# Virco MFG Corporation: Form 10-Q for the period ended Jul 31, 2020

- Company: [Virco MFG Corporation](/companies/virc.md) (CIK 751365)
- Form: 10-Q
- Filed: 2020-09-14
- Accepted by EDGAR: Sep 14, 2020, 14:50 ET
- Period: 2020-07-31
- Accession: 0001628280-20-013545
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/751365/000162828020013545/virc-20200731.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/751365/000162828020013545/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-07-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-05-01 to 2020-07-31 | $59.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2020-02-01 to 2020-07-31 | $76.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2020-05-01 to 2020-07-31 | $23.2m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2020-02-01 to 2020-07-31 | $28.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2020-05-01 to 2020-07-31 | $15.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2020-02-01 to 2020-07-31 | $27.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-05-01 to 2020-07-31 | $7.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-02-01 to 2020-07-31 | $688.0k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-05-01 to 2020-07-31 | $494.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-02-01 to 2020-07-31 | $898.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-05-01 to 2020-07-31 | $3.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-02-01 to 2020-07-31 | −$149.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-05-01 to 2020-07-31 | $3.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-02-01 to 2020-07-31 | −$1.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-05-01 to 2020-07-31 | $0.23 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-02-01 to 2020-07-31 | −$0.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-05-01 to 2020-07-31 | $0.23 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-02-01 to 2020-07-31 | −$0.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-05-01 to 2020-07-31 | 15,746,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-02-01 to 2020-07-31 | 15,694,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-02-01 to 2020-07-31 | −$15.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-02-01 to 2020-07-31 | $1.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2020-02-01 to 2020-07-31 | $0 | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2020-07-31 | $878.0k | us-gaap:Cash |
| Current assets | at 2020-07-31 | $85.8m | us-gaap:AssetsCurrent |
| Total assets | at 2020-07-31 | $163.4m | us-gaap:Assets |
| Current liabilities | at 2020-07-31 | $51.7m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2020-07-31 | $15.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-07-31 | $18.4m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-07-31 | $54.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 14,730 characters.

### Results of Operations

### The effects of COVID -19

Results of operations for the three-month and six-month periods ended July 31, 2020 have been significantly impacted by economic conditions driven by the COVID-19 epidemic. The majority of our primary customers, the K-12 public school systems, closed school campuses and initiated remote learning on or about March 15, 2020. At this time, most school districts are continuing with remote learning for the academic year beginning August 2020, with a minority of districts attempting hybrid or on-site learning.

Selling activities have been significantly impacted. Our direct sales force, one of the Company’s distinct competitive advantages, was unable to make in-person sales calls and has been required to call on customers using telephonic or other electronic methods. Our primary customers, educators and district business officials, are typically working remotely which complicates selling activities. Virco traditionally displays product at a variety of shows, most of which have been cancelled or held remotely. When working on site, educators and business officials typically require appointments and many districts do not allow vendors on-site. Orders of furniture were impacted, but the severity of the impact varied by funding source. Transactional orders, which are typically smaller, sometimes made through internet and other resellers, and are frequently for more immediate delivery fell sharply. Project orders, which are typically, larger, frequently requiring project management and full-service, characterized by a longer selling process, typically months in advance of the order, remained stable compared to the prior year. Funding sources for project orders are frequently bond funded, precluding funding from being diverted to alternative expenditures. The market for educational furniture is extremely seasonal, but there has traditionally been a remarkable stability to this seasonal cycle. In the current year, the timing of orders has not followed the traditional seasonal trends. Orders of educational furniture are traditionally very strong in May and June. In the current year these months were uncharacteristically slow.

Delivery of furniture to customers has been adversely impacted. Customers deferred deliveries of furniture during the initial school closures. This caused a reduction in first quarter shipments, but because orders were stable, our backlog of orders at April 30, 2020 was approximately $8,324,000 greater than the same date in the prior year. Order backlog at July 31, 2020 was flat compared to the same date in the prior year. The Company has followed a process where we call every customer prior to shipping furniture from our warehouse to confirm that there will be school personnel on-site to accept the delivery. This has added complexity to the distribution process but has enabled effective execution of deliveries. During the second quarter, shipments of furniture started to model the traditional seasonal cycle, but at a reduced level of activity due to lower May and June orders. In typical years, shipments of furniture are scheduled to occur prior to Labor Day, when all schools are typically in session. This year does not appear to have the same hard deadline.

Manufacturing has been impacted, but operations have been successful given the circumstances. Our Arkansas factories, which represent approximately two-thirds of our annual volume have been operating the entire time. Our Torrance factory closed for one week at the inception of the pandemic when state and local shutdown orders were not coordinated. After the Company determined that our operations were essential, production re-started. The Torrance operations were closed for several days around Memorial Day to facilitate deep cleaning when a small number of employees were tested positive for COVID-19, but it quickly resumed operations and has been operating since Memorial Day. Our seasonal manufacturing cycle traditionally utilized temporary labor to address the education market seasonal cycle. The reduced production volume has been addressed by limiting temporary labor, and there have been no layoffs or furloughs of our employees. At various times our supply chain has been challenged by interruptions of imported components and by domestic suppliers’ difficulties. While challenging, the Company has performed effectively during this period.

The COVID-19 epidemic has impacted or accelerated changes in many industries, including the furniture industry. While many furniture markets may be permanently impacted, the current pandemic appears to have reinforced the need and desire to have children attend K-12 schools and be instructed in classroom settings. Furniture that facilitates social distancing has been a part of the Company’s product offering since its founding in 1950. The current condition of the K-12 education market continues to be one of significant disruption. State and local governments are anticipated to have severe budgetary concerns. Management believes that while the market for school furniture may decline in the fiscal year ending January 31, 2021 and probably beyond, our domestic manufacturing footprint provides meaningful opportunities to take market share without having to do so through pricing tactics.

### Three Months Ended July 31, 2020

For the three months ended July 31, 2020, the Company earned a pre-tax profit of $6,679,000 on sales of $59,285,000 compared to a pre-tax profit of $9,084,000 on sales of $70,359,000 in the prior year.

Net sales for the three months ended July 31, 2020 decreased by $11,074,000 or 15.7%. The Company began the quarter with an order backlog that was over $8 million higher than the prior year due to slow COVID-19 impacted sales for the first quarter. Orders for the second quarter were approximately 27.9% lower than in the second quarter of the prior year. School closures adversely impacted selling activities and order rates for the months of May and June – traditionally significant months for generating orders during the traditional seasonal market for education furniture. Order rates for the month of July partially recovered to a 12% reduction compared to the prior year. Order backlog at July 31, 2020 was flat compared to the same date last year.

Gross margin for the second quarter was 39.1% compared to 40.8% in the prior year. The gross margin was favorably affected by a modest price increase at the beginning of the year, 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 July 31, 2020 decreased by more than $3.0 million compared to the same period last year and decreased as a percentage of sales to 26.1% from 26.4%. The decrease in selling, general and administrative expenses was primarily attributable to decreased variable freight, service, and selling expenses.

Interest expense decreased by $413,000 for the three months ended July 31, 2020 compared to the same period last year. The Company has borrowed less money to finance seasonal working capital.

Income tax expense for the second quarter ended July 31, 2020 is less than the prior year, primarily due to the decrease in pre-tax income.

### Six Months Ended July 31, 2020

For the six months ended July 31, 2020, the Company incurred a pre-tax loss of $1,294,000 on net sales of $76,884,000 compared to a pre-tax profit of $4,599,000 on net sales of $97,252,000 in the same period last year. Net sales for the six months ended July 31, 2020 decreased by approximately $20.4 million compared to the same period last year. This decrease was primarily the result of a reduction in unit volume offset by a modest increase in selling prices. The Company began the year with a backlog of orders that was slightly less than the prior year. Order rates for the first six months decreased by approximately 18.6% compared to the prior year.

Gross margin as a percentage of sales declined to 36.6% for the six months ended July 31, 2020 compared to 38.9% in the same period last year. The gross margin was favorably affected by the price increase described above, 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 six months ended July 31, 2020 decreased by approximately $3.8 million compared to the same period last year and increased as a percentage of sales to 35.7% compared to 32.1% in the prior year. The decrease in selling, general and administrative expenses was primarily attributable to decreased variable freight, service, and selling expenses.

Interest expense decreased by $709,000 for the six months ended July 31, 2020 compared to the same period last year. The Company has borrowed less money to finance seasonal working capital.

For the six months ended July 31, 2020 the Company recorded an income tax benefit compared to income tax expense due to the loss for the current year versus income in the prior year.

### Liquidity and Capital Resources

Approximately 50% of the Company's annual sales volume is traditionally 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. Accounts receivable increased by $20,926,000 from January 31, 2020 to July 31, 2020. This compares to prior year when accounts receivable grew by $27,852,000 during the same period. The accounts receivable balance was approximately $8.4 million lower at July 31, 2020 than at July 31, 2019 due to lower second quarter sales.

For the first six months, the Company increased inventory by approximately $6,115,000 at July 31, 2020 compared to January 31, 2020. This compares to an increase of $11,728,000 during the same period last year. Inventory at July 31, 2020 was $9.6 million lower than the prior year. The decrease in inventory compared to the prior year is primarily due to decreased unit volume to related to slower order rates. The increase in accounts receivable and inventory at July 31, 2020 compared to the January 31, 20120, was offset in part by a reduction in payables and additional borrowings through the Company's credit facility with PNC Bank.

Interest expense for the six months ended July 31, 2020 is lower than the same period last year. This is primarily attributable to lower levels of borrowing. Borrowings under the Company's revolving line of credit with PNC Bank at July 31, 2020 is lower than the borrowings at July 31, 2019.

Capital spending for the six months ended July 31, 2020 was $1,359,000 compared to $2,309,000 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 has experienced an overall decline in net sales and net income through the first six-months of fiscal 2021 as compared to fiscal 2020 as a result of the disruption to its business and its customers caused by the COVID-19 pandemic. As a result of the reduced revenue , the Company was not in compliance with its fixed-charge coverage ratio under its revolving and secured credit agreement with PNC Bank, as of July 31, 2020 (see Note 7). The Company successfully negotiated a waiver and amendment to the agreement to satisfy the event of default and reduced the ratio required for the rolling four quarter period ending October 31, 2020 from 1.10:1.00 to 1.00:1.00.

The Company expects the impact of COVID-19 to continue to be a challenge for the foreseeable future and believes the economy will be adversely impacted for an indeterminate period, including the demand for its products. The extent of the impact will depend on numerous factors that are unknown, uncertain and cannot be reasonably predicted. The Company has plans to further moderate certain selling, general and administrative expenses and capital expenditures to preserve cash and maintain compliance with its financial covenants. Based on the Company’s current projections and its ability to manage certain controllable expenditures, management believes it will maintain compliance with the financial covenants for the next 12 months.

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, 2020.

### Forward-Looking Statements

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2020, 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, 2020 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, 192 characters.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act as of our second quarter of fiscal 2021 and are not required to provide the information under this item.

## Controls and procedures

As filed, 2,526 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 July 31, 2020. 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, 431 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, 2020 (the “Form 10-K”), which was filed with the SEC on April 30, 2020. The risk factors associated with our business have not materially changed compared to the risk factors disclosed in the Form 10-K.

Filed Sep 14, 2020.
Source: SEC EDGAR, the filing index for accession 0001628280-20-013545. Last ingested by Listed: Oct 24, 2026, 14:54 ET. No prices; not investment advice.