# Virco MFG Corporation: Form 10-Q for the period ended Oct 31, 2022

- Company: [Virco MFG Corporation](/companies/virc.md) (CIK 751365)
- Form: 10-Q
- Filed: 2022-12-12
- Accepted by EDGAR: Dec 12, 2022, 14:11 ET
- Period: 2022-10-31
- Accession: 0001628280-22-031709
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/751365/000162828022031709/virc-20221031.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/751365/000162828022031709/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-10-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-08-01 to 2022-10-31 | $77.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-02-01 to 2022-10-31 | $192.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-08-01 to 2022-10-31 | $46.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-02-01 to 2022-10-31 | $119.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-08-01 to 2022-10-31 | $30.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-02-01 to 2022-10-31 | $72.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-08-01 to 2022-10-31 | $22.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-02-01 to 2022-10-31 | $57.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-08-01 to 2022-10-31 | $8.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-02-01 to 2022-10-31 | $15.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-08-01 to 2022-10-31 | $567.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-02-01 to 2022-10-31 | $1.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-08-01 to 2022-10-31 | $319.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-02-01 to 2022-10-31 | $332.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-08-01 to 2022-10-31 | $7.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-02-01 to 2022-10-31 | $12.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-08-01 to 2022-10-31 | $0.48 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-02-01 to 2022-10-31 | $0.77 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-08-01 to 2022-10-31 | $0.49 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-02-01 to 2022-10-31 | $0.77 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-08-01 to 2022-10-31 | 16,249,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-02-01 to 2022-10-31 | 16,136,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-02-01 to 2022-10-31 | $1.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-02-01 to 2022-10-31 | $2.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-10-31 | $2.2m | us-gaap:Cash |
| Current assets | at 2022-10-31 | $89.5m | us-gaap:AssetsCurrent |
| Total assets | at 2022-10-31 | $143.7m | us-gaap:Assets |
| Current liabilities | at 2022-10-31 | $43.2m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2022-10-31 | $14.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-10-31 | $2.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-10-31 | $64.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 19,253 characters.

### Results of Operations

### Overview

The results of operations for the three-month and nine-month periods ended October 31, 2022 and the comparable periods ended October 31, 2021 have been significantly impacted by economic conditions driven by the COVID-19 pandemic, global supply chain disruptions and global conflict. The impact of COVID-19 has been quite different 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.

During the three-month and nine-month periods ended October 31, 2021, the majority of our primary customers had either returned to full time classroom instruction or were planning for an imminent return. During this period, the Company received a large number of orders earlier than usual for immediate delivery in anticipation of the return to classroom instruction. Due to shortages of labor and raw materials, the Company was not able to deliver the ordered furniture during the traditional three months seasonal window in 2021, and therefore elevated production and shipping activity extended through the fourth quarter ended January 31, 2022. The Company began this fiscal year with a backlog of unshipped sales orders that was approximately $20 million more than typical of prior years.

For the three-month and nine-month periods ended October 31, 2022, management believes that the traditional seasonal cycle and the Company’s ability to service that seasonal cycle has started to return to normal. Year-to-date the Company experienced a 6.7% increase in orders compared to the same period last year, but quarterly order rates were volatile compared to the prior year and returned to a more traditional seasonal cycle. During the quarter ended October 31, 2022, the Company experienced a 15.9% decrease in orders compared to the same period last year, while orders for the first two quarters of 2022 increased compared to the same period last year.

During the three-month and nine-month periods ended October 31, 2021, the Company incurred severe price increases in the cost of raw materials. By example the cost of steel, depending on type, increased by 50% to 100% during the year. In addition to increased costs, the Company incurred shortages of domestically supplied materials including steel, plastic, resin, and wood. These cost increases continued through the end of the fiscal year ended January 31, 2022. During the three-month and nine-month periods ended October 31, 2021, the Company incurred labor shortages and had severe difficulty hiring both permanent and temporary labor. The Company paid significant amounts of double-time wages to both factory and warehouse employees, which adversely affected financial results. In comparison, the three-month and nine-month periods ended October 31, 2022 were characterized by continued high raw material costs, but did not incur the same severe spike in raw material costs incurred in the prior year. Many raw material costs continued to increase moderately during the nine months ended October 31, 2022, but the cost of steel and select other costs have declined. The Company raised factory wages by nearly $3 per hour in the fourth quarter of fiscal year ended January 31, 2022. This increased factory direct labor and overhead expenses, but allowed the Company to hire and retain adequate permanent and temporary labor. Production levels for the nine months ended October 31, 2022 increased by 18% compared to the prior year, but the entire increase occurred in the first six months of the year to support increased levels of seasonal summer sales. Increased levels of factory production and the related overhead absorption partially offset the effect of increased labor expenses.

