Virco Mfg. Corporation — Q1 FY2015 Form 10-Q
Reporting period: Three months ended April 30, 2014. Virco manufactures and sells furniture, primarily to educational customers. The business is highly seasonal, with approximately half of annual sales typically occurring from June through August.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $23.530 million | $19.890 million |
| Gross profit / margin | $8.177 million / 34.8% | $6.409 million / 32.2% |
| SG&A expense | $11.722 million | $10.565 million |
| Interest expense, net | $0.329 million | $0.328 million |
| Pre-tax loss | $3.874 million | $4.484 million |
| Net loss / diluted loss per share | $3.855 million / $0.26 | $4.447 million / $0.31 |
| Operating cash flow | $(11.251) million | $(13.769) million |
| Capital expenditures | $0.667 million | $0.800 million |
At April 30, 2014, cash was $1.471 million, inventory $41.592 million, current assets $54.490 million and current liabilities $40.439 million. Total debt was $20.586 million ($14.586 million current and $6.000 million long-term); stockholders’ equity was $24.205 million. The revolving credit facility had approximately $9.871 million available to borrow.
Operating cash use chiefly reflected the seasonal inventory build, partly offset by growth in accounts payable and accrued liabilities. Cash increased $0.420 million during the quarter, supported by $12.338 million of net financing cash flow.
Changes and management commentary
- Sales increased 18%, driven by higher unit volume despite slightly lower selling prices. Gross margin improved by 2.6 percentage points, which management attributed to better factory efficiency and stable raw-material costs.
- SG&A increased approximately $1.1 million, including higher variable distribution and selling costs, legal expenses related to an intellectual-property matter, and a sales program. Management did not expect further costs from the latter two items during the remainder of the year.
- Quarterly incoming orders rose 5.3% year over year, but trends were volatile: February and March orders were substantially stronger, while April orders fell 24%. Backlog at April 30 was down approximately 19.6% year over year and had begun the quarter about $3.8 million below the prior-year starting level.
- Management cited public-school funding constraints and fewer bond-funded new-school construction completions as headwinds to unit volume. Cost-saving actions had reduced full-time employees by approximately 33% over the preceding 2.5 years; the company planned to rely more on seasonal temporary workers.
Liquidity, outlook, and risks
- On April 15, 2014, the company amended its secured, asset-based revolver: maturity was extended to December 22, 2017, and maximum availability was reduced from $60 million to $50 million. The facility has seasonal borrowing adjustments, borrowing-base limits, and a $3 million letter-of-credit sublimit.
- The company was in compliance with its financial covenants at April 30. The lender had waived specified minimum-EBITDA and fixed-charge-coverage violations at January 31, 2014. The facility also requires a 60-consecutive-day annual clean-down to borrowings below $6 million. Management believed normal operating cash flow could meet that requirement and that available cash flow and revolver capacity would cover needs for the next 12 months.
- Management set a fiscal 2014 capital-spending goal below $3 million, less than expected depreciation. No specific revenue or earnings guidance was provided.
- Key risks include seasonal working-capital needs, slower payment by government customers, school funding and demand, material and labor availability and costs, competitive pricing, and variable-rate borrowing costs. A 100-basis-point increase in the bank base rate would have added approximately $35,000 of interest expense for the quarter.
- The revolver’s borrowing base and automatic cash sweep of receivables make liquidity dependent on eligible collateral and covenant compliance; the filing cautions that access to cash could be restricted following a breach or borrowing-base deterioration.
- Most deferred tax assets remained subject to a valuation allowance, limiting the expected tax benefit from losses. The company corrected immaterial pension-accounting errors in prior 2013 interim balance-sheet and comprehensive-income figures; previously reported net income and cash flows were unaffected.
Other notable items
- Effective February 1, 2014, the product warranty changed to a limited lifetime warranty; management did not expect a significant effect on warranty expense but said it could not predict whether future claims would rise or fall.
- Ordinary-course legal proceedings were not considered material by management. The company reported no material changes to previously disclosed risk factors or off-balance-sheet arrangements.
- The credit agreement prohibits dividends and generally restricts share repurchases. No shares were repurchased in the quarter; approximately $1.053 million remained under the board-authorized repurchase program, subject to those restrictions.
- The board planned to terminate the shareholder rights plan after the 2014 annual meeting, subject to shareholder approval.
Investor verification priorities
- Track summer-season shipments, collections, and inventory conversion against the elevated $41.6 million inventory balance.
- Monitor order trends and backlog, particularly after the April order decline and year-over-year backlog reduction.
- Confirm borrowing-base availability, covenant headroom, and progress toward the annual clean-down requirement.
- Assess whether improved gross margin and cost reductions can offset demand, pricing, and higher SG&A pressures.
- Review subsequent filings for the planned corrections to the July and October 2013 interim pension and comprehensive-income figures, and for developments in warranty claims and the shareholder rights plan.