Virco Mfg. Corporation — Form 10-Q
Reporting period: Quarter and six months ended July 31, 2016, in fiscal 2017. Virco manufactures educational furniture; sales are highly seasonal, with about half of annual sales typically shipped from June through August.
Financial performance and position
| Metric | Three months ended July 31, 2016 | Six months ended July 31, 2016 |
|---|---|---|
| Net sales | $61.354 million, up 0.5% year over year | $82.181 million, down 2.3% |
| Gross profit / margin | $23.738 million / 38.7%, versus $23.996 million / 39.3% | $31.801 million / 38.7%, versus $32.190 million / 38.3% |
| Operating income / margin | $7.512 million / 12.2%, versus $7.941 million / 13.0% | $4.667 million / 5.7%, versus $5.101 million / 6.1% |
| Net income | $6.886 million, versus $7.450 million; diluted EPS $0.45 versus $0.49 | $3.747 million, versus $4.274 million; diluted EPS $0.25 versus $0.28 |
Six-month interest expense was $0.750 million, unchanged year over year. Six-month income tax expense was $0.170 million; the effective tax burden remained low because a valuation allowance covers the majority of deferred tax assets.
Six-month operating cash flow was negative $26.586 million, compared with negative $17.749 million a year earlier. Capital expenditures were $1.935 million, and cash ended at $2.428 million. At July 31, total debt was $37.004 million, including $36.979 million on the revolving line; current debt was $31.068 million. The PNC facility had a $49.750 million maximum availability, with approximately $25.252 million available to borrow. The company reported compliance with its financial covenants.
At July 31, accounts receivable were $33.835 million and inventory was $51.871 million. Compared with January 31, receivables had risen $23.906 million and inventory $17.268 million. Stockholders’ equity was $37.731 million.
Changes and management commentary
- Quarterly sales were slightly higher, but six-month sales declined, primarily due to lower unit volume. Quarter orders were down approximately 6%; six-month order rates were up approximately 0.4%. Backlog at July 31 was $39.5 million, versus $39.1 million a year earlier.
- Management attributed the quarterly gross-margin decline to lower production rates and reduced overhead absorption. For the six-month period, improved pricing and production efficiencies lifted gross margin, partly offset by lower production rates.
- Management said orders specifying August delivery shifted some revenue from the second quarter into the third quarter. July orders fell year over year, while August orders increased.
- Inventory was built to support an enhanced quick-ship program, reduce reliance on temporary labor, and improve delivery performance during the compressed summer delivery window. Seasonal working-capital needs are funded partly through vendor credit and the PNC facility.
Outlook, risks, and notable items
- Management expected cash from operations and unused PNC borrowing capacity to fund debt service, capital spending, and working-capital needs for at least the next 12 months. Fiscal 2017 capital spending was targeted at less than $4 million.
- Key risks cited include educational-institution funding, demand, material and labor availability and costs, competitive pricing and margins, capital costs, and general economic conditions. The company said its disclosed risk factors had not materially changed from its latest Form 10-K.
- The credit agreement limits dividends and includes financial covenants; an April 2016 amendment temporarily increased borrowing availability and shortened the required clean-down period. The line’s stated maturity is December 22, 2019.
- Management said a reassessment could result in release of some or all of the deferred-tax-asset valuation allowance within 12 months, which would create an income-tax benefit if recognized.
- The company revised prior-year inventory-category disclosures after identifying an error in how the obsolete-inventory reserve was allocated. It said the error was immaterial and did not change previously reported net inventory. Ordinary-course legal proceedings were not expected to be material; no material subsequent events were reported.
Important facts for investors to verify
- Whether the August delivery shift and higher August orders translated into third-quarter shipments and revenue, and how backlog and order trends developed.
- Whether seasonal receivable and inventory balances convert to cash as expected, given six-month operating cash use and the low reported cash balance.
- Revolver availability, borrowing levels, covenant compliance, and the ability to meet the credit agreement’s clean-down requirements.
- Whether production levels, quick-ship inventory, labor costs, and overhead absorption support margins through the peak season.
- Any change in the deferred-tax valuation allowance, and the potential tax effect of a release.