Virco Mfg. Corporation — Form 10-K Summary
Business context and reporting period. Virco designs, manufactures and distributes furniture and equipment, primarily for U.S. K–12 schools, with additional education, government, hospitality and commercial customers. This is the annual report for the fiscal year ended January 31, 2014 (the company’s fiscal 2013); the filing also reports fourth-quarter results. Sales are highly seasonal, with about half of annual sales delivered in June through August.
Financial performance
| Metric | FY ended Jan. 31, 2014 | Prior year |
|---|---|---|
| Net sales | $155.920 million | $158.856 million |
| Gross profit / margin | $53.432 million / 34.3% | $51.552 million / 32.4% |
| Net loss | $1.730 million; $0.12 per share | $3.830 million; $0.27 per share |
| Cash flow from operations | $(0.243) million | $7.260 million |
| Capital expenditures | $3.632 million | $2.050 million |
| Cash at year-end | $1.051 million | $0.853 million |
- Cost of sales fell to 65.7% of sales from 67.6%, reflecting higher selling prices, stable material costs and lower factory spending. Selling, general and administrative expenses were $53.465 million, and restructuring expense was $1.408 million.
- At January 31, 2014, working capital was $16.983 million and the current ratio was 1.7:1. Total debt was $8.248 million, versus $4.053 million a year earlier; stockholders’ equity was $27.605 million.
- Fourth-quarter sales were $19.643 million, gross profit $4.276 million and net loss $6.901 million. In the prior-year fourth quarter, these were $18.154 million, $2.400 million and $8.958 million, respectively.
Material changes and management commentary
- Annual sales declined 1.8%. Management attributed the decrease to constrained school budgets and fewer completions of bond-funded projects; sales volume fell about $6 million, partly offset by pricing. New-product sales increased nearly $1.3 million but were offset by declines in older product lines.
- Backlog fell to $13.5 million at year-end from $17.3 million. Substantially all backlog was expected to ship during fiscal 2014.
- Cash from operations swung from $7.260 million provided to $0.243 million used, as inventory increased $2.464 million and other operating-liability movements used cash.
- Restructuring included workforce reductions and pension settlement costs. The company reported $1.408 million of restructuring expense in FY2013, including approximately $0.9 million of pension settlement costs.
- The company suspended cash dividends in 2011; the credit agreement prohibits dividends and generally restricts share repurchases.
Outlook, liquidity and risks
- Management expected fiscal 2014 school-furniture sales to be comparable to, or potentially below, fiscal 2013, citing continuing public-budget pressure and fewer bond-funded project completions. It anticipated price competition and uncertainty in material, freight and energy costs; material costs as a percentage of sales could exceed fiscal 2013 levels.
- Management set a fiscal 2014 capital-spending goal below $3 million. It expected the revolving credit facility and operating cash flow to cover working-capital needs over the next 12 months, while emphasizing the seasonal need to finance inventory and receivables.
- At January 31, 2014, approximately $10.919 million was available under the PNC facility. The company had violated its minimum EBITDA and fixed-charge-coverage covenants for the period, reporting EBITDA of $3.301 million against a $5.593 million minimum and a fixed-charge-coverage ratio below 0.00 against a 1.00 minimum. An April 15, 2014 amendment waived those violations, extended facility maturity to December 22, 2017, and set revised covenant terms. The amended facility’s maximum availability was reduced by $10 million to $50 million.
- Key risks include dependence on education funding, seasonal working-capital demands, price competition, commodity and supplier-cost volatility, reliance on a nationwide purchasing contract that priced about 49% of sales, and the possibility of future covenant noncompliance or reduced credit availability.
- The company recorded a $24.210 million valuation allowance against deferred tax assets. Pension obligations and market returns may affect future expense and funding needs; anticipated 2014 contributions were approximately $2.4 million in the pension-plan note.
- Management reported effective internal control over financial reporting, and the independent auditor issued an unqualified opinion on the financial statements. Management said ordinary-course legal matters were not expected to be material.
Important facts for investors to verify
- Whether Virco meets the revised PNC financial covenants and maintains sufficient seasonal borrowing availability, particularly given negative operating cash flow and the prior covenant waivers.
- Whether school spending, bond-funded project completions, order trends and backlog recover; verify actual fiscal 2014 sales against management’s comparable-or-lower expectation.
- Whether pricing offsets changes in steel, plastics, freight, energy and imported-component costs without materially sacrificing volume or margin.
- Whether restructuring savings persist and pension contributions, settlement costs and obligations develop as expected.
- Whether the limited lifetime warranty introduced February 1, 2014, changes warranty costs, notwithstanding management’s expectation of no significant effect.