Virco(VIRC) - 2020 Q3 - Quarterly Report

Part I. Financial Information Financial Statements The unaudited condensed consolidated financial statements show a decrease in total assets, an increase in liabilities due to ASC 842, and improved net income despite lower sales Unaudited Condensed Consolidated Balance Sheets Total assets increased to $139.9 million from January 2019 due to ASC 842, while total liabilities also rose to $75.3 million Consolidated Balance Sheet Highlights (in thousands) | Account | 10/31/2019 | 1/31/2019 | 10/31/2018 | | :--- | :--- | :--- | :--- | | Total current assets | $63,270 | $63,111 | $71,476 | | Net property, plant and equipment | $40,023 | $41,920 | $42,065 | | Operating lease right-of-use assets | $22,251 | $— | $— | | Total assets | $139,865 | $123,113 | $130,526 | | Total current liabilities | $25,392 | $32,125 | $34,361 | | Total non-current liabilities | $49,924 | $33,961 | $32,881 | | Total stockholders' equity | $64,549 | $57,027 | $63,284 | | Total liabilities and stockholders' equity | $139,865 | $123,113 | $130,526 | - The company adopted the new lease accounting standard ASC 842 on February 1, 2019, resulting in the initial recording of Right-of-Use (ROU) assets of approximately $23.9 million and lease liabilities of $25.6 million[42] Unaudited Condensed Consolidated Statements of Income Despite decreased net sales for both the three and nine months ended October 31, 2019, net income increased due to improved gross profit margins Three Months Ended October 31 (in thousands, except per share data) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Net sales | $66,998 | $76,809 | -12.8% | | Gross profit | $26,845 | $26,430 | +1.6% | | Operating Income | $6,369 | $4,961 | +28.4% | | Net income | $3,892 | $2,932 | +32.7% | | Diluted EPS | $0.25 | $0.19 | +31.6% | Nine Months Ended October 31 (in thousands, except per share data) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Net sales | $164,250 | $174,180 | -5.7% | | Gross profit | $64,668 | $61,247 | +5.6% | | Operating income | $12,951 | $9,348 | +38.5% | | Net lncome | $6,692 | $4,835 | +38.4% | | Diluted EPS | $0.43 | $0.31 | +38.7% | Unaudited Condensed Consolidated Statements of Comprehensive Income Net comprehensive income for the three months ended October 31, 2019, decreased to $4.0 million, while for the nine-month period, it increased to $7.1 million Comprehensive Income Summary (in thousands) | Period | 10/31/2019 | 10/31/2018 | | :--- | :--- | :--- | | Three Months Ended | | | | Net income | $3,892 | $2,932 | | Net comprehensive income | $4,022 | $4,308 | | Nine Months Ended | | | | Net income | $6,692 | $4,835 | | Net comprehensive income | $7,082 | $4,862 | Unaudited Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $10.2 million for the nine months ended October 31, 2019, driven by higher net income and favorable working capital changes Cash Flow Summary - Nine Months Ended Oct 31 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,223 | $2,819 | | Net cash used in investing activities | ($2,963) | ($3,316) | | Net cash (used in) provided by financing activities | ($7,301) | $2,444 | | Net (decrease) increase in cash | ($41) | $1,947 | Unaudited Condensed Consolidated Statements of Changes in Equity Total stockholders' equity increased to $64.5 million by October 31, 2019, primarily due to net income and stock-based compensation, with no cash dividends paid - Stockholders' equity increased to $64.5 million at October 31, 2019, from $57.0 million at February 1, 2019, mainly due to net income of $6.7 million[34] - The company paid no cash dividends in the first nine months of fiscal 2020, compared to $697,000 in the same period of fiscal 2019[35] Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the business's seasonality, adoption of ASC 842, revenue recognition, debt covenants, stock-based compensation, and retirement plans - The educational furniture market is highly seasonal, with about 50% of total sales typically occurring from June to August, requiring significant upfront investment in inventory and reliance on bank financing[39] - The company's revolving credit facility with PNC Bank matures in March 2023, with an April 2019 amendment waiving a prior covenant violation and restricting dividend payments and stock repurchases through January 31, 2020[64][71] - As of October 31, 2019, the company had $3.1 million of unrecognized compensation expense related to unvested restricted stock units, expected to be recognized over approximately 3 years[82] Management's Discussion and Analysis of Financial Condition and Results of Operations Despite a 5.7% decrease in net sales, pre-tax profit significantly increased due to improved gross margins, supported by price increases to offset rising costs Results of Operations - Nine Months Ended Oct 31 | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Sales | $164,250,000 | $174,180,000 | | Pre-tax Profit | $10,177,000 | $6,594,000 | | Gross Margin % | 39.4% | 35.2% | - Sales for the first nine months decreased by 5.7% due to a 14% decline in order rates in the first six months, partially mitigated by a 27% increase in order rates in the third quarter[102] - The company raised selling prices at the beginning of the year to compensate for increased costs of commodities (steel), imported components, labor, and freight, with no product price increased by less than 10%[99] - Capital expenditures for the nine months were $3.0 million, down from $3.3 million in the prior year, financed through the credit facility and operating cash flow[109] 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 estimated to add $272,000 in interest charges - The company's main market risk is interest rate fluctuations on its variable-rate bank borrowings[118] - A hypothetical 100-basis point increase in interest rates would have increased interest expense by approximately $77,000 for the third quarter and $272,000 for the nine months ended October 31, 2019[118] Controls and Procedures Disclosure controls and procedures were deemed effective as of October 31, 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 October 31, 2019[119] - No changes in internal control over financial reporting occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[121] Part II. Other Information Legal Proceedings Ongoing legal proceedings are not expected to materially affect the company's financial position, results of operations, or cash flows - Ongoing legal proceedings are not expected to be material to the company's financial condition[124] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - The risk factors associated with the business have not materially changed from those disclosed in the Form 10-K filed on May 1, 2019[125] Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities 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[126] Defaults Upon Senior Securities The company reported no defaults upon senior securities - The company reported no defaults upon senior securities[127] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[128] Other Information The company reported no other information required to be disclosed under this item - The company reported no other information required to be disclosed under this item[129] Exhibits The report lists filed exhibits, including CEO and CFO certifications as required by the Sarbanes-Oxley Act - Exhibits filed with the report include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[130]