Results of Operations
The effects of COVID -19
The results of operations for the three-months ended April 30, 2021 have been
significantly impacted by economic conditions driven by the COVID-19 pandemic.
The majority of our primary customers, the K-12 public school systems, closed
school campuses and initiated remote learning on or about March 15, 2020. Most
school districts continued with remote learning for the academic year beginning
August 2020, with a minority of districts attempting hybrid or on-site learning.
During the first quarter ended April 30, 2021, many school districts announced
hybrid or on-site learning beginning approximately April 2021. The Company
received a large volume of orders for immediate delivery during the first
quarter ended April 30, 2021. Orders received for the quarter increased by 26.7%
compared to the same period of the prior year. Sales volume for the quarter
increased by 59.2% compared to the same period of the prior year. Backlog of
orders at April 30, 2021 were approximately $2.1 million greater than the prior
The market for educational furniture is extremely seasonal, but there has
traditionally been stability to this seasonal cycle. In the prior year, the
timing of orders did not follow the traditional seasonal trends. Orders of
educational furniture are traditionally very strong in May and June. In the
fiscal 2021, these months were uncharacteristically slow. This reduction
adversely impacted both second and third quarter sales revenue in fiscal 2021.
In the current year, the Company experienced strong orders in the first quarter.
Subsequent to April 30, 2021, the Company continued to experience strong order
rates through May 2021. Nevertheless, management is not able to predict whether
and to what extent the return to full time classroom learning will result in a
return to the traditional seasonal sales cycle for educational furniture.
Due to uncertainty created by COVID-19 during fiscal 2021 the Company moderated
production levels to reflect the reduced order activity and maintained
conservative inventory levels going into the first quarter ended April 30, 2021.
Because the first quarter of the year is a seasonally slow period, sales
activity during the first quarter was not significantly affected by supply chain
considerations that have impacted the economy.
The Company imports a number of key components from manufacturers in China. The
cost and timely delivery of these components has been adversely affected by
difficulties at the ports and by cost increases from China. The cost of steel
and a variety of other raw materials has been extremely volatile, and the supply
chain considerations have been challenging. The severe weather experienced in
significant portions of the United States in February 2021 has also interrupted
the supply and increased cost for plastic and utilities. The availability of
labor, both permanent employees and temporary employees, has been adversely
impacted. In response to the labor shortage, and to reward employees who will be
working substantial overtime hours during the seasonal summer peak, the Company
has announced that for all factory and warehouse hourly employees, all overtime
hours will be paid at double time rather than the traditional time and one-half
for hours worked between June 1 and Labor Day. This is anticipated to cost the
Company an additional $1.5 million during the second and third quarters. The
Company anticipates that this increased cost will be offset, in whole or in
part, by the increased efficiency of using experienced Virco employees with a
substantial reduction in temporary labor. Inventory levels at April 30, 2021 are
significantly lower than the prior year, and the Company may incur additional
costs for expediting to satisfy customer orders. While these challenges are
substantial, the Company believes that the benefits of domestic manufacturing
compared to an import model will be realized during the current fiscal year.
Three Months Ended April 30, 2021
Order rates and sales for the first three months of 2021 increased significantly
compared to the prior year, as schools reopen and effects of COVID-19 are
moderating. Orders for the first quarter increased by 26.7%, and sales increased
by 59.2% compared to the same period of the prior year. Backlog of orders at
April 30, 2021 is approximately $2.1 million greater than the prior year.
For the three months ended April 30, 2021, the Company incurred a pre-tax loss
of $5,094,000 on sales of $28,367,000 compared to a pre-tax loss of $7,973,000
on sales of $17,817,000 in the prior year.
Gross Margin for the first quarter was 27.1% of sales compared to 27.5% in the
prior year. The gross margin was favorably affected by a modest price increase
at the beginning of the year, a favorable change in product mix, and an increase
in the proportion of product sold with full service relative to sold FOB
factory. These improvements were offset by an increase in the cost of
commodities used to manufacture product and reduced levels of production. The
Company was required to close the Conway, Arkansas factory for more than one
week in February due to severe weather and increased utility bills related to
the same severe weather.
Selling, general and administrative expenses for the three months ended April
30, 2021 increased by less than 1% compared to the same period last year and
decreased as a percentage of sales to 42.2% from 67.0%. The increase in selling,
general and administrative expenses was primarily attributable to increased
variable freight expense.
Interest expense decreased by $111,000 for the three months ended April 30, 2021
compared to the same period last year. The Company has borrowed less money to
finance seasonal working capital in the first quarter.
Income Taxes for the three-months ended April 30, 2021
Income tax benefit for the first quarter ended April 30, 2021 is less than the
prior year, primarily due to the decrease in pre-tax loss.
Liquidity and Capital Resources
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
Accounts receivable increased by $6,770,000 at April 30, 2021 compared to the
same date in the prior year. A portion of the increase was attributable to
increased volume of sales, and a portion due to the timing of sales. Sales in
the month of April 2021 were more than double sales in April 2020 due to the
timing of school closures. Inventory decreased by $15,315,000 at April 30, 2021
compared to the prior year. The reduction was due to cautious inventory
management combined with a significant increase in first quarter sales activity.
The net reduction in working capital enabled the Company to reduce its borrowing
under its revolving line of credit with PNC Bank as of April 30, 2021.
Outstanding debt at April 30, 2021 includes an equipment loan from PNC in the
amount of $611,000 and a seller financed mortgage on a manufacturing facility in
Interest expense for the three months ended April 30, 2021 is less than the same
period last year due to lower average outstanding borrowings under the Company's
revolving line of credit with PNC Bank.
Accrual basis capital expenditures for the three months ended April 30, 2021 was
$428,000 compared to $922,000 for the same period last year. The reduction in
capital spending was a direct result of management controlling the expenditures
to preserve cash due to the adverse impact that the COVID-19 pandemic had on the
Company's operations. 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 by covenant.
Due to the adverse impact of the COVID-19 pandemic upon the Company's
operations, the Company violated its fixed-charge coverage ratio contained in
the credit agreement with PNC Bank for the quarterly periods ended July 31, 2020
and October 31, 2020. The Company obtained limited waivers and amendments from
PNC Bank for both events of default, Amendment No. 21 and 22 (see Note 7 to the
condensed consolidated financial statements). Amendment No. 22 amended the
ongoing fixed-charge coverage calculation to allow for the add back of certain
COVID-19 related costs incurred from May 1, 2020 through April 30, 2021, not to
exceed $2,000,000, to adjusted EBITDA and retained the minimum fixed-charge
coverage ratio of 1.10:1.00 beginning with the four quarter period ending
January 31, 2021. Based on the add back allowance for certain COVID-19 related
costs, and the current forecasts through April 30, 2022, management believes the
Company will maintain compliance with its financial covenants.
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
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, 2021.
From time to time, including in this Quarterly Report on Form 10-Q for the
quarterly period ended April 30, 2021, 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, especially steel,
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, 2021 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.
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