Virco Mfg. Corporation — Q1 FY2014 Form 10-Q
Reporting period: Three months ended April 30, 2013; comparison is the three months ended April 30, 2012. Virco manufactures and sells educational furniture. Its business is highly seasonal: typically more than half of annual sales occur from June through September, and the first quarter includes inventory buildup ahead of that peak season. Figures below are in millions of dollars except per-share data and percentages.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $19.890 | $23.668 |
| Gross profit / gross margin | $6.409 / 32.2% | $6.967 / 29.4% |
| Selling, general and administrative expense | $10.565 | $11.529 |
| Interest expense | $0.328 | $0.255 |
| Loss before income taxes | $(4.484) | $(4.817) |
| Income tax expense (benefit) | $(0.037) | $0.016 |
| Net loss / diluted loss per share | $(4.447) / $(0.31) | $(4.833) / $(0.34) |
| Cash from (used in) operating activities | $(13.769) | $(7.394) |
| Capital expenditures | $0.800 | $0.325 |
- At April 30, 2013, cash was $1.174 million, inventory $38.920 million, and total current assets $50.406 million against current liabilities of $35.389 million.
- Total debt was $18.932 million ($12.932 million current and $6.000 million long-term), compared with $18.284 million at April 30, 2012. The PNC revolving facility has a stated maximum of $60 million, subject to seasonal terms and borrowing-base limits; $8.342 million was available at quarter-end. The facility matures December 22, 2014.
- Stockholders’ equity was $22.715 million, down from $26.291 million a year earlier. Accrued pension expenses were $26.476 million.
Changes versus prior year
- Sales declined $3.778 million, or 16%, primarily from lower unit volume, partly offset by modestly higher selling prices. Gross margin rose 2.8 percentage points, attributed to pricing and lower factory spending.
- SG&A fell by about $1 million, but rose as a percentage of sales by 4.0 percentage points. The reduced cost base helped narrow the seasonal first-quarter net loss.
- Incoming orders fell approximately 24.1%; backlog at April 30 was approximately 9.5% below the prior-year level. Accounts receivable were lower, reflecting lower sales.
- Operating cash outflow increased by $6.375 million, mainly because of the inventory build, lower receivables collections, and slower growth in accounts payable and accrued liabilities. Inventory increased $13.603 million from January 31.
Outlook, risks and notable items
- Management expects the PNC facility and operating cash flows to meet debt service, capital spending, and working-capital needs over the next 12 months. It set a fiscal 2013 capital-spending goal below $3 million; first-quarter spending was $0.800 million.
- Order trends were volatile: February and March orders were substantially below the prior year, with a 44% decline for the two months combined; April orders were up 5% and May orders up 15% year over year. If the April–May pace continues, management expects to increase production and hire seasonal workers in the second and third quarters; weaker orders could prompt rapid production reductions.
- Virco reduced full-time headcount by 38 in the first week of May. Approximately $0.400 million of related severance was expected to be recorded in Q2.
- The company recorded a valuation allowance against the majority of net deferred tax assets because management determined that realization no longer met the more-likely-than-not threshold. Management expected the tax provision or benefit to remain relatively low.
- The credit agreement contains financial covenants and restricts dividends and stock repurchases. Amendments had modified covenant terms and waived prior covenant violations; Virco reported compliance at April 30, 2013. The facility’s borrowing-base mechanics and receivables sweep mean liquidity could be constrained if covenant compliance or borrowing availability deteriorates. The required annual clean-down is to below $6 million for 60 consecutive days.
- Key stated business risks include school funding, demand, competition and pricing, materials costs (especially steel), labor availability and cost, and general economic conditions. The filing reported no material change to previously disclosed risk factors, no material subsequent events, and ordinary-course legal matters not expected by management to be material.
Important facts for investors to verify
- Whether order and backlog trends improve, and whether the reported May strength continues into the peak selling season.
- Inventory conversion, seasonal cash needs, borrowing-base availability, and progress toward the facility’s clean-down requirement.
- Ongoing compliance with amended PNC covenants and the company’s ability to retain adequate liquidity.
- The effect of the Q2 headcount reduction and severance expense on costs, production capacity, and margins.
- Assumptions supporting the deferred-tax-asset valuation allowance and the outlook for future taxable income.