# Virco MFG Corporation: Form 10-Q for the period ended Oct 31, 2019

- Company: [Virco MFG Corporation](/companies/virc.md) (CIK 751365)
- Form: 10-Q
- Filed: 2019-12-13
- Accepted by EDGAR: Dec 13, 2019, 14:53 ET
- Period: 2019-10-31
- Accession: 0001628280-19-015063
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/751365/000162828019015063/virc-20191031x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/751365/000162828019015063/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-10-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-08-01 to 2019-10-31 | $67.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-02-01 to 2019-10-31 | $164.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-08-01 to 2019-10-31 | $40.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2019-02-01 to 2019-10-31 | $99.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-08-01 to 2019-10-31 | $26.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2019-02-01 to 2019-10-31 | $64.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-08-01 to 2019-10-31 | $20.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2019-02-01 to 2019-10-31 | $51.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-08-01 to 2019-10-31 | $6.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-02-01 to 2019-10-31 | $13.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-08-01 to 2019-10-31 | $603.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-02-01 to 2019-10-31 | $2.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-08-01 to 2019-10-31 | $1.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-02-01 to 2019-10-31 | $3.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-08-01 to 2019-10-31 | $3.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-02-01 to 2019-10-31 | $6.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-08-01 to 2019-10-31 | $0.25 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-02-01 to 2019-10-31 | $0.43 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-08-01 to 2019-10-31 | $0.25 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-02-01 to 2019-10-31 | $0.43 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-08-01 to 2019-10-31 | 15,710,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-02-01 to 2019-10-31 | 15,621,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-02-01 to 2019-10-31 | $10.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-02-01 to 2019-10-31 | $3.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2019-02-01 to 2019-10-31 | $0 | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2019-10-31 | $697.0k | us-gaap:Cash |
| Current assets | at 2019-10-31 | $63.3m | us-gaap:AssetsCurrent |
| Total assets | at 2019-10-31 | $139.9m | us-gaap:Assets |
| Current liabilities | at 2019-10-31 | $25.4m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2019-10-31 | $13.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2019-10-31 | $872.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2019-10-31 | $64.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 11,688 characters.

### Results of Operations

#### Three Months Ended October 31, 2019

For the three months ended October 31, 2019, the Company earned a pre-tax profit of $5,578,000 on sales of $66,998,000 compared to a pre-tax profit of $4,035,000 on sales of $76,809,000 in the prior year.

Net sales for the three months ended October 31, 2019 decreased by $9,811,000 or 12.8%, compared to the same period last year. The Company began the quarter with an order backlog that was more than $18 million lower than the prior year due to slow order rates for the first and second quarters. Order rates for the first six months declined by approximately 14% compared to the same period last year. Order rates for the third quarter reflected a significant improvement, increasing by over 27% compared to the same period last year. The decrease in revenue for the quarter was attributable to the reduced beginning backlog, partially offset by the increased order rate for the third quarter. Order backlog at October 31, 2019 is approximately $19.0 million and is $3 million greater than the prior year.

The third quarter results reflect continued seasonality of the Company’s business. School districts in many parts of the Country have accelerated the beginning of back to school to mid-August, impacting the summer delivery window. At the beginning of the fiscal year, the Company substantially revised its production stocking program in order to facilitate the timeliness and completeness of order fulfillment during the summer. This new production stocking program was very successful with an improvement in the timeliness of deliveries and a greater portion of orders filled in the second quarter.

In the prior year the Company was adversely affected by increased cost of commodities, particularly steel and components imported from China. In addition, the Company was adversely impacted by increased costs for labor, employee benefits, and freight. The Company anticipated continued pressure on these costs during the fiscal year ending January 31, 2020, including additional tariff related costs incurred in the second quarter of the fiscal year ending January 31, 2020. To compensate for these increased costs, the Company raised selling prices at the beginning of the year. The amount of price increase varied based upon the type of product and competitive considerations, but no product increased by less than 10%. Gross margin for the third quarter was 40.1% compared to 34.4% in the prior year. The gross margin was favorably affected by the price increase described above, partially offset by unfavorable manufacturing overhead variances incurred when production rates declined in response to the decrease in unit volume.