Supply chain disruptions from international sources – primarily China – continue to adversely affect operations and the competitive landscape. In the six-month period ended July 31, 2021, obtaining materials from China was adversely affected by sharply increased freight costs and by severe disruptions in ocean freight at domestic ports. The Company experienced supply chain disruptions from domestic suppliers in addition to imported components. In the current nine-month period ended October 31, 2022, the port congestion has improved moderately and ocean freight costs have not been as volatile as in the prior year, but China’s severe lockdowns of major cities due to COVID has adversely affected shipments from China to the United States. 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 October 31, 2022, but may impact the timing of sales during the balance of the year.

The Russian invasion of Ukraine in February 2022 has caused oil and energy prices to spike, which can increase the cost of plastic and freight. The Company incurred increased freight rates, but because the Company increased selling prices at the beginning of the year, freight costs as a percentage of sales have been stable. In addition, approximately two thirds of the pig iron used in domestic steel production comes from Russia and Ukraine. During the quarter ended October 31, 2022, steel prices declined, but remain high in comparison to the beginning of 2021.

As discussed in the Risk Factors section of the Company’s Form 10-K for the fiscal year ended January 31, 2022, 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 January 1 price increase. There is typically 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. Sales for the second quarter ended July 31, 2022 and third quarter ending October 31, 2022 substantially consist of orders received prior to the July 1, 2022 price increase. The impact of the price increase for orders received after July 1, 2022 should benefit the Company’s fourth quarter ending January 31, 2023 to the extent such orders are shipped during the fourth quarter.

### Three Months Ended October 31, 2022

For the three months ended October 31, 2022, the Company earned pre-tax income of $8,194,000 on sales of $77,395,000 compared to a pre-tax income of $1,620,000 on sales of $57,331,000 in the prior year.

Sales increased by approximately $20,064,000 or 35.0%, compared to the same period in 2021. The increase was attributable to an increase in beginning of year sales backlog, increased first quarter orders, a price increase for orders received after January 1, and by the Company’s ability to service the traditional seasonal cycle. During fiscal year ended January 31, 2022, the Company incurred severe supply chain issues and labor shortages and shipped a larger portion of annual sales revenue later in the fiscal year.

Gross margin for the third quarter ended October 31, 2022 was 39.8% of sales compared to 35.4% in the prior year. In order to recover the increased cost of materials and labor incurred in the prior year, 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 first quarter, but was substantially realized for sales during the second quarter ended July 31, 2022 and the third quarter ended October 31, 2022. In the prior quarter, the Company incurred significant increases in raw material costs. In the current quarter, raw material costs remained high but were relatively stable, and were covered by the price increase of January 1, 2022.

Selling, general and administrative expenses for the three months ended October 31, 2022 increased by approximately $4,195,000 compared to the same period last year, but decreased as a percentage of sales to 28.4% compared to 31.0% in the prior year. The increase in selling, general and administrative expenses was attributable in part to increased variable freight and service expense and by increased variable selling expenses. In addition, the Company settled a legal action related to its intellectual property rights against a competitor in the school furniture market. The settlement effectively offset legal expenses for the nine months ended October 31, 2022.

The primary component of pension expense relates to the amortization of AOCI. In the prior 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 AOCI was lower, the quarterly amortization of AOCI was reduced compared to the comparable period in the prior year.

Interest expense increased by $240,000 for the three months ended October 31, 2022 compared to the same period last year. The increase was primarily attributable to an increase in the amount borrowed in 2022 to finance seasonal working capital and an increase in the interest rate.

