Virco(VIRC) - 2021 Q4 - Annual Report

Part I Business Virco is the largest US K-12 furniture manufacturer, leveraging domestic production and an ATS strategy for seasonal demand Introduction and Operations Virco, founded in 1950, is the largest US K-12 furniture manufacturer with facilities in CA and AR, serving diverse sectors - Virco is the largest manufacturer and supplier of moveable educational furniture for the preschool through 12th grade market in the United States[17] - The company operates a 560,000 sq. ft. facility in Torrance, CA, and three facilities in Conway, AR, totaling 1,750,000 sq. ft. of manufacturing and distribution space[20] - In addition to the K-12 market, Virco serves junior colleges, universities, convention centers, hospitality, government facilities, and places of worship[19] Products and Services Virco offers a broad range of GREENGUARD Gold certified furniture, adapting product focus to market needs and providing diverse delivery services - In fiscal 2021, due to the COVID-19 pandemic, product focus shifted from collaborative furniture to traditional single-student desks and chair-desk combos to facilitate physical distancing in schools[24] - Principal manufactured product categories include Seating (ZUMA®, Sage™), Tables (4000/5000 Series, TEXT®), Computer Furniture, Desks/Chair Desks, Administrative Office Furniture, Laboratory Furniture, Mobile Furniture, and Storage Equipment[35][36][38] - Hundreds of Virco furniture models have earned GREENGUARD® Gold Certification for indoor air quality, and the company offers a Take-Back program for recycling out-of-service furniture components[44] - The company offers multiple delivery service levels, including Standard (tailgate), Inside Delivery, and Full-Service Delivery (placed in the classroom)[46] Manufacturing, Distribution, and Marketing Virco leverages a direct sales force, dealer network, and "Assemble-to-Ship" strategy for mass customization and seasonal demand - The company's "Assemble-to-Ship" (ATS) strategy involves sourcing low-cube components globally while fabricating bulky frames and tops domestically, allowing for customer-specific product and color combinations shortly before delivery[31][32] - Virco's educational products are marketed through what management believes is the largest direct sales force of any education furniture manufacturer, supplemented by a dealer network[55] - The company relies on third-party carriers for over 90% of its freight, which is effective for managing seasonal peaks but exposes Virco to freight rate volatility and capacity constraints[62][67] Seasonality and Working Capital Extreme seasonality in educational furniture sales necessitates significant inventory build-up and reliance on bank financing for working capital % of Sales in June, July, August | Fiscal Year | % of Sales in June, July, August | | :--- | :--- | | 2021 | ~52% | | 2020 | ~49% | - Shipments during peak weeks in July and August can be six times greater than in the seasonally slow winter months[33][63] - Due to seasonality, Virco builds significant inventory and carries large accounts receivable balances during the summer, relying on its line of credit with PNC Bank to meet cash flow requirements[64][65] Raw Materials and Supply Chain Volatile raw material costs (steel, plastics) and supply chain disruptions, especially from China, pose significant risks to production and profitability - The company's largest raw material costs are for steel, followed by plastics and wood. Prices for these commodities can be volatile[48][49] - The company purchases components from overseas, primarily China, and costs are impacted by tariffs, freight, and supplier price increases. In fiscal 2020, tariffs on components from China increased by 15%[49][50] - The company has experienced supply chain disruptions from China due to COVID-19 and freight availability, and domestic suppliers have also been disrupted[51][52] Customers, Competition, and Backlog Virco serves diverse customers, with 67% of sales from a single contract, operating in a price-competitive market with stable backlog - Sales priced under a single nationwide purchasing contract, where Virco is the exclusive supplier, accounted for approximately 67% of sales in fiscal 2021 and 65% in fiscal 2020. This contract extends through December 2022[61] - Key competitors include manufacturers such as Artco-Bell, KI Inc., and Smith System (owned by Steelcase), and dealers like School Outfitters and School Specialty[70] Sales Order Backlog | Metric | Jan 31, 2021 | Jan 31, 2020 | | :--- | :--- | :--- | | Sales Order Backlog | $20.9 million | $20.7 million | Human Capital and Other Matters Virco employs 775 full-time staff, holds over 50 patents, and maintains strong environmental compliance, adapting to pandemic conditions - As of January 31, 2021, the company had approximately 775 full-time employees, with about 595 in manufacturing/distribution, 115 in sales/marketing, and 65 in administration[76] - The company holds over 50 patents issued in the last 15 years and numerous trademarks, which it actively protects. However, the business is not materially dependent on any single patent or trademark, except perhaps the "Virco" name[73][74] - Virco is committed to environmental compliance, with policies for recycling and resource recovery that have earned repeated commendations from agencies like the EPA and CalRecycle[80][81] Risk Factors The company faces significant risks from COVID-19, education funding dependency, supply chain disruptions, seasonality, and commodity price volatility Risks Related to COVID-19 COVID-19 adversely impacted school operations, reduced demand, and poses ongoing risks to funding and supply chains - The COVID-19 pandemic led to widespread school closures and remote learning, which had an immediate adverse impact on the company's operating activities and product demand during fiscal 2021[92] - The pandemic may materially harm state and local tax revenues, which could reduce school budgets and future demand for furniture, and there is no assurance that federal aid will be sufficient