Virco Mfg. Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended January 31, 2013 (the company’s “2012”); comparisons are to the year ended January 31, 2012. The filing also reports fourth-quarter results. Virco designs, manufactures and distributes furniture, primarily for schools and other institutional customers. Its business is highly seasonal, with about half of annual sales delivered in June through August.
Key financial results
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $158.856 million | $166.441 million |
| Gross profit / margin | $51.552 million / 32.4% | $48.158 million / 28.9% |
| Net loss | $3.830 million | $13.803 million |
| Loss per diluted share | $0.27 | $0.97 |
| Cash provided by (used in) operations | $7.163 million | ($0.910 million) |
| Capital expenditures | $2.050 million | $2.159 million |
- Fourth-quarter sales were $18.154 million, gross profit was $2.400 million, and net loss was $8.958 million. In the prior-year fourth quarter, sales were $26.294 million, gross profit $5.457 million, and net loss $7.836 million.
- Year-end cash was $0.853 million. Working capital was $12.526 million and the current ratio was 1.5:1, down from $18.598 million and 1.7:1 a year earlier.
- Year-end revolving debt was $4.053 million; approximately $4.841 million was available to borrow. Total stockholders’ equity was $27.020 million. Accrued pension liabilities were $26.385 million.
- Management reported covenant-defined EBITDA of $2.582 million for the year. Interest expense rose to $1.556 million from $1.122 million.
Changes versus the prior year
- Sales declined 4.5%, which management attributed to constrained school budgets and fewer completions of bond-funded projects. Project-order sales fell by more than $6 million; new-product sales rose by nearly $1.5 million but older product lines declined.
- Gross profit increased despite lower sales: higher selling prices, stable material costs and lower factory spending improved gross margin. Reduced factory utilization partly offset these benefits.
- The net loss narrowed by $9.973 million. SG&A fell approximately $6.7 million, reflecting lower severance and employee-related costs following workforce reductions. The company reported roughly $8 million less in full-time employee salary, wage and benefit spending than in FY2011.
- Operating cash flow improved to positive $7.163 million, supported in part by lower receivables and inventory. Inventory ended the year approximately $2.4 million below the prior year.
- Backlog was $17.3 million at January 31, 2013, versus $14.4 million a year earlier; substantially all was expected to ship during 2013.
Outlook, risks and unusual items
- Management expected 2013 school furniture sales to be comparable to or below FY2012, with lower bond-funded project completions and continued pressure on replacement-furniture demand. It did not expect new school construction completions to improve in 2013; industry forecasts pointed to potential improvement beginning in 2014.
- Management anticipated commodity, transportation and energy cost volatility in 2013, potentially greater than in 2012 but less severe than in 2011. It raised list prices for 2013 but cautioned that competitive bidding could limit price increases or require price concessions.
- About 49% of FY2012 sales were priced under one nationwide purchasing contract. The company’s exclusive supplier status under that contract was extended through 2014; loss of that status could affect sales.
- Credit covenants: At January 31, 2013, Virco failed the then-applicable minimum tangible-net-worth and EBITDA tests; its fixed-charge coverage ratio was 0.90:1 against a 1.10:1 requirement. On March 1, 2013, the lender amended the covenants, lowered specified thresholds and waived the EBITDA violation. The company said it believed its facility would provide sufficient liquidity for the next 12 months, but future covenant compliance was not assured. The secured revolving facility matured December 22, 2014.
- Dividends had been suspended since 2011, and the credit agreement prohibited dividends and most share repurchases. The company planned 2013 capital expenditures below $3 million and anticipated approximately $1.6 million in qualified pension-plan contributions plus about $0.691 million for nonqualified plans.
- FY2012 included a $760,000 pension settlement charge. The deferred-tax valuation allowance was $24.601 million; federal and state net operating loss carryforwards were approximately $23.563 million and $49.635 million, respectively.
- Environmental and ordinary-course legal contingencies were disclosed; management did not expect pending legal matters or insured claims to materially affect results. The auditor issued an unqualified opinion, and management reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether sales, project orders and school-furniture demand stabilize, and whether backlog converts to shipments and collections as expected.
- Compliance with the amended PNC covenants, seasonal borrowing availability, and the ability to refinance or replace the facility before its December 2014 maturity.
- Whether margin improvement persists amid bid competition, commodity and freight costs, and limited ability to reprice orders already contracted.
- Cash requirements for pension funding, lease and purchase commitments, and any additional operating losses; also assess the recoverability of deferred tax assets.