For the three months ended October 31, 2022 and 2021, the effective income tax rates were 3.9% and 18.2%, respectively. The lower effective tax rate in 2022 was due primarily to the recording of a valuation allowance needed for federal deferred tax assets and certain state net operating loss carryforwards which commenced in the fourth quarter of fiscal year ended January 31, 2022 and continued through the period ended October 31, 2022. Effective tax rate for the third quarter ended October 31, 2021 was primarily due to the change in forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a partial valuation allowance on net deferred tax assets.

### Nine Months Ended October 31, 2022

For the nine-month period ended October 31, 2022 the Company earned a pre-tax profit of $12,803,000 on sales of $192,276,000 compared to a pre-tax profit of $1,511,000 on sales of $144,720,000 in the prior year. Sales increased by approximately $47,556,000 or 32.9%. The increase was attributable to an increase in beginning of year sales backlog, increased first quarter orders, a price increase for orders received after January 1, 2022 and by the Company’s ability to service the traditional seasonal cycle.

Gross margin for the first nine months of fiscal 2023 was 37.6% of sales compared to 34.8% in the prior year. The margin was positively affected by a price increase at the beginning of fiscal 2023, offset in part by increased labor expenses. Raw material costs increased significantly in the prior year. These costs remained high for the current year but were relatively stable and were substantially covered by the price increase implemented January 1, 2022.

Selling, general and administrative expenses for the nine months ended October 31, 2022 increased compared to the same period last year by approximately $11,083,000 but decreased as a percentage of sales to 29.7% compared to 31.8% in the prior year . The increase in selling, general and administrative expenses was attributable to increased variable freight and service expenses and variable selling expenses. Legal expenses to enforce the Company's intellectual property rights against a competitor in the school furniture market were offset by a settlement received in the third quarter ended October 31, 2022.

The primary component of pension expense relates to the amortization of AOCI. In the prior 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 AOCI was lower, the quarterly amortization of AOCI was reduced compared to the comparable period in the prior year.

Interest expense increased by $713,000 for the nine months ended October 31, 2022 compared to the same period last year. The increase was primarily attributable to an increase in the amount borrowed in 2022 to finance seasonal working capital and an increase in interest rate.

For the nine months ended October 31, 2022 and 2021, the effective income tax rates were 2.6% and 22.2%, respectively. The lower effective tax rate was due primarily to the recording of a valuation allowance needed for federal deferred tax assets and certain state net operating loss carryforwards which commenced in the fourth quarter of fiscal year ended January 31, 2022 and continued through the period ended October 31, 2022. Effective tax rate for the third quarter ended October 31, 2021 was primarily due to the change in forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a partial valuation allowance on net deferred tax assets.

### 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 current quarter ended October 31, 2022, the Company continued to experience supply chain challenges, but not to the same degree as in the prior year. The Company believes that traditional seasonal sales cycle has substantially returned for the quarter ended October 31, 2022, and will continue through the fourth quarter ending January 31, 2023.

Inventory increased by $16,982,000 at October 31, 2022 compared to October 31, 2021. Approximately 11% of the increase in inventory was valuation as a result of increased material and labor costs, and the balance was due to increased quantity. The quantity of inventory increased due to increased sales volume, and because the Company did not have adequate levels of inventory in the prior year due to supply chain issues. 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 nine months ended October 31, 2022 were $2,716,000 compared to $2,552,000 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 and increase in the borrowing limit from $65,000,000 to $70,000,000 in July and August 2022, and from $40,000,000 to $45,000,000 in October 2022. 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, including COVID-19 related costs, raw material costs and its ability to introduce price increases, management believes it will maintain compliance with its financial covenants under Amendment No. 2, 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 October 31, 2022.

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, 2022.

### Forward-Looking Statements

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2022, 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, 2022, 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.

## Market risk

As filed, 162 characters.

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.

## 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, 2022. 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, 2022 (the “Form 10-K”), which was filed with the SEC on April 28, 2022. The risk factors associated with our business have not materially changed compared to the risk factors disclosed in the Form 10-K.

Filed Dec 12, 2022.
Source: SEC EDGAR, the filing index for accession 0001628280-22-031709. Last ingested by Listed: Oct 24, 2026, 14:54 ET. No prices; not investment advice.