to offset these losses[96] Risks Related to School Funding Sales are highly dependent on education funding, vulnerable to economic downturns and state budget shortfalls impacting spending - Company sales are highly dependent on the level of education funding, which is a function of state and local tax revenues and the general economic environment[98] - State budget shortfalls, driven by factors like underfunded retirement obligations or economic downturns, may lead to cuts in education spending, which would adversely affect revenue and results of operations[100] Strategic and Operational Risks Risks include new product failures, supply chain dependence, freight issues, sales concentration in one contract, and seasonal working capital needs - The company depends on outside suppliers for raw materials and components, including from international sources like China, making it vulnerable to supply interruptions, tariffs, and transportation disruptions[104] - Approximately 67% of sales in fiscal 2021 were priced through a single nationwide contract where Virco is the exclusive supplier. The loss of this status could cause sales to decline[107][108] - The highly seasonal nature of the business requires significant working capital financed through a credit facility with PNC Bank, which imposes restrictive covenants that may limit operational and financial flexibility[110][111] Industry and Economic Risks Profitability is sensitive to volatile commodity prices (steel, plastics) and petroleum-based product costs, which are difficult to pass on - Volatility in the price and availability of commodities, particularly steel and plastics, can adversely affect profitability, as the company may be unable to pass on cost increases due to fixed-price annual contracts[113][114] - Profitability is sensitive to the cost of fuel and petroleum-based products, which impact transportation costs, plastic material costs, and energy costs for manufacturing facilities[116] Financing Risks Reliance on a maturing credit facility, forecasting inaccuracies, and market volatility impacting pension costs pose financing risks - The company relies on its credit facility with PNC Bank, which matures in March 2023, and may not be able to renew it on favorable terms, which would adversely affect operations[117] - Inaccurate forecasts of peak summer season requirements for inventory, labor, and materials could diminish customer service or result in higher costs, negatively affecting results[118][119] - Volatility in equity markets or interest rates could significantly increase pension costs for the company's defined benefit plans, as the funded status is sensitive to investment returns and discount rates[121] Legal and Regulatory Risks Risks include intellectual property protection, environmental compliance costs, labor disruptions, and anti-takeover provisions - The company's ability to compete depends on protecting its intellectual property through patents and trademarks; failure to do so could allow competitors to copy products and increase price competition[122] - The company is subject to extensive federal, state, and local environmental laws, and compliance with more stringent future regulations could require material expenditures[124][125] - Corporate documents and Delaware law (Section 203) contain anti-takeover provisions, such as a staggered board, which could discourage, delay, or prevent a change in control[130][131] General Risk Factors General risks include key personnel loss, IT system failures, privacy non-compliance, and stock price volatility - The success of operations is highly dependent on retaining the senior management team and other key employees[133] - Information technology systems are vulnerable to disruptions from network failures, cyber-attacks, and other events that could interrupt business operations[134] Unresolved Staff Comments No unresolved staff comments from the SEC - None[138] Properties Virco operates a leased 560,000 sq. ft. HQ in CA and owns 1,750,000 sq. ft. facilities in AR - The company leases a 560,000 sq. ft. facility in Torrance, California, which includes its corporate headquarters, under a lease expiring April 30, 2025[139] - In Conway, Arkansas, the company owns a primary 1,200,000 sq. ft. facility on 100 acres, a 375,000 sq. ft. fabrication facility, and a 175,000 sq. ft. manufacturing facility[140][141] Legal Proceedings Ongoing legal proceedings are not expected to materially impact the company's financial position or results - Management does not consider any ongoing legal proceedings to be material to the company's financial condition or results of operations[142] Mine Safety Disclosures This item is not applicable to the company - Not applicable[143] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Virco's common stock trades on NASDAQ; dividend and repurchase ability was suspended through FY2020 - The company's common stock (VIRC) is traded on The NASDAQ Global Market[145] - The company's ability to pay cash dividends or repurchase stock was suspended through January 31, 2020, by an amendment to its credit facility[146] - No shares of stock were repurchased during fiscal years 2021 and 2020[147] Selected Financial Data As a smaller reporting company, selected financial data is not required - The Company is a smaller reporting company and is not required to provide the information under this item[148] Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A details COVID-19's adverse impact on sales and profitability, liquidity challenges, and credit facility covenant waivers Results of Operations (fiscal 2021 vs. 2020) Net sales decreased by 20.8% in FY2021, resulting in a pre-tax loss due to reduced volume and higher cost of sales Financial Metric (In thousands) | Financial Metric | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | | Net Sales | $152,795 | $193,001 | | Pre-tax (Loss)/Profit | ($2,976) | $2,727 | | Net (Loss)/Income per Diluted Share | ($0.14) | $0.15 | | Cash Flow from Operations | $7,799 | $9,759 | - Net sales decreased by 20.8% in fiscal 2021, primarily due to a reduction in volume partially