Virco(VIRC) - 2020 Q1 - Quarterly Report

Part I. Financial Information Financial Statements The unaudited condensed consolidated financial statements for the three months ended April 30, 2019, show increased net sales, a reduced net loss, and the impact of seasonal inventory build-up and ASC 842 adoption Condensed Consolidated Balance Sheets Selected Balance Sheet Data (in thousands) | Account | April 30, 2019 | Jan 31, 2019 | April 30, 2018 | | :--- | :--- | :--- | :--- | | Total current assets | $79,298 | $63,111 | $77,822 | | Inventories | $63,511 | $47,289 | $62,498 | | Net property, plant and equipment | $41,353 | $41,920 | $41,638 | | Operating lease right-of-use assets | $23,295 | $— | $— | | Total assets | $163,308 | $123,113 | $139,507 | | Total current liabilities | $53,702 | $32,125 | $51,412 | | Total long-term debt | $16,508 | $15,910 | $13,990 | | Total liabilities | $109,032 | $66,086 | $84,243 | | Total stockholders' equity | $54,276 | $57,027 | $55,264 | - The adoption of the new lease standard (ASC 842) resulted in the recognition of $23.3 million in Operating lease right-of-use assets and corresponding lease liabilities as of April 30, 2019[8][11][28] - Inventories increased significantly to $63.5 million from $47.3 million at the end of the prior fiscal year, reflecting the seasonal build-up for the peak summer sales period[8][24] Condensed Consolidated Statements of Operations Statements of Operations Highlights (in thousands, except per share data) | Metric | Three months ended April 30, 2019 | Three months ended April 30, 2018 | | :--- | :--- | :--- | | Net sales | $26,893 | $22,569 | | Gross profit | $9,084 | $7,685 | | Operating loss | $(3,597) | $(4,468) | | Net loss | $(3,067) | $(3,572) | | Net loss per share (Basic & Diluted) | $(0.20) | $(0.23) | - Net sales increased by 19.2% year-over-year for the three months ended April 30, 2019[13][81] - The company reported a reduced net loss of $3.07 million compared to a net loss of $3.57 million in the same period of the prior year, primarily due to higher sales[13] Condensed Consolidated Statements of Cash Flows Cash Flow Summary (in thousands) | Cash Flow Activity | Three months ended April 30, 2019 | Three months ended April 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(18,286) | $(16,992) | | Net cash used in investing activities | $(1,219) | $(1,141) | | Net cash provided by financing activities | $19,320 | $20,971 | | Net (decrease) increase in cash | $(185) | $2,838 | - The significant cash outflow from operations was primarily driven by a $16.2 million increase in inventories, a typical seasonal trend for the company[19][24] - Financing activities provided $19.3 million in cash, mainly from net proceeds from long-term debt, which was used to fund the seasonal inventory build-up and operating cash shortfall[19] Notes to Financial Statements Key notes detail the business's extreme seasonality, the adoption of ASC 842 for leases, amendments to the revolving credit facility, and dividend restrictions - The educational furniture market is highly seasonal, with approximately 50% of total sales typically occurring from June to August, requiring a large up-front investment in inventory[24] - Effective February 1, 2019, the company adopted lease accounting standard ASC 842, resulting in the recording of right-of-use (ROU) assets of approximately $23.8 million and lease liabilities of $25.6 million[27][28] - The company's revolving credit agreement was amended in March 2019 to increase the maximum amount to $65 million and in April 2019 to waive a prior covenant violation and amend future covenants[55][57] - The credit agreement with PNC Bank restricts the company from issuing dividends or repurchasing stock through January 31, 2020[57][66] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the 19.2% sales increase driven by backlog and price adjustments, offset by declining new order rates and a slight gross margin decrease due to higher costs and lower efficiency, with financing primarily from the revolving credit facility Q1 FY2020 vs Q1 FY2019 Performance | Metric | Q1 FY2020 (ended 4/30/19) | Q1 FY2019 (ended 4/30/18) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $26,893,000 | $22,569,000 | +19.2% | | Pre-tax Loss | $(4,485,000) | $(5,034,000) | Improvement | | Gross Margin % | 33.8% | 34.1% | -0.3 ppt | | Order Rates | N/A | N/A | -18.2% YoY | | Order Backlog | $39,254,000 | $50,136,000 | -22.0% | - The company significantly increased selling prices at the beginning of the fiscal year to compensate for cost increases from steel tariffs, tariffs on Chinese products, and other costs, with full impact expected in Q2 and Q3[82] - Gross margin decreased due to higher factory employee compensation, increased material costs (steel, Chinese imports), selling from older, lower-priced backlog, and reduced factory efficiency from 13% lower production levels[84] - The company believes cash flow from operations and its revolving line of credit, with $4.0 million available, will be sufficient to fund its needs for the next twelve months[90] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate fluctuations on its variable-rate bank borrowings, with a 100-basis point increase impacting interest expense by approximately $74,000 - The company's main market risk is interest rate fluctuations on its variable-rate debt[99] - A 100-basis point upward fluctuation in the base interest rate would have increased interest expense by approximately $74,000 for the three months ended April 30, 2019, and $61,000 for the same period in 2018[99] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of April 30, 2019, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of April 30, 2019[100] - No changes in the company's internal control over financial reporting occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal controls[102] Part II. Other Information Legal Proceedings The company is involved in various legal actions, none of which are expected to materially impact its financial position, results of operations, or cash flows - The company states that pending legal proceedings are not expected to be material to its financial condition or results[104] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019 - The risk factors associated with the business have not materially changed from those disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2019[105] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or issuer purchases of equity securities during the period - The company reported no unregistered sales of equity securities or issuer purchases of equity securities during the period[106] Exhibits The report includes CEO and CFO certifications as required by Sarbanes-Oxley, along with XBRL-related documents - Exhibits filed with the report include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906, and XBRL data files[110][111][112]