Virco Mfg. Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2020 (fiscal 2021). Amounts below are U.S. dollars in millions unless noted. Virco manufactures and distributes school and office furniture; roughly half of annual sales typically ship from June through August, making the business highly seasonal.
Financial performance
| Metric | Three months ended July 31, 2020 | Prior-year quarter | Six months ended July 31, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $59.3 | $70.4 | $76.9 | $97.3 |
| Gross profit / margin | $23.2 / 39.1% | $28.7 / 40.8% | $28.1 / 36.6% | $37.8 / 38.9% |
| Operating income | $7.7 | $10.2 | $0.7 | $6.6 |
| Net income (loss) | $3.6 | $5.9 | $(1.1) | $2.8 |
| Diluted earnings (loss) per share | $0.23 | $0.38 | $(0.07) | $0.18 |
Quarterly sales declined 15.7%; six-month sales fell about $20.4 million. Six-month SG&A was $27.4 million, down from $31.2 million, but rose to 35.7% of sales from 32.1%. Interest expense declined to $0.9 million for six months from $1.6 million. Six-month income tax was a $0.1 million benefit, compared with $1.8 million of expense a year earlier.
Cash flow, balance sheet and liquidity
- Six-month operating cash use was $15.9 million, versus $27.6 million in the prior-year period; capital expenditures were $1.4 million, versus $2.3 million. Cash declined $0.3 million from fiscal year-end to $0.9 million at July 31.
- At July 31, current assets were $85.8 million and current liabilities $51.7 million. Receivables were $32.7 million and inventory $49.4 million. Receivables were about $8.4 million lower and inventory $9.6 million lower than a year earlier.
- Total debt was $33.8 million, including $27.5 million drawn on the revolving line; $18.4 million was classified as current. Approximately $32.9 million was available to borrow under the facility at July 31. The PNC credit agreement matures March 19, 2023; its stated July 31 interest rate was 4.5%. Operating lease liabilities totaled $22.4 million.
- Stockholders’ equity was $54.7 million. Accrued pension expense was $21.4 million. No cash dividends were paid in the six-month period.
Material changes and business developments
- COVID-19 disruption to schools, selling activity and deliveries reduced demand and shifted the usual order and shipment seasonality. Six-month order rates were down about 18.6% year over year. Second-quarter orders were down about 27.9%; July orders improved to a 12% decline. Backlog was flat year over year at July 31, after being about $8.3 million higher at April 30.
- Lower production volumes created unfavorable manufacturing overhead variances and contributed to gross-margin compression. Price increases partly offset the pressure. Lower variable freight, service and selling costs reduced SG&A.
- Arkansas facilities, representing about two-thirds of production and distribution capacity, remained operational. The Torrance facility operated at an estimated 50% of normal staffing at the time described; it had brief closures for cleaning. The company reported supply-chain interruptions involving imported components and domestic suppliers.
Outlook, risks and contingencies
- Management expects COVID-19 and economic uncertainty to continue affecting demand for an indeterminate period. It believes the school-furniture market may decline in fiscal 2021 and beyond, while its domestic manufacturing footprint could support market-share gains. No numerical revenue or earnings guidance is provided.
- Virco violated the 1.10:1.00 fixed-charge coverage covenant as of July 31. On September 8, 2020, PNC granted a limited waiver and amended the requirement to 1.00:1.00 for the rolling four-quarter period ending October 31, 2020, returning to 1.10:1.00 thereafter. Virco agreed to a non-refundable $75,000 fee. Management said it expects to maintain covenant compliance for the next 12 months and believes cash, operating cash flows and available credit are adequate; these expectations depend on projections and expense management.
- The asset-based credit facility includes borrowing-base limits and an automatic sweep of substantially all receivables. The filing cautions that a covenant breach, borrowing-base deterioration or other default could restrict access to cash liquidity. Management identified school funding, materials and labor availability and costs, demand, pricing, margins, capital costs and broader economic conditions as risks.
- Management reported ordinary-course legal proceedings as not expected to materially affect results or financial condition. The company was under IRS examination for its fiscal 2016 federal tax return. No material change in disclosed risk factors was reported.
Important facts for investors to verify
- Whether demand, order intake, backlog and school delivery activity recover, and how school budgets affect project and transactional orders.
- Compliance with the amended PNC fixed-charge coverage covenant, borrowing-base availability and seasonal liquidity needs.
- Whether lower production volumes continue to pressure manufacturing absorption and gross margins, and whether cost reductions can offset weaker sales.
- Receivable collections, inventory levels and cash generation through the seasonal cycle, alongside lease and pension obligations.
- Developments in COVID-19 impacts, supplier availability, and the ongoing IRS examination.