Business Context and Reporting Period
Company: Virco Mfg. Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2009
Business Overview: Virco manufactures educational furniture and equipment. The industry is highly seasonal, with over 50% of sales typically occurring between June and September. The company operates under a fiscal year ending January 31.
Key Financial Metrics
| Metric | Three Months Ended 10/31/2009 | Nine Months Ended 10/31/2009 | Nine Months Ended 10/31/2008 |
|---|---|---|---|
| Net Sales | $62,920,000 | $164,592,000 | $184,276,000 |
| Gross Profit | $21,045,000 | $55,121,000 | $59,936,000 |
| Gross Margin % | 33.4% | 33.5% | 32.5% |
| Net Income | $2,905,000 | $3,964,000 | $4,436,000 |
| Diluted EPS | $0.20 | $0.28 | $0.31 |
| Cash from Operations (9mo) | $3,050,000 (vs. $7,399,000 prior year) | ||
| Cash & Equivalents (10/31/09) | $2,127,000 | ||
| Debt Outstanding | None (Revolving credit line unused) | ||
| Available Credit | $20,111,000 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 16.0% for the quarter and 10.7% for the nine-month period compared to the prior year. This was driven by a reduction in unit volume, specifically in non-project related business, while project-related business remained stable.
- Order Rates: Incoming orders declined 13.7% in the quarter and 12.4% for the nine-month period. Backlog decreased approximately 14.0% year-over-year.
- Profitability: Despite lower sales, gross margins improved (33.4% vs. 32.7% for the quarter) due to lower raw material costs (steel, plastic, fuel) compared to the prior year. Net income decreased 23.1% for the quarter and 10.6% for the nine-month period.
- One-Time Items: The prior year period included a $1,131,000 gain on the sale of real estate, which was not present in the current period.
- Working Capital: Accounts receivable decreased by approximately $6.1 million compared to the prior year due to lower sales volume. Inventory levels were approximately $1.6 million higher than the prior year due to seasonal build-up.
Outlook, Risks, and Management Commentary
- Economic Impact: Management attributes the decline in order rates to adverse U.S. economic conditions and reduced tax receipts funding public school expenditures. The American Recovery and Reinvestment Act did not significantly impact sales in the first nine months.
- Liquidity: The company maintains a $65 million revolving credit facility with Wells Fargo. As of October 31, 2009, there were no outstanding borrowings, with $20.1 million available. Management believes cash flows and credit availability are sufficient for the next 12 months.
- Capital Expenditures: Capital spending for the nine months was $3.675 million. The company targets approximately $5 million for fiscal 2009, including tenant improvements and manufacturing process expansions.
- Dividends & Buybacks: The company declared a quarterly dividend of $0.025 per share. It also continues a $3 million stock repurchase program, having repurchased 455,000 shares for $1.474 million through October 31, 2009.
- Risks: Key risks include the inability to raise prices under annual fixed-price contracts if commodity costs rise, reliance on government-funded school expenditures, and general economic conditions. The company currently benefits from stable and lower commodity costs.
Investor Verification Checklist
- Seasonality: Verify the impact of the upcoming peak season (June-September) on cash flow requirements and inventory levels.
- Commodity Costs: Monitor steel, plastic, and fuel prices, as the company's margins are sensitive to these costs under fixed-price contracts.
- Order Backlog: Track the trend in backlog and order rates, which have declined significantly year-over-year.
- Credit Facility: Confirm continued compliance with financial covenants (leverage, asset/liability ratios) on the Wells Fargo credit line.
- Government Funding: Assess the potential impact of future federal or state education funding on the company's primary customer base.