Virco Mfg. Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended January 31, 2020, compared with fiscal 2019. Virco designs, manufactures and distributes furniture, primarily for U.S. schools. Results reflect the year before the major COVID-19 disruptions described as subsequent events.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $191.1 million | $200.7 million |
| Gross profit / margin | $71.7 million / 37.5% | $67.1 million / 33.4% |
| Operating income / margin | $5.9 million / 3.1% | $2.3 million / 1.2% |
| Net income (loss) | $2.4 million | $(1.6) million |
| Diluted earnings (loss) per share | $0.15 | $(0.10) |
| Cash provided by operations | $9.8 million | $2.4 million |
| Capital expenditures | $4.2 million | $5.4 million |
Sales declined 4.8%, with an 18% volume reduction partly offset by higher selling prices. Cost of sales fell to 62.5% of sales from 66.6%, principally reflecting price increases; lower production volume raised overhead variances. SG&A rose to $65.7 million from $64.8 million and to 34.4% of sales from 32.3%. Net interest expense was $2.5 million, up $0.3 million.
Liquidity, debt and balance sheet
- At January 31, 2020, cash was $1.2 million, current assets $58.3 million and current liabilities $25.1 million. Inventories were $43.3 million, down from $47.3 million.
- Total debt was $16.7 million, down from $21.4 million; revolving-credit borrowings were $10.0 million. The company reported approximately $19.9 million available to borrow under its PNC facility. The facility matures March 2023, is secured by substantially all borrower personal property and certain real property, and had a 6.0% interest rate at year-end.
- Virco complied with debt covenants in FY2020. A FY2019 fixed-charge coverage covenant breach had been waived through an April 2019 amendment. The facility includes seasonal borrowing limits, a fourth-quarter clean-down requirement and restrictions on dividends and repurchases; cash dividends and stock repurchases were suspended from February 1, 2019.
- Adoption of lease accounting added $21.3 million of operating lease right-of-use assets and $23.4 million of lease liabilities at year-end; adoption did not materially affect reported operations or cash flows.
- Defined-benefit retirement obligations were significantly exposed to interest-rate and asset-return changes. Pension-plan funded status was a $19.6 million deficit, versus $12.8 million a year earlier; pension-related other comprehensive loss was $14.3 million net of tax.
Changes, outlook and risks
- Profitability and operating cash generation improved despite lower sales. Pricing actions helped offset prior-year material and labor cost increases; the company also reduced inventory and debt.
- Fiscal 2021 outlook was uncertain, not numerically guided. Management anticipated modest price increases to recover costs, continued price competition, and potential pressure on sales volume and margins. Planned capital spending was no more than $5 million.
- COVID-19 had closed most customer schools by March 2020. Virco reported transactional sales were immediately and severely affected, while project demand was expected to be more stable; it could not estimate the pandemic’s full financial impact and expected an adverse effect on FY2021 first-quarter results. State and local education budgets, school reopening, construction timing, seasonal staffing and supplier continuity were significant uncertainties.
- Other material exposures include seasonal working-capital needs, reliance on third-party freight for over 90% of deliveries, commodity costs and tariffs, and concentration of pricing through one nationwide purchasing contract (66% of FY2020 sales; awarded through December 2022 with extension options). Backlog was $20.7 million at year-end versus $21.4 million, mostly expected to ship in FY2021.
- Management reported effective disclosure controls and internal control over financial reporting, with no material weakness identified. The independent auditor issued an unqualified opinion on the financial statements. Management said ordinary-course legal matters were not expected to be material.
Investor verification priorities
- Track school reopenings, education funding and COVID-related order trends against management’s qualitative FY2021 expectations.
- Verify covenant compliance, borrowing-base availability, seasonal liquidity and the clean-down requirement under the PNC facility.
- Assess whether price increases can offset tariffs, materials, labor, freight and energy costs without further volume or margin pressure.
- Monitor pension funding and discount-rate assumptions, as well as the implications of the $19.6 million plan deficit.
- Confirm execution and timing of the $20.7 million backlog and continued access to the nationwide contract representing 66% of sales.