Virco Mfg. Corporation — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2019. Virco manufactures and distributes school and office furniture. Its business is highly seasonal, with approximately half of annual sales typically shipped from June through August.
Financial performance
| Metric | Three months ended July 31, 2019 | Six months ended July 31, 2019 |
|---|---|---|
| Net sales | $70.359 million; down 5.9% year over year | $97.252 million; down $0.119 million year over year |
| Gross profit / margin | $28.739 million / 40.9%, versus $27.132 million / 36.3% | $37.823 million / 38.9%, versus $34.817 million / 35.8% |
| Operating income | $10.179 million, versus $8.855 million | $6.582 million, versus $4.387 million |
| Net income | $5.867 million, versus $5.475 million; diluted EPS $0.38 versus $0.35 | $2.800 million, versus $1.903 million; diluted EPS $0.18 versus $0.12 |
For the quarter, gross margin was 40.9%, operating margin approximately 14.5%, and net margin approximately 8.3%. For the six-month period, the respective margins were approximately 38.9%, 6.8%, and 2.9%.
- Cash flow: Six-month operating cash flow was negative $27.642 million, compared with negative $31.241 million a year earlier. Capital expenditures were $2.309 million, versus $1.686 million. Cash increased $139,000 to $877,000, primarily as financing inflows funded seasonal working capital.
- Working capital: Receivables were $41.105 million and inventory was $59.017 million at July 31. During the six months, receivables increased $27.887 million and inventory increased $11.728 million, consistent with seasonal activity.
- Debt and liquidity: Total debt was $51.748 million, including $44.585 million on the revolving credit line; the line’s interest rate was 6.75%. Approximately $18.415 million was available to borrow at July 31. The company reported $69.559 million of current liabilities. Operating lease liabilities totaled $24.873 million.
Changes and management commentary
- Quarterly sales declined as order rates weakened: second-quarter orders were about 11% below the prior-year quarter, and backlog fell to $42 million from $60.1 million a year earlier. Revenue held up better than orders because fulfillment timeliness improved.
- For the first six months, orders were approximately 14% lower year over year. Revenue was nearly flat because improved fulfillment and a larger opening backlog offset lower unit volume.
- Price increases of at least 10% by product, averaging nearly 15% across the first half and more than 15% in the second quarter, helped offset commodity, labor, benefit, freight, and tariff costs. Lower production rates and unit volume partly offset the margin benefit; SG&A rose, particularly due to freight and selling expenses.
- Management said the revised production-stocking program improved order fulfillment through July and anticipated it would benefit the third quarter. No quantified earnings or revenue guidance was provided.
Liquidity, risks, and unusual items
- The company said operating cash flow and unused PNC borrowing capacity should be sufficient for debt service, capital expenditures, and working-capital needs over the next 12 months. Seasonal inventory and receivables make liquidity dependent on borrowing availability and collections.
- Virco had violated its minimum fixed-charge coverage covenant for fiscal 2019; an April 2019 amendment waived that breach and revised fiscal 2020 covenants. The company reported compliance as of July 31, 2019. The credit agreement prohibits dividends and stock repurchases through January 31, 2020 and imposes capital-spending limits. Receivables are swept to repay the revolver, and covenant or borrowing-base problems could restrict access to cash.
- Variable-rate debt creates interest-rate exposure: a 100-basis-point increase in PNC’s base rate would have added approximately $121,000 of interest expense for the quarter and $195,000 for the six months.
- Adoption of lease accounting on February 1, 2019 added approximately $23.9 million of right-of-use assets and $25.6 million of lease liabilities, with no material impact on reported operations or cash flows. The filing reports no material change in risk factors, no material legal proceedings, and no subsequent events requiring disclosure. The company was under IRS examination for its fiscal 2016 federal tax return.
Important facts for investors to verify
- Whether weaker order intake and the $42 million backlog translate into lower shipments or further production underutilization.
- Whether pricing continues to offset input-cost and tariff pressure without further loss of volume.
- Revolver availability, seasonal cash conversion, covenant compliance, and progress toward the required clean-down.
- Whether management’s expectation of sufficient liquidity over the next 12 months remains supportable as receivables and inventory convert to cash.