Virco Mfg. Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended January 31, 2015 (the filing’s “2014”); fourth-quarter figures are for the three months ended January 31, 2015. Virco designs, manufactures and distributes furniture, primarily for U.S. schools, with highly seasonal sales and a concentration of deliveries in June through August.
Financial results and key metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $164.052 million | $155.042 million |
| Gross profit / margin | $55.398 million / 33.8% | $52.554 million / 33.9% |
| Operating income (loss) | $2.372 million | $(1.431) million |
| Net income (loss) | $849,000 | $(1.730) million |
| Diluted earnings (loss) per share | $0.06 | $(0.12) |
| Cash provided by (used in) operations | $1.659 million | $(243,000) |
- Sales rose 5.8%, primarily from higher volume; management cited approximately $9 million of volume growth and no significant price change. New products added nearly $3.9 million in sales; project-order sales declined approximately $2.7 million.
- Cost of goods sold was 66.2% of sales versus 66.1%; gross margin was approximately 33.8%. SG&A and other expenses were 32.3% of sales versus 34.8%, helped by lower restructuring costs ($287,000 versus $1.408 million). Interest expense increased $152,000.
- Cash from operations improved to $1.659 million. Capital expenditures were $3.314 million, and cash declined to $470,000 from $1.051 million.
- At year-end, working capital was $17.566 million and the current ratio was 1.8:1. Total debt was $9.519 million, including $3.366 million current. The company reported $10.658 million available to borrow under its seasonal, asset-based credit facility at January 31, 2015.
- Stockholders’ equity was $22.573 million, down from $27.605 million; accrued retirement benefits rose to $28.986 million from $23.951 million. Pension-related other comprehensive loss increased by $6.254 million during the year.
Fourth quarter and changes versus prior period
- Fourth-quarter sales were $25.354 million, up from $19.480 million; gross profit was $6.000 million versus $4.113 million. The filing attributes the higher revenue in part to shipment timing and higher opening backlog.
- Fourth-quarter net loss was $5.131 million, compared with a $6.901 million loss in the prior-year quarter. The quarter remained loss-making despite improved sales.
- Annual performance returned to profit after losses in FY2013 and FY2012. Backlog at January 31, 2015 was $11.8 million, down from $13.5 million a year earlier; substantially all was expected to ship during 2015.
- In 2014, the company revised prior-period presentation of certain customer payments from SG&A to reductions of sales. It characterized the prior-period error as immaterial; the revision reduced both sales and gross profit by $878,000 for FY2013 and $944,000 for FY2012.
Outlook, risks and other notable items
- Management expected 2015 sales to be comparable to or slightly above 2014, while cautioning that state and local budget constraints and a lack of anticipated growth in bond-funded projects would limit growth. Management also anticipated continued price competition and possible price reductions to protect market share.
- Management expected continued volatility in raw materials, transportation and energy costs, with material costs as a percentage of sales potentially higher in 2015. Freight capacity was constrained in 2014 and expected to remain so through at least 2015; more than 90% of customer freight is supplied by third-party carriers.
- Seasonality creates substantial inventory, receivables and funding needs ahead of summer deliveries. The $50 million PNC revolving facility matures in December 2017, is secured by substantially all of the borrowers’ personal property and certain real property, and includes financial covenants and a required annual borrowing “clean down.”
- Virco was below the minimum tangible-net-worth covenant at January 31, 2015 under the then-applicable threshold. A March 31, 2015 amendment retroactively reduced the threshold; the company reported compliance with the amended covenant and expected to remain compliant. Future covenant compliance and lender waivers are not assured.
- Deferred-tax valuation allowance was $26.399 million, reflecting uncertainty about realization of most deferred tax assets. Federal and state net operating loss carryforwards were approximately $26.340 million and $54.332 million, respectively.
- Discount-rate declines and updated mortality assumptions increased pension obligations; management anticipated approximately $2.3 million of Employee Plan contributions in 2015, plus approximately $664,000 for nonqualified plans. The company disclosed significant sensitivity of pension obligations to discount-rate changes.
- The credit agreement prohibits dividends and generally restricts stock repurchases. No dividends were paid in FY2014. Ordinary-course legal proceedings were not considered material by management; environmental compliance and remediation remain potential cost risks.
- Management reported effective internal control over financial reporting and no identified material weakness. The independent auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether Virco maintains compliance with the amended PNC covenants and can meet the annual clean-down requirement while financing peak-season working capital.
- Whether the expected 2015 sales outlook, order timing and $11.8 million opening backlog translate into shipments and operating cash flow.
- Whether freight availability, labor, commodity and energy costs pressure margins, particularly where contract pricing limits timely price increases.
- Future pension funding needs and the impact of discount rates, plan assets and mortality assumptions on liabilities and equity.
- Whether sustained profitability supports realization of deferred tax assets currently subject to a substantial valuation allowance.