Virco Mfg. Corporation — Form 10-Q Summary
Reporting period: Three months ended April 30, 2017, the first quarter of fiscal 2018. The company manufactures and sells educational furniture. Results are highly seasonal: approximately half of annual sales typically occur from June through August, so first-quarter inventory and cash usage are elevated ahead of peak-season shipments.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $23.235 million | $20.827 million |
| Gross profit / margin | $8.427 million / 36.3% | $8.063 million / 38.7% |
| Operating loss | $3.265 million | $2.845 million |
| Pre-tax loss | $3.560 million | $3.109 million |
| Income tax benefit (expense) | $1.349 million benefit | $29,000 expense |
| Net loss / diluted loss per share | $2.211 million / $0.15 | $3.138 million / $0.21 |
| Net cash used in operating activities | $17.543 million | $16.526 million |
| Capital expenditures | $1.896 million | $1.097 million |
Sales increased 11.6%; management attributed about two-thirds of the increase to volume and the balance to price. Despite higher gross profit dollars, gross margin declined 2.4 percentage points. SG&A rose to $11.692 million from $10.909 million; management said it was stable as a percentage of sales. The net loss narrowed mainly alongside a substantially larger income tax benefit; operating and pre-tax losses both widened.
At April 30, 2017, cash was $685,000, inventory $54.788 million, current assets $68.004 million, and current liabilities $43.716 million. Total debt was $24.347 million, including $18.336 million classified as current; stockholders’ equity was $57.629 million. Cash fell $103,000 from January 31. Operating cash use was driven principally by the seasonal inventory build, which increased approximately $18.9 million from fiscal year-end. Financing provided $19.336 million, including $24.347 million of debt proceeds and $5.011 million of repayments.
Changes, outlook, and risks
- Orders increased approximately 17.5% year over year, and backlog at quarter-end rose about 24% to $39.553 million from $31.843 million. Management cautioned that order trends are volatile and project orders can shift deliveries into the summer and intensify seasonal workload.
- Management attributed lower gross margin primarily to higher factory compensation, particularly minimum-wage pressure; increased commodity costs, especially steel; and the lag before higher selling prices applied to shipments tied to earlier orders.
- The $49.5 million revolving credit facility had approximately $13.375 million available at April 30 and bore interest at 4.5%. The company reported compliance with financial covenants and believed liquidity would cover needs for at least 12 months. The facility includes covenants and limits dividends and certain capital-stock payments. A June 8, 2017 amendment reset revolving advances to $14 million for June and $11 million for July, and extended the equipment-line borrowing period.
- Management anticipates capital spending above depreciation for the first time in 16 years, with investment in factory automation and technology. First-quarter capital expenditures were higher than the prior-year quarter.
- After quarter-end, the company entered a non-binding agreement to purchase its Conway, Arkansas manufacturing building for $7.2 million, proposing a 20% down payment and seller financing for 20 years at 4%. The current lease expires in March 2018; the agreement was not binding at the time of the filing.
- Key stated risks include educational-institution funding and demand, material availability and costs (especially steel), labor availability and costs, competition and selling prices, capital costs, and general economic conditions. Management said risk factors had not materially changed from the latest Form 10-K. Ordinary-course legal matters were not expected to be material.
- The quarter included adoption of accounting guidance for share-based compensation; approximately $172,000 of unrecognized excess tax benefits was recorded through retained earnings. The filing reports a $1.349 million income tax benefit and notes that the prior-year comparison was affected by a deferred-tax valuation allowance. Management said the tax provision was not comparable between periods.
Investor verification points
- Whether the higher order rate and $39.553 million backlog convert to on-time summer shipments and collections, given project timing and seasonal volatility.
- Whether selling-price increases offset wage and steel-cost inflation and restore gross margin.
- Seasonal inventory conversion, operating cash use, revolver borrowings, covenant compliance, and remaining borrowing availability through peak season.
- The scale and funding of planned automation and technology spending, and whether the Conway building purchase proceeds beyond the non-binding agreement.
- The sustainability of deferred-tax assets and tax benefits; the filing does not provide a clear standalone forecast of future effective tax rates or earnings.