Virco Mfg. Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended October 31, 2019. Amounts below are in millions of dollars except per-share data and percentages. Virco manufactures and distributes school and office furniture. Its business is highly seasonal, with approximately half of annual sales typically shipped from June through August.
Financial performance
| Metric | Three months ended Oct. 31, 2019 | Prior-year quarter | Nine months ended Oct. 31, 2019 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $67.0 | $76.8 | $164.3 | $174.2 |
| Gross profit / margin | $26.8 / 40.1% | $26.4 / 34.4% | $64.7 / 39.4% | $61.2 / 35.2% |
| Operating income / margin | $6.4 / 9.5% | $5.0 / 6.5% | $13.0 / 7.9% | $9.3 / 5.4% |
| Net income | $3.9 | $2.9 | $6.7 | $4.8 |
| Diluted earnings per share | $0.25 | $0.19 | $0.43 | $0.31 |
Quarterly sales fell 12.8%, while nine-month sales declined 5.7%. Higher selling prices helped improve gross margins and earnings despite lower unit volume. Selling, general and administrative expense declined in dollars but increased as a percentage of sales. Nine-month interest expense rose $0.3 million, reflecting higher first-half borrowings and interest rates.
Cash flow, balance sheet and debt
- Operating cash flow: $10.2 million for the first nine months, compared with $2.8 million a year earlier. Working-capital movements included a $4.5 million increase in receivables and a $4.4 million decrease in inventory from January 31.
- Investing and financing: Capital expenditures were $3.0 million, versus $3.3 million. Net financing cash outflow was $7.3 million; cash decreased $0.04 million to $0.7 million.
- Debt and liquidity: Total debt was $14.4 million at October 31, down from $21.4 million at January 31 and $20.2 million a year earlier. The revolving facility’s rate was 5.75%; approximately $10.7 million was available to borrow at quarter-end. The facility matures March 2023 and is secured by substantially all borrower personal property and certain real property.
- Leases: Adoption of ASC 842 added operating lease right-of-use assets and liabilities of approximately $23.9 million and $25.6 million, respectively, at February 1, 2019. At October 31, lease liabilities totaled $24.3 million, including $3.5 million current.
- Other balance-sheet items: Cash was $0.7 million, inventory $42.9 million, and stockholders’ equity $64.5 million. The filing reports a $13.4 million accrued pension liability.
Changes, outlook and risks
- Management attributed the sales decline to reduced unit volume and a lower beginning backlog, partly offset by price increases. Prices were raised at the start of the fiscal year, with no product increase below 10%, to address commodity, labor, freight and tariff cost pressures.
- Order rates fell approximately 14% in the first six months but rose more than 27% in Q3 year over year. October 31 backlog was approximately $19 million, about $3 million above the prior year; nine-month orders nevertheless trailed the prior year by approximately $13 million, or 7.3%.
- Management said the revised production-stocking program improved delivery timeliness and shifted a greater portion of order fulfillment into Q2. Lower production rates still caused unfavorable manufacturing-overhead variances.
- No numerical earnings or revenue guidance was provided. Management expected operating cash flow and unused PNC borrowing capacity to fund debt service, capital expenditures and working-capital needs for the next 12 months.
- The company had violated its minimum fixed-charge coverage covenant for fiscal 2019; an April 2019 amendment waived that violation and revised fiscal 2020 covenants. Virco reported compliance as of October 31, 2019. The agreement restricts dividends and stock repurchases through January 31, 2020 and imposes capital-expenditure limits. Management expected to meet the seasonal clean-down requirement. A covenant breach or borrowing-base deterioration could limit access to cash.
- Key operating risks include educational-market demand, competition and pricing, availability and costs of materials (particularly steel), labor costs, and general economic conditions. A 100-basis-point increase in PNC’s base rate would have added approximately $77,000 to quarterly interest expense and $272,000 to nine-month expense. The company disclosed an IRS examination of its fiscal 2016 federal return; management said ordinary-course legal matters were not expected to be material. Risk factors were reported as unchanged from the 2018 Form 10-K.
Important facts for investors to verify
- Whether the Q3 order-rate rebound translates into sustained orders and revenue, given the year-to-date order shortfall.
- Whether price increases can continue to offset commodity, tariff, labor and freight costs without further volume or margin pressure.
- Ongoing covenant compliance, seasonal clean-down performance, borrowing-base availability and liquidity through the next peak season.
- Cash conversion and working-capital trends, including receivables collections and inventory levels.
- Future pension funding and lease obligations, and the outcome of the IRS examination.