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

- Company: [Virco MFG Corporation](/companies/virc.md) (CIK 751365)
- Form: 10-Q
- Filed: 2020-12-14
- Accepted by EDGAR: Dec 14, 2020, 14:05 ET
- Period: 2020-10-31
- Accession: 0001628280-20-017466
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/751365/000162828020017466/virc-20201031.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/751365/000162828020017466/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-10-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-08-01 to 2020-10-31 | $56.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-02-01 to 2020-10-31 | $133.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2020-08-01 to 2020-10-31 | $22.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2020-02-01 to 2020-10-31 | $50.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2020-08-01 to 2020-10-31 | $16.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2020-02-01 to 2020-10-31 | $43.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-08-01 to 2020-10-31 | $5.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-02-01 to 2020-10-31 | $6.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-08-01 to 2020-10-31 | $419.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-02-01 to 2020-10-31 | $1.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-08-01 to 2020-10-31 | $384.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-02-01 to 2020-10-31 | $235.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-08-01 to 2020-10-31 | $4.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-02-01 to 2020-10-31 | $3.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-08-01 to 2020-10-31 | $0.28 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-02-01 to 2020-10-31 | $0.21 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-08-01 to 2020-10-31 | $0.28 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-02-01 to 2020-10-31 | $0.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-08-01 to 2020-10-31 | 15,767,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-02-01 to 2020-10-31 | 15,586,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-02-01 to 2020-10-31 | $12.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-02-01 to 2020-10-31 | $1.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2020-02-01 to 2020-10-31 | $0 | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2020-10-31 | $1.2m | us-gaap:Cash |
| Current assets | at 2020-10-31 | $56.9m | us-gaap:AssetsCurrent |
| Total assets | at 2020-10-31 | $131.9m | us-gaap:Assets |
| Current liabilities | at 2020-10-31 | $26.7m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2020-10-31 | $5.2m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-10-31 | $885.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-10-31 | $59.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 15,941 characters.

### Results of Operations

### The effects of COVID -19

Results of operations for the three-month and nine-month periods ended October 31, 2020 have been significantly impacted by economic conditions driven by the COVID-19 pandemic. 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. Most school districts continued with remote learning for the academic year beginning August 2020, with a minority of districts attempting hybrid or on-site learning. During the third quarter many districts attempted to implement on-site instruction, but most large districts are continuing remote 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 frequently 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. This reduction adversely impacted both second and third quarter sales revenue.

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. Our backlog of orders was slightly less at October 31, 2020 compared to 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 and third quarters, shipments of furniture started to model the traditional seasonal cycle, but at a reduced level of activity due to lower orders. In typical years, shipments of furniture are scheduled to occur prior to Labor Day, when all schools are typically in session. This year did not have the same “hard deadline” and summer deliveries extended into September.

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. The Company did not experience significant disruption to production during the third quarter. Production rates have been moderated in response to reduced unit sales volume and a decision by management to reduce inventory levels. 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. 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 through October 31, 2020 there have been no layoffs or furloughs of our employees. In response to the seasonal nature of our business, the Company traditionally closes or curtails operations for one week during Thanksgiving, and for approximately two weeks during

Christmas and New Year’s, mirroring the holidays when schools are closed. For the current year, the Company anticipates adding an additional week of restricted operations at both Thanksgiving and New Year’s.

The COVID-19 pandemic 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 in-person 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 in the foreseeable future. While the overall market for school furniture may decline in the fiscal year ending January 31, 2021 and probably beyond, management believes that our domestic manufacturing base provides meaningful opportunities to increase market share due to our flexibility and rapid turnaround rather than by reducing prices.

In September 2020, after consideration of uncertainties tied to COVID-19 pandemic, the Compensation Committee of the Board adopted a flexible strategy that will reduce cash compensation payable to outside directors and executive officers by at least 25% between October 2020 and January 2021.

### Three Months Ended October 31, 2020

Order rates for the first nine months have been volatile, with a material reduction in orders corresponding to COVID19. Orders for the first quarter declined by approximately 2.1%, orders for the second quarter declined by nearly 28%, and orders for the third quarter declined by 22.5%. Year-to-date orders through October 31, 2020 have declined by approximately 19.5%.

For the three months ended October 31, 2020, the Company earned a pre-tax income of $4,864,000 on sales of $56,741,000 compared to a pre-tax income of $5,578,000 on sales of $66,998,000 in the prior year. Net sales for the three months ended October 31, 2020 decreased by $10,257,000 or 15.3%, compared to the same period last year. The Company began the quarter with an order backlog that was comparable to the prior year. Backlog at October 31, 2020 is approximately $1.8 million less than the prior year.