Selling, general and administrative expenses for the three months ended October 31, 2019 decreased by $993,000 compared to the same period last year and increased as a percentage of sales to 30.6% from 28.0%. The decrease in selling, general and administrative expenses was primarily attributable to decreased freight expense.

Interest expense decreased by $27,000 for the three months ended October 31, 2019 compared to the same period last year. The Company has borrowed less money to finance seasonal working capital in the third quarter.

#### Nine Months Ended October 31, 2019

For the nine months ended October 31, 2019, the Company earned a pre-tax profit of $10,177,000 on net sales of $164,250,000 compared to a pre-tax profit of $6,594,000 on net sales of $174,180,000 in the same period last year. Net sales for the nine months ended October 31, 2019 decreased by approximately $9,930,000 or 5.7% compared to the same period last year. This net decrease was primarily the result of a reduction in unit volume offset by an increase in selling prices. The Company began the year with a backlog of orders that was approximately $4.2 million greater than the prior year. Order rates for the first six months decreased by approximately 14% compared to the prior year. Order rates for the third quarter reflected a significant improvement, increasing by over 27% compared to the same period last year. Because the third quarter is traditionally a slow period for orders, strong third quarter order rates mitigated the reduction for the first two quarters, but as of October 31, 2019 orders trailed the prior year by approximately $13 million, a 7.3% reduction compared to the same period last year.

As described above the Company increased selling prices at the beginning of the year to recover increased commodity and other costs incurred during 2018. The impact of the price increase was not fully effective until the second quarter as the beginning backlog at January 31, 2019 reflected selling prices in effect prior to the price increase.

Gross margin as a percentage of sales improved to 39.4% for the nine months ended October 31, 2019 compared to 35.2% in the same period last year. The gross margin was favorably affected by the price increase described above, partially offset by unfavorable manufacturing overhead variances incurred when production rates declined in response to the decrease in unit volume.

Selling, general and administrative expenses for the nine months ended October 31, 2019 decreased by approximately $186,000 compared to the same period last year and increased as a percentage of sales by 1.7%.

Interest expense increased by $312,000 for the nine months ended October 31, 2019 compared to the same period last year. The Company has borrowed slightly more money to finance seasonal working capital in the first six months of the year and increased as a result of higher interest rates.

#### Income Taxes for the three- and nine-months ended October 31, 2019

Income tax expense for the third quarter and nine months ended October 31, 2019 is greater than the prior year, primarily due to the increase in pre-tax income.

### Liquidity and Capital Resources

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. During the last two months of the third quarter, the Company typically repays significant portions of the seasonal working capital borrowed to finance the summer activity. Accounts receivable increased by $4,504,000 from January 31, 2019 to October 31, 2019. This compares to prior year when accounts receivable grew by $12,896,000 during the same period. The accounts receivable balance was approximately $6.6 million lower at October 31, 2019 than at October 31, 2018 due to lower third quarter sales. The decrease in accounts receivable at October 31, 2019 compared to the January 31, 2019, was offset in part by a reduction in account payable.

For the first nine months, the Company decreased inventory by approximately $4,382,000 at October 31, 2019 compared to January 31, 2019. This compares to an increase of $613,000 during the same period last year. Inventory at October 31, 2019 was $238,000 greater than the prior year. The increase in inventory compared to the prior year is primarily due an increase in valuation due to increased commodity and tariffs costs.

Interest expense for the nine months ended October 31, 2019 is slightly higher the same period last year. Borrowings under the Company's revolving line of credit with PNC Bank were higher in the first six months of the year.

Capital spending for the nine months ended October 31, 2019 was $2,963,000 compared to $3,319,000 for the same period last year. Capital expenditures are being financed through the Company's credit facility with PNC Bank and operating cash flow.

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, 2019.

#### Operating Lease Liabilities

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.

In accordance with ASC 842, 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. 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. 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%.

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.

### Forward-Looking Statements

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended October 31, 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, 679 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 $77,000 and $272,000 for the three and nine months ended October 31, 2019, 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, 2,529 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 October 31, 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 Dec 13, 2019.
Source: SEC EDGAR, the filing index for accession 0001628280-19-015063. Last ingested by Listed: Oct 24, 2026, 14:54 ET. No prices; not investment advice.