# Virco MFG Corporation: Form 10-Q for the period ended Apr 30, 2019

- Company: [Virco MFG Corporation](/companies/virc.md) (CIK 751365)
- Form: 10-Q
- Filed: 2019-06-14
- Accepted by EDGAR: Jun 14, 2019, 15:36 ET
- Period: 2019-04-30
- Accession: 0001628280-19-008000
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/751365/000162828019008000/virc-20190430x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/751365/000162828019008000/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-04-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-02-01 to 2019-04-30 | $26.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-02-01 to 2019-04-30 | $17.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-02-01 to 2019-04-30 | $9.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-02-01 to 2019-04-30 | $12.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-02-01 to 2019-04-30 | −$3.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-02-01 to 2019-04-30 | $700.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-02-01 to 2019-04-30 | −$1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-02-01 to 2019-04-30 | −$3.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-02-01 to 2019-04-30 | −$0.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-02-01 to 2019-04-30 | −$0.20 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-02-01 to 2019-04-30 | 15,486,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-02-01 to 2019-04-30 | −$18.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-02-01 to 2019-04-30 | $1.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2019-02-01 to 2019-04-30 | $0 | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2019-02-01 to 2019-04-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-04-30 | $553.0k | us-gaap:Cash |
| Current assets | at 2019-04-30 | $79.3m | us-gaap:AssetsCurrent |
| Total assets | at 2019-04-30 | $163.3m | us-gaap:Assets |
| Current liabilities | at 2019-04-30 | $53.7m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2019-04-30 | $16.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2019-04-30 | $24.2m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2019-04-30 | $54.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 11,633 characters.

### Results of Operations

### Three Months Ended April 30, 2019

For the three months ended April 30, 2019, the Company incurred a pre-tax loss of $4,485,000 on net sales of $26,893,000 compared to a pre-tax loss of $5,034,000 on net sales of $22,569,000 in the same period in 2018. Net sales for the three months ended April 30, 2019 increased by $4,324,000, a 19.2% increase, compared to the same period last year. Net sales increased largely because the Company started the year with an order backlog that was $4,200,000 higher than in the prior year. Approximately 60% of the increase in net sales was attributable to increase in selling price and the balance due to increased volume.

At the beginning of the current fiscal year, the Company significantly increased selling prices to compensate for severe cost increases incurred during last fiscal year. These increases included the effect of steel tariffs, tariffs on product from China, and a variety of other costs. In addition, the price increase was intended to cover anticipated cost increases for fiscal year ending January 31, 2020. The amount of price increase varied based upon the type of product and competitive considerations, but no product increased by less than 10%. Impact of this price increase did not fully impact first quarter sales, as the majority of first quarter sales were from the beginning backlog of orders, which were received before the price increase. The impact of the price increase will be more impactful during the second and third quarters.

Order rates for the first quarter decreased by approximately 18.2% compared to the prior year period. Order rates were very slow for the months of February and March, with year-to-date orders through March being 27% lower than the prior year. Order rates for April and May which are seasonally higher than February and March were 2% lower than prior year. Because these orders are more likely to be delivered in the summer months when school is not in session, order backlog at April 30, 2019 decreased by approximately 22.0%. Backlog at April 30, 2019 was $39,254,000 compared to $50,136,000 at April 30, 2018 and $39,553,000 at April 30, 2017.

Gross margin for the three months ended April 30, 2019 decreased as a percentage of sales to 33.8% in the current quarter compared to 34.1% in the prior quarter. This decrease was primarily attributable to four components. First, the Company increased compensation for factory employees, in large part because of pressures from increases in minimum wage and other pressures in employee compensation. Second, the Company has incurred increased material costs for certain commodities, particularly steel and imported components from China. Third, while the Company has increased selling prices to recover these cost increases, a significant portion for shipments in the first quarter were from orders placed in the prior year prior to the price increase. Fourth, factory production levels were approximately 13% lower for the first quarter of fiscal 2020 compared to the prior year in response to slow order rates. The reduced production levels adversely impacted factory efficiency.

Selling, general and administrative expenses increased by approximately $527,000 compared to the prior year but decreased as a percentage of sales. The increase in spending is attributable to variable selling and service costs.

Income tax benefit for the quarter ended April 30, 2019 is comparable to the prior year. The effective tax rate for the first quarter of 2020 was 31.6% compare to 29.0% for the same period last year.

