Virco Mfg. Corporation — Form 10-Q Summary
Reporting period: Three months ended April 30, 2020, the first quarter of fiscal 2021. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted.
Business context and results
Virco manufactures and distributes school and office furniture, primarily to K-12 schools and other educational and government customers. Its business is highly seasonal, with approximately half of annual sales typically occurring from June through August. COVID-19 school closures and delivery deferrals materially affected first-quarter shipments and selling activity.
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $17,599 | $26,893 |
| Gross profit | $4,904 | $9,084 |
| Gross margin | 27.9% | 33.8% |
| Operating loss | $(7,027) | $(3,597) |
| Loss before income taxes | $(7,973) | $(4,485) |
| Income tax benefit | $3,275 | $1,418 |
| Net loss | $(4,698) | $(3,067) |
| Loss per share, basic and diluted | $(0.30) | $(0.20) |
Sales fell $9.294 million, or 34.6%, largely from lower shipment volume; modestly higher selling prices partly offset the decline. Gross margin fell as production was reduced and factory efficiency weakened. Selling, general and administrative expenses declined by about $750,000, mainly due to lower variable selling and service costs, but rose as a share of sales. Interest expense decreased to $404,000 from $700,000.
Cash flow, liquidity and debt
- Operating cash used was $9.887 million, versus $18.286 million in the prior-year quarter. The company attributed the improvement mainly to lower receivables and inventory investment and higher accounts payable and accrued liabilities.
- Investing cash used was $488,000; financing provided $9.552 million, including $11.413 million of borrowings and $1.861 million of debt repayments. Cash decreased $823,000 to $327,000.
- At April 30, 2020, total debt was $26.248 million, including $19.740 million drawn on the revolving line. The line’s interest rate was 4.50%; approximately $12.343 million remained available to borrow. The credit facility matures March 19, 2023. The company reported compliance with financial covenants at quarter-end.
- Current assets were $69.020 million and current liabilities $42.386 million. Inventory was $58.190 million, up $14.861 million from January 31, 2020 but $5.321 million below April 30, 2019.
- Accrued capital expenditures were $922,000, compared with $884,000 a year earlier; cash capital expenditures in the cash flow statement were $488,000. These are different reported measures.
Management said operating cash flow and unused credit capacity should fund debt service, capital expenditures and working capital for at least 12 months, while noting it could not estimate COVID-19’s full financial impact.
Material changes, outlook and risks
- First-quarter order rates declined approximately 2.1% year over year, but shipments were deferred. Backlog rose 21.2% to $47.578 million from $39.254 million a year earlier.
- Transactional orders declined sharply, while larger project orders remained strong. Management said the backlog increase reflected stable orders alongside delayed deliveries.
- Production was approximately 20% lower year over year. Management delayed production and inventory investment until specific orders were received and reduced standard-product production.
- Management expected the pandemic to remain a challenge and said lower sales and earnings than otherwise expected were possible for the remainder of fiscal 2021. The duration and scale of effects were uncertain. It also cited potential market-share opportunities, including possible competitor delivery constraints and challenges in the China supply chain.
- At the Torrance facility, staffing was estimated at about 50% of normal; Conway, Arkansas, representing about two-thirds of production and distribution capacity, remained fully operational during the period described. The company reported no material supply-chain disruption to date.
- COVID-19 effects on schools, demand, delivery schedules and customer funding remain key uncertainties. Other stated risks include material and labor costs, competition, selling prices and margins, and general economic conditions.
- The company recorded an approximately $200,000 tax benefit related to the CARES Act’s change to the business-interest deduction limitation. It also had a partial valuation allowance against certain state deferred tax assets.
- Ordinary-course legal proceedings were assessed by management as not expected to materially affect the company. The company reported no off-balance-sheet arrangements and no material change in risk factors from its latest Form 10-K.
Important facts for investors to verify
- Whether backlog converts into shipments and cash collections, and how school reopening plans affect summer deliveries and fiscal 2021 demand.
- Availability under the asset-based credit facility, borrowing-base calculations, covenant compliance and the ability to maintain liquidity through the seasonal working-capital build.
- Whether reduced production and factory utilization continue to pressure gross margin, and whether inventory levels remain recoverable at net realizable value.
- The evolving impact of COVID-19 on customer funding, order patterns, facilities, supply chains and the company’s forward outlook.
- The basis for the differing capital expenditure figures: cash expenditures of $488,000 in the cash flow statement versus $922,000 on an accrual basis in MD&A.