Business Context and Reporting Period
Company: Virco Mfg. Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2009
Industry: Educational and institutional furniture manufacturing.
Seasonality: The business is highly seasonal, with over 50% of annual sales typically occurring between June and September. This period requires significant upfront investment in inventory and working capital.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended 7/31/2009 | Six Months Ended 7/31/2009 |
|---|---|---|
| Net Sales | $74,623 | $101,672 |
| Gross Profit | $25,776 | $34,076 |
| Gross Margin % | 34.5% | 33.5% |
| Net Income | $4,046 | $1,059 |
| Diluted EPS | $0.29 | $0.07 |
| Cash and Equivalents | $1,614 (as of 7/31/2009) | N/A |
| Total Debt (Current + Long-term) | $27,116 | N/A |
| Working Capital | $40,965 | N/A |
Liquidity: The company maintains a revolving credit facility with Wells Fargo with a maximum limit of $65,000,000. As of July 31, 2009, availability under the line was $25,267,000.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 7.0% for the three months and 7.1% for the six months ended July 31, 2009, compared to the prior year. This was driven by a reduction in unit volume, specifically in non-project related business.
- Order Backlog: Incoming orders declined approximately 17.1% in the second quarter and 12.0% for the first six months compared to the prior year. Backlog decreased by approximately 17.0% year-over-year.
- Margin Expansion: Despite lower sales, gross margins improved (34.5% vs. 32.3% for the quarter) due to lower raw material costs (steel, plastic) compared to the prior year.
- Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased by approximately $1.4 million for the quarter and $2.1 million for the six months, primarily due to lower freight and field service costs.
- Balance Sheet: Accounts receivable increased by $27.4 million compared to January 31, 2009, reflecting seasonal peak shipments. Inventory levels were lower than the prior year by approximately $5.0 million due to reduced unit quantities and lower material costs.
Outlook, Risks, and Management Commentary
- Economic Impact: Management notes that order rates and results were adversely impacted by U.S. economic conditions and reduced tax receipts funding public school expenditures. Industry-wide office furniture shipments declined approximately 30% in the first six calendar months of 2009.
- Dividends: The company declared a third quarterly cash dividend of $0.025 per share subsequent to the period end. Management anticipates continuing quarterly dividends subject to balance sheet strength and cash flow.
- Capital Expenditures: Capital spending for the six months was $2.1 million. The company aims to limit total fiscal 2009 capital spending to approximately $5.0 million.
- Risks: Key risks include the availability and cost of materials (especially steel), labor costs, and demand for products. The company operates under annual fixed-price contracts, limiting its ability to pass on cost increases immediately.
- Compliance: The company was in compliance with all financial covenants under its credit facility as of July 31, 2009.
Investor Verification Checklist
- Seasonal Cash Flow: Verify the company's ability to manage the significant cash outflow required for inventory build-up prior to the peak summer season.
- Order Trends: Monitor incoming order rates, which declined 12-17% year-over-year, to assess future revenue visibility.
- Debt Covenants: Confirm continued compliance with the Wells Fargo credit facility covenants (leverage, asset/liability ratios, interest coverage).
- Commodity Costs: Track steel and plastic prices, as the recent margin improvement was driven by lower input costs which may fluctuate.
- Government Funding: Assess the impact of public school budget constraints on the company's primary customer base.