Virco(VIRC) - 2024 Q2 - Quarterly Report

PART I. Financial Information This part presents the company's unaudited financial statements, management's analysis, market risk disclosures, and control procedures Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes for Virco Mfg Corporation Unaudited Condensed Consolidated Balance Sheets Balance Sheet Highlights (in thousands) | Metric | 7/31/2023 | 1/31/2023 | 7/31/2022 | | :--- | :--- | :--- | :--- | | Total Assets | $204,337 | $150,126 | $165,529 | | Total Liabilities | $122,042 | $82,065 | $113,024 | | Total Stockholders' Equity | $82,295 | $68,061 | $52,505 | Current Assets (in thousands) | Metric | 7/31/2023 | 1/31/2023 | 7/31/2022 | | :--- | :--- | :--- | :--- | | Cash | $1,600 | $1,057 | $2,179 | | Trade accounts receivables, net | $68,592 | $18,435 | $44,286 | | Inventories | $71,853 | $67,406 | $61,228 | | Total current assets | $144,331 | $89,068 | $109,967 | Current Liabilities (in thousands) | Metric | 7/31/2023 | 1/31/2023 | 7/31/2022 | | :--- | :--- | :--- | :--- | | Accounts payable | $27,854 | $19,448 | $27,290 | | Current portion of long-term debt | $32,256 | $7,360 | $22,736 | | Total current liabilities | $91,063 | $48,525 | $71,865 | Unaudited Condensed Consolidated Statements of Income - Three months ended July 31, 2023 and 2022 Three Months Ended July 31 (in thousands, except per share data) | Metric | 7/31/2023 | 7/31/2022 | YoY Change | | :--- | :--- | :--- | :--- | | Net sales | $107,321 | $82,797 | +29.6% | | Gross profit | $48,578 | $31,845 | +52.5% | | Operating income | $21,254 | $11,174 | +90.2% | | Net income | $15,534 | $9,680 | +60.5% | | Basic Net income per common share | $0.95 | $0.60 | +58.3% | Unaudited Condensed Consolidated Statements of Income - Six months ended July 31, 2023 and 2022 Six Months Ended July 31 (in thousands, except per share data) | Metric | 7/31/2023 | 7/31/2022 | YoY Change | | :--- | :--- | :--- | :--- | | Net sales | $142,264 | $114,881 | +23.8% | | Gross profit | $61,780 | $41,552 | +48.7% | | Operating income | $19,942 | $6,430 | +209.0% | | Net income | $14,092 | $4,596 | +206.6% | | Basic Net income per common share | $0.87 | $0.29 | +200.0% | Unaudited Condensed Consolidated Statements of Comprehensive Income - Three months ended July 31, 2023 and 2022 Three Months Ended July 31 (in thousands) | Metric | 7/31/2023 | 7/31/2022 | | :--- | :--- | :--- | | Net income | $15,534 | $9,680 | | Pension adjustments | — | $135 | | Net comprehensive income | $15,534 | $9,815 | Unaudited Condensed Consolidated Statements of Comprehensive Income - Six months ended July 31, 2023 and 2022 Six Months Ended July 31 (in thousands) | Metric | 7/31/2023 | 7/31/2022 | | :--- | :--- | :--- | | Net income | $14,092 | $4,596 | | Pension adjustments | — | $270 | | Net comprehensive income | $14,092 | $4,866 | Unaudited Condensed Consolidated Statements of Cash Flows - Six months ended July 31, 2023 and 2022 Cash Flow Summary (Six Months Ended July 31, in thousands) | Activity | 7/31/2023 | 7/31/2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(21,150) | $(19,970) | | Net cash used in investing activities | $(2,795) | $(1,524) | | Net cash provided by financing activities | $24,488 | $22,314 | | Net increase in cash | $543 | $820 | | Cash at end of period | $1,600 | $2,179 | - Net cash used in operating activities increased to $(21,150) thousand in 2023 from $(19,970) thousand in 2022, primarily due to a significant increase in trade accounts receivable[29] Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity - Three and six months ended July 31, 2023 and 2022 Total Stockholders' Equity (Three Months Ended July 31, in thousands) | Metric | 7/31/2023 | 7/31/2022 | | :--- | :--- | :--- | | Balance at May 1 | $66,722 | $42,750 | | Net income | $15,534 | $9,680 | | Balance at July 31 | $82,295 | $52,505 | Total Stockholders' Equity (Six Months Ended July 31, in thousands) | Metric | 7/31/2023 | 7/31/2022 | | :--- | :--- | :--- | | Balance at February 1 | $68,061 | $47,446 | | Net income | $14,092 | $4,596 | | Balance at July 31 | $82,295 | $52,505 | Notes to Unaudited Condensed Consolidated Financial Statements - July 31, 2023 - The financial statements are prepared in accordance with U.S. GAAP for interim information and SEC rules, and should be read in conjunction with the Company's Annual Report on Form 10-K[38] - The educational furniture market is highly seasonal, with approximately 50% of total sales typically occurring from June to August, requiring significant upfront investment in inventory and reliance on third-party bank financing[39] - Revenue is recognized when control of promised goods or services is transferred to customers, primarily at the point of delivery (FOB destination), and is recorded net of discounts, sales incentives, and estimated returns[42][44][45] Inventories Breakdown (in thousands) | Category | 7/31/2023 | 1/31/2023 | 7/31/2022 | | :--- | :--- | :--- | :--- | | Finished goods | $24,995 | $25,740 | $26,336 | | Work in process | $29,081 | $25,303 | $19,138 | | Raw materials | $17,777 | $16,363 | $15,754 | | Total inventories | $71,853 | $67,406 | $61,228 | - Total debt increased to $46,517 thousand as of July 31, 2023, from $21,744 thousand at January 31, 2023, primarily due to increased revolving credit line borrowings to finance seasonal working capital[53][56] - The effective income tax rates for the three and six months ended July 31, 2023, were 23.6%, significantly higher than the prior year, primarily due to the reversal of a valuation allowance for federal deferred tax assets[61] - Total stock-based compensation expense for the six months ended July 31, 2023, was $252 thousand, with $572 thousand of unrecognized compensation expense remaining[66] - Shipping and classroom delivery costs of $9,991 thousand (three months) and $13,334 thousand (six months) were included in