Virco Mfg. Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 31, 2015; fiscal year ends January 31, 2016. Virco manufactures and sells educational furniture. Results are highly seasonal, with about half of annual sales typically occurring from June through August. Financial statements are unaudited.
Financial performance
| Metric | Three months ended October 31 | Nine months ended October 31 |
|---|---|---|
| Net sales | 2015: $64.981 million; 2014: $62.273 million, up 4.3% | 2015: $149.100 million; 2014: $138.698 million, up 7.5% |
| Gross profit / gross margin | $23.210 million / 35.7%; prior year $20.672 million / 33.2% | $55.399 million / 37.2%; prior year $49.398 million / 35.6% |
| Operating income | $6.519 million; prior year $4.793 million | $11.619 million; prior year $7.262 million |
| Net income | $6.003 million; diluted EPS $0.39. Prior year $4.632 million; diluted EPS $0.31 | $10.276 million; diluted EPS $0.67. Prior year $5.980 million; diluted EPS $0.40 |
| Net interest expense | $0.379 million; prior year $0.393 million | $1.129 million; prior year $1.227 million |
| Cash from operations | Not presented separately for the quarter | $10.294 million; prior year $2.954 million |
Management attributed higher sales to increased selling prices, and nine-month growth also reflected higher unit volume. Gross-margin improvement reflected higher prices, stable material costs, and production efficiencies. SG&A increased, including variable selling costs and performance-bonus accruals. Nine-month factory production hours rose 7%.
Financial position and liquidity
At October 31, 2015, cash was $1.595 million, trade receivables $20.369 million, inventory $27.168 million, and total assets $93.445 million. Total debt was $4.132 million, including $4.018 million drawn on the revolving credit line; stockholders’ equity was $34.497 million. Debt was down from $9.519 million at January 31, 2015 and $8.171 million a year earlier. Cash was $1.125 million higher than at January 31, 2015.
Operating cash flow improved year over year, mainly due to stronger profitability and increased current liabilities, partly offset by higher receivables. Receivables increased year over year because of shipment timing; inventory was $1.258 million below October 31, 2014. Capital expenditures were $3.583 million for the nine months, versus $2.584 million a year earlier, exceeding management’s stated goal of keeping full-year fiscal 2015 spending below $3 million.
The PNC facility has a $50 million maximum availability and matures December 22, 2017. Approximately $13.331 million was available at October 31, 2015; the stated interest rate was 4%. The company reported compliance with financial covenants through the first three quarters. Management said cash from operations and unused facility capacity should cover capital and working-capital needs for at least 12 months.
Changes, outlook and risks
- Year-to-date shipments plus order backlog were 3% above the comparable prior-year measure, down from 6% growth reported through the second quarter. Backlog at October 31 was approximately $6 million below the prior year.
- Management said activity appeared to be moderating heading into the seasonally slow November–January quarter. No specific earnings or revenue guidance was provided.
- A December 2, 2015 credit amendment modified the annual clean-down requirement: during October–December, revolving advances may exceed $6 million for up to 30 consecutive days. The filing describes an earlier requirement to reduce borrowings below $6 million for 60 consecutive days each fiscal year.
- The company recorded little income tax expense for the first nine months. A valuation allowance was recorded against the majority of net deferred tax assets; quarterly tax expense was affected by the allowance and state taxes. Accrued uncertain tax positions were $137,000.
- Accrued pension expenses were $27.368 million at October 31, 2015, versus $22.063 million a year earlier. The filing reports pension adjustments in other comprehensive income, including $1.485 million for the nine-month period.
- Key stated risks include education-sector funding and demand, material availability and costs—especially steel—labor availability and costs, competitive pricing and margins, capital costs, and general economic conditions. Ordinary-course legal matters were described as not expected to be material; the company reported no off-balance-sheet arrangements.
Prior-year sales and expense presentation was revised for customer payments that should have been recorded as reductions of sales rather than SG&A. The changes reduced reported 2014 net sales, gross margin, and SG&A by $379,000 for the quarter and $676,000 for the nine-month period; management characterized the errors as immaterial.
Important facts for investors to verify
- Whether the moderation in activity and year-over-year backlog decline persist through the seasonally slow fourth quarter.
- Whether receivables convert to cash as expected and seasonal working-capital needs remain supported by operating cash flow and PNC availability.
- Compliance with the amended credit-facility terms, including covenant requirements and the clean-down provision.
- The effect of the deferred-tax valuation allowance and the company’s ability to realize deferred tax assets.
- Capital-spending outcomes versus the stated fiscal-year target, and any changes in pension obligations or warranty exposure.