Virco Mfg. Corporation — Q1 FY2013 10-Q
Reporting period: Three months ended April 30, 2012. Virco manufactures and sells educational furniture. Its business is highly seasonal: management says more than 50% of annual sales typically occur from June through September, so the company builds inventory ahead of its summer peak.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $23.668 | $24.256 |
| Gross profit / margin | $6.967 / 29.4% | $6.778 / 27.9% |
| SG&A and other expenses | $11.529 | $11.936 |
| Interest expense | $0.255 | $0.214 |
| Pre-tax loss | $(4.817) | $(5.372) |
| Income tax expense | $0.016 | $0.028 |
| Net loss / diluted loss per share | $(4.833) / $(0.34) | $(5.400) / $(0.38) |
| Cash used in operating activities | $(7.394) | $(12.243) |
| Capital expenditures | $0.325 | $0.803 |
Liquidity, debt and balance sheet
- At April 30, cash was $1.958 million, total current assets $53.881 million and current liabilities $38.001 million. Inventory was $39.911 million.
- Total debt was $18.284 million ($12.276 million current and $6.008 million long-term), versus $19.152 million a year earlier. The current-period debt balance was up from $11.508 million at January 31, reflecting seasonal working-capital needs.
- Availability under the secured, asset-based PNC revolving facility was $11.311 million at quarter-end. The facility provides up to $60 million subject to seasonal adjustments and borrowing-base limits; it matures December 22, 2014.
- Management said operating cash flow and unused facility capacity should fund debt service, capital expenditures and working capital for the next 12 months. The company was in compliance with facility covenants at April 30.
Changes and management commentary
- Sales declined $0.588 million, or 2.4%, year over year, due to lower unit volume partly offset by modestly higher selling prices. Backlog entering the quarter was about 18.4% below the prior-year start; incoming orders rose about 3.5%, while April 30 backlog was about 3.7% lower year over year.
- Gross margin improved 1.5 percentage points, reflecting higher prices and lower factory spending, partly offset by weaker manufacturing-overhead absorption. SG&A fell about $0.407 million, mainly from lower headcount following an early-retirement program and attrition.
- Production was reduced about 25% year over year. Inventory at April 30 was approximately $11.6 million, or 22.5%, below the prior-year level. If orders continue to exceed prior-year levels, Virco expects to add temporary workers and increase production in the second and third quarters.
- Operating cash use improved by $4.849 million year over year, primarily with lower inventory production and increased receivable collections. The company set a fiscal 2013 capital-spending goal of less than $3 million, below expected depreciation expense.
Outlook, risks and unusual items
- The quarter’s results are not necessarily indicative of full-year results because of strong seasonality. No numerical sales or earnings guidance was provided.
- Management cited school funding, demand, competition and selling prices, materials costs (particularly steel), labor availability and costs, capital costs, and general economic conditions as risks to forward results.
- A valuation allowance was recorded against the majority of net deferred tax assets because management concluded their realization no longer met the more-likely-than-not threshold. No income tax benefit was recorded for the quarter; tax expense was $16,000.
- The IRS was examining the fiscal year ended January 31, 2011; other federal and state tax years remained open to examination. Management did not expect a significant change in unrecognized tax benefits within 12 months.
- The PNC agreement prohibits dividends and generally prohibits share repurchases, subject to a limited exception for repurchases financed by a substantially concurrent share issuance. No shares were repurchased and no dividend was declared in the quarter.
- The facility requires borrowings to be below $6 million for 60 days each fiscal year and includes financial covenants. Receivables are swept to repay borrowings; covenant breaches or reduced borrowing-base capacity could restrict access to liquidity. Management said it expected to meet the clean-down requirement.
- Routine legal proceedings were assessed by management as not material. No material changes to the Form 10-K risk factors were reported. Disclosure controls were determined effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether order growth translates into peak-season shipments and collections, given the lower backlog and ongoing public-school funding pressures.
- Whether the company can fund seasonal inventory and meet the facility’s borrowing-base, covenant and annual clean-down requirements; quarter-end availability was $11.311 million.
- Whether lower production and headcount sustain improved margins without impairing capacity to serve peak demand.
- How future taxable income and tax examinations affect the deferred-tax valuation allowance and reported tax expense.
- Whether capital spending stays below the stated $3 million fiscal-year goal and liquidity remains adequate through the seasonal cycle.