Virco Mfg. Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended January 31, 2017; the filing also reports fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise. Virco designs, manufactures and distributes educational and commercial furniture, with highly seasonal sales concentrated in the summer delivery period.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $173.4 million | $168.6 million |
| Gross profit / gross margin | $62.5 million / 36.1% | $59.6 million / 35.4% |
| Operating income / margin | $5.9 million / 3.4% | $5.9 million / 3.5% |
| Income before taxes | $4.7 million | $4.7 million |
| Net income | $22.8 million | $4.5 million |
| Cash flow from operations | $5.9 million | $7.5 million |
| Capital expenditures | $4.4 million | $4.3 million |
FY2017 diluted EPS was $1.49 versus $0.30. The large net-income increase did not reflect comparable growth in operating performance: a $17.962 million income-tax benefit resulted primarily from releasing most of the deferred-tax-asset valuation allowance. The company expects its FY2018 effective tax rate to return to approximately 39%.
At January 31, 2017, cash was $0.8 million, working capital was $26.9 million and the current ratio was 2.2. Total debt was $5.0 million, down from $6.8 million; approximately $22.0 million was available under the seasonal credit facility. Total assets were $108.2 million and stockholders’ equity was $59.4 million. Inventory was $35.7 million, up from $34.6 million. Retirement-benefit liabilities were $18.7 million.
Changes and operating performance
- Sales grew 2.9% year over year, attributed to higher volume; selling prices were substantially unchanged. New products contributed to the increase.
- Gross margin improved from 35.4% to 36.1%, supported by manufacturing efficiency and the timing of inventory sourcing, despite late-year steel cost increases. SG&A rose to $56.6 million from $53.7 million.
- FY2017 fourth-quarter sales increased to $23.4 million from $19.5 million, helped by a disaster-relief project and other school projects. Quarterly net loss was $5.0 million; the full-year tax benefit was recorded in the third quarter.
- Operating cash flow fell to $5.9 million from $7.5 million, with inventory and accrued-liability movements affecting cash generation.
- Backlog at year-end was $13.6 million, versus $12.2 million a year earlier; substantially all was expected to ship in FY2018.
Outlook, risks and other notable items
Management anticipated FY2018 school-furniture sales modestly above FY2017, while cautioning that education-budget constraints and delays between school bond approvals and furniture orders could limit growth. The company planned modest net price increases to recover higher commodity costs, but stated it may discount or otherwise compete on price to protect market share. It expected uncertainty in raw materials, freight and energy costs, with material costs as a share of sales potentially higher than in FY2017.
- Seasonality is pronounced: approximately 54% of annual sales were delivered in June through August. Inventory build-up and slower customer collections make seasonal bank financing important.
- About 56% of FY2017 sales were priced under one nationwide purchasing contract, exclusive to Virco for classroom furniture; the contract extension runs through December 2017, with two one-year extensions available through 2019.
- The PNC revolving facility matures in December 2019, is secured by substantially all borrower assets, and includes financial covenants and seasonal borrowing limits. Virco was compliant with its FY2017 financial covenants; it had required lender relief for a prior-year covenant issue.
- Management targeted approximately $7 million of FY2018 capital spending, above recent annual levels. Pension funding, volatile steel and other input costs, freight availability and pricing competition remain risks.
- The company changed product warranties effective January 1, 2017 to specified component-based periods, with no period longer than ten years. It also identified environmental compliance and remediation exposure, though management considered pending legal matters immaterial.
- Audited financial statements received an unqualified opinion. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Separate recurring operating earnings from the $17.962 million one-time tax benefit; review deferred-tax-asset realizability and the expected FY2018 tax rate.
- Confirm FY2018 sales, margins and pricing assumptions against actual school spending, bond-funded project timing, commodity costs and freight rates.
- Monitor seasonal borrowing availability, covenant compliance, the facility’s borrowing base and the planned capital-spending level.
- Assess customer and contract concentration, especially the nationwide purchasing contract and its extension options.
- Reconcile the filing’s narrative statement that Virco made no FY2017 share repurchases with the cash-flow statement’s $264,000 “common stock repurchased” amount.