Interest expense was more for the quarter ended April 30, 2019 compared to the same period last year. There are two components of the increase. First, the Company has borrowed more money to finance production of inventory in anticipation of increased summer shipping activity. Second, expense increased as a result of higher interest rates.

### Liquidity and Capital Resources

Accounts receivable were slightly higher at April 30, 2019 than at April 30, 2018 due to increased sales during the quarter resulting from the backlog at January 31, 2019. Due to the seasonal nature of our business, the Company traditionally builds large quantities of inventory during the first quarter of each fiscal year in anticipation of seasonally high summer shipments. During the first quarter ended April 30, 2019, the Company increased inventory by approximately $16.2 million compared to January 31, 2019, approximately $4.2 million less than what was added in the first quarter of the prior year. This reduction was in part to compensate for a larger beginning inventory balance at January 31, 2019 compared to the prior year and in response to slower order rates. At April 30, 2019 inventory was slightly higher in dollars due to increased raw material prices but lower in unit volume. The increase in inventory during the first quarter of this year was financed through the Company's credit facility with PNC Bank, National Association ("PNC").

Borrowing under the Company's revolving line of credit with PNC at April 30, 2019 is approximately $1.9 million higher compared to the same quarter last year. The increase in borrowing is primarily attributable to increased accounts receivable.

Accrual basis capital expenditures were $884,000 for the three months ended April 30, 2019 compared to $613,000 for the same period last year. Capital expenditures are being financed through the Company's credit facility with PNC.

Net cash used in operating activities for the three months ended April 30, 2019 was $18,286,000 compared to $16,992,000 for the same period last year. The slight increase in cash used was primarily attributable to a reduction in accounts payable.

The Company believes that cash flows from operations, together with the Company's unused borrowing capacity under its revolving line of credit with PNC will be sufficient to fund the Company's debt service requirements, capital expenditures and working capital needs for at least the next twelve months. Approximately $4,000,000 was available for borrowing as of April 30, 2019.

### 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, 2019. On February 1, 2019, the Company adopted ASU No. 2016-02-*Leases (Topic 842)*, using the modified retrospective approach and applying the transitional relief allowing entities to initially apply the requirements at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, results and disclosures for the reporting periods beginning on February 1, 2019 are reported and presented under ASC 842, while prior period amounts, and disclosures are not adjusted and continue to be reported and presented under ASC 840, *Leases*. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. Further, the Company did not elect to apply the hindsight practical expedient, which allowed the Company to forgo reassessing the lease term at adoption. The Company has 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.

The Company determines if an arrangement is a lease at inception. Operating leases in which the Company is the lessee are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in the consolidated balance sheets. The Company does not have any finance leases, as a lessee, and no leases for which it is the lessor.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. 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. The weighted average remaining lease term is 5.72 years. As most of the Company’s leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. 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 uses the implicit rate when readily determinable. The incremental borrowing rate used is 6.39%. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. 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 operating lease payments is recognized on a straight-line basis over the lease term

The Company has lease agreements that contain non-lease components, which are generally accounted for as part of a combined lease.

Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $23.9 million and $25.6 million respectively, as of February 1, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was due to previous deferred rent balances that were removed as part of the adoption of Topic 842. The standard did not materially impact our condensed consolidated statement of operations and had an immaterial impact on the condensed consolidated statement of cash flows.

### Forward-Looking Statements

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2019, 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, especially steel, 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, 2019 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.

## Market risk

As filed, 676 characters.

The Company is subject to interest rate risk related to its seasonal borrowings used to finance additional inventory and receivables. Rising interest rates may adversely affect the Company's results of operations and cash flows related to its variable-rate bank borrowings under its credit line with PNC. Accordingly, a 100-basis point upward fluctuation in PNC's base rate would have caused the Company to incur additional interest charges of approximately $74,000 and $61,000 for the three months ended April 30, 2019 and 2018, respectively. The Company would have benefited from a similar interest savings if the base rate were to have fluctuated downward by a like amount.

## Controls and procedures

As filed, 2,528 characters.

### 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, 2019. 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 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.

## Risk factors

As filed, 428 characters.

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, 2019 (the “Form 10-K”), which was filed with the SEC on May 1, 2019. The risk factors associated with our business have not materially changed compared to the risk factors disclosed in the Form 10-K.

Filed Jun 14, 2019.
Source: SEC EDGAR, the filing index for accession 0001628280-19-008000. Last ingested by Listed: Oct 24, 2026, 14:54 ET. No prices; not investment advice.