Results of Operations
The effects of COVID-19
The results of operations for the three-month and six-month periods ended July
31, 2021 and the comparable periods ended July 31, 2020 have been significantly
impacted by economic conditions driven by the COVID-19 pandemic. The impact of
COVID-19 has been quite different during the current year compared to the prior
year. Typically, the Company has an exceptionally seasonal annual cycle where
approximately 50% of sales occur in the months of June, July and August. Orders
received from customers follow a similar cycle, approximately 4-6 weeks
preceding the selling season.
During the three and six-month periods ended July 31, 2020, 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 ended June 2020 and into
the year beginning August 2020, with a minority of districts attempting hybrid
or on-site learning. During this period our direct sales force, one of the
Company's distinct competitive advantages, was unable to make in-person calls.
Our primary customers, educators and district business officials, were typically
working remotely which complicated selling activities. As a result, order rates
during our traditionally busy summer season of June 2020 through August 2020
declined, causing a reduction in sales.
During the six months ended July 31, 2021, many school districts announced
hybrid or on-site learning beginning in approximately April 2021. The Company
received a large volume of orders for immediate delivery during this period.
Orders received for the first quarter ended April 30, 2021 increased by 26.7%
compared to the same period of the prior year. The majority of school districts
have planned for full time in-school teaching for the academic year beginning in
August / September 2021. Orders for the second quarter ended July 31, 2021
increased by 29.9% compared to the same period of the prior year.
Due to uncertainty created by COVID-19 during the year ended January 31, 2021,
the Company moderated production levels to reflect the reduced order activity
and maintained conservative inventory levels going into the current year. The
current year has been characterized by severe supply chain issues, which were
exacerbated by our low levels of inventory going into the year. The Company has
significant domestic manufacturing capabilities and manufactures the large
majority of finished goods domestically, but the Company imports a number of
components from manufacturers in China. The cost and timely delivery of these
components have been adversely affected by difficulties at the ports and by cost
increases from China. The cost and availability of steel, plastic, 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 interrupted the
supply and increased cost for plastic and utilities. The availability of labor,
both permanent employees and temporary employees, has been severely impacted.
Because the first quarter of the year is a seasonally slow period, sales
activity during the first quarter was not significantly affected by the supply
chain considerations. Sales volume for the first quarter ended April 30, 2021
increased by 59.2% compared to the same period of the prior year.
During the second quarter, which includes two of the three months that typically
account for 50% of our annual sales, the supply chain issues have been
challenging. Sales for the second quarter were flat compared to the same period
of the prior year. Backlog of orders at July 31, 2021 was approximately $20
million greater than the prior year.
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 continuing through the peak deliveries. This
is anticipated to cost the Company an additional $1.5 - $2.0 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 July 31, 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 with an extended supply
chain to China will be realized during the current fiscal year.
Three Months Ended July 31, 2021
Order rates for the three-months ended July 31, 2021 increased significantly
compared to the prior year, as schools reopened. Orders for the second quarter
increased by 29.9%, but sales were flat, decreasing by 0.7% compared to the same
period of the
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prior year. Backlog of orders at July 31, 2021 is approximately $20.0 million
greater than the prior year. The Company anticipates that a significant portion
of the increased backlog will ship during the third quarter, with a portion
delivered in the fourth quarter.
For the three months ended July 31, 2021, the Company earned a pre-tax profit of
$4,985,000 on sales of $59,022,000 compared to a pre-tax profit of $6,679,000 on
sales of $59,456,000 in the prior year.
Gross Margin for the second quarter was 37.8% of sales compared to 39.0% in the
prior year. The gross margin was affected by increased cost for raw materials
and costs relating to operating the factories with a reduced and interrupted
supply of materials, partially offset by a price increase at the beginning of
the year.
Selling, general and administrative expenses for the three months ended July 31,
2021 increased compared to the same period last year. The increase in selling,
general and administrative expenses was attributable to increased variable
freight expense and by increased selling expenses as our sales force is now
actively calling on customers.
Interest expense decreased by $135,000 for the three months ended July 31, 2021
compared to the same period last year. The Company has borrowed less money to
finance seasonal working capital in the second quarter.
For the three months ended July 31, 2021 and 2020, the effective tax rates were
24.6% and 46.8%, respectively. Effective tax rates for the three months ended
July 31, 2021 and 2020 were primarily due to the change in forecasted mix of
income before taxes in various jurisdictions, estimated permanent differences
and the recording of a partial valuation allowance on net deferred tax assets.
Six Months Ended July 31, 2021
Order rates for the six-months ended July 31, 2021 increased by 28.5% compared
to the prior year.
For the six-month period ended July 31, 2021 the Company earned a pre-tax loss
of $109,000 on sales of $87,389,000 compared to a pre-tax loss of $1,294,000 on
sales of $77,273,000.
Gross Margin for the first six months was 34.3% of sales compared to 36.4% in
the prior year. The gross margin was affected by increased cost for raw
materials and costs relating to operating the factories with a reduced and
interrupted supply of materials, partially offset by a price increase at the
beginning of the year. 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 six months ended July 31,
2021 increased compared to the same period last year but decreased as a
percentage of sales. The increase in selling, general and administrative
expenses was attributable to increased variable freight and service expenses.
Interest expense decreased by $246,000 for the six months ended July 31, 2021
compared to the same period last year. The Company has borrowed less money to
finance seasonal working capital during the year.
For the six months ended July 31, 2021 and 2020, the effective tax rates were
(36.7)% and 11.5%, respectively. Effective tax rates for the six months ended
July 31, 2021 and 2020 were primarily due to the change in forecasted mix of
income before taxes in various jurisdictions, estimated permanent differences
and the recording of a partial valuation allowance on net deferred tax assets.
Liquidity and Capital Resources
In years not impacted by COVID, 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 season. As discussed above, the current year impact
of COVID has moderated the summer peak deliveries, and the Company has operated
with reduced levels of inventory. This has reduced the need for seasonal
borrowing under our line of credit.
Accounts receivable increased by $1,712,000 at July 31, 2021 compared to the
same date in the prior year. The increase was primarily due to the timing of
sales during the second quarter. Inventory decreased by $7,051,000 at July 31,
2021 compared to the prior year. The decrease in units was more significant than
the decrease in dollars due to the increased material cost of
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the inventory. The net reduction in working capital enabled the Company to
reduce its borrowing under its revolving line of credit with PNC Bank as of July
31, 2021. Outstanding debt at July 31, 2021 includes an equipment loan from PNC
in the amount of $444,000 and a seller financed mortgage on a manufacturing
facility in Conway, Arkansas.
Interest expense for the six months ended July 31, 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 six months ended July 31, 2021 was
$1,210,000 compared to $1,625,000 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 fourth quarter period ended
January 31, 2021. Based on the add back allowance for certain COVID-19 related
costs, and the current forecasts through September 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
None.
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.
Forward-Looking Statements
From time to time, including in this Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 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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