offset by a 5% increase in list selling prices[175] - Cost of sales increased as a percentage of net sales to 64.1% in fiscal 2021 from 62.9% in fiscal 2020, mainly due to increased manufacturing overhead variances from reduced production levels[179] Liquidity and Capital Resources Liquidity is driven by seasonality, relying on a PNC Bank credit facility, which required covenant waivers in FY2021 - The company relies on a secured revolving line of credit with PNC Bank of up to $65 million to meet its seasonal cash flow requirements. The facility matures on March 19, 2023[200][201] - The company violated the fixed charge coverage ratio covenant in July and October 2020 but received waivers and amendments from PNC Bank to allow for a COVID-related cost add-back for calculation purposes[204][205] - The company's accumulated deficit of approximately $52 million as of January 31, 2021, is primarily the result of accounting reclassifications from historical stock dividends (1983-2003), not accumulated operating losses[220] Cash Flow Operating cash flow decreased to $7.8 million in FY2021, while investing cash use declined and financing cash use increased Cash Flow Summary (In thousands) | Cash Flow Summary (In thousands) | Year ended Jan 31, 2021 | Year ended Jan 31, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,799 | $9,759 | | Net cash used in investing activities | ($2,135) | ($4,258) | | Net cash used in financing activities | ($6,412) | ($5,089) | | Net (decrease) increase in cash | ($748) | $412 | Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, market risk disclosures are not required - The Company is a smaller reporting company and is not required to provide the information under this item[228] Financial Statements and Supplementary Data This section presents audited financial statements and notes, including the auditor's report on critical audit matters Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion, highlighting critical audit matters on inventory and deferred tax asset valuations - The auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements[231] - A critical audit matter was the valuation of slow-moving and obsolete inventories, due to the significant judgment required by management in forecasting consumption and sales[236][237] - A second critical audit matter was the realizability of U.S. federal deferred tax assets, which required significant judgments regarding projections of future taxable income, especially given recent cumulative losses[239][241] Consolidated Financial Statements Financial statements show decreased assets and liabilities, with a net loss in FY2021 compared to net income in FY2020 Balance Sheet Highlights (In thousands) | Balance Sheet Highlights (In thousands) | Jan 31, 2021 | Jan 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $50,967 | $58,342 | | Total Assets | $125,036 | $138,992 | | Total Current Liabilities | $22,106 | $25,118 | | Total Liabilities | $70,849 | $84,174 | | Total Stockholders' Equity | $54,187 | $54,818 | Statement of Operations Highlights (In thousands) | Statement of Operations Highlights (In thousands) | Year ended Jan 31, 2021 | Year ended Jan 31, 2020 | | :--- | :--- | :--- | | Net Sales | $152,795 | $193,001 | | Gross Profit | $54,925 | $71,675 | | Operating Income | $735 | $5,915 | | Net (Loss) Income | ($2,232) | $2,382 | Notes to Consolidated Financial Statements Notes detail accounting policies, debt, pension plans, income taxes, and lease commitments, including COVID-19 impacts - The company's debt is primarily a revolving credit line with PNC Bank, which had an outstanding balance of $4.6 million at Jan 31, 2021, down from $10.0 million at Jan 31, 2020[310] - The company's two defined benefit pension plans had a combined unfunded status of ($20.2 million) as of Jan 31, 2021[327] - The company maintains a valuation allowance of $1,064,000 against certain state net operating loss carryforwards that are not more-likely-than-not to be realized[346] - As of Jan 31, 2021, the company had total operating lease liabilities of $20.3 million with a weighted-average remaining lease term of 4.06 years[356] Changes in and Disagreements with Accountants on Accounting and Financial Disclosures No changes in or disagreements with accountants on financial disclosures - None[363] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective with no material weaknesses - Management concluded that the company's disclosure controls and procedures are effective as of the end of the fiscal year[365] - Management's assessment concluded that the company's internal control over financial reporting was effective as of January 31, 2021, with no material weaknesses identified[370] Other Information No other information is reported under this item - None[373] Part III Directors, Executive Officers of the Registrant and Corporate Governance Information is incorporated by reference from the definitive Proxy Statement - Information is incorporated by reference from the company's definitive Proxy Statement[376] Executive Compensation Information is incorporated by reference from the definitive Proxy Statement - Information is incorporated by reference from the company's definitive Proxy Statement[377] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information is incorporated by reference from the definitive Proxy Statement - Information is incorporated by reference from the company's definitive Proxy Statement[378] Certain Relationships and Related Transactions, and Director Independence Information is incorporated by reference from the definitive Proxy Statement - Information is incorporated by reference from the company's definitive Proxy Statement[379] Principal Accounting Fees and Services Information is incorporated by reference from the definitive Proxy Statement - Information is incorporated by reference from the company's definitive Proxy Statement[380] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K - This section provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K[382][386] Form 10-K Summary This item is not applicable - Not applicable[388]