Virco Mfg. Corporation — Q1 FY2016 (quarter ended April 30, 2015)
Virco manufactures educational furniture. The filing covers the first quarter of its fiscal year ending January 31, 2016; results are unaudited. The business is highly seasonal: roughly half of annual sales typically occur from June through August, and the company builds inventory ahead of that peak.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $23.048 million | $23.383 million |
| Gross profit / margin | $8.194 million / 35.6% | $8.030 million / 34.3% |
| Operating loss | $2.841 million | $3.545 million |
| Pre-tax loss | $3.139 million | $3.874 million |
| Net loss | $3.178 million | $3.855 million |
| Basic and diluted loss per share | $0.21 | $0.26 |
| Net cash used in operating activities | $10.023 million | $11.251 million |
Gross margin improved with slightly higher selling prices and lower raw-material costs. SG&A fell by approximately $532,000, partly because the prior-year quarter included non-recurring legal expenses and a sales program that ended in 2014. Interest expense was slightly lower, attributed to lower borrowings. The effective tax rate was affected by a valuation allowance on most deferred tax assets and discrete items.
Liquidity, debt and balance sheet
- Cash was $580,000 at April 30, 2015, versus $470,000 at January 31, 2015 and $1.471 million a year earlier.
- Inventory rose $15.572 million during the quarter to $42.250 million, reflecting seasonal production ahead of summer shipments.
- Total debt was $20.844 million, compared with $9.519 million at January 31, 2015 and $20.586 million a year earlier. The increase from January largely reflects seasonal borrowing; the debt table classifies $14.691 million as current.
- The PNC revolving facility has a $50 million maximum and matures December 22, 2017. Approximately $8.407 million was available at quarter-end; the interest rate was 4%. The company reported compliance with its financial covenants.
- The facility requires borrowings to be reduced below $6 million for 60 consecutive days each fiscal year and restricts dividends and stock repurchases. Management said the facility and operating cash flows should fund requirements for at least the next 12 months.
- Capital expenditures were $1.2 million, versus $667,000 a year earlier, primarily due to timing, ERP enhancements and equipment purchases at lease expiration.
Changes, outlook and risks
- Sales declined 1.4% year over year: approximately $1 million of higher selling prices was more than offset by lower unit volume. Management cited February severe weather and fewer bond-funded new-school construction completions. The company began the quarter with backlog about $1.6 million below the prior-year starting level; April 30 backlog was up 1.9% year over year to $23.855 million.
- First-quarter order rates were 4.9% higher year over year, but monthly trends were volatile: February orders were down 38%, while March and April were significantly higher. No formal earnings or sales guidance was provided.
- Operating cash use was lower than in the prior-year quarter, principally due to improved results, receivable collections, and higher accounts payable and accrued liabilities associated with inventory growth.
- Management identified risks including school funding availability, material availability and costs (especially steel), labor availability and costs, product demand, competition and pricing, capital costs, and general economic conditions. Results may vary materially from forward-looking statements.
- The prior-year comparison was revised for an immaterial classification correction: customer payments previously included in SG&A were reclassified as reductions to sales, lowering net sales, gross profit and SG&A by $147,000 for Q1 2014.
- The company had an IRS examination for fiscal 2013 with no adjustments proposed and $45,000 of uncertain tax positions accrued. Ordinary-course legal matters were described as not expected to be material. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether order growth and the $23.855 million backlog convert into peak-season shipments and collections, given volatility and seasonality.
- Whether the company can manage the inventory build, cash usage and seasonal borrowing while meeting the facility’s clean-down requirement and covenants.
- Whether improved gross margin and lower SG&A are sustainable, and how selling prices, raw-material costs and school construction demand develop.
- Whether deferred tax asset valuation allowances, pension obligations and any tax examination or legal developments materially affect future results.