Gross Margin for the third quarter was approximately 39.3% of sales compared to 40.1% 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 variances incurred when production rates were moderated in response to the decrease in unit volume and a decision by management to reduce inventory levels.

Selling, general and administrative expenses for the three months ended October 31, 2020 decreased by $4,025,000 compared to the same period last year and decreased as a percentage of sales to 29.0% from 30.6%. The decrease in selling, general and administrative expenses was primarily attributable to decreased variable freight, service, and selling expense.

Interest expense decreased by $184,000 for the three months ended October 31, 2020 compared to the same period last year. The Company has borrowed less money to finance seasonal working capital in the third quarter. At October 31, 2020 the Company had completely paid off its revolving line of credit with the bank.

### Nine Months Ended October 31, 2020

For the nine months ended October 31, 2020, the Company earned a pre-tax income of $3,570,000 on net sales of $133,625,000 compared to a pre-tax income of $10,177,000 on net sales of $164,250,000 in the same period last year. Net sales for the nine months ended October 31, 2020 decreased by approximately $30,625,000 or 18.6% compared to the same period last year. This net decrease was primarily the result of a reduction in unit volume offset by a small increase in selling price.

Gross margin as a percentage of sales decreased to 37.7% for the nine months ended October 31, 2020 compared to 39.4% 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 and a decision by management to reduce inventory levels.

Selling, general and administrative expenses for the nine months ended October 31, 2020 decreased by approximately $7,844,000 compared to the same period last year and increased as a percentage of sales by 1.3%. The reduction in selling expense was primarily attributable to reduced variable freight, service, and selling expenses.

Interest expense decreased by $893,000 for the nine months ended October 31, 2020 compared to the same period last year. The Company has borrowed less money to finance seasonal working capital in the first nine months of the year. At October 31, 2020 the Company had completely paid off its revolving line of credit with the bank.

### Income Taxes for the three and nine-months ended October 31, 2020

Income tax expense for the third quarter and nine months ended October 31, 2020 is less than the prior year, primarily due to the decrease in pre-tax income and the change of the valuation allowance related to the business interest expense limitation deduction and state net operating losses.

### 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 current year, the COVID19 pandemic did not have a dramatic impact on the seasonality of shipments but did have an adverse impact on the volume which reduced working capital requirements. In addition, the Company was cautious about building inventory during these uncertain times. 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 decreased by $820,000 at October 31, 2020 compared to the prior year. Inventory decreased by $6,035,000 at October 31, 2020 compared to the prior year. The reduction in working capital enabled the Company to completely pay down its revolving line of credit with PNC Bank as of October 31, 2020. Outstanding debt at October 31, 2020 includes an equipment loan from PNC in the amount of $944,000 and a seller financed mortgage on a manufacturing facility in Conway, Arkansas.

Interest expense for the three and nine months ended October 31, 2020 is less than the same period last year due to lower average outstanding borrowings under the Company's revolving line of credit with PNC Bank.

Capital spending for the nine months ended October 31, 2020 was $1,900,000 compared to $2,963,000 for the same period last year. The reduction in capital spending was a direct result of management controlling the expenditures to preserve cash due to the adverse impact that the COVID-19 pandemic had on the Company’s operations. 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 by covenant.

Due to the adverse impact of the COVID-19 pandemic upon the Company’s operations, the Company violated its fixed-charge coverage ratio contained in the credit agreement with PNC Bank for the four quarter period ended July 31, 2020 and October 31, 2020. The Company obtained limited waivers and amendments from PNC Bank for both events of default, Amendment No. 21 and 22 (see Note 7 to the condensed consolidated financial statements). Amendment No. 22, amended the ongoing fixed-charge coverage calculation to allow for the add back of certain COVID-19 related costs incurred from May 1, 2020 through April 30, 2021, not to exceed $2,000,000, to adjusted EBITDA and retained the minimum fixed-charge coverage ratio of 1.10:1.00 beginning with the four quarter period ending January 31, 2021. Based on the add back allowance for certain COVID-19 related costs, and the current forecasts through December 31, 2021, management believes the Company will maintain compliance with its financial covenants.

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 October 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, 2,529 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, 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 Dec 14, 2020.
Source: SEC EDGAR, the filing index for accession 0001628280-20-017466. Last ingested by Listed: Oct 24, 2026, 14:54 ET. No prices; not investment advice.