large balance of accounts receivable during the peak season. As discussed above, during the fiscal year ended January 31, 2022, the Company experienced severe supply chain disruptions and labor availability and delivered orders later in the year. In the fiscal year ended January 31, 2023, the supply chain disruptions abated and the
Company started to return to the more traditional seasonal cycle. The Company believes that traditional seasonal sales cycle has substantially returned for the quarter ended April 30, 2023, and will continue through the fourth quarter ending January 31, 2024.
Inventory increased by $19,343,000 at April 30, 2023, compared to April 30, 2022. The entire increase in inventory was attributable to increased quantity. The cost and valuation of inventory was stable. The quantity of inventory was increased in response to a material increase in unshipped sales orders (backlog). The majority of the backlog is scheduled for delivery
during the traditional seasonal peak from June through August. The increase in inventory was financed by increased borrowing under the Company’s line of credit with PNC Bank and increased vendor credit, which traditionally increases with increased purchases of materials.
Accrual basis capital expenditures for the three months ended April 30, 2023 were $1,300,000 compared to $627,000 for the same period last year. Capital expenditures are being financed through the Company's credit facility with PNC Bank and operating cash flow and restricted to not exceed $8,000,000 per year by covenant.
The
Company was in violation of its financial covenants under the Restated Credit Agreement as of January 31, 2022, due to an increase in the Company’s net loss primarily attributable to the effects of supply chain disruptions and labor shortages. On April 15, 2022, the Company entered into Amendment No. 2 to the Revolving Credit and Security Agreement with PNC Bank, which implemented certain changes to the Company’s credit facility with PNC Bank, including the extension of the final maturity date of the facility to April 15, 2027. Subsequent to the period ended April
30, 2023, the Company entered into Amendment No. 3 which increased the borrowing limit to $72.5 million during the peak seasonal period from June through August 2023. See Note 7. Debt of Notes to Unaudited Consolidated Financial Statements under Item 1 of this Quarterly Report on Form 10-Q.
Based on the Company’s current projections, raw material costs and its ability to introduce price increases, management believes it will maintain compliance with its financial covenants under the Credit Agreement, although risks and uncertainties remain, such as economic conditions, changing raw material costs and supply chain challenges. The
Company was in compliance with its debt covenants as of April 30, 2023.
18
The Company believes that cash flows from operations, together with the Company's unused borrowing capacity with PNC Bank will be sufficient to fund the Company's debt service requirements, capital expenditures and working capital needs for the next twelve months.
Off
Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
The Company's critical accounting policies are outlined in its Annual Report on Form 10-K for the fiscal year ended January 31, 2023.
Forward-Looking Statements
From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended April 30,
2023, the Company or its representatives have made and may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission ("SEC"). The words or phrases “anticipates,”“expects,”“will continue,”“believes,”“estimates,”“projects,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated
by the Company's forward-looking statements are subject to certain risks and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, availability of funding for educational institutions, availability and cost of materials, availability and cost of labor, demand for the Company's products, competitive conditions affecting selling prices and margins, capital costs and general economic conditions. Such risks and uncertainties are discussed in more detail in the Company's Form 10-K for the fiscal year ended January 31, 2023, including under the caption "Risk Factors".
The
Company's forward-looking statements represent its judgment only on the dates such statements were made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and is therefore not required to provide the information under this item.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Principal Executive Officer along with its Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) as of April 30, 2023. Based upon the foregoing, the Company's Principal Executive Officer along with the
Company's Principal Financial Officer concluded that the Company's disclosure controls and procedures as of such date were effective to ensure that the information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Company management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Company management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control Over Financial Reporting
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Principal Executive Officer along with its Principal Financial Officer, of the effectiveness of the design and operation of disclosure controls and procedures. Based upon the foregoing, the Company's Principal Executive
Officer along with the Company's Principal Financial Officer concluded that the Company's disclosure controls and procedures (as such term
19
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
There have been no changes in the Company's internal control over financial reporting during the fiscal quarter covered by this quarterly report
on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
20
PART II — Other Information
Virco Mfg. Corporation
Item 1. Legal Proceedings
The Company is
a party to various legal actions arising in the ordinary course of business which, in the opinion of the Company, are not material in that management either expects that the Company will be successful on the merits of the pending cases or that any liabilities resulting from such cases will be substantially covered by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to these actions, management believes that the aggregate amount of such liabilities will not be material to the results of operations, financial position, or cash flows of the Company.
Item 1A.
Risk Factors
You should carefully consider and evaluate the information in this Quarterly Report and the risk factors set forth under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023 (the “Form 10-K”), which was filed with the SEC on April 28, 2023. The risk factors associated with our business have not materially changed compared to the risk factors disclosed in the Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