selling, general and administrative expenses[75][76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting a return to seasonal sales cycles, increased profitability, and liquidity Overview - The company has fully returned to its traditional seasonal summer peak in 2023, overcoming prior year's COVID-19 related labor and material shortages, with approximately 50% of annual sales typically occurring from June to August[79][80] - The company started the current fiscal year with an order backlog approximately $18 million greater than the prior year, reaching $104.6 million at April 30, 2023, and began the peak period with nearly $20 million of increased inventory[80][81] - Orders increased by 10.4% in the quarter ended April 30, 2023, and 3.3% in the quarter ended July 31, 2023, resulting in a 6.7% year-to-date increase[81] Three Months Ended July 31, 2023 - Net sales for the second quarter increased by $24,524 thousand (29.6%) to $107,321 thousand, compared to $82,797 thousand in the prior year, driven by increased backlog, first-quarter orders, and price increases[83][84] - Gross margin improved to 45.3% from 38.5% in the prior year, attributed to price increases, stable commodity costs, and an increase in full-service orders[85] - Selling, general and administrative expenses increased by $6,653 thousand, due to higher variable freight and service, selling expenses, and a management bonus provision[86] - The effective income tax rate increased to 23.6% from 3.0% in the prior year, primarily due to the reversal of a valuation allowance for deferred tax assets[89] Six Months Ended July 31, 2023 - Net sales for the six-month period increased by $27,383 thousand (23.8%) to $142,264 thousand, compared to $114,881 thousand in the prior year, driven by increased backlog, first-quarter orders, and price increases[90] - Gross Margin for the first six months was 43.4% compared to 36.2% in the prior year, affected by price increases and relatively stable raw material and labor costs[91] - Interest expense increased by $670 thousand due to higher borrowings for seasonal working capital and increased interest rates[93] Liquidity and Capital Resources - The company's liquidity is significantly impacted by the extreme seasonality of the education furniture market, with 50% of annual sales shipped from June to August, requiring substantial inventory build-up and financing of accounts receivable[95] - Accounts Receivable increased by $24,306 thousand and Inventory increased by $10,625 thousand at July 31, 2023, compared to the prior year, financed by increased borrowing under the PNC Bank line of credit and vendor credit[96][97] - The revolving credit line with PNC Bank was amended (Amendment No 3) to increase the borrowing limit to $72.5 million during the peak seasonal period (June-August 2023)[99][100] - The company was in compliance with its debt covenants as of July 31, 2023, and management believes cash flows from operations and unused borrowing capacity will be sufficient for the next twelve months[101][102] Off Balance Sheet Arrangements - The company has no off-balance sheet arrangements[103] 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, 2023[104] Forward-Looking Statements - Forward-looking statements are subject to risks and uncertainties, including funding for educational institutions, material/labor costs, demand, competition, capital costs, and general economic conditions[105] - The company assumes no duty to update forward-looking statements to reflect new, changed, or unanticipated events or circumstances[106] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Virco Mfg Corporation is not required to provide these disclosures - The company is a smaller reporting company and is therefore not required to provide quantitative and qualitative disclosures about market risk[107] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - The company's Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were effective as of July 31, 2023, ensuring timely and accurate reporting[108] Changes in Internal Control Over Financial Reporting - There have been no material changes in the company's internal control over financial reporting during the fiscal quarter ended July 31, 2023[111] PART II. Other Information This part covers legal proceedings, risk factors, equity sales, and other required disclosures Item 1. Legal Proceedings The company is involved in ordinary course legal actions not expected to have a material financial impact - The company is a party to various legal actions arising in the ordinary course of business[114] - Management believes the ultimate outcome of all such matters will not materially affect the Company's financial position, results of operations or cash flows[114] Item 1A. Risk Factors Risk factors have not materially changed from those disclosed in the company's latest Annual Report on Form 10-K - The risk factors associated with the company's business have not materially changed compared to the risk factors disclosed in the Form 10-K[115] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds during the reporting period - None[116] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - None[117] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[118] Item 5. Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the quarter - No director or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the fiscal quarter ended July 31, 2023[119] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including agreements, plans, and required certifications - Exhibit 10.1: Amendment No 3 to Amended and Restated Revolving Credit and Security Agreement, effective May 5, 2023[120] - Exhibit 10.2: 2019 Omnibus Equity Incentive Plan, amended and restated as of May 19, 2023[120] - Exhibits 31.1, 31.2, and 32.1 include certifications from the Chief Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act[120]