Virco Mfg. Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended October 31, 2013. Financial statements are unaudited. Virco manufactures educational furniture; sales are highly seasonal, with about half typically occurring from June through August.
Financial performance
| Metric | Three months ended Oct. 31 | Nine months ended Oct. 31 |
|---|---|---|
| Net sales | $59.454 million, up 5.0% from $56.642 million | $136.277 million, down 3.1% from $140.702 million |
| Gross profit / margin | $21.161 million / 35.6%, versus $19.318 million / 34.1% | $49.156 million / 36.1%, versus $49.152 million / 34.9% |
| Operating expenses | SG&A $16.653 million; restructuring $0.791 million | SG&A $41.572 million; restructuring $1.266 million |
| Pre-tax income | $3.394 million, versus $2.757 million | $5.195 million, versus $5.199 million |
| Net income / diluted EPS | $3.408 million / $0.23, versus $2.908 million / $0.20 | $5.171 million / $0.35, versus $5.128 million / $0.35 |
| Interest expense | $0.323 million, versus $0.395 million | $1.123 million, versus $1.113 million |
- Cash flow: The cash flow statement reports nine-month operating cash flow of $3.442 million, versus $9.659 million a year earlier. MD&A instead states $3.285 million, versus $9.571 million; the filing does not reconcile these differing figures. Investing cash outflow was $2.721 million, including $2.740 million of capital expenditures. Financing cash outflow was $0.433 million. Cash increased $0.288 million to $1.141 million.
- Balance sheet at October 31: Cash was $1.141 million; receivables were $17.542 million; inventory was $24.475 million; total assets were $90.206 million. Current liabilities were $26.747 million and stockholders’ equity was $33.181 million.
- Debt and liquidity: The balance sheet lists $3.777 million of current debt and no non-current debt. The company had $11.770 million available under its PNC revolving facility. It reported covenant compliance and believed available credit and operating cash flow would fund needs for the next 12 months. The facility matures December 22, 2014 and requires a 60-day annual period with borrowings below $6 million.
- Other financial item: A pension settlement resulted in an approximately $0.800 million charge, included in restructuring charges, and a corresponding reclassification to other comprehensive income. A valuation allowance was recorded against the majority of net deferred tax assets; the quarter’s tax benefit was $0.014 million.
Changes and management commentary
- Quarterly sales rose on modestly higher prices and unit volume; incoming orders increased about 2% year over year and backlog was $1.7 million higher. For the first nine months, orders fell about 3.9%, reflecting constrained public-school budgets and fewer bond-funded projects.
- Quarterly gross margin improved with higher prices, greater production, and lower factory spending. Nine-month production rates were nearly 4% lower, but cost reductions helped improve gross margin.
- Quarterly SG&A rose about $0.386 million, mainly due to freight and service costs. Nine-month SG&A declined about $1.268 million, partly offset by severance and pension-settlement costs.
- Full-time headcount declined from 1,045 in February 2011 to 695 at October 31, 2013. Management described a continued focus on cost control, product development, domestic manufacturing, and profitable sales opportunities. No specific financial guidance was provided.
Risks, contingencies, and restrictions
- Demand remains exposed to school funding, tax receipts, public-sector budgets, and general economic conditions. Other cited risks include material and labor costs, competition and pricing, financing availability, and potential acceleration of the credit facility.
- The asset-based credit line is secured by substantially all personal property and certain real estate. Receivables are swept to repay borrowings; covenant breaches or reduced borrowing-base availability could restrict access to cash. The agreement also restricts dividends and stock repurchases. No dividends were paid, and repurchases were restricted.
- Management said ordinary-course legal matters were not expected to be material. No material changes to previously disclosed risk factors were reported. The company was under a Texas state tax examination for the year ended January 31, 2009; it reported no current IRS examination.
Investor verification points
- Reconcile the conflicting nine-month operating cash flow figures in the cash flow statement and MD&A.
- Review receivables growth and collections: receivables rose to $17.542 million, and the company attributed weaker operating cash flow mainly to higher receivables.
- Assess order trends, backlog, and school-budget conditions against the seasonal sales pattern.
- Monitor PNC availability, borrowing-base capacity, covenant compliance, and the December 2014 facility maturity.
- Evaluate the pension settlement charge and the deferred-tax valuation allowance, including their effects on reported earnings and future